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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 For the fiscal year ended September 30, 2006
 Commission file number 1-11700
 HEMAGEN DIAGNOSTICS, INC.
  Delaware
    
    04-2869857(State or Other Jurisdiction 
of Incorporation or Organization)
    
    (I.R.S. employer
identification No.)9033 Red Branch Rd., Columbia, MD
    
    21045(Address of Principal Executive Offices)
    
    (Zip Code)
 (Issuers telephone number, Including Area Code)
   o
 o þ
 o
 o
 
  Documents Incorporated by Reference




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##### 



HEMAGEN DIAGNOSTICS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
 PagePART IItem 1. Description of Business
    
    
    3Item 2. Description of Property
    
    
    10Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5. Market For Common Equity Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
    
    
    11Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    12Item 7. Financial Statements
    
    
    16Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
    
    
    17Item 8A. Controls and Procedures
    
    
    17Item 8B Other Information
    
    
    17PART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
    
    
    17Item 10. Executive Compensation
    
    
    17Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Meeting
    
    
    17Item 12. Certain Relationships and Related Transactions
    
    
    17Item 13. Exhibits
    
    
    17Item 14. Principal Accountant Fees and Services
    
    
    17EX-23EX-31.1EX-31.2EX-32.1EX-32.2
  Certain statements contained in this report that are not historical facts constitute
forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of
1995, and are intended to be covered by the safe harbors created by that Act. Forward looking
statements may be identified by words such as estimates, anticipates, projects, plans,
expects, intends, believes, should and similar expressions and by the context in which they
are used. Such statements are based on current expectations. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to differ materially from those
expressed or implied. Any forward-looking statement speaks only as of the date made. Hemagen
undertakes no obligation to update any forward-looking statements to reflect events or
circumstances after the date on which they are made.
 Statements concerning the establishments of reserves and adjustments for dated and obsolete
products, expected financial performance, on-going business strategies and possible future action
which Hemagen intends to pursue to achieve strategic objectives constitute forward-looking
information. All forward looking statements, including those relating to the sufficiency of such
charges, implementation of strategies and the achievement of financial performance are each subject
to numerous conditions, uncertainties, risks and other factors. Factors which could cause actual
performance to differ materially from these forward-looking statements, include, without
limitation, managements analysis of Hemagens assets, liabilities and operations, the failure to
sell datesensitive inventory prior to its expiration, competition, new product development by
competitors which could render particular products obsolete, the inability to develop or acquire
and successfully introduce new products or improvements of existing products, costs and
difficulties in complying with the laws and regulations administered by the United States Food and
Drug Administration, changes in the relative strength of the U.S. dollar and Brazilian reais,
unfavorable political or economic developments in Brazilian operations, and the ability to
assimilate successfully product acquisitions.
 2




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Item 1. Description of Business.
 Virgo® product line ® ® www.hemagen.com
 â ® ® ® ä
 â
 â â â
 3




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Recent Developments
  
    
    At the end of fiscal 2006 the company has recruited, and is involved in recruiting
several key management members.
 o
    
    In August 2006, the company hired a new Director of Manufacturing &
Development for its Raichem Division from Fisher Scientific where he held key
Technical and Management positions. His role is to bring vast technical and
management experience to the Raichem division and to steer the direction of the
Raichem division including the development of certain reagents. He has held senior
level positions in manufacturing, R&D, manufacturing engineering, business
management, and product management, among others.o
    
    In November 2006, the company hired a new Director of Manufacturing &
Development for its Virgo Division. His role will be to oversee all manufacturing
and development in our IFA, ELISA, and HA areas. He has extensive experience in
Bacteriology, virology, immunology, cell biology, and molecular biology and holds a
Ph.D as well as an M.D.o
    
    In November 2006, the company hired a controller who has over 20 years
of extensive experience in financial reporting matters and senior management.o
    
    In the first quarter of 2007, the company hired a new Sales Manager for
our Raichem Division who will be responsible for overseeing Sales and Marketing of
the Raichem Products.
 
    
    In July 2006, the Company sold a building, that had originally been purchased for a new
corporate headquarters and manufacturing plant, for $1,800,000 and recognized a gain on
sale of approximately $865,000. The building was originally purchased in June 2005 for
$800,000.
    
    In February of 2006, the company purchased the remaining 16.3% interest in its
Brazilian subsidiary increasing the ownership to 100%. In June 2004, the Company had
purchased an additional 32.7% of the ownership of its Brazilian subsidiary, increasing its
ownership to 83.7% of the subsidiary. The subsidiary distributes the Companys Virgo
autoimmune and infectious disease product lines in Brazil, and in October 2005 launched the
Analyst® products in Brazil.
    
