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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, 2005

                         Commission file number 1-11700

                            HEMAGEN DIAGNOSTICS, INC.
                 (Name of Small Business Issuer in Its Charter)

<TABLE>
<S>                                                          <C>
                Delaware                                          04-2869857
      (State or Other Jurisdiction                             (I.R.S. employer
    of Incorporation or Organization)                        identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
    9033 Red Branch Rd., Columbia, MD                               21045
(Address of Principal Executive Offices)                          (Zip Code)
</TABLE>

                                 (443) 367-5500
                (Issuer's telephone number, Including Area Code)

        Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock.

     Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 60 days. Yes   X   No      .
                                              -----    -----

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and will no disclosure be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ]

     The registrant had revenues of $7,585,654 in its most recent year. The
aggregate market value of the voting stock held by non-affiliates of the
registrant on December 21, 2005, was $3,020,870. As of December 21, 2005,
15,104,351 shares Common Stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for its 2005 Annual Meeting
are incorporated by reference into Items 9, 10,11,12 and 14 hereof.

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                            HEMAGEN DIAGNOSTICS, INC.
                      INDEX TO ANNUAL REPORT ON FORM 10-KSB

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PART I
Item 1.    Description of Business.......................................     3
Item 2.    Description of Property.......................................    10
Item 3.    Legal Proceedings.............................................    11
Item 4.    Submission of Matters to a Vote of Security Holders...........    11

PART II
Item 5.    Market For Common Equity Related Stockholder Matters and Small
              Business Issuer Purchases of Equity Securities.............    11
Item 6.    Management's Discussion and Analysis or Plan of Operation.....    12
Item 7.    Financial Statements..........................................    17
Item 8.    Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosures..................................    17
Item 8A.   Controls and Procedures.......................................    17
Item 8B    Other Information

PART III
Item 9.    Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act..........    17
Item 10.   Executive Compensation........................................    17
Item 11.   Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Meeting............................    17
Item 12.   Certain Relationships and Related Transactions................    17
Item 13.   Exhibits......................................................    17
Item 14.   Principal Accountant Fees and Services........................    17
</TABLE>

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.


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ITEM 1. DESCRIPTION OF BUSINESS.

Hemagen Diagnostics, Inc., is a biotechnology company that develops,
manufactures, and markets more than 150 FDA-cleared proprietary medical
diagnostic test kits. Hemagen has three different product lines. The Virgo(R)
product line of diagnostic test kits is used to aid in the diagnosis of certain
autoimmune and infectious diseases, using ELISA, Immunoflourescence, and
hemagglutination technology. Hemagen manufactures and markets a complete line of
clinical chemistry reagents through its wholly owned subsidiary Reagents
Applications, Inc., under the brand name Raichem, as well as under various OEM
arrangements. In addition, Hemagen manufactures and sells the Analyst(R) an
FDA-cleared clinical chemistry analyzer used to measure important constituents
in human and animal blood, and the Endochek, a clinical chemistry analyzer used
to measure important constituents in animal blood. In the United States, the
Company sells its products directly to physicians, veterinarians, clinical
laboratories and blood banks and on a private-label basis through multinational
distributors of medical diagnostics and supplies. Internationally, the Company
sells its products primarily through distributors. The Company sells the
Analyst(R) and the Endochek both directly and through distributors servicing
physicians' office laboratories and veterinarians' offices. Hemagen's products
are used in many of the largest laboratories, hospitals, and blood banks around
the world. The Company focuses on markets that offer significant growth
opportunities. The Company was incorporated in 1985 and became a public company
in 1993. Hemagen's principal offices are located at 9033 Red Branch Road,
Columbia, Maryland 21045 and the telephone number is (443) 367-5500. Hemagen
maintains a website at www.hemagen.com. Investors can obtain copies of our
filings with the Securities and Exchange Commission from our site free of charge
as well as from the Securities and Exchange Commission website at www.sec.gov.

In September 1998, Hemagen acquired the Analyst(R) Clinical Chemistry system
from Dade Behring, Inc. The Analyst(R) was originally designed and developed by
Dupont and sold to Dade Behring thereafter. The Analyst(R) is a proprietary, low
cost, bench top clinical chemistry instrument and reagent system. The Analyst(R)
instrument is used to test general chemistry profiles for both the human and
veterinary markets using a proprietary consumable rotor that is manufactured by
Hemagen at its Columbia, Maryland facility. The Analyst is cleared by the FDA
for marketing in the United States to physician office laboratories. In addition
to offering the Analyst, Hemagen has been acquiring distribution rights for
other complimentary products for these markets and in December 2002 acquired the
Endocheck(TM) veterinary chemistry analyzer. Today, Hemagen estimates that its
customer base for the Analyst is approximately 72% veterinary practices and 28%
physician office laboratory practices.

In 1996, Hemagen acquired Reagents Applications, Inc. (RAI) from Kone Holdings,
Inc. RAI manufactures and markets a complete line of clinical chemistry reagents
and diagnostic products for in vitro use in hospitals, clinics, physicians'
office laboratories, and reference laboratories. These products are sold under
the Raichem(R) label or through private label arrangements with several large
domestic and international customers. The reagents manufactured by RAI can be
used manually, or in automated clinical chemistry analyzers. In December 1999,
RAI signed an exclusive supply agreement with a multinational diagnostics
company, to provide reagents for their automated clinical chemistry instrument
in the United States. This exclusive agreement was renewed for four years in
December 2002. Sales resulting from this exclusive agreement were approximately
$917,000 and $923,000 in the years ending September 30, 2005 and September 30,
2004, respectively. RAI's foreign sales were approximately 44% of total sales in
the year ending September 30, 2005, and mainly represent sales to foreign OEM's
and distributors.

In 1995, Hemagen completed the acquisition of a comprehensive product line of
diagnostic test kits utilizing immunofluorescence ("IFA products") from
Schiaparelli Biosystems, Inc. This product line now part of Hemagen's Virgo(R)
product line consists of autoimmune and infectious disease diagnostic test kits
that are manufactured for manual use or for use on most automated instrument
platforms. In addition to the IFA line, Hemagen from its inception in 1985 has
developed a comprehensive line of diagnostic test kits based on its proprietary
hemagglutination technology ("HA") and enzyme-linked immunosorbence assay
technologies ("ELISA" or "EIA"). The Virgo product-line is marketed directly to
the largest reference laboratories, hospitals, and universities in the United
States, among others and internationally, there are over 30 distributors that
market the Virgo(R) product line. Hemagen also markets the Virgo(R) product line
in South America through its 83.7% owned subsidiary Hemagen Diagnosticos
Comercio, Importacao Exportacao, Ltd. (HDC), a Brazilian limited liability
company.


                                        3

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RECENT DEVELOPMENTS

On September 30, 1999, current management assumed control of the Company
pursuant to a settlement agreement that resulted from a consent solicitation.
Management has taken actions over the past six fiscal years to refinance the
business, to consolidate operations, to reduce headcount and costs and to
increase sales and marketing efforts. Recently, under the new management, the
Company has taken the following steps:

     -    In June 2005, the Company completed a financing of $1,935,000 to
          provide for the purchase of a new corporate headquarters and
          manufacturing facility for $800,000, improvements to the building, and
          relocation and installation of Hemagen's existing equipment into the
          new building. Once the build out and relocation project is completed,
          the project will provide overhead savings from reduced facility costs.
          The Company purchased this facility in order to reduce its overall
          overhead expenses related to facilities, utilities, inventory control
          and labor costs and will look to combine as many of its manufacturing
          processes in that facility over the next year. Likewise, the Company
          believes that by owning its own facility it will be able to ensure
          that its facilities expenses remain stable for the foreseeable future;
          and that it will have additional space for future growth by internal
          growth, acquisition, or product line expansion.

     -    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).

     -    RAI entered into a supply arrangement with an international biotech
          company to manufacture several proprietary products on a contract
          basis. Revenues in fiscal 2005 were approximately $164,000. The
          Company is attempting to continue to develop this arrangement into
          additional future business.

     -    In June 2004, the Company 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(R) products in Brazil.

     -    In June 2004, the Company hired new management for the Brazilian
          subsidiary. During fiscal 2005, sales increased by $336,000, 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 legal, accounting and other outside services, while
          managing other operational expenses more tightly. Selling, general and
          administrative expenses for fiscal year 2005 were approximately
          $2,350,900 as compared to approximately $2,407,000 in fiscal year
          2004.

     -    Initiated and established an Employee Stock Ownership Plan (ESOP) to
          increase employee 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, 2005, the employees of the company owned
          approximately 157,000 shares of common stock in 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 Endochek(TM),that is used to measure
          essential constituents in animal blood. The Endochek is now marketed
          by Hemagen as an alternative to the Analyst(R) and is used to reach
          more price sensitive veterinary practices than those that would
          normally purchase the Analyst.


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     -    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 54%, from 98 employees
          as of September 30, 1999, to 47 as of September 30, 2005. Management
          is currently recruiting approximately five positions. With the
          exception of the five positions management is looking to fill,
          management believes that the reduction in the number of employees has
          had no impact on operations, and has helped the Company become more
          price competitive.

TECHNOLOGY

     Analyst Instrument System

     Hemagen acquired a patent protected rotor based technology for use in the
Analyst in 1998. The Analyst is a bench-top centrifugal clinical chemistry
analyzer. The Analyst utilizes a consumable rotor that contains dry prepackaged
reagents. The Analyst spins the rotor, mixing the patient sample with the dry
reagents, producing a result in approximately ten minutes. Hemagen currently
markets four types of rotors providing a variety of clinical chemistry tests
which are 510K cleared by the FDA for the Human medical market. The Company also
markets two types of rotors exclusively for the veterinary market. The Analyst
instrument has been designated by the Clinical Laboratory Improvements
Amendments (CLIA) as a moderately complex system, and is therefore suitable for
both the physician and veterinary office laboratories.

     Clinical Chemistries

     Hemagen's blood chemistry and Analyst system assays are used to aid in the
monitoring and measurement of health profiles, such as cholesterol, blood urea
nitrogen, triglycerides, glucose and uric acid.

     Hemagen produces a line of general clinical chemistry reagents utilizing
colorimetric, turbidometric and enzymatic procedures. These chemistry reagents
are most commonly used in clinical laboratories as general health screening
tests and in the identification of diseases. These tests can be performed using
a broad range of automated and semi-automated analyzer instruments that are
typically used by clinical laboratories.

     Autoimmune and Infectious Disease Assays

     Detection of the presence and concentration of certain antibodies in human
blood can assist physicians in the diagnosis of certain diseases. Hemagen's
assays are in vitro (outside of a patient's body) diagnostic tests that are used
to measure specific substances, antibodies, in blood or other body fluids. Our
assays recognize specific antibodies which will bind to our assay platforms in
the proper environment, making it detectable either by the naked eye, or with
the aid of a laboratory technique, which amplifies the reaction so that it is
rendered visible. Hemagen's hemagglutination, ELISA and immunofluorescence
assays are three examples of such techniques.

     Immunofluorescence

     Hemagen's immunofluorescence tests are manufactured using several
procedures, the most common, using mammalian cells grown on microscope slides
treated with disease-producing organisms (viral or bacterial). Serum from a
patient is placed in contact with the infected cells on the slides. If a patient
has antibodies to the organism causing the disease, the antibodies will bind to
the organism. A chemical reagent is added to the slide that binds to the
organism and the antibody, if present and detectable. When the slide is
illuminated with light at a specific wavelength in a fluorescent microscope, the
chemically-treated cells will appear with a specific fluorescent pattern,
indicating a positive test result. If the patient did not have detectable
quantities of the appropriate antibody, no fluorescence will appear producing a
negative test result.


                                        5

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     Enzyme Linked Immunosaorbent Assays

     ELISA or EIA tests employ small plastic wells coated with particular
antigens. The test process involves introducing the patient's serum into the
well to allow a reaction to occur. If the antibody being tested for is present,
it will bind to the antigens on the inner surface of the well. After the wells
are rinsed, the specifically bound antibody will remain while any non-specific
antibodies will be washed away. To detect the quantity of the specific antibody,
other compounds (conjugate, substrate) are added which will cause a color change
in the liquid, the intensity of which is proportionate to the quantity of the
specific antibody found. If no color is noted, this indicates that the patient's
serum did not contain detectable quantities of the specific antibody.

Hemagen has developed an application for its ELISA technology to detect
cardiovascular and inflammatory risk factors (apolipoproteins) and inflammatory
signals (acute phase reactants), the latter of which are present in a patient's
blood prior to the clinical manifestation of infection or inflammation. If
successful, these technologies could lead to earlier detection and prevention of
cardiovascular disease, the imminent rejection of transplanted organs or the
onset of infections. Such earlier detection could enable physicians to better
plan appropriate treatment of patients with these conditions. Hemagen currently
markets two test kits to detect inflammatory signals.

     Hemagglutination

     Hemagglutination is the agglutination or "clumping" of red blood cells
(RBCs). Many substances, including certain antibodies, when placed in contact
with RBCs, will cause agglutination. Under the appropriate conditions, human
RBCs may be modified or sensitized by binding specific foreign antigens to their
surface. These sensitized RBCs will bind to the specific antibody and this will
cause agglutination of these cells. The presence of certain antibodies in an
individual's serum (blood from which clotted RBCs have been removed) can
indicate certain diseases. By sensitizing RBCs with an antigen that specifically
reacts with a particular antibody, the simple visible observation of the
agglutination reaction will indicate the presence of the disease-produced
antibody. The use of RBCs instead of other particles can allow for simple visual
observation of the agglutination reaction in the proper environment, and reduces
the non-specific reactions seen in artificial systems such as those that utilize
latex particles.

     To perform Hemagen's hemagglutination test, a technician combines Hemagen's
sensitized RBCs with a patient's serum in a small well with a V-shaped bottom
according to directions included with Hemagen's test kits. If no agglutination
takes place, the RBCs will settle to the bottom of the well, resulting in a
clearly visible red dot which indicates that the test is negative. In contrast,
if the particular antibody is present in the patient's blood, the RBCs will
agglutinate, which prevents the RBCs from settling to the bottom of the well.
Instead of the small red dot, the substance will appear a diffuse red, which
indicates a positive reaction.

CURRENT PRODUCTS

     Analyst(R) System Products

     Hemagen currently markets four FDA 510K cleared rotor types for use on the
Analyst clinical chemistry analyzer, two general chemistry rotors, a glucose
test and a lipid screen test. In addition, Hemagen sells two general chemistry
rotors specifically designed for the veterinary marketplace called the VET-16,
and the VetSelect.

     RAI Products

     Hemagen's general chemistry products, sold under the trade name RAICHEM(R)
consist of a broad range of assays used on automated and semi-automated clinical
chemistry analyzer systems or run manually. Many of the RAICHEM assays are used
in profiling general health conditions and as specific indications of possible
disease states. The most widely recognized general chemistry tests made by
Hemagen include those for blood levels of glucose, cholesterol, triglycerides,
uric acid, urea nitrogen and total protein. In all, more than 70 of Hemagen's
clinical chemistry products have been 510K cleared by the FDA for sale in the
United States.


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     Immunofluorescence or "IFA" Products

     Hemagen's immunofluorescence products consist primarily of diagnostic
assays for infectious diseases and several products for autoimmune diseases.
Immunofluorescence kits are used as primary or confirmatory tests in many large
clinical laboratories in the United States. There are currently 15 kits sold in
the immunofluorescence format.

Hemagen's immunofluorescence products are used to aid in the diagnosis of the
following:

          cytomegalovirus infections
          SLE (lupus)
          connective tissue diseases
          primary bilary Cirrhosis
          toxoplasmosis
          syphilis
          primary RSV infections
          Herpes simplex
          german measles
          chicken pox
          infections with Epstein-Barr virus
          chlamydial infections
          measles
          mumps infections
          autoimmune diseases

     ELISA Assays

     Hemagen develops, manufactures, and markets ELISA test kits for the
detection of disease. Along with the immunofluorescence and hemagglutination
assays, Hemagen's ELISA kits test for specific antibodies. The quantitative or
semi-quantitative test results give useful information about the stage and
prevalence of a particular disease. Elisa tests are widely used by large
laboratories, due to their ready adaptability to automation and high volume
testing. Hemagen's autoimmune and infectious disease ELISA kits are used in the
diagnosis of the following diseases:

          Systemic Lupus Erythematous (lupus)
          Scleroderma
          Glomerulonephritis
          Polymyositis
          Primary biliary cirrhosis
          Systemic Vasculitides
          Venous and arterial thromboses
          Recurrent abortion
          Rubella (German Measles)
          Herpes simplex 1 & 2 infections
          Varicella Zoster infections
          (Chicken pox & shingles)
          Rheumatoid Arthritis
          Sjogren's syndrome
          mixed connective tissue disease
          Dermatomyositis
          Wegener's granulomatosis
          Anti-phospholipid Syndrome
          Thrombocytopenia
          Toxoplasmosis
          Cytomegalovirus infections
          Chagas Disease

Hemagen has also developed specialized assays for quantitative analysis of the
acute phase markers, C-Reactive Protein and Serum Amyloid A. These are believed
to be important in the detection and prediction of inflammatory events
associated with several diseases, including systemic lupus, rheumatoid
arthritis, and myocardial infarction.

Hemagen also offers ELISA & hemagglutination screening assays, capable of
verifying the presence of as many as six analytes in a single test. This is a
useful tool in a patient's initial assessment. For example, if an individual's
autoimmune screen 6 test is positive, individual marker kits are then used to
differentially diagnose the particular rheumatoid disease. To better serve
customer's needs, most of the reagents for these kits are offered in both
lyophilized and liquid-stable form.

     Hemagglutination Assays

     Hemagen's hemagglutination assays are based on Hemagen's proprietary
technique to lyophilize, or "freeze dry," the RBCs which form the central
component of a hemagglutination assay. Hemagen's proprietary lyophilization
technique for the preservation of RBCs permits the production of standardized,
easy-to-use and accurate hemagglutination tests with an extended shelf-life,
most of which were previously unavailable using hemagglutination assays. The
shelf-life of the lyophilized RBCs before reconstitution may be up to 48 months.
A technician reconstitutes the powdered cells in a water-based solution prior to
introducing to the patient's serum.


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     Each hemagglutination test also requires a specific formula to sensitize
the RBCs prior to lyophilization such that they will react to a specific
antibody. For each of its tests, Hemagen uses a proprietary formula to combine
antigens and other reagents with RBCs in a manner that allows for standard,
sensitive and specific agglutination reactions. Results from Hemagen's test kits
are generally available within two hours. Hemagen's hemagglutination test kits
aid in the diagnosis of the following diseases:

          SLE (lupus)
          mixed connective tissue disease
          Sjogren's syndrome
          scleroderma (systemic sclerosis)
          dermatomyositis
          polymyositis
          rheumatoid arthritis
          Chagas' disease

DISTRIBUTION AND MARKETING

     General

     In the United States, Hemagen, excluding the RAI division, sells its
products directly and through distributors to clinical laboratories, hospitals,
veterinary offices, and research organizations, among other places.
Domestically, the RAI division mainly sells its products to large multinational
distributors on a private label basis. Internationally, Hemagen sells its
products primarily through distributors and its majority owned subsidiary in
Brazil. Hemagen grants both exclusive and non-exclusive distributorships, which
generally cover limited geographic areas and specific test kits. Hemagen has
relationships with over 30 distributors in various countries worldwide.

     Hemagen's primary non-exclusive distributor of the Analyst product line to
physician office laboratories is Inverness Medical Innovations Inc.
("Inverness"), formerly Wampole Labs prior to it being acquired by Inverness.
Sales to Inverness accounted for approximately $458,000 and $528,000 or
approximately 6% and 7% of Hemagen's revenue for the fiscal years ended
September 30, 2005 and 2004, respectively.

     Hemagen markets its Virgo product line in South America through HDC in
Brazil. HDC maintains an office in Sao Paulo, Brazil that is staffed by
full-time sales administrators who receive and process orders and other
employees that handle light assembly work, shipping, and technical support for
the products. In fiscal years 2005, and 2004, Hemagen derived product sales
through HDC of $1,206,000 and $870,000, respectively, which represents 16% and
12% of Hemagen's total sales, respectively.

PRODUCTS UNDER DEVELOPMENT

     Hemagen spent approximately $281,000 and $248,000 on research and
development for the fiscal years ended September 30, 2005, and 2004,
respectively. Such research and development is focused on:

     -    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

     Hemagen manufactures its ELISA test kits, hemagglutination test kits,
immunofluorescence test kits and Analyst and Endochek consumables at its
Columbia, Maryland facility. Clinical chemistry products are produced at
Hemagen's facility in San Diego, California. The Analyst and the Endochek
instruments are manufactured by third parties for Hemagen. Hemagen purchases
many of the antigens and other reagents used in its kits from outside vendors.
Certain of these antigens and reagents are from single suppliers. The Company
attempts to minimize the risk from these single suppliers by maintaining a
safety supply of inventory. If the products purchased from these single sources
become unavailable there can be no assurances that the Company will be able to
substitute a new supplier in a timely manner and thus could have a material
adverse effect on the business, financial condition, and results of operation.
Some of the reagents used in Hemagen's


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test kits are manufactured at Hemagen's facilities. Hemagen uses lyophilization
equipment to preserve sensitized red blood cells for its hemagglutination test
kits. All of Hemagen's products are manufactured under the Quality System
Regulation as defined by the FDA.

     Most components used in Hemagen's products are available from multiple
sources. The outsourced manufacturing of the Analyst instrument can be obtained
from multiple sources while the manufacturing of the Endochek is sole sourced.
Hemagen does not consider the dependence on a sole source for the Endochek a
business risk for Hemagen because the Analyst instrument is a viable alternative
to the Endochek. The chemistry tablets that are used in the Analyst rotors are
manufactured for the Company pursuant to a manufacturing agreement with Dade
Behring, Inc. Although Dade Behring has been a reliable vendor for the Company
for over seven years, today they represent the sole source for those tablets.
The Company continues to consider other potential vendors or alternative vendors
for tablet manufacturing although there can be no assurances that we will be
able to develop any new suppliers for the chemistry tablets used in the Analyst
product line.

GOVERNMENT REGULATION

     Hemagen's manufacturing, distribution, and marketing of diagnostic test
kits are subject to a number of both domestic and international regulatory
controls. In the United States, Hemagen's production and marketing activities
are subject to regulation by the FDA, under the authority of the Federal Food
Drug, and Cosmetic Act, as amended.

     These regulations require that Hemagen must formally notify the FDA of its
intentions to market in vitro diagnostic devices through a regulatory submission
process, either the 510(k) process or the Premarket Approval (PMA) process. When
a 510(k) process is used, Hemagen is required to demonstrate that the product is
"substantially equivalent" to another product in commercial distribution.
Hemagen cannot proceed with sales of its diagnostic products in the United
States until it receives clearance from the FDA in the form of a substantial
equivalency letter. Currently, the majority of products that are reviewed by the
510(k) process are cleared within 90 days. In certain cases, specifically for
Class III devices, Hemagen must follow the PMA process that involves a lengthier
and more burdensome process.

     Hemagen is required to register with the FDA as a device manufacturer and
to disclose its devices. Accordingly, Hemagen is subject to inspection on a
routine basis for compliance with the FDA's Quality System Regulations. These
regulations require that Hemagen manufacture its products and maintain its
documents in a prescribed manner with respect to design, manufacturing, testing,
process control and distribution activities. In addition, Hemagen is required to
comply with various FDA requirements for labeling, pursuant to the applicable
regulations. The most recent inspections by the FDA were August 2004 for the
Columbia, MD facility and November 2002 for the Company's San Diego, CA
facility. The results of those inspections can be reviewed by going to the FDA
website at www.fda.gov. Finally, the FDA prohibits an approved device from being
marketed for unapproved applications. Hemagen believes it is in conformity with
all such regulations.

     In January 2004, the Company received CE certification thereby allowing the
Company to sell certain of its registered products in the European Community.
The Company plans to obtain ISO 13485 certification in order to market
additional products in the European Community and Canada.