    As of September 30, 2004, the Company exchanged $6,065,000 of Senior Subordinated
Secured Convertible Notes that were due April 2005 for 5,079,438 shares of Common Stock and
new Senior Subordinated Secured Convertible Notes with a face value of $4,033,225. The new
Notes pay interest quarterly at the rate of 8% per annum, are convertible into common stock
at $0.75 per share any time after September 30, 2005, and mature on September 30, 2009.
(See footnote J of the financial statements for a detailed description of the transaction).
    
    In fiscal 2004, Raichem entered into a supply arrangement with an international biotech
company to manufacture several proprietary products on a contract basis. Revenues in
fiscal 2006 were approximately $235,000 compared to revenues of $164,000 in fiscal 2005.
The Company is attempting to continue to develop this arrangement into additional future
business and to extend the supply agreement during fiscal 2007.
    
    In June 2004, the Company hired new management for the Brazilian subsidiary. During
fiscal 2006, Brazilian sales increased by $301,000, which management believes is due to the
change in Brazils management as well as an improvement in the currency fluctuations in the
Brazilian marketplace.
    
    Focused on continuing to reduce selling, general and administrative expenses including
outside consulting and professional services, while managing other operational expenses
more tightly. Selling, general and administrative expenses for fiscal year 2006 were
approximately $2,325,626 as compared to approximately $2,350,900 in fiscal year 2005.
    
    Initiated and established an Employee Stock Ownership Plan (ESOP) to increase employee
 4




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ownership of the Company. The ESOP plan is a qualified employee benefit plan that based on
the Companys discretionary contributions, purchases Company common stock on the open
market. At September 30, 2006, the employees of the company owned approximately 304,069
shares of the outstanding common stock, approximately 2.01%, through the ESOP.
    
    As of December 2001, acquired substantially all of the assets of Kalisto Biologicals,
Inc. Kalisto manufactured and marketed a clinical chemistry analyzer called the
Endochekä, that is used to measure essential constituents in animal blood. The
Endochek is now marketed by Hemagen as an alternative to the Analystâ and is used to
reach more price sensitive veterinary practices than those that would normally purchase the
Analyst.
    
    In fiscal 2001, consolidated operations by closing the Waltham, Massachusetts facility
and moving the headquarters and certain manufacturing operations to Hemagens Columbia,
Maryland facility. Certain unprofitable product lines were discontinued at that time.
    
    Since 1999, reduced headcount by approximately 53%, from 98 employees as of September
30, 1999, to 46 as of September 30, 2006. Management believes that the reduction in the
number of employees has not had a negative impact on the operations of the company, and has
helped the Company become more competitive.
 Technology
 Analyst Instrument System
  Clinical Chemistries
   Autoimmune and Infectious Disease Assays
 in vitro
   5




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Current Products
 Analyst â System Products
  RAI Products
 ®
 6




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Immunofluorescence or IFA Products
   cytomegalovirus infections
    
    Herpes simplexSLE (lupus)
    
    german measlesconnective tissue diseases
    
    chicken poxprimary bilary Cirrhosis
    
    infections with Epstein-Barr virustoxoplasmosis
    
    chlamydial infectionssyphilis
    
    measlesprimary RSV infections
    
    mumps infections
autoimmune diseases
 ELISA Assays
  Systemic Lupus Erythematous (lupus)
    
    Rheumatoid ArthritisScleroderma
    
    Sjögrens syndromeGlomerulonephritis
    
    mixed connective tissue diseasePolymyositis
    
    DermatomyositisPrimary biliary cirrhosis
    
    Wegeners granulomatosisSystemic Vasculitides
    
    Anti-phospholipid SyndromeVenous and arterial thromboses
    
    ThrombocytopeniaRecurrent abortion
    
    ToxoplasmosisRubella (German Measles)
    
    Cytomegalovirus infectionsHerpes simplex 1 & 2 infections
    
    Chagas DiseaseVaricella Zoster infections (Chicken pox & shingles)
   Hemagglutination Assays
  7




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SLE (lupus)
    
    dermatomyositismixed connective tissue disease
    
    polymyositisSjögrens syndrome
    
    rheumatoid arthritisscleroderma (systemic sclerosis)
    
    Chagas disease
 Distribution and Marketing
 General
    Products Under Development
  
    
    Activities related to upgrades to the Analyst instrument and
product offering such as evaluating and developing complimentary
products for Hemagens Analyst product line to distribute to the
veterinary market and alternative tests utilizing the Analysts
rotor technology; and
    
    Continuing to develop additional assays and reagents to fill in
the Raichem clinical chemistry reagent product line; and
    
    Developing new ELISA kits and enhancing existing ELISA kits.
 Manufacturing and Sources of Supply
  8




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Government Regulation
  in vitro
   Competition
  9




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Product Liability
  Patents and Proprietary Rights
  Royalty Obligations
 â
 Employees
   
 Item 2. Description of Property
  10




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Part II
 
 Item 5. Market for Registrants Common Equity Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
   High
    
    LowFiscal 2005First Quarter
    
    $
    0.51
    
    
    $
    0.22Second Quarter
    
    $
    0.45
    
    
    $
    0.27Third Quarter
    
    $
    0.40
    
    
    $
    0.22Fourth Quarter
    
    $
    0.33
    
    
    $
    0.17Fiscal 2006First Quarter
    
    $
    0.26
    
    
    $
    0.17Second Quarter
    
    $
    0.52
    
    
    $
    0.19Third Quarter
    
    $
    0.50
    
    
    $
    0.30Fourth Quarter
    
    $
    0.36
    
    
    $
    0.25
  Dividends
  11




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Securities Authorized for Issuance under Equity Compensation Plans
  Number of securitiesremaining available for futureNumber of securities to be
    
    Weighted-average
    
    issuance under equityissued upon exercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan category
    
    warrants, and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    2,496,014
    (1)
    
    
    $1.08
    
    
    
    550,500
    (2)Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,496,014
    (1)
    
    
    $1.08
    
    
    
    550,500
    (2)
 
 (1)
    
    Amount includes 1,000,000 options for the purchase of common stock issued under the
Companys 2001 Stock Option Plan, 1,732,014 options for the purchase of common stock approved
by the shareholders in conjunction with the consent solicitation which resulted in the
replacement of certain former members of the Companys senior management and Board of
Directors on September 30, 1999, 164,500 options for the purchase of common stock pursuant to
the Companys 1992 Stock Option Plan approved by the shareholders on February 27, 2001 and
150,000 options for the purchase of common stock pursuant to the Companys 2000 Directors
Stock Option Plan approved by the shareholders on April 25,
2000 that have been issued as of September 30, 2006.(2)
    
    Amount represents options for the purchase of common stock approved by the shareholders
pursuant to the Companys 2001 Stock Option Plan and 2000 Directors Stock Option Plan that
have not been issued as of as of September 30, 2006. 
 Item 6. Managements Discussion and Analysis or Plan of Operations
 Overview
     12




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Results of Operations
 Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005
   â
        13




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Liquidity and Capital Resources
     Fiscal 2006 compared to Fiscal 2005
   14




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New Accounting Pronouncements
     15




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Critical Accounting Policies
   Revenue Recognition
    Accounts Receivable
  Inventories
  
 Item 7. Financial Statements
  16




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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 8A. Controls and Procedures
     
 Item 8B. Other Information
  
 PART III
 Items 9 through 12 and 14 are incorporated by reference to the Registrants Proxy Statement
relating to its 2006 Annual Shareholders Meeting to be filed with the Commission pursuant to
Regulation 14A within 120 days after September 30th. Information required by Regulation S-B Item
2 01(d) is contained in Item 5 of this form 10-KSB.
 
 Item 13. Exhibits
  (a)(1) and (2) Financial Statements and Schedules
 PageReport of Independent Registered Public Accounting firm
    
    F-2Consolidated Balance Sheets at September 30, 2006
and 2005
    
    F-3Consolidated Statements of Operations for the years
ended September 30, 2006, and 2005
    
    F-5Consolidated Statements of Stockholders Equity
for the years ended September 30, 2006, and 2005
    
    F-6Consolidated Statements of Cash Flows for the years
ended September 30, 2006, and 2005
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
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(a)(3) Exhibit List.
 Exhibit No.
    
    Description of Exhibit
    
    Filing Status3.1
    
    Certificate of Incorporation.
    
    A3.2
    
    Bylaws.
    
    A4.1
    
    Specimen Stock Certificate.
    
    A4.2
    
    Rights Agreement dated January 27, 1999.
    
    A4.3
    
    First Amendment to the Rights Agreement dated September 30, 1999.
    