COMPETITION

     The clinical diagnostic industry is highly competitive. There are many
companies, both public and private, engaged in diagnostics-related sales,
including a number of well-known pharmaceutical and chemical companies.
Competition is based primarily on product reliability, customer service and
price. Many of these companies have substantially greater capital resources and
have marketing and business organizations that are substantially greater in size
than Hemagen. Many companies have been working on immunodiagnostic reagents and
products, including some products believed to be similar to those currently
marketed or under development by Hemagen. Hemagen believes that its primary
competitors in the market include Abaxis Inc., Bion, Bio-Rad Laboratories,
Corgenix Medical Corporation, Diamedix Corporation, Heska Corporation, IDEXX
Laboratories, Inc., Immco Diagnostics, INOVA Diagnostics, Inc., Jas Diagnostics,
Inc, Pointe Scientific, Inc., The Binding Site. Ltd, and Trinity Biotech Plc,
among others. Hemagen expects competition within this industry to intensify.


                                        9

<PAGE>

PRODUCT LIABILITY

     The testing, marketing and sale of clinical diagnostic products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against Hemagen. Hemagen may
incur product liability due to product failure or improper use of products by
the user. Inaccurate detection may result in the failure to administer necessary
therapeutic drugs or administration of unnecessary and potentially toxic drugs.
Even with proper use of a product, there may be specific instances in which the
results obtained from Hemagen's test kits could lead a physician to predict the
inappropriate therapy for a particular patient. Hemagen maintains product
liability insurance in the amount of up to $4,000,000 per incident and in the
aggregate which, based on Hemagen's experience and industry practice, Hemagen
believes to be adequate for its present operations. No assurance can be given
that Hemagen's insurance coverage is sufficient to fully insure against claims
which may be made against Hemagen.

PATENTS AND PROPRIETARY RIGHTS

     Hemagen protects its technology primarily as trade secrets rather than
relying on patents, either because patent protection is not possible or, in
management's opinion, would be less effective than maintaining secrecy. In
addition, Hemagen relies upon confidentiality agreements with its employees. To
the extent that it relies on confidentiality agreements and trade secret
protection, there can be no assurance that Hemagen's efforts to maintain secrecy
will be successful or that third parties will not be able to develop the
technology independently. Hemagen may in the future apply for patent protection
for certain of its technology when management believes such protection would be
beneficial to Hemagen. The protection afforded by patents depends upon a variety
of factors which may severely limit the value of the patent protection,
particularly in foreign countries, and no assurance can be given that patents,
if granted, will provide meaningful protection for Hemagen's technology.

ROYALTY OBLIGATIONS

     Hemagen is required to pay royalties to third parties on sales of some of
its products. Hemagen had a license agreement with Dade Behring, Inc. for the
license of technical information relating to the Analyst(R) product line. The
license was signed in conjunction with the Analyst acquisition and required
payments through August 2004. Hemagen has a license agreement for the use of
certain technology involved in the manufacture and sale of the Analyst product
line. This license agreement terminates upon the expiration of the last patent
associated with the applicable technology, which is February 2007.

EMPLOYEES

     As of September 30, 2005, Hemagen had 47 full-time employees, 20 are
employed in sales, marketing, general and administrative activities and 27 are
involved in production and research and development.

     None of Hemagen's employees are represented by a labor organization and
Hemagen is not a party to any collective bargaining agreement. Hemagen has never
experienced any strike or work stoppage and considers its relationship with its
employees to be good.

ITEM 2. DESCRIPTION OF PROPERTY

     Hemagen maintains its principal administrative office, laboratory and
production operations in a 27,400 square foot leased facility in Columbia,
Maryland. Under the Columbia lease, which extends through July 30, 2007, Hemagen
pays approximately $188,000 per year in rent. Hemagen also leases 20,160 square
feet in San Diego, California, where it manufactures the RAICHEM products. Under
the San Diego lease, which extends through May 31, 2008, Hemagen will pay
approximately $246,000 in rent during the next fiscal year.

     Hemagen's 83.7%-owned subsidiary, Hemagen Diagnosticos Comercio, Importacao
e Exportacao, Ltd, leases approximately 6,000 square feet of flexible office
space in Sao Paulo, Brazil pursuant to a lease that expires on June 30, 2006.
This subsidiary pays approximately $29,000 per year in rent for this space.

     It is management's opinion that all of the properties are adequately
insured. The Company believes that it currently has excess space and is working
to eliminate the excess leased space. In June 2005, the


                                       10

<PAGE>

Company purchased a new 64,500 square foot corporate headquarters facility
located in Baltimore, Maryland for $800,000. In addition to the building, the
Company has obtained financing for the build out and relocation of its existing
facilities to the new building. The Company estimates the total project cost at
$2,150,000. The total amount that will be financed is estimated at $1,935,000.
This project is expected to be completed in fiscal year 2006. Over the upcoming
fiscal year, management will be looking to migrate more of its manufacturing
processing to this new facility. The new building will allow the Company to take
its current U.S. based property that have weighted average base rents of
approximately $8.39 per square foot and are subject to rent escalations and
relocate to a Company owned building with a base rent that equates to
approximately $3.35 per square foot when excess space is sublet or $6.00 per
square foot if only 36,000 square feet of the total building is utilized, which
is planned for at this time. Management believes that due to the substantial
investment in specialized equipment it is prudent to provide for a long-term
stable facility with relatively fixed costs, room for expansion without
additional rent, and to be able to control all future decisions with respect to
its facilities. In addition, as a result of the location of the new facility,
the Company will benefit from several city and state tax incentive plans.

ITEM 3. LEGAL PROCEEDINGS

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
     SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

     Hemagen's Common Stock has been traded on the over-the-counter bulletin
board (OTC-BB) market since March 3, 2003 under the symbol "HMGN". Prior to that
date, the Company's common stock traded on the over-the-counter market through
the Nasdaq Smallcap Market from February 4, 1993 to February 28, 2003. On
December 21, 2005 the closing bid and ask price for the Common Stock as reported
by the OTC-BB were $0.20 and $0.24 per share, respectively.

     For the periods indicated, the following table sets for the range of high
and low bid prices for the Common Stock as reported by the OTC-BB and the Nasdaq
during Fiscal 2005 and 2004. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.

<TABLE>
<CAPTION>
                  HIGH    LOW
                 -----   -----
<S>              <C>     <C>
FISCAL 2004
First Quarter    $0.69   $0.24
Second Quarter   $0.91   $0.47
Third Quarter    $0.80   $0.53
Fourth Quarter   $0.68   $0.35

FISCAL 2005
First Quarter    $0.51   $0.22
Second Quarter   $0.45   $0.27
Third Quarter    $0.40   $0.22
Fourth Quarter   $0.33   $0.17
</TABLE>

     As of December 21, 2005, there were 177 holders of record of Hemagen's
Common Stock which Hemagen believes represents approximately 1800 beneficial
owners.

DIVIDENDS

     Hemagen has never paid cash dividends. Hemagen currently intends to retain
all future earnings, if any, for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.


                                       11

<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The following table sets forth our Securities authorized for issuance under
our currently effective Equity Compensation Plans.

<TABLE>
<CAPTION>
                                                                                         Number of securities
                                                                                       remaining available for
                                  Number of securities to be     Weighted-average       future issuance under
                                    issued upon exercise of      exercise price of    equity compensation plans
                                     outstanding options,      outstanding options,     (excluding securities
Plan category                        warrants, and rights       warrants and rights   reflected in column (a))
-------------                     --------------------------   --------------------   -------------------------
<S>                               <C>                          <C>                    <C>
Equity compensation plans
   approved by security holders          3,046,514(1)                  $1.19                  348,000(2)
Equity compensation plans not
   approved by security holders                 --                        --                       --
                                         ---------                     -----                  -------
Total                                    3,046,514(1)                  $1.19                  348,000(2)
                                         =========                     =====                  =======
</TABLE>

(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.

(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, 2005.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

OVERVIEW

Historically, Hemagen has concentrated its efforts on developing, manufacturing
and marketing medical diagnostic test kits used to aid in the diagnosis of
certain diseases and for assessing general health conditions. Hemagen has
approximately 150 different test kits available that are 510(K) cleared for sale
in the United States by the FDA.

Fiscal year 2005 represents the sixth year of operations under a new management
team. Management has been working over the past six fiscal years to take the
appropriate actions to improve the management and operations of the Company
while attempting to achieve sustained profitability. There can be no assurance
that any of the above actions management is taking will achieve the desired
results. However, management believes that as a direct result of these actions,
that cash flow from operations, the cash on hand at September 30, 2005 and its
traditional line of credit availability will be sufficient to finance its
operations for fiscal 2006. See the "Recent Developments" section on page 4.

At September 30, 2005, Hemagen had $272,000 of unrestricted cash, working
capital of $1,683,000 and a current ratio of 1.65 to 1.0. Hemagen currently has
a revolving line of credit with a bank for the purpose of financing working
capital needs as required. The line of credit facility currently provides for
borrowings up to $500,000, at an annual interest rate of the prime rate plus
3/4%. The line of credit facility was initially established to provide
borrowings of up to $1,000,000 but was reduced in June 2005 in conjunction with
the Company establishing $1,935,000 in financing for the purchase and subsequent
build out of a corporate manufacturing headquarters building located in
Baltimore, Maryland. At September 30, 2005 the Company had $400,000 borrowed on
its line of credit facility.

The Company purchased this new headquarters building in order to reduce its
overall overhead expenses related to facilities, utilities, inventory control
and labor costs and will look to combine as many of its manufacturing processes
in that facility over the next year. Likewise, the Company believes that by
owning its own facility it will be able to ensure that its facilities expenses
remain stable for the foreseeable future; and that it will have additional space
for future growth by internal growth, acquisition, or product line expansion.

Hemagen believes that cash flow from operations, cash on hand at September 30,
2005, and the availability of the line of credit will be sufficient to finance
its operations for fiscal 2006. The line of credit matures on March 31, 2006 and
the Company expects to renew the line at that time. However Hemagen can give no
assurances that it will have sufficient cash flow to finance its operations. The
Company is currently working to expand its borrowing availability particularly
during the construction period to ensure there is more than adequate credit
availability to the Company at all times. Hemagen has no off-balance sheet
financing arrangements.

RESULTS OF OPERATIONS

Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30,
2004

Revenues for fiscal 2005 increased $115,000 (2%) to approximately $7,586,000
from approximately $7,471,000 for fiscal 2004. This increase in sales resulted
from $215,000 of increased sales of the Company's Virgo autoimmune and
infectious disease product line and $67,000 of increased sales at the Company's
Raichem division offset by $167,000 of reduced sales with the Company's Analyst
and Endochek Clinical Chemistry Benchtop Analyzer systems.

The increase in the Virgo product line sales mainly resulted from growth at the
Company's 83.7% owned Brazilian subsidiary, Hemagen Diagnosticos Comercio,
Importacao Exportacao, Ltd. This growth resulted from a new management team that
was put in place in the second half of fiscal year 2004 and the strength of


                                       12

<PAGE>

the Brazilian reais as compared to the US dollar over the past year.

Sales of the Analyst Clinical Chemistry Analyzer and Endochek product line were
$167,000 lower than the prior year as a result of approximately $132,000 of
lower sales to physician office laboratories and the distributors that support
that market in addition to $35,000 of lower sales of the Company's Veterinary
Endochek product line. The largest decrease within the Analyst sales stem from
lower sales to a foreign distributor of $76,000 which mainly resulted from the
timing of fulfilling this customer's order, which was pushed into the first
quarter of 2006.

The Company believes it will be able to continue to increase its revenues by
adding additional OEM contracts, direct customers, and distributors and through
increasing the business to current customers. However, Hemagen can give no
assurances that it will be able to increase revenues in the future.

Cost of product sales increased approximately $353,000 (7%) to approximately
$5,677,000 from approximately $5,324,000 in fiscal 2004 due to an increase in
production costs and lower levels of production. Cost of product sales as a
percentage of sales was 75% in fiscal year 2005 as compared to 71% in fiscal
year 2004. Gross margins for fiscal year 2005 were 25% as compared to 29% in
fiscal year 2004. The gross margins for the year decreased 4% in fiscal 2005 as
a result of the increased production costs and overall lower production levels
than in previous years. In fiscal year 2005, the Analyst consumable production
levels were lower than previous years which when added to a high level of fixed
costs within our product lines that are required regardless of production
levels, led to a higher cost of sales than the previous year. In the current
fiscal year, higher expenditures for outside consulting services and their
related travel costs, temporary labor expense and facility expense caused the
total cost of sales amount to increase from the previous fiscal year.