    B10.6*
    
    1992 Stock Option Plan.
    
    A10.17
    
    Description of the Lease for office space of HDC in Sao Paulo, Brazil.
    
    N10.25
    
    Settlement Agreement dated September 30, 1999.
    
    C10.29
    
    Form of 8% Senior Subordinated Secured Convertible Note.
    
    E10.30
    
    Second Amendment to the Lease between the Company and 9033
Red Branch Road, L.L.C. dated June 9,2000.
    
    E10.32
    
    Second Restructuring Agreement between the Company and
Dade Behring, Inc. dated November 9, 2000.
    
    D10.35*
    
    2001 Stock Option Plan.
    
    D10.40
    
    Line of Credit Financing Agreement between Hemagen Diagnostics, Inc.
and Reagents Applications, Inc and Bay National Bank dated
September 26,2002
    
    I10.42*
    
    Directors Rule 10(b)5-1 Stock Purchase Plan
    
    J10.44*
    
    Hemagen Employee Stock Ownership Plan
    
    K10.45
    
    Trust Agreement for the Hemagen Stock Ownership Plan
    
    K10.50
    
    Quota Purchase and Sale Agreement and Non-Competition Agreement
    
    K10.52
    
    Form of 8% Senior Subordinated Secured Convertible Note dated
September 30, 2004.
    
    M10.55
    
    Construction Loan Agreement and related Promissory Note between
Hemagen Diagnostics, Inc. and Reagents Applications, Inc. and Bay National
Bank dated June 24, 2005.
    
    L10.60
    
    Second modification and amendment to Line of Credit Financing Agreement
between Hemagen Diagnostics, Inc. and Reagents Applications, Inc. and
Bay National Bank dated June 24, 2005.
    
    L10.65
    
    Lease Agreement for 330 North Warwick Avenue, Baltimore City, Maryland
between Hemagen Properties LLC and Hemagen Diagnostics, Inc.
dated June 24, 2005.
    
    L14.0
    
    Code of Ethics Policy
    
    J
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Exhibit No.
    
    Description of Exhibit
    
    Filing Status14.1
    
    Insider Trading Policy
    
    J23
    
    Consent of Independent Registered Public Accounting Firm
    
    O31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
    
    O31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
    
    O32.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
    
    O32.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
    
    O
 
  A.
    
    Incorporated by reference to Registration Statement No. 33-52686-B.B.
    
    Incorporated by reference to Hemagens Form 10-KSB for the fiscal year ended September 30,
2000.C.
    
    Incorporated by reference to Hemagens Form 8-K filed on October 7, 1999.D.
    
    Incorporated by reference to Hemagens Form 10-KSB for the fiscal year ended September 30,
2001.E.
    
    Incorporated by reference to Hemagens Form S-3 filed on July 21, 2000.F.
    
    Incorporated by reference to Hemagens Form S-8, Registration Statement No. 333-57080, filed
with the SEC on March 15, 2001.G.
    
    Incorporated by reference to Hemagens 10-QSB for the quarter ended March 31, 2001.H.
    
    Incorporated by reference to Hemagens Form 8-K filed on March 23, 2001.I.
    
    Incorporated by reference to Hemagens Form 10-KSB for the fiscal year ended September 30,
2002.J.
    
    Incorporated by reference to Hemagens Form 10-KSB for the fiscal year ended September 30,
2003.K.
    
    Incorporated by reference to Hemagens Form 10-KSB for the year ended September 30, 2004.L.
    
    Incorporated by reference to Hemagens Form 10-QSB for the quarter ended June 30, 2005.M.
    
    Incorporated by reference to S-3 filed on May 26, 2005.N.
    
    Incorporated by reference to Hemagens Form 10-KSB for the year ended September 30, 2005.O.
    
    Filed herewith.
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C O N T E N T S
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTS:BALANCE SHEETS AT SEPTEMBER 30, 2006 AND 2005
    
    
    F-3STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 2006 AND 2005
    
    
    F-5STATEMENTS OF STOCKHOLDERS EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 2006 AND 2005
    
    
    F-6STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
SEPTEMBER 30, 2006 AND 2005
    
    
    F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




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Hemagen Diagnostics Inc. and Subsidiaries
 
 CONSOLIDATED BALANCE SHEET
 As of September 30, 2006 and 2005
 2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    150,663
    
    
    $
    272,168Accounts receivable, less allowance for
doubtful accounts of $76,625 and $86,862
at September 30, 2006 and 2005, respectively
    
    
    1,003,373
    
    
    
    957,518Inventories, net
    
    
    2,760,781
    
    
    
    2,762,967Prepaid expenses and other current assets
    
    
    267,863
    
    
    
    282,762Total current assets
    
    
    4,182,680
    
    
    
    4,275,415PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization
    
    
    170,974
    
    
    
    1,024,349OTHER ASSETS, NETOther
    
    
    35,118
    
    
    
    37,82435,118
    
    
    
    37,824Total Assets
    
    $
    4,388,772
    
    
    $
    5,337,588
 The accompanying notes are an integral part of these financial statements
 F-3




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Hemagen Diagnostics Inc. and Subsidiaries
 CONSOLIDATED BALANCE SHEET
 As of September 30, 2006 and 2005
 2006
    
    
    2005LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESCurrent portion senior subordinated secured
convertible notes due April 17, 2005, net of
unamortized discount of $5,188 at September 30, 2005
    
    
    
    
    
    $
    25,000Revolving line of credit
    
    
    
    
    
    
    400,000Accounts payable and accrued liabilities
    
    
    1,230,890
    
    
    
    1,476,541Deferred revenue
    
    
    25,104
    
    
    
    40,385Note payable
    
    
    
    
    
    
    650,000Total current liabilities
    
    
    1,255,994
    
    
    
    2,591,926Senior subordinated secured convertible notes due
September 30, 2009, net of unamortized discount of
$209,285 and $269,257 at September 30, 2006 and 2005,
respectively
    
    
    3,840,565
    
    
    
    3,763,968Total liabilities
    
    
    5,096,559
    
    
    
    6,355,894COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYPreferred stock, $0.01 par value - 1,000,000 shares
authorized; none issuedCommon stock, $0.01 par
value - 30,000,000 shares authorized; 15,325,281 and
15,304,343 shares issued and outstanding at September
30, 2006 and 2005, respectively
    
    
    153,252
    
    
    
    153,043Additional paid-in
capital
    
    
    22,836,134
    
    
    
    22,832,155Accumulated deficit
    
    
    (23,503,209
    )
    
    
    (23,816,135
    )Accumulated other comprehensive loss  currency
translation loss
    
    
    (104,327
    )
    
    
    (97,732
    )Less treasury stock at
cost; 100,000 shares at September 30, 2006 and 2005,
respectively
    
    
    (89,637
    )
    
    
    (89,637
    )Total stockholders deficit
    
    
    (707,787
    )
    
    
    (1,018,306
    )Total liabilities and stockholders deficit
    
    $
    4,388,772
    
    
    $
    5,337,588
 The accompanying notes are an integral part of these financial statements
 F-4




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Hemagen Diagnostics Inc. and Subsidiaries
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 Years Ended September 30, 2006 and 2005
 2006
    
    
    2005Net sales
    
    $
    7,250,196
    
    
    $
    7,585,654Costs and expensesCosts of sales
    
    
    4,670,526
    
    
    
    5,676,562Research and development
    
    
    317,196
    
    
    
    281,019Selling, general and administrative
    
    
    2,325,626
    
    
    
    2,350,899Impairment of goodwill
    
    
    
    
    
    
    152,324Total operating costs and expenses
    
    
    7,313,348
    
    
    
    8,460,804Operating loss
    
    
    (63,152
    )
    
    
    (875,150
    )Other income (expenses)Interest expense, (net), including $55,785 and
$62,794, respectively of debt discount amortization
    
    
    (452,255
    )
    
    
    (412,962
    )Gain on building sale
    
    
    865,198
    
    
    
    Other income (expense)
    
    
    38,596
    
    
    
    Total other income (expense)
    
    
    451,539
    
    
    
    (412,962
    )Net income (loss) before income taxes
    
    
    388,387
    
    
    
    (1,288,112
    )Income tax expense
    
    
    (75,461
    )
    
    
    (49,137
    )Net income (loss)
    
    $
    312,926
    
    
    $
    (1,337,249
    )Net income (loss) per share  Basic
    
    $
    0.02
    
    
    $
    (0.09
    )Net income (loss) per share  Diluted
    
    $
    0.02
    
    
    $
    (0.09
    )Weighted average common shares used in the calculation of
net loss per share  Basic
    
    
    15,220,585
    
    
    
    15,204,351Weighted average common shares used in the calculation of
net loss per share  Diluted
    
    
    15,300,289
    
    
    
    15,204,351
 The accompanying notes are an integral part of these financial statements
 F-5