Research and development expenses for fiscal 2005 increased approximately
$34,000 (14%) to approximately 281,000 from $247,000 in the previous year. This
increase is attributable to higher consultancy expenses related to the Virgo
product line for developing and improving the Company's existing ELISA products
and certain other projects.

Selling, general and administrative expenses for fiscal 2005 decreased
approximately $56,000 (2%) to approximately $2,351,000 from $2,407,000 in the
previous year primarily due to reduced legal and consulting services in the
current year. Legal expenses were higher in the previous year as a result of the
cost of the exchange offering of subordinated notes that had an effective date
of September 30, 2004.

In fiscal 2004, the Company had other operating expenses of $62,000 as compared
to no charges in the current year. This expense is related to the purchase of an
additional 32.7% of the common shares outstanding of its Brazilian subsidiary
for $20,000 and two non-compete agreements costing $42,000 signed in conjunction
with the purchase of the shares. In fiscal 2004, the Company expensed these
purchases in the current year because of the uncertainty of any future value of
this investment. Historically, the Company's Brazilian subsidiary has generated
losses since its inception in 1992, and most of the current management in Brazil
has been in place for less than one year. The Company acquired these shares and
non-compete agreements because in the future, the Company is seeking to expand
its marketing efforts in Brazil. In fiscal year 2005, the Company did expand its
focus in Brazil as noted in the section titled "Distribution and Marketing".

In fiscal 2005, goodwill of approximately $152,000 was written off based on
impairment tests performed. The goodwill on the books related to the 1996
acquisition of the Raichem clinical chemistry division. Management determined
that based on the current cash usage and the accumulation of previous year's
losses from the consolidated operations of the Company an impairment of goodwill
had occurred, and was written off.

For the fiscal year 2005, Hemagen had an operating loss of $875,000 as compared
to $569,000 for the previous fiscal year. This increase in the operating loss
resulted from lower gross margins from the previous year and the impairment of
the Raichem goodwill.

Net other expense decreased $2,593,000 (86%) to approximately $413,000 from
approximately $3,006,000 in fiscal 2004. The reduction in other expenses
resulted from lower interest expense of $1,756,000 and debt conversion costs in
fiscal year 2004 of $863,000. Net interest expense for fiscal 2005 was $413,000
as compared to $2,139,000 in fiscal 2004. The reduction in interest expense is
mainly related to the reduction in non-cash interest expense resulting from the
amortization of the debt discount on the Senior Subordinated Convertible notes.
Cash payments of


                                       13

<PAGE>

interest expenses decreased by $133,000 (28%) to $350,000 in the current year as
compared to $483,000 in the prior year.

The debt conversion costs realized by the Company in fiscal 2004 of $863,000
resulted from an exchange offer the Company completed in December 2004 that had
an effective date of September 30, 2004. The Company exchanged $6,065,000 of its
Senior Secured Convertible Notes that were due on April 17, 2005 for 5,079,438
shares of common stock and Senior Secured Convertible Notes with a face value of
$4,033,225 (See Note J of the financial statements for an explanation of the
exchange offer and description of the securities issued). The debt conversion
costs represent the difference between the fair value of the securities issued
as of September 30, 2004 and the net book value of the Senior Secured
Convertible Notes that were cancelled as a result of the exchange. There were no
debt conversion costs in the current fiscal year.

In the current fiscal year, the Company had $49,000 of income tax expense as
compared to $24,000 in fiscal year 2004. All of the income tax expense is
related to the Company's Brazilian subsidiary and represents the net tax expense
after adjusting the benefit of loss carryforwards utilized according to
Brazilian tax law.

Net loss for fiscal 2005 decreased to approximately $1,337,000 (163% decrease)
or $0.09 per share basic and diluted compared to a net loss of approximately
$3,599,000 or $0.36 per share basic and diluted, for the previous year primarily
due to the decrease in interest expense, and debt conversion costs in the
previous fiscal year, offset by lower margins in the current year and the write
off of Raichem goodwill.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2005, Hemagen had $272,000 of unrestricted cash, working
capital of $1,683,000 and a current ratio of 1.65 to 1.0. Hemagen currently has
a revolving line of credit with a bank for the purpose of financing working
capital needs as required. The line of credit facility currently provides for
borrowings up to $500,000, at an annual interest rate of the prime rate plus
3/4%. The line of credit facility was initially established to provide
borrowings of up to $1,000,000 but was reduced in June 2005 in conjunction with
the Company establishing $1,935,000 in financing for the purchase and subsequent
build out of a corporate manufacturing headquarters building located in
Baltimore, Maryland. At September 30, 2005 the Company had $400,000 borrowed on
its line of credit facility.

In fiscal 2005, Hemagen had capital expenditures of $851,000 mainly related to
the purchase of a corporate manufacturing headquarters building. The Company has
capital expenditures planned for fiscal 2006 related to build out of this new
corporate manufacturing facility in Maryland estimated at $1,323,000. No
commitments for capital expenditures in fiscal 2006 have been made at this time.
The Company has a financing commitment in place to finance all of the
expenditures on a short term basis using construction financing that matures on
June 30, 2006 and then upon the completion of the build out, commitments are in
place to finance approximately $2,021,000 on a long term basis. Upon the
completion of the construction and relocation project, Hemagen will finance up
to approximately $1,135,000 of the project costs over ten years amortized over a
twenty year period with a traditional bank mortgage. The rate on the long term
financing will be the Federal Home Loan Bank of Atlanta five year rate index
plus three and three-quarters percentage points. As of September 30, 2005 this
rate was 8.76%. This rate is adjustable five years after the anniversary of the
conversion to long term financing. In addition, the Company has a commitment
from the U.S. Small Business Administration (SBA) to finance up to 40% or
$886,000 of the total project costs over a long term basis once the construction
period is completed and certain closing requirements are met. The portion of the
project financed by the SBA will be paid back over twenty years and will bear
interest at the rate determined by the SBA at that time. The current rate on
this type of financing is approximately 6.38%. Once this build out project is
complete and long term financing is in place, the debt related to this capital
acquisition which was $650,000 at September 30, 2005, will be classified as a
long term liability of the Company. At September 30, 2005, this construction
Note payable is classified as a current liability of the Company and thus has
had a substantial impact on the working capital ratio at year end. Excluding
this Note payable, the working capital ratio at September 30, 2005 would have
been 2.2. to 1.0 as compared to 1.65 to 1.0 as reported by the Company.

In fiscal 2005, Hemagen used cash of approximately $266,000. Cash used by
operating activities was approximately $475,000. Cash used by investing
activities was approximately $851,000 and financing activities generated
approximately $1,015,000. The effect of exchange rates on cash in the current
fiscal year resulted in a positive adjustment of approximately $44,000 which
offset the cash usage from operating and investing activities.


                                       14

<PAGE>

Effective September 30, 2004, the Company completed an exchange offer to
exchange 8% Senior Subordinated Secured Convertible Notes outstanding of
$6,065,000 that were convertible into 3,032,500 shares of Common Stock that were
due in April 2005 for 5,079,438 shares of common stock and 8% Senior
Subordinated Secured Convertible Notes of $4,033,225 that are convertible into
5,377,633 shares of Common stock due September 2009. This exchange has been a
non-cash transaction and accordingly had no impact on the cash reported by the
Company in fiscal year 2004.

Hemagen believes that cash flow from operations, cash on hand at September 30,
2005, and the availability of the line of credit will be sufficient to finance
its operations for fiscal 2006. The line of credit matures on March 31, 2006 and
the Company expects to renew the line at that time. However Hemagen can give no
assurances that it will have sufficient cash flow to finance its operations. The
Company is currently working to expand its borrowing availability particularly
during the construction period to ensure there is more than adequate credit
availability to the Company at all times. Hemagen has no off-balance sheet
financing arrangements.

FISCAL 2005 COMPARED TO FISCAL 2004

Hemagen used $475,000 of cash flow from operating activities during fiscal 2005
compared to using $166,000 in cash flow from operating activities in fiscal
2004. This increase in cash used is attributed to the increase in the net loss
after adjusting for non-cash, one-time charges of approximately $797,000 as
compared to net loss after adjusting for non-cash charges of $292,000 in fiscal
2004. Changes in working capital mainly include increases in the cash provided
by the reduction in inventory of $795,000, which was offset by increased cash
used to reduce accounts payable and accrued expenses of $297,600, a decrease in
the cash generated from accounts receivable of $176,000, and an increase in the
cash used for prepaid expenses of $118,000. Included in the expenses for the
period were approximately $72,000 of cash used related to the exchange offering
that was completed in the first quarter of 2005, and approximately $50,000 of
expenses related to the acquisition of the new corporate facility.

Cash used in investing activities totaled $851,000 in fiscal 2005, as compared
to $54,000 of cash used in fiscal 2004. In June 2005, the Company purchased a
corporate headquarters manufacturing facility for approximately $827,000 and
other capital expenditures of $24,000, which represents the cash used in fiscal
year 2005. The cash used in fiscal 2004 was related to capital expenditures of
approximately $39,000 and $20,000 spent to purchase additional shares of common
stock of the Company's Brazilian subsidiary.

Cash generated by financing activities totaled $1,015,000 in fiscal 2005 as
compared to $3,000 generated in fiscal 2004. The cash generated in the current
year represents $612,000, the net amount financed with a construction loan
obtained to purchase and build out the Company's new facility, and $400,000
borrowed on the Company's line of credit facility during fiscal year 2005. The
total commitment for the financing for the new facility is $1,935,000 and as of
September 30, 2005, the Company had financed approximately $650,000 of that
amount, and had paid approximately $38,000 in commitment fees to arrange for
that financing. The increased borrowings on the line of credit facility were
mainly attributed to cash used for the Company's equity contribution to the
facility purchase and expenditures related to this new facility, and to finance
operations.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting for Changes and
Error Corrections - a replacement of Accounting Opinions Board ("APB") Opinion
No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective
applications to changes in accounting principles for prior periods' financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005, and earlier adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005, and earlier adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after this statement was
issued. The Company has adopted SFAS No. 154 as of its issuance and will apply
its provisions to any changes in accounting principle that occur in future
periods. The Company's adoption of SFAS No. 154 did not have an impact on the
Company's financial condition or results of operations during the twelve months
ended September 30, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". This statement


                                       15

<PAGE>

will provide investors and other users of financial statements with more
complete financial information by requiring that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. This statement covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans, and replaces FASB SFAS No. 123 "Accounting for Stock-Based Compensation",
and supersedes APB Opinion No. 25. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in APB No. 25,
as long as the footnotes to financial statements disclosed the pro forma net
income under the fair-value-based method. The Company will be required to apply
SFAS No. 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is evaluating the impact of the adoption of
SFAS No. 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements requires us to make
estimates and judgments with respect to the selection and application of
accounting policies that affect the reporting of amounts of assets, liabilities,
revenues and expenses, and the disclosures of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies and estimates have the
greatest impact on the preparation of our consolidated financial statements:

Revenue Recognition

We manufacture and market a broad offering of in vitro diagnostic products and
services which currently include: (1) reagents and consumables for general
chemistry analyzers, (2) medical diagnostic test kits (3) medical diagnostic
instruments, and (4) maintenance services. Reagents and consumables, in addition
to medical test kits represent the largest portion of our sales. Revenues from
reagents and consumables and test kits are recognized when the product is
shipped and all contractual obligations have been satisfied and it is reasonably
assured that the resulting receivable is collectible.

Instruments are usually sold either directly to the customer or to a third party
financing entity that in turn leases it to the end customer. Instrument revenue
is recognized upon shipment and when all contractual obligations have been
satisfied and it is reasonably assured that the resulting receivable is
collectible

Revenue under product service contracts, which are generally for one year or
less, are recognized ratably over the term of the contract.