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Hemagen Diagnostics, Inc. and Subsidiaries
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 Years Ended September 30, 2006 and 2005
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Shares
    
    
    Cost
    
    
    EquityBalance at October 1, 2004
    
    
    15,294,343
    
    
    $
    152,943
    
    
    $
    22,829,354
    
    
    $
    (22,478,886
    )
    
    $
    (151,812
    )
    
    
    100,000
    
    
    $
    (89,637
    )
    
    $
    261,962Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337,249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337,249
    )Foreign exchange
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,080
    
    
    
    
    
    
    
    
    
    
    
    54,080Total Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,283,169
    )Exercise of stock options
    
    
    10,000
    
    
    
    100
    
    
    
    2,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,901Balance at September 30, 2005
    
    
    15,304,343
    
    
    $
    153,043
    
    
    $
    22,832,155
    
    
    $
    (23,816,135
    )
    
    $
    (97,732
    )
    
    
    100,000
    
    
    $
    (89,637
    )
    
    $
    (1,018,306
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,926Foreign exchange
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,595
    )
    
    
    
    
    
    
    
    
    
    
    (6,595
    )Total Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,331Issuance of common stock
in exchange for secured
convertible Notes due
September 30, 2009
    
    
    20,938
    
    
    
    209
    
    
    
    3,979
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,188Balance at September 30, 2006
    
    
    15,325,281
    
    
    $
    153,252
    
    
    $
    22,836,134
    
    
    $
    (23,503,209
    )
    
    $
    (104,327
    )
    
    
    100,000
    
    
    $
    (89,637
    )
    
    $
    (707,787
    )
 The accompanying notes are an integral part of these financial statements
 F-6




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006 and 2005
 2006
    
    
    2005Cash flows from operating activitiesNet income (loss)
    
    $
    312,926
    
    
    $
    (1,337,249
    )Adjustments to reconcile net income (loss) to net cash used in
operating activitiesDepreciation and amortization
    
    
    43,912
    
    
    
    300,754Amortization of debt discount
    
    
    55,785
    
    
    
    62,794Provision for bad debts
    
    
    
    
    
    
    10,488Write off of fixed assets
    
    
    
    
    
    
    14,333Impairment of goodwill
    
    
    
    
    
    
    152,324Loss on sales of property and equipment
    
    
    2,521
    
    
    
    Gain on the sale of the building
    
    
    (865,198
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (45,855
    )
    
    
    (8,871
    )Inventories
    
    
    2,186
    
    
    
    576,965Prepaid expenses and other assets
    
    
    17,607
    
    
    
    (126,425
    )Accounts payable and accrued expenses
    
    
    (245,653
    )
    
    
    (107,499
    )Deferred revenue
    
    
    (15,281
    )
    
    
    (12,877
    )Net cash used in operating activities
    
    
    (737,050
    )
    
    
    (475,263
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (19,674
    )
    
    
    (850,510
    )Proceeds from the building sale, net of expenses
    
    
    1,692,240
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,672,566
    
    
    
    (850,510
    )Cash flows from financing activitiesNet (payments on) borrowings from revolving line of
credit
    
    
    (400,000
    )
    
    
    400,000Net (payment on) proceeds from land and building
mortgage financing
    
    
    (650,000
    )
    
    
    612,175Exercise of stock options
    
    
    
    
    
    
    2,901Net cash (used in) provided by financing activities
    
    
    (1,050,000
    )
    
    
    1,015,076Effect of exchange rates on cash and cash equivalents
    
    
    (7,021
    )
    
    
    44,323Net decrease in cash and cash equivalents
    
    
    (121,505
    )
    
    
    (266,374
    )Cash and cash equivalents, beginning of year
    
    
    272,168
    
    
    
    538,542Cash and cash equivalents, end of year
    
    $
    150,663
    
    
    $
    272,168
 The accompanying notes are an integral part of these financial statements
 F-7




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006 and 2005
 NOTE A  NATURE OF BUSINESS
 Virgo® product line â â
   F-8




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Use of Estimates
  Foreign Currency Translation
  Cash Equivalents
  F-9




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##### Table of Contents



Hemagen Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
 Accounts Receivable
  Allowancefor DoubtfulAccountsBalance, October 1, 2004
    
    $
    102,359Bad debt expense
    
    
    10,488Accounts receivable write-offs
    
    
    (25,985
    )Balance, September 30, 2005
    
    $
    86,862Bad debt expense
    
    
    1,114Accounts receivable write-offs
    
    
    (11,351
    )Balance, September 30, 2006
    
    $
    76,625
 Inventories
  F-10




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
 Long-lived Assets
  Property and Equipment
  Other Assets
  Income Taxes
  F-11