Accounts Receivable

The majority of the Company's accounts receivable are due from distributors
(domestic and international), hospitals, universities, and physician and
veterinary offices and other entities in the medical field. Credit is extended
based on evaluation of a customers' financial condition and, generally,
collateral is not required. Accounts receivable are most often due within 30
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. We maintain allowances for doubtful accounts
based on a number of factors, including the length of time the accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts. Actual
amounts collectible could vary from our estimates and affect our operating
results.

Inventories

Inventories are stated at the lower of cost or market. Market for raw materials
is based on replacement costs and, for other inventory classifications, on net
realizable value. We regularly review inventory quantities on


                                       16

<PAGE>

hand and record a provision for deterioration, excess and obsolete inventory
based primarily on our estimated forecast of product demand and production
requirements for the next 12 to 18 months, depending on the product. Several
factors may influence the realizability of our inventories, including
technological change and new product development. These factors could result in
an increase in the amount of obsolete inventory on hand. Additionally, our
estimates of future product demand may prove to be inaccurate, in which case we
may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if we determine that our inventory was
overvalued, we will be required to recognize such costs in cost of goods sold at
the time of such determination. Although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of our inventory and our reported operating
results.

ITEM 7. FINANCIAL STATEMENTS

     See Item 13 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE.

     None.

ITEM 8A. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer, William P. Hales, and Chief Financial
Officer, Deborah F. Ricci, have evaluated the Company's disclosure controls and
procedures as of September 30, 2005. Based upon this evaluation, these officers
believe that the Company's disclosure controls and procedures are effective in
timely alerting them to material information required to be included in the
Company's Securities and Exchange Commission filings.

There have been no significant changes in the Company's internal controls as of
September 30, 2005 over financial reporting that occurred during the last fiscal
year that has materially affected or is reasonably likely to affect Hemagen's
internal control over financial reporting. Management is aware that there is a
lack of segregation of duties due to the small number of employees within the
financial and administrative functions of the Company. However, management has
decided that considering the employees involved and the control procedures in
place, risks associated with such lack of segregation are insignificant and the
potential benefits of adding employees to clearly segregate duties do not
justify the expenses associated with such increases. Management will continue to
evaluate this segregation of duties. In addition, management is aware that many
of the internal controls that are in place at the Company are undocumented
controls. The Company is working to document these controls over the up coming
year to be in compliance with Section 404 of the Sarbannes-Oxley Act of 2002.

ITEM 8B. OTHER INFORMATION

     None.

                                    PART III

ITEMS 9 THROUGH 12 AND 14 ARE INCORPORATED BY REFERENCE TO THE REGISTRANT'S
PROXY STATEMENT RELATING TO ITS 2005 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 201(D) IS CONTAINED IN ITEM 5
OF THIS FORM 10-KSB.

ITEM 13. EXHIBITS

     None filed herewith.

(A)(1) AND (2) FINANCIAL STATEMENTS AND SCHEDULES


                                       17

<PAGE>

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting firm                      F-2
Consolidated Balance Sheets at September 30, 2005 and 2004                   F-3
Consolidated Statements of Operations for the years ended
September 30, 2005, and 2004                                                 F-5
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 2005, and 2004                                           F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 2005, and 2004                                           F-7
Notes to Consolidated Financial Statements                                   F-8
</TABLE>

(A)(3) EXHIBIT LIST.

<TABLE>
<CAPTION>
Exhibit No.                            Description of Exhibit                           Filing Status
-----------                            ----------------------                           -------------
<S>           <C>                                                                       <C>
3.1           Certificate of Incorporation.                                                   A

3.2           Bylaws.                                                                         A

4.1           Specimen Stock Certificate.                                                     A

4.2           Rights Agreement dated January 27, 1999.                                        A

4.3           First Amendment to the Rights Agreement dated September 30, 1999.               B

10.6*         1992 Stock Option Plan.                                                         A

10.17         Description of the Lease for office space of HDC in Sao Paulo, Brazil.          N

10.25         Settlement Agreement dated September 30, 1999.                                  C

10.29         Form of 8% Senior Subordinated Secured Convertible Note.                        E

10.30         Second Amendment to the Lease between the Company and 9033                      E
              Red Branch Road, L.L.C. dated June 9, 2000.

10.32         Second Restructuring Agreement between the Company and                          D
              Dade Behring, Inc. dated November 9, 2000.

10.35*        2001 Stock Option Plan.                                                         D

10.40         Line of Credit Financing Agreement between Hemagen Diagnostics, Inc.            I
              and Reagents Applications, Inc and Bay National Bank dated
              September 26, 2002

10.42*        Directors Rule 10(b)5-1 Stock Purchase Plan                                     J

10.44*        Hemagen Employee Stock Ownership Plan                                           K

10.45         Trust Agreement for the Hemagen Stock Ownership Plan                            K

10.50         Quota Purchase and Sale Agreement and Non-Competition Agreement                 K

10.52         Form of 8% Senior Subordinated Secured Convertible Note dated                   M
              September 30, 2004.

10.55         Construction Loan Agreement and related Promissory Note between                 L
</TABLE>


                                       18

<PAGE>

<TABLE>
<S>           <C>                                                                       <C>
              Hemagen Diagnostics, Inc. and Reagents Applications, Inc. and Bay
              National Bank dated June 24, 2005.

10.60         Second modification and amendment to Line of Credit Financing Agreement         L
              between Hemagen Diagnostics, Inc. and Reagents Applications, Inc. and
              Bay National Bank dated June 24, 2005.

10.65         Lease Agreement for 330 North Warwick Avenue, Baltimore City, Maryland          L
              between Hemagen Properties LLC and Hemagen Diagnostics, Inc.
              dated June 24, 2005.

14.0          Code of Ethics Policy                                                           J

14.1          Insider Trading Policy                                                          J

23            Consent of Independent Certified Public Accountants                             N

31.1          Certification of Chief Executive Officer pursuant to Rule 13a-14(a)             N

31.2          Certification of Chief Financial Officer pursuant to Rule 13a-14(a)             N

32.1          Certification of Chief Executive Officer pursuant to Rule 13a-14(b)             N

32.2          Certification of Chief Financial Officer pursuant to Rule 13a-14(b)             N
</TABLE>

*    Management compensatory contracts.

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.   Filed herewith.


                                       19

<PAGE>

                                    CONTENTS

<TABLE>
<S>                                                                          <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      F-2

CONSOLIDATED FINANCIAL STATEMENTS:

   BALANCE SHEETS AT SEPTEMBER 30, 2005 AND 2004                             F-3

   STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
      SEPTEMBER 30, 2005 AND 2004                                            F-5

   STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
      SEPTEMBER 30, 2005 AND 2004                                            F-6

   STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
      SEPTEMBER 30, 2005 AND 2004                                            F-7

   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F-8
</TABLE>


                                       F-1

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Hemagen Diagnostics, Inc.


We have audited the accompanying consolidated balance sheets of Hemagen
Diagnostics, Inc. and subsidiaries as of September 30, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hemagen Diagnostics,
Inc. and subsidiaries at September 30, 2005 and 2004, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Grant Thornton LLP
Baltimore, Maryland
November 4, 2005


                                       F-2

<PAGE>

                    HEMAGEN DIAGNOSTICS INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                        AS OF SEPTEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                                        2005         2004
                                                     ----------   ----------
<S>                                                  <C>          <C>
                          ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                         $  272,168   $  538,542
   Accounts receivable, less allowance for
      doubtful accounts of $86,862 and $102,359
      at September 30, 2005 and 2004, respectively      957,518      959,135
   Inventories, net                                   2,762,967    3,339,932
   Prepaid expenses and other current assets            282,762      153,756
                                                     ----------   ----------
      Total current assets                            4,275,415    4,991,365

PROPERTY AND EQUIPMENT, net of accumulated
   depreciation and amortization                      1,024,349      468,509

OTHER ASSETS, NET
   Goodwill                                                  --      152,325
   Other                                                 37,824       13,240
                                                     ----------   ----------
                                                         37,824      165,565
   Total Assets                                      $5,337,588   $5,625,439
                                                     ==========   ==========
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       F-3

<PAGE>

                    HEMAGEN DIAGNOSTICS INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                        AS OF SEPTEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                     2005           2004
                                                                 ------------   ------------
<S>                                                              <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Current portion senior subordinated secured convertible
      notes due April 17, 2005, net of unamortized discount of
      $5,188 at September 30, 2004                               $     25,000   $     19,812
      Revolving line of credit                                        400,000             --
      Accounts payable and accrued liabilities                      1,476,541      1,584,041
      Deferred revenue                                                 40,385         53,262
      Note payable                                                    650,000             --
                                                                 ------------   ------------
         Total current liabilities                                  2,591,926      1,657,115

      Senior subordinated secured convertible notes due
         September 30, 2009, net of unamortized discount of
         $269,257 and $326,863 at September 30, 2005 and
         2004, respectively                                         3,763,968      3,706,362
                                                                 ------------   ------------
         Total liabilities                                          6,355,894      5,363,477

COMMITMENTS AND CONTINGENCIES                                              --             --

STOCKHOLDERS' EQUITY
   Preferred stock, $0.01 par value - 1,000,000 shares
      authorized; none issued                                              --             --
   Common stock, $0.01 par value - 30,000,000
      shares authorized; 15,304,351 and 15,294,343 shares
      issued and outstanding at September 30, 2005 and 2004,
      respectively                                                    153,043        152,943
   Additional paid-in capital                                      22,832,155     22,829,354
   Accumulated deficit                                            (23,816,135)   (22,478,886)
   Accumulated other comprehensive loss -
      currency translation loss                                       (97,732)      (151,812)
   Less treasury stock at cost; 100,000 shares at
      September 30, 2005 and 2004, respectively                       (89,637)       (89,637)
                                                                 ------------   ------------
      Total stockholders' equity                                   (1,018,306)       261,962
                                                                 ------------   ------------
      Total liabilities and stockholders' equity                 $  5,337,588   $  5,625,439
                                                                 ============   ============
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       F-4

<PAGE>

                    HEMAGEN DIAGNOSTICS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                     YEARS ENDED SEPTEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                2005          2004
                                                            -----------   -----------
<S>                                                         <C>           <C>
NET SALES                                                   $ 7,585,654   $ 7,470,677

COSTS AND EXPENSES
   Costs of sales                                             5,676,562     5,323,560
   Research and development                                     281,019       247,267
   Selling, general and administrative                        2,350,899     2,406,898
   Impairment of goodwill                                       152,324            --
   Other operating expenses                                          --        62,000
                                                            -----------   -----------
         Total cost and expenses                              8,460,804     8,039,725
                                                            -----------   -----------
         Operating loss                                        (875,150)     (569,048)

OTHER INCOME (EXPENSES)
      Interest income                                             1,856        31,359
      Interest expense, including $62,794 and $1,658,162,
         respectively of debt discount amortization            (414,818)   (2,170,322)
      Debt conversion costs                                          --      (863,253)
      Other expense                                                  --        (4,165)
                                                            -----------   -----------
         Total other income (expense)                          (412,962)   (3,006,381)
                                                            -----------   -----------
      Net loss before income taxes                           (1,288,112)   (3,575,430)
      Income tax expense                                        (49,137)      (23,739)

NET LOSS                                                    $(1,337,249)  $(3,599,168)
                                                            ===========   ===========

Other Comprehensive Income, net of tax:
  Foreign Currency translation adjustments                  $    54,080   $     6,021
                                                            -----------   -----------
Other Comprehensive income                                       54,080         6,021
                                                            -----------   -----------
Comprehensive loss                                          $(1,283,169)  $(3,593,147)
                                                            ===========   ===========

Net loss per share - Basic and Diluted                      $     (0.09)  $     (0.36)
                                                            ===========   ===========
Weighted average common shares used in the calculation
   of net loss per share                                     15,204,351    10,108,517
                                                            ===========   ===========
</TABLE>


                                       F-5

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                     YEARS ENDED SEPTEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                                  Accumulated
                                    Common Stock       Additional                    Other        Treasury Stock       Total
                               ---------------------    Paid-in     Accumulated  Comprehensive  -----------------  Stockholders'
                                 Shares    Par Value    Capital       Deficit         Loss       Shares    Cost        Equity
                               ----------  ---------  -----------  ------------  -------------  -------  --------  -------------
<S>                            <C>         <C>        <C>          <C>           <C>            <C>      <C>       <C>
Balance at October 1, 2003     10,204,855   $102,048  $20,947,149  $(18,879,718)   $(157,833)   100,000  $(89,637)  $ 1,922,009
                               ----------   --------  -----------  ------------    ---------    -------  --------   -----------