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
 Revenue Recognition
  Stock- Based Compensation
   2006
    
    
    2005Net income (loss) as reported
    
    $
    312,926
    
    
    $
    (1,337,249
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
    
    
    (68,496
    )
    
    
    (10,553
    )Proforma Net Income (Loss)
    
    $
    244,430
    
    
    $
    (1,347,802
    )Basic Net income (loss) per share as reported
    
    $
    0.02
    
    
    $
    (0.09
    )Diluted Net income (loss) per share as reported
    
    $
    0.02
    
    
    $
    (0.09
    )Proforma Basic Net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.09
    )Proforma Diluted Net income (loss) per share
    
    $
    0.02
    
    
    $
    (0.09
    )
 F-12




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
 Net Loss Per Share of Common Stock
  2006
    
    2005Common shares outstanding for basic EPS
    
    
    15,220,585
    
    
    
    15,204,351Shares issued upon assumed exercise of
outstanding stock options
    
    
    79,704
    
    
    
    Weighted average number of common and
common equivalent shares outstanding for
diluted EPS
    
    
    15,300,289
    
    
    
    15,204,351
  F-13




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
 Research and Development Costs
  Fair Value of Financial Instruments
  Advertising Expenses
  Shipping and Handling
  Current Accounting Pronouncements
  F-14




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
    F-15




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE C  RELATED PARTY TRANSACTIONS
  NOTE D  INVENTORIES
  2006
    
    
    2005Raw materials
    
    $
    1,397,931
    
    
    $
    1,369,693Work-in-process
    
    
    162,501
    
    
    
    173,350Finished goods
    
    
    1,794,053
    
    
    
    1,816,3253,354,485
    
    
    
    3,359,368Less reserves
    
    
    (593,744
    )
    
    
    (596,401
    )Net inventories
    
    $
    2,760,741
    
    
    $
    2,762,967
 NOTE E  PROPERTY AND EQUIPMENT
  2006
    
    
    2005Land
    
    $
    
    
    
    $
    163,704Building
    
    
    
    
    
    
    663,338Furniture and equipment
    
    
    7,269,417
    
    
    
    7,294,936Leasehold improvements
    
    
    121,338
    
    
    
    121,3387,390,755
    
    
    
    8,243,316Less accumulated depreciation
and amortization
    
    
    (7,219,781
    )
    
    
    (7,218,967
    )$
    170,974
    
    
    $
    1,024,349
  F-16




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE F  ACCOUNTS PAYABLE AND ACCRUED EXPENSES
  2006
    
    
    2005Accounts payable  trade
    
    $
    532,399
    
    
    $
    905,958Accrued professional fees
    
    
    75,200
    
    
    
    103,535Accrued royalties
    
    
    300,556
    
    
    
    300,556Accrued vacation
    
    
    129,357
    
    
    
    100,926Accrued other
    
    
    193,378
    
    
    
    65,566$
    1,230,890
    
    
    $
    1,476,541
 NOTE G  DEVELOPMENT AND LICENSE AGREEMENTS
  ®
  NOTE H  LINE OF CREDIT
 3 4
 F-17




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE I  NOTE PAYABLE
   NOTE J  EXCHANGE OFFERING
   F-18




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE J  EXCHANGE OFFERING  Continued
   NOTE K  STOCKHOLDERS EQUITY
 Preferred Stock
  Accumulated Other Comprehensive Loss
  F-19




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE K  STOCKHOLDERS EQUITY-Continued
 Stock Options
    F-20




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE K  STOCKHOLDERS EQUITY-Continued
  Weighted-AverageShares
    
    Exercise PriceBalance, October 1, 2004
    
    
    2,348,014
    
    
    $
    1.19Granted
    
    
    35,000
    
    
    
    0.29Exercised
    
    
    (10,000
    )
    
    
    0.29Cancelled or expired
    
    
    (80,000
    )
    
    
    0.85Balance, September 30, 2005
    
    
    2,293,014
    
    
    $
    1.19Granted
    
    
    475,000
    
    
    
    0.24Exercised
    
    
    
    
    
    
    Cancelled or expired
    
    
    (272,000
    )
    
    
    0.56$
    1.08Balance, September 30, 2006
    
    
    2,496,014Exercisable at September 30, 2006
    
    
    2,276,014
  Options OutstandingWeighted-Number
    
    AverageOutstanding
    
    Remaining
    
    WeightedRange of Exercise
    
    at September
    
    Contractual
    
    AveragePrices
    
    30, 2006
    
    Life (years)
    
    Exercise Price0.20  0.34
    
    
    425,500
    
    
    
    8.4
    
    
    
    0.250.35  0.77
    
    
    150,000
    
    
    
    4.2
    
    
    
    0.550.78  0.97
    
    
    188,500
    
    
    
    .7
    
    
    
    0.800.98  1.36
    
    
    1,732,014
    
    
    
    3.0
    
    
    
    1.36$0.20 - $1.36
    
    
    2,496,014
    
    
    
    7.0
    
    
    
    1.08
   F-21




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE K  STOCKHOLDERS EQUITY-Continued
 Stock Rights Purchase Agreement
  NOTE L  INCOME TAXES
  Years ended September 30,
    
    2006
    
    
    2005Domestic
    
    $
    146,130
    
    
    $
    (1,487,260
    )Foreign
    
    
    242,257
    
    
    
    199,148$
    388,387
    
    
    $
    (1,288,112
    )
  F-22




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE L  INCOME TAXES-Continued
  Years ended September 30,
    
    2006
    
    2005Federal tax (credit) at statutory rate
    
    
    34
    %
    
    
    (34
    %)Valuation Allowance
    
    
    
    
    
    
    13.1Current tax benefit of operating losses
    
    
    (34
    )
    
    
    Impact of international operations
    
    
    19.4
    
    
    
    24.719.4
    %
    
    
    3.8
    %
  2006
    
    
    2005Net operating loss carryforwards
    
    $
    7,134,500
    
    
    $
    6,808,000Inventory reserve
    
    
    237,000
    
    
    
    239,000Accounts receivable reserve
    
    
    31,000
    
    
    
    35,000Debt conversion cost
    
    
    207,000
    
    
    
    276,000Other
    
    
    244,000
    
    
    
    271,000Total deferred tax assets
    
    
    7,853,500
    
    
    
    7,629,000Basis difference in fixed assets
    
    
    (25,000
    )
    
    
    (14,000
    )Net deferred tax assets
    
    $
    7,828,500
    
    
    $
    7,615,000Valuation allowance
    
    $
    (7,828,500
    )
    
    
    (7,615,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
   F-23




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE M  SIGNIFICANT SALES AND CONCENTRATION OF CREDIT RISK
   NOTE N  GEOGRAPHICAL INFORMATION
   United*States
    
    Brazil
    
    ConsolidatedSeptember 30, 2006:Revenues
    
    $
    5,743,099
    
    
    $
    1,507,097
    
    
    $
    7,250,196Long-lived assets
    
    
    144,558
    
    
    
    61,534
    
    
    
    206,092September 30, 2005:Revenues
    
    $
    6,277,939
    
    
    $
    1,206,000
    
    
    $
    7,585,654Long-lived assets
    
    
    1,031,553
    
    
    
    44,953
    
    
    
    1,062,173
 
 *
    
    Includes export sales to countries other than Brazil of approximately $2,090,000 and
$2,044,000 in 2006 and 2005, respectively. F-24




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE O  COMMITMENTS
  Years ending September 30,2007
    
    
    482,5592008
    
    
    410,1122009
    
    
    182,895Thereafter
    
    
    
  Retirement
and Directors Plan
    F-25




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##### Table of Contents



Hemagen
Diagnostics, Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 September 30, 2006 and 2005
 NOTE P  SUPPLEMENTAL DISCLOSURE OF CASH
 September 30,
    
    2006
    
    
    2005Cash paid for interest
    
    $
    452,255
    
    
    $
    349,864
  F-26




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##### Table of Contents



SIGNATURES
  HEMAGEN DIAGNOSTICS, INC.Date: January 18, 2007
    By:
    /s/  William P. HalesWilliam P. Hales, President &Chief Executive Officer  Name
    
    Capacity
    
    Date/s/ William P. Hales
    
    President and Chief ExecutiveWilliam P. Hales
    
    Officer, Director
    
    January 18, 2007/s/ Alan S. Cohen
    
    Director
    
    January 18, 2007Alan S. Cohen, M.D./s/ Richard W. Edwards
    
    Director
    
    January 18, 2007Richard W. Edwards/s/ Edward T. Lutz
    
    Director
    
    January 18, 2007Edward T. Lutz/s/ William P. Hales

William P. Hales
    
    Principal Financial Officer
    
    January 18, 2007