Net loss                               --         --           --    (3,599,168)          --         --        --    (3,599,168)
Foreign exchange translation
   adjustment                          --         --           --            --        6,021         --        --         6,021
                                                                                                                    -----------
Total Comprehensive loss                                                                                             (3,593,147)
Issuance of common stock in
   exchange for secured
   convertible Notes due
   April 17, 2005               5,079,438     50,794    1,879,393            --           --         --        --     1,930,187
Exercise of stock options          10,050        101        2,812            --           --         --        --         2,913
                               ----------   --------  -----------  ------------    ---------    -------  --------   -----------
Balance at September 30, 2004  15,294,343   $152,943  $22,829,354  $(22,478,886)   $(151,812)   100,000  $(89,637)  $   261,962
                               ----------   --------  -----------  ------------    ---------    -------  --------   -----------
Net loss                               --         --           --    (1,337,249)          --         --        --    (1,337,249)
Foreign exchange translation
   adjustment                          --         --           --            --       54,080         --        --        54,080
                                                                                                                    -----------
Total Comprehensive loss                                                                                             (1,283,169)
Exercise of stock options          10,000        100        2,801            --           --         --        --         2,901
                               ----------   --------  -----------  ------------    ---------    -------  --------   -----------
Balance at September 30, 2005  15,304,343   $153,043  $22,832,155  $(23,816,135)   $ (97,732)   100,000  $(89,637)  $(1,018,306)
                               ----------   --------  -----------  ------------    ---------    -------  --------   -----------
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       F-6

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           SEPTEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                       2005          2004
                                                                   -----------   -----------
<S>                                                                <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                        $(1,337,249)  $(3,599,168)
   Adjustments to reconcile net loss to net cash provided by
      (used by) operating activities
      Depreciation and amortization                                    300,754       552,897
      Amortization of debt discount                                     62,794     1,680,167
      Provision for bad debts                                           10,488        15,737
      Write off of fixed assets                                         14,333            --
      Provision for inventories                                             --       129,095
      Impairment of goodwill                                           152,324            --
      Debt conversion costs associated with the exchange of
         senior secured convertible notes                                   --       863,253
      Loss on sales of property and equipment                               --         4,426
      Write off of additional investment in Brazilian subsidiary
         and related non-compete agreements                                 --        62,000
      Changes in operating assets and liabilities:
         Accounts receivable                                            (8,871)      167,308
         Inventories                                                   576,965      (218,137)
         Prepaid expenses and other current assets                    (126,425)       (8,768)
         Accounts payable and accrued expenses                        (107,499)      190,166
         Deferred revenue                                              (12,877)       (4,501)
                                                                   -----------   -----------
            Net cash used in operating activities                     (475,263)     (165,525)
                                                                   -----------   -----------

 CASH FLOWS FROM INVESTING ACTIVITIES
      Purchase of property and equipment                              (850,510)      (38,689)
      Purchase of additional shares of common stock of
         Brazilian subsidiary                                               --       (20,000)
      Proceeds from sales of property and equipment                         --         4,721
                                                                   -----------   -----------
            Net cash used in investing activities                     (850,510)      (53,968)
                                                                   -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES
      Net borrowings from revolving line of credit                     400,000            --
      Net proceeds from mortgage financing obtained with
         purchase of land and building                                 612,175            --
      Exercise of stock options                                          2,901         2,913
                                                                   -----------   -----------
            Net cash provided by financing activities                1,015,076         2,913
                                                                   -----------   -----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                   44,323        30,835
                                                                   -----------   -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                             (266,374)     (185,745)
                                                                   -----------   -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                           538,542       724,287
                                                                   -----------   -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                             $   272,168   $   538,542
                                                                   ===========   ===========
</TABLE>


                                       F-7

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           SEPTEMBER 30, 2005 AND 2004

NOTE A - NATURE OF BUSINESS

Hemagen Diagnostics, Inc., is a biotechnology company that develops,
manufactures, and markets more than 150 FDA-cleared proprietary medical
diagnostic test kits. Hemagen has three different product lines. The Virgo(R)
product line of diagnostic test kits is used to aid in the diagnosis of certain
autoimmune and infectious diseases, using ELISA, Immunoflourescence, and
hemagglutination technology. Hemagen also manufactures and markets a complete
line of clinical chemistry reagents through its wholly owned subsidiary Reagents
Applications, Inc., under the brand name Raichem, as well as various OEM
arrangements. In addition, Hemagen manufactures and sells the Analyst(R) an
FDA-cleared clinical chemistry analyzer used to measure important constituents
in human and animal blood, and the Endochek, a clinical chemistry analyzer used
to measure important constituents in animal blood. In the United States, the
Company sells its products directly to physicians, veterinarians, clinical
laboratories and blood banks and on a private-label basis through multinational
distributors of medical diagnostics and supplies. Internationally, the Company
sells its products primarily through distributors. The Company sells the
Analyst(R) and the Endochek both directly and through distributors servicing
physicians' office laboratories and veterinarians' offices. The Company was
incorporated in 1985 and became a public company in 1993.

At September 30, 2005, Hemagen had $272,000 of unrestricted cash, working
capital of $1,683,000 and a current ratio of 1.65 to 1.0. Hemagen currently has
a revolving line of credit with a bank for the purpose of financing working
capital needs as required. The line of credit facility currently provides for
borrowings up to $500,000, at an annual interest rate of the prime rate plus
3/4%. The line of credit facility was initially established to provide
borrowings of up to $1,000,000 but was reduced in June 2005 in conjunction with
the Company establishing $1,935,000 in financing for the purchase and subsequent
build out of a corporate manufacturing headquarters building located in
Baltimore, Maryland. At September 30, 2005 the Company had $400,000 borrowed on
its line of credit facility.

The Company purchased this new headquarters building in order to reduce its
overall overhead expenses related to facilities, utilities, inventory control
and labor costs and will look to combine as many of its manufacturing processes
in that facility over the next year. Likewise, the Company believes that by
owning its own facility it will be able to ensure that its facilities expenses
remain stable for the foreseeable future; and that it will have additional space
for future growth by internal growth, acquisition, or product line expansion.

Hemagen believes that cash flow from operations, cash on hand at September 30,
2005, and the availability of the line of credit will be sufficient to finance
its operations for fiscal 2006. The line of credit matures on March 31, 2006 and
the Company expects to renew the line at that time. However Hemagen can give no
assurances that it will have sufficient cash flow to finance its operations. The
Company is currently working to expand its borrowing availability particularly
during the construction period to ensure there is more than adequate credit
availability to the Company at all times. Hemagen has no off-balance sheet
financing arrangements.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Reagents Applications, Inc. ("RAI") and
its 83.7% owned subsidiary, Hemagen Diagnostics Commercio, Importaco &
Exporataco, Ltd. ("HDC"). All significant intercompany balances and transactions
have been eliminated in consolidation and all losses of HDC in excess of the
minority shareholders' investment have been allocated to the Company.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.


                                       F-8

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

FOREIGN CURRENCY TRANSLATION

The financial position and results of operations of HDC are measured using HDC's
local currency as the functional currency. Revenues and expenses of HDC have
been translated into U.S. dollars at average exchange rates prevailing during
the year. Assets and liabilities have been translated at the rates of exchange
on the balance sheet date. The resulting translation gain and loss adjustments
are recorded directly as a separate component of stockholders' equity.

CASH EQUIVALENTS

The Company considers all investments with original maturities of three months
or less at the date of purchase to be cash equivalents.

ACCOUNTS RECEIVABLE

The majority of the Company's accounts receivable are due from distributors
(domestic and international), hospitals, universities, and physician and
veterinary offices and other entities in the medical field. Credit is extended
based on evaluation of a customers' financial condition and, generally,
collateral is not required. Accounts receivable are most often due within 30
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts. The
balance of the allowance for doubtful accounts was $86,862 and $102,359 on
September 30, 2005 and 2004, respectively. The Company does not accrue interest
on accounts receivable past due. Changes in the Company's allowance for doubtful
accounts is summarized as follows:


                                       F-9

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

<TABLE>
<CAPTION>
                                      Allowance
                                    for Doubtful
                                      Accounts
                                    ------------
<S>                                 <C>
BALANCE, OCTOBER 1, 2003              $179,251
   Bad debt expense                     15,737
   Accounts receivable write-offs      (92,629)
                                      --------
BALANCE, SEPTEMBER 30, 2004           $102,359
   Bad debt expense                     10,488
   Accounts receivable write-offs      (25,985)
                                      --------
BALANCE, SEPTEMBER 30, 2005           $ 86,862
                                      --------
</TABLE>

INVENTORIES

Inventories are stated at the lower of cost or market, determined on a first-in,
first-out basis. Inventory reserves are established for obsolescence based on
expiration dating of perishable products and excess levels of inventory on hand.

LONG-LIVED ASSETS

The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Should the review indicate
that long-lived assets are not recoverable (i.e., the carrying amount is less
than the future projected undiscounted cash flows), this carrying amount would
be reduced to fair value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets which
range from 4 to 10 years. Expenditures for repairs and maintenance are expensed
as incurred.


                                      F-10

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

OTHER ASSETS

Other assets, net at September 30, 2005 consists primarily of loan origination
fees that will be amortized over the life of the applicable loans. At September
30, 2004, other assets, net consists primarily of goodwill resulting from the
acquisition of RAI. In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 142 Goodwill and
Intangible Assets ("SFAS 142"). SFAs No.142 requires goodwill to be tested
annually for impairment and between annual tests in certain circumstances, and
written down when impaired, rather than being amortized as previous accounting
standards required.

In accordance with SFAS 142, the Company ceased amortizing goodwill of $152,325,
therefore, there was no amortization in fiscal years 2004 and 2005. Based on the
impairment tests performed in fiscal year 2005, the Company wrote off all of the
goodwill of $152,324 in the current year. The Company performed several
different tests on the financial performance of the Raichem segment of the
business and determined based on those tests that there had been an impairment
of the goodwill. The impairment of the Goodwill resulted from the continued
operating losses of the Raichem segment after allocating a proportionate share
of the corporate overhead to the Raichem business

INCOME TAXES

The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amount and
the tax basis of assets and liabilities at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.

REVENUE RECOGNITION

Revenues from the sale of products are recognized when shipped and all
contractual obligations have been satisfied and the collection of the resulting
receivable is reasonably assured. Revenues from product service contracts are
recognized ratably over the terms of the contracts. Losses are provided for at
the time that management determines that contract costs will exceed related
revenues. The portion of product service contracts not complete at the balance
sheet date is included in deferred revenue.


                                      F-11

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

STOCK- BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements using
the intrinsic-value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25) Accounting for Stock Issued to
Employees, and complies with the disclosure provisions of Statement of Financial
Accounting Standard No. 148 (SFAS No. 148), "Accounting for Stock-Based
Compensation Transition and Disclosure".

Had the Company applied the fair value recognition provisions of Financial
Accounting Standards Board ("FASB") Statement No. 123 "Accounting for
Stock-Based Compensation" to stock based employee compensation, the Company's
net loss for the years ended September 30, 2005 and 2004 would have increased as
shown in the table below.

<TABLE>
<CAPTION>
                                                2005          2004
                                            -----------   -----------
<S>                                         <C>           <C>
Net Loss as reported                        $(1,337,249)  $(3,599,168)
Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for all awards       (10,553)      (28,412)
                                            -----------   -----------

Proforma Net Loss                           $(1,347,802)  $(3,627,580)
                                            ===========   ===========

Basic and Diluted Net Loss per
   share as reported                        $     (0.09)       ($0.36)
                                            ===========   ===========

Proforma Basic and Diluted
   Net loss per share                       $     (0.09)       ($0.36)
                                            ===========   ===========
</TABLE>


                                      F-12

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

NET LOSS PER SHARE OF COMMON STOCK

Basic "earnings per share" excludes the effect of any dilutive options or
convertible securities and is computed by dividing the net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing the net income (loss) by the sum of
the weighted average number of common shares and common share equivalents
computed using the average market price for the period under the treasury stock
method.

Common share equivalents outstanding at September 30, 2005 and 2004 totaled
7,610,647 and 5,393,014 shares, respectively including currently outstanding
stock options and convertible debt. These shares were not included in the
denominator for diluted income per share as their effect was anti-dilutive.

RESEARCH AND DEVELOPMENT COSTS

All costs incurred to research, design and develop products are considered
research and development costs and are charged to expense as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments include cash and cash equivalents, short-term investments,
customer receivables, accounts payable, certain other accrued liabilities and
long-term debt. The fair value of long-term debt approximates the carrying
amount based on the current rate offered to the Company for debt of similar
remaining maturities. The carrying values of all other financial instruments are
reasonable estimates of their values.

ADVERTISING EXPENSES

Costs of advertising, which also includes promotional expenses are expensed as
incurred. Advertising expenses for fiscal 2005 and 2004 were $13,417, and
$20,639 respectively.

SHIPPING AND HANDLING

The cost of shipping products to customers is included in cost of goods sold.
Amounts billed to a customer in a sale transaction related to shipping and
handling is classified as revenue.


                                      F-13

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

CURRENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting for Changes and
Error Corrections - a replacement of Accounting Opinions Board ("APB") Opinion
No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective
applications to changes in accounting principles for prior periods' financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005, and earlier adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005, and earlier adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after this statement was
issued. The Company has adopted SFAS No. 154 as of its issuance and will apply
its provisions to any changes in accounting principle that occur in future
periods. The Company's adoption of SFAS No. 154 did not have an impact on the
Company's financial condition or results of operations during the twelve months
ended September 30, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment". This statement will provide investors and other users of financial
statements with more complete financial information by requiring that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. This statement covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans, and replaces FASB SFAS No. 123 "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25. Statement 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
statement permitted entities the option of continuing to apply the guidance in
APB No. 25, as long as the footnotes to financial statements disclosed the pro
forma net income under the fair-value-based method. The Company will be required
to apply SFAS No. 123(R) as of the first interim or annual reporting period that
begins after December 15, 2005. The Company is evaluating the impact of the
adoption of SFAS No. 123(R), and does not believe the impact will be significant
to the Company's overall results of operations or financial position.


                                      F-14

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE C - RELATED PARTY TRANSACTIONS

William P. Hales, the Chairman of the Board of Directors and President and Chief
Executive Officer of the Company owns $518,700 face value of the senior
subordinated secured convertible notes due September 30, 2009. See note J for a
description of the senior notes.

NOTE D - INVENTORIES

Inventories at September 30, consist of the following:

<TABLE>
<CAPTION>
                     2005         2004
                  ----------   ----------
<S>               <C>          <C>
Raw materials     $1,369,693   $1,895,064
Work-in-process      173,350      135,651
Finished goods     1,816,325    2,027,824
                  ----------   ----------
                   3,359,368    4,058,539
Less reserves       (596,401)    (718,607)
                  ----------   ----------
Net inventories   $2,762,967   $3,339,932
                  ==========   ==========
</TABLE>

NOTE E - PROPERTY AND EQUIPMENT

Property and equipment at September 30, consist of the following:

<TABLE>
<CAPTION>
                                    2005          2004
                                -----------   -----------
<S>                             <C>           <C>
Land                            $   163,704   $        --
Building                            663,338            --
Furniture and equipment           7,305,209     7,228,942
Leasehold improvements              111,065       111,065
                                -----------   -----------
                                  8,243,316     7,340,007
Less accumulated depreciation
   and amortization              (7,218,967)   (6,871,498)
                                -----------   -----------
                                $ 1,024,349   $   468,509
                                ===========   ===========
</TABLE>

Depreciation and amortization expense relating to property and equipment was
approximately $290,000 and $532,000 for the years ended September 30, 2005, and
2004, respectively. The building purchased in June 2005 was not placed in
service as of September 30, 2005, therefore no depreciation expense has been
recorded on that asset in the current fiscal year.


                                      F-15

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include the following at September 30,

<TABLE>
<CAPTION>
                               2005         2004
                            ----------   ----------
<S>                         <C>          <C>
Accounts payable - trade    $  905,958   $  874,226
Accrued professional fees      103,535      185,447
Accrued royalties              300,556      300,556
Accrued vacation               100,926       96,352
Accrued other                   65,566      127,460
                            ----------   ----------
                            $1,476,541   $1,584,041
                            ==========   ==========
</TABLE>

NOTE G - DEVELOPMENT AND LICENSE AGREEMENTS

In August 1998, the Company entered into an agreement under which the Company
obtained exclusive proprietary rights to certain patents, licenses and
technology to manufacture, market and sell certain products. This agreement
required quarterly royalty payments based on a percentage of sales of defined
products through August 31, 2004.

In addition, the Company entered into a sublicense agreement whereby two license
agreements, one of which expired in March 2000, related to certain Analyst(R)
products that were transferred to the Company. The remaining license agreement,
which contains provisions for royalty obligations, based on production and net
sales of certain products, expires in February 2007.

Expense related to the royalty agreement and the sublicense agreement amounted
to approximately $27,000 for the year ended September 30, 2004. There was no
royalty expense in the year ended September 30, 2005.

NOTE H - LINE OF CREDIT

In September 2002, the Company obtained a revolving line of credit with a bank
for the purpose of financing working capital needs as required. The line of
credit facility provides for borrowing up to $500,000 at an interest rate of
Prime Rate plus 3/4% and expires March 31, 2006. Originally, this line of credit
provided for up to $1,000,000 of borrowing but was reduced in June 2005 in
conjunction with the note payable described in Note I. Maximum borrowings under
the loan are based on the domestic receivables and inventory of the Company. The
line of credit facility has a first lien of all assets of the Company. At
September 2005, the outstanding balance on the line of credit was $400,000 and
the effective interest rate on the line of credit was 7.50%. There was no
outstanding balance at September 30, 2004.


                                      F-16

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE I - NOTE PAYABLE

On June 24, 2005, Hemagen Diagnostics, Inc. obtained financing of $1,935,000 to
provide for the purchase of a new corporate headquarters facility for $800,000
with the remainder to be used for improvements to the building and relocation
and installation of Hemagen's existing equipment in the new building. The
commitment for this financing will expire on June 30, 2006. The note payable is
secured by a first lien on the property. At September 30, 2005, the Company had
an outstanding balance of $650,000 related to this commitment. During the
construction period, Hemagen will pay interest only on the borrowings
outstanding at a rate equal to the prime rate plus two percentage points. The
rate payable by Hemagen at September 30, 2005 was 8.75%, per annum. In
conjunction with this commitment, the Company paid $24,725 in loan origination
fees.

Upon the completion of the construction and relocation project, Hemagen will
finance up to approximately $1,135,000 of the project costs over ten years
amortized over a twenty year period. The rate on the long term financing will be
the Federal Home Loan Bank of Atlanta five year rate index plus three and
three-quarters percentage points. As of September 30, 2005 this rate was 8.76%.
This rate is adjustable five years after the anniversary of the conversion to
long term financing. Hemagen has a commitment from the U.S. Small Business
Administration (SBA) to finance up to 40% or $886,000 of the total project costs
over a long term basis once the construction period is completed and certain
closing requirements are met. The portion of the project financed by the SBA
will be paid back over twenty years and will bear interest at the rate
determined by the SBA at that time. The current rate on this type of financing
is 6.38%. In conjunction with this commitment, the Company paid $13,000 in loan
origination fees.

In conjunction with the real estate and construction financing, Hemagen agreed
to reduce its existing line of credit facility from $1,000,000 to $500,000 of
availability.

NOTE J - EXCHANGE OFFERING

In December 2004, the Company completed an exchange offering of its senior
subordinated secured convertible notes due on April 17, 2005 ("Old Notes") for
5,079,438 shares of its common stock and $4,033,225 of senior subordinated
secured convertible notes due on September 30, 2009 ("New Notes"). At the
completion of the exchange offering, $6,065,000 of Old Notes, or all but $25,000
of the Old Notes, representing over 99% of the Old Notes had been exchanged. The
exchange offering was effective as of September 30, 2004, since at that time
more than 80% of the Old Notes had been tendered for exchange. The Company has
accounted for the exchange offering as though the exchange of the entire amount
of $6,065,000 of Old Notes was effective as of September 30, 2004, because at
September 30, 2004 the Company had the right and the intent to require the
remaining Old Notes to be exchanged and more than 75% of the Old Notes had been
tendered.


                                      F-17

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE J - EXCHANGE OFFERING - CONTINUED

The shares of common stock issued in connection with the exchange offering were
restricted by the terms of the exchange offer from sale or transfer until after
September 30, 2005.

The New Notes pay interest quarterly at an annual rate of 8%, are convertible at
the option of the holder after September 30, 2005 at $0.75 per share into shares
of the Company's common stock and mature on September 30, 2009. The New Notes
are secured by a first lien on all real, tangible and intangible property except
that the terms of the New Notes provide that the following are subordinated to
the security for the New Notes: the $25,000 of Old Notes; up to a maximum of $3
million credit facility; real estate financing obtained for a corporate
headquarters subject to limitation; and up to $4.0 million for financing related
to strategic acquisitions. The Company has the right to require conversion of
the New Notes at any time after September 30, 2005 if the Company's common stock
has traded at or above $1.25 per share for a consecutive twenty-day trading
period. The Company may also prepay the New Notes at any time at their full face
amount plus any accrued and unpaid interest.

The Company determined the fair value of the 5,079,438 shares of its common
stock on the closing market price, at September 30, 2004, of its common stock of
$0.38 to be $1,930,186. The fair value of the New Notes was determined by
management based on a 10% discount rate, resulting in a fair value of the New
Notes of $3,706,362. In connection with the exchange offering at September 30,
2004 the Company expensed $863,253 of the $1,291,705 debt discount remaining at
the time of the exchange offering related to the Old Notes. The amount recorded
as expense represented the excess of the fair value of the New Notes and common
stock issued in the exchange offering over the net book value of the Old Notes.
At September 30, 2005 and 2004, the unamortized discount on these notes was
$269,257 and $326,863, respectively.

NOTE K - SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES

On May 24, 2000, the Company completed a private placement offering of units
consisting of Old Notes, shares of common stock and detachable warrants to
purchase common stock. The Company issued Old Notes in the face amount of
$6,315,000 with net proceeds of $6,025,524. Each unit was sold for $500,000 and
consisted of one $500,000 senior subordinated secured convertible note, 200,000
detachable warrants to purchase common stock and 93,750 shares of common stock.

As described in Note J, on September 30, 2004, Old Notes in the principal amount
of $6,065,000 were exchanged for shares of the Company's Common Stock and New
Notes. The principal amount of the Old Notes outstanding at September 30, 2004
is $25,000. The unamortized discount on the Old Notes was $5,188 at September
30, 2004. This outstanding Old Note has been classified as a current liability
of the Company.


                                      F-18

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC.AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE L - STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company is authorized to issue up to 1,000,000 shares of preferred stock,
$.01 par value per share. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors and may include voting rights, preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consists solely of foreign currency
translation adjustments totaling $97,729 and $151,812 at September 30, 2005 and
2004, respectively.

STOCK OPTIONS

On February 27, 2001, the shareholders voted to approve the 2001 Stock Option
Plan. The 2001 Stock Option Plan provides for the grant of incentive and
nonqualified stock options for the purchase of an aggregate of 1,000,000 shares
of the Company's common stock by employees, directors and consultants of the
Company. The Compensation Committee of the Board of Directors is responsible for
the administration of the Plan. The Compensation Committee determines the term
of each option, the number of shares for which each option is granted and the
rate at which each option is exercisable.

Prior to the establishment of the 2001 Stock Option Plan, the Company granted
certain stock options in accordance with the terms of the 1992 Stock Option
Plan. The 1992 Stock Option Plan, as amended, provides for the grant of
incentive and nonqualified stock options for the purchase of an aggregate of
1,000,000 shares of the Company's common stock by employees, directors, and
consultants of the Company. The Board of Directors is responsible for the
administration of the Plan. The terms of the 1992 Stock Option Plan are
generally the same as those of the 2001 Stock Option Plan as described above.

On September 30, 1999, the Company's Board of Directors awarded options to the
Company's President and Chief Executive Officer and certain directors at that
date to purchase an aggregate of 1,732,014 shares of the Company's common stock
at an exercise price of $1.36 per share, which represented the fair value of the
common stock at that date. The options were granted pursuant to stockholder
authorization received during a consent solicitation which resulted in the
replacement of certain former members of the Company's senior management and
Board of Directors. The options, which were not issued under the Plan, expire on
September 30, 2009 and are transferable and became exercisable on March 31,
2001.


                                      F-19

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE L - STOCKHOLDERS' EQUITY-CONTINUED

Changes in options outstanding are summarized as follows:

<TABLE>
<CAPTION>
                                                Weighted-
                                                 Average
                                                 Exercise
                                     Shares       Price
                                    ---------   ---------
<S>                                 <C>         <C>
BALANCE, OCTOBER 1, 2003            2,475,010     $1.27
   Granted                            125,000      0.56
   Exercised                          (10,050)     0.29
   Cancelled or expired              (241,946)     1.70
                                    ---------
BALANCE, SEPTEMBER 30, 2004         2,348,014     $1.19
   Granted                             35,000      0.29
   Exercised                          (10,000)     0.29
   Cancelled or expired               (80,000)     0.85
                                    ---------
BALANCE, SEPTEMBER 30, 2005         2,293,014     $1.19
                                    =========
EXERCISABLE AT SEPTEMBER 30, 2005   2,193,014     $1.23
                                    =========
</TABLE>

The following table summarizes information about stock options outstanding at
September 30, 2005

                               Options Outstanding

<TABLE>
<CAPTION>
                                       Weighted-Average
                        Number             Remaining
    Range of        Outstanding at     Contractual Life   Weighted Average
Exercise Prices   September 30, 2005        (years)        Exercise Price
---------------   ------------------   ----------------   ----------------
<S>               <C>                  <C>                <C>
  0.29 - 0.63            307,500              3.2               0.49
  0.64 - 1.25            233,500              2.3               0.81
  1.26 - 1.36          1,732,014              4.0               1.36
  1.37 - 2.00             20,000              0.7               2.00
                       ---------             ----               ----
$0.29 - $2.00          2,293,014             3.70               1.19
                       =========             ====               ====
</TABLE>

The fair value of each option grant was determined on the date of the grant
using the Black-Scholes option-pricing model with the following weighed-average
assumptions used for grants in 2005 and 2004; dividend yield of 0%; expected
volatility rate of 88% and 300%, respectively; risk-free interest rate of 4%
for both years; and expected lives ranging from 5.0 to 10.0 years.

The weighted average grant date fair value of options granted during 2005 and
2004 was $7,023 and $70,462, respectively.


                                      F-20

<PAGE>

                    HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE L - STOCKHOLDERS' EQUITY-CONTINUED

STOCK RIGHTS PURCHASE AGREEMENT

In fiscal year 1999, the Company's Board of Directors implemented a Stock
Purchase Rights Agreement (the "Agreement"). Under the Agreement, as amended,
the Company declared a dividend of one common share purchase right (a "Right")
for each share of the Company's outstanding common stock as of February 10,
1999. Each Right entitles the holder to purchase from the Company $4.00 worth of
Company common stock at a per-share price equal to 50 percent of the current
market price. The Rights become exercisable only if a person or group, as
defined, acquires beneficial ownership of 15 percent or more of the Company's
outstanding common stock or announces a tender offer that would result in
beneficial ownership of 15 percent or more of the Company's outstanding common
stock. Pursuant to a Board of Directors' resolution dated January 9, 2003,
William P. Hales, the Company's current Chief Executive Officer and a stock and
debt holder, is exempt under the Agreement. The Rights, which expire on January
27, 2009, are redeemable in whole, but not in part, at the Company's option at
$0.001 per Right at any time prior to the earlier of ten days after public
announcement that a person or group has acquired beneficial ownership of 15% or
more of the Company's outstanding common stock or the expiration date of the
Rights. There are no rights outstanding at September 30, 2005 or 2004.

NOTE M - INCOME TAXES

For the years ended September 30, 2005 and 2004, domestic and foreign (losses)
or income before income taxes are as follows:

<TABLE>
<CAPTION>
                                2005          2004
                            -----------   -----------
<S>                         <C>           <C>
Years ended September 30,
Domestic                    $(1,487,260)  $(3,748,381)
Foreign                         199,148       172,951
                            -----------   -----------
                            $(1,288,112)  $(3,575,430)
                            ===========   ===========
</TABLE>

In the fiscal year ended September 30, 2005, the Company had income tax expense
of $49,137 which was related to foreign income tax expenses from its Brazilian
subsidiary.

The difference between income taxes provided at the Company's effective tax rate
and the Federal statutory rate is as follows:

<TABLE>
<CAPTION>
                                          2005   2004
                                          ----   ----
<S>                                       <C>    <C>
Years ended September 30,
Federal tax (credit) at statutory rate    (34%)  (34%)
Current tax benefit of operating losses    34     34
                                          ---    ---
                                            0%     0%
                                          ===    ===
</TABLE>


                                      F-21

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE M - INCOME TAXES-CONTINUED

Deferred tax assets (liabilities) are comprised of the following at September
30, 2005 and 2004:

<TABLE>
<CAPTION>
                                       2004          2003
                                   -----------   -----------
<S>                                <C>           <C>
Net operating loss carryforwards   $ 6,808,000   $ 6,345,000
Inventory reserve                      239,000       294,000
Accounts receivable reserve             35,000        41,000
Debt conversion cost                   276,000       345,000
Other                                  271,000       185,000
                                   -----------   -----------
Total deferred tax assets            7,629,000     7,210,000
Basis difference in fixed assets       (14,000)      (37,000)
                                   -----------   -----------
Net deferred tax assets            $ 7,615,000   $ 7,173,000
Valuation allowance                $(7,615,000)   (7,173,000)
                                   -----------   -----------
Net deferred tax assets            $        --   $        --
                                   ===========   ===========
</TABLE>

The Company has provided a valuation allowance equal to 100% of the total net
deferred tax asset in recognition of the uncertainty regarding the ultimate
amount of the net deferred tax asset that will be realized.

At September 30, 2005, the Company has approximately $20,025,000 and $18,012,000
of federal and state net operating loss carry-forwards, respectively, available
to offset future taxable income, which expire on various dates through 2025.
Ownership changes as defined in the Internal Revenue Code may limit the amount
of net operating loss and tax credit carryforwards that may be utilized
annually.


                                      F-22

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE N - SIGNIFICANT SALES AND CONCENTRATION OF CREDIT RISK

During the years ended September 30, 2005 and 2004, the Company derived $917,000
and $923,000 in revenues, respectively from one significant customer
representing 12% of total sales in both years. These sales were in conjunction
with a supply agreement that extends to December 2006. Revenues derived from
export sales amounted to approximately $3,041,000, or 40% of total sales in 2005
and $3,036,000, or 41% of total sales in 2004. Export sales to Europe were
approximately $1,230,000 or 16% of total sales in 2005 and $1,443,000, or 19% of
total sales in 2004. Export sales to South America were approximately
$1,547,000, or 20% of total sales in 2003 and $1,116,000, or 15% of total sales
in 2004.

NOTE O - GEOGRAPHICAL INFORMATION

The Company considers its manufactured kits, tests and instruments as one
operating segment, as defined under Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information."

The following table sets forth revenue and assets by geographic location.

<TABLE>
<CAPTION>
                         United*
                         States       Brazil     Consolidated
                       ----------   ----------   ------------
<S>                    <C>          <C>          <C>
SEPTEMBER 30, 2005:
   Revenues            $6,277,939   $1,307,715    $7,585,654
   Long-lived assets    1,031,553       44,953     1,062,173

SEPTEMBER 30, 2004:
   Revenues            $6,539,672   $  931,005    $7,470,677
   Long-lived assets      603,954       30,120       634,074
</TABLE>

*    Includes export sales to countries other than Brazil of approximately
     $2,044,000 and $2,110,000 in 2005 and 2004, respectively.


                                      F-23

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE P - COMMITMENTS

The Company leases certain facilities and equipment under non-cancelable
operating leases expiring through 2008. Future minimum lease commitments under
the non-cancelable operating leases are as follows:

<TABLE>
<CAPTION>
Years ending September 30,     2004
--------------------------   -------
<S>                          <C>
2006                         482,559
2007                         410,112
2008                         187,324
THEREAFTER                        --
</TABLE>

Rent expense approximated $501,000 and $471,000 in 2005 and 2004, respectively.

The Company has entered into an employment agreement with a key employee which
defines certain payment of salary and the issuance of stock options.

RETIREMENT PLAN

The Company maintains a defined contribution retirement plan, which qualifies
under Section 401(k) of the Internal Revenue Code, covering substantially all
employees. Participant contributions and employer matching contributions are
made as defined in the Plan agreement. No company contributions were made to the
plan in fiscal years 2005 and 2004.

Effective October 1, 2004, the Company created an Employee Stock Option Plan
(ESOP) for the benefit of its employees, which has been determined by the
Internal Revenue Service to be a qualified retirement plan subject to section
4975(E)7 of the Code. The Company's contributions to the ESOP were $40,000 in
fiscal 2005 and 2004. At September 30, 2005 and 2004, the ESOP owned
approximately 157,000 and 41,000 shares of Hemagen common stock, respectively
that were purchased in the open market by the plan.


                                      F-24

<PAGE>

                   HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                           SEPTEMBER 30, 2005 AND 2004

NOTE Q - CONTINGENCIES

On February 7, 2002, URRMA Biopharma, Inc. filed suit against Hemagen in the
Superior Court, District of Montreal, and Providence of Quebec, Canada. The suit
sought approximately $20,645,000 in damages for an alleged breach of contract
for failure to provide information called for under an alleged manufacturing
agreement and for publishing misleading information regarding the product and
URRMA. Hemagen responded to the claim and filed a counter suit for approximately
$19,752,000 on June 10, 2002. On January 16, 2003, the Company agreed to settle
the matter. Under the terms of the settlement agreement URRMA agreed to pay the
Company cash of approximately $100,000, $50,000 of which was paid in February
2003 and $50,000 which was due in February 2004, and royalties of 3% of revenues
of URRMA's R7V test kit beginning on the date of the first commercial sale of
the kit until the total royalties equal $250,000. The payment of $50,000 due in
February 2004 has not been paid by URRMA and due to URRMA's financial condition
no receivable has been established. No royalties have been paid as of September
30, 2005.

NOTE R - SUPPLEMENTAL DISCLOSURE OF CASH

<TABLE>
<CAPTION>
September 30,                                                2005        2004
-------------                                              --------   ----------
<S>                                                        <C>        <C>
Cash paid for interest                                     $349,864   $  483,195
                                                           ========   ==========
Disclosure of non-cash investing and financing
   activities:
Issuance of 5,079,438 shares of common stock and
   $4,033,225 senior secured convertible notes due
   September 30, 2009, with an original issue discount
   of $326,863 in exchange for $6,065,000 senior secured
   convertible notes due April 17, 2005, net of
   unamortized discount of $1,291,705 at
   September 30, 2004.                                           --    4,773,295
                                                           ========   ==========
</TABLE>


                                      F-25

<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                        HEMAGEN DIAGNOSTICS, INC.


Date: December 23, 2005                 By: /s/ William P. Hales
                                            ------------------------------------
                                            William P. Hales, President &
                                            Chief Executive Officer

     In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
Name                                       Capacity                   Date
----                                       --------                   ----
<S>                              <C>                           <C>


/s/ William P. Hales             President and Chief           December 23, 2005
------------------------------   Executive Officer, Director
William P. Hales


/s/ Alan S. Cohen                Director                      December 23, 2005
------------------------------
Alan S. Cohen, M.D.


/s/ Richard W. Edwards           Director                      December 23, 2005
------------------------------
Richard W. Edwards


/s/ Edward T. Lutz               Director                      December 23, 2005
------------------------------
Edward T. Lutz


/s/ Deborah F. Ricci             Principal Financial Officer   December 23, 2005
------------------------------
Deborah F. Ricci
</TABLE>