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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------

For the Transition Period from              to

Commission file number 0-21371



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APPLIED IMAGING CORP.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0120490                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|120 Baytech Drive San Jose, California                         |  | 95134-2302                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

(408) 719-6400

(Registrants telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report).



---

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 90 days.    x  Yes ̈No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

 ̈Large accelerated filer ̈Accelerated filer     x  Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ̈Yes    x  No

The number of shares
of Common Stock, with $0.001 par value, outstanding on April 28, 2006 was 5,588,593.



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##### Table of Contents

APPLIED IMAGING CORP.

INDEX



|         |  |                                                                                                    |  |      
|-------- |  | -------------------------------------------------------------------------------------------------- |  | -----
|         |  |                                                                                                    |  | Page 
|         |  | PART I. FINANCIAL INFORMATION                                                                      |  |      
|         |  |                                                                                                   
|Item 1.  |  | Financial Statements (Unaudited)                                                                   |  | 3    
|         |  |                                                                                                   
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                   |  | 4    
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 |  | 5    
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |  | 6    
|         |  |                                                                                                   
|         |  | Notes to Condensed Consolidated Financial Statements                                               |  | 7-14 
|         |  |                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 14-15
|         |  |                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk Derivatives and Financial Instruments   |  | 15   
|         |  |                                                                                                   
|Item 4.  |  | Disclosure Controls and Procedures                                                                 |  | 15   
|         |  |                                                                                                   
|         |  | PART II. OTHER INFORMATION                                                                         |  |      
|         |  |                                                                                                   
|Item 1A. |  | Risk Factors                                                                                       |  | 16-23
|         |  |                                                                                                   
|Item 6.  |  | Exhibits                                                                                           |  | 23-24
|         |  |                                                                                                   
|         |  | Signature                                                                                          |  | 25   



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##### Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Unless the context otherwise indicates, all share and per share common stock
information in this Quarterly Report reflects a 1-for-4 reverse stock split of the common stock effected May 20, 2005.



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APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except shares and par values)



|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                   |  | March 31, 2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                                                                             |  |                |         |   |                   |   |         |  
|Current assets:                                                                                                                                                    |  |                |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                          |  | $              | 4,550   |   |                   | $ | 3,136   |  
|Restricted cash                                                                                                                                                    |  |                | 157     |   |                   |   | 172     |  
|Trade accounts receivable, net of allowance for doubtful accounts                                                                                                  |  |                | 4,247   |   |                   |   | 4,806   |  
|Inventories                                                                                                                                                        |  |                | 432     |   |                   |   | 434     |  
|Prepaid expenses and other current assets                                                                                                                          |  |                | 281     |   |                   |   | 354     |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total current assets                                                                                                                                               |  |                | 9,667   |   |                   |   | 8,902   |  
|Property and equipment, net                                                                                                                                        |  |                | 1,109   |   |                   |   | 1,208   |  
|Goodwill                                                                                                                                                           |  |                | 2,364   |   |                   |   | 2,364   |  
|Other assets                                                                                                                                                       |  |                | 49      |   |                   |   | 54      |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total assets                                                                                                                                                       |  | $              | 13,189  |   |                   | $ | 12,528  |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |                |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                               |  |                |         |   |                   |   |         |  
|Bank debt                                                                                                                                                          |  | $              | 1,744   |   |                   | $ | 2,054   |  
|Accounts payable                                                                                                                                                   |  |                | 1,377   |   |                   |   | 1,288   |  
|Accrued expenses                                                                                                                                                   |  |                | 2,120   |   |                   |   | 2,368   |  
|Deferred rent, current                                                                                                                                             |  |                | 157     |   |                   |   | 149     |  
|Deferred revenue, current                                                                                                                                          |  |                | 3,346   |   |                   |   | 3,537   |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                          |  |                | 8,744   |   |                   |   | 9,396   |  
|Deferred rent, non-current                                                                                                                                         |  |                | 369     |   |                   |   | 374     |  
|Deferred revenue, non-current                                                                                                                                      |  |                | 495     |   |                   |   | 405     |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                  |  |                | 9,608   |   |                   |   | 10,175  |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Commitments and contingencies (Note 4)                                                                                                                             |  |                |         |   |                   |   |         |  
|                                                                                                                                                                   |  |               
|Stockholders equity:                                                                                                                                              |  |                |         |   |                   |   |         |  
|Preferred stock, $0.001 par value; 6,000,000 shares authorized; none issued and outstanding at March 31, 2006 and December 31,
2005                                |  |                |        |   |                   |   |        |  
|Common stock, $0.001 par value; 50,000,000 shares authorized; 5,588,593 and 4,814,781 issued and outstanding at March 31, 2006 and
December 31, 2005, respectively |  |                | 19      |   |                   |   | 19      |  
|Additional paid-in capital                                                                                                                                         |  |                | 54,311  |   |                   |   | 53,021  |  
|Accumulated deficit                                                                                                                                                |  |                | (50,382 | ) |                   |   | (50,320 | )
|Accumulated other comprehensive loss                                                                                                                               |  |                | (367    | ) |                   |   | (367    | )
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                         |  |                | 3,581   |   |                   |   | 2,353   |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                         |  | $              | 13,189  |   |                   | $ | 12,528  |  
|                                                                                                                                                                   |  |                |         |   |                   |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)





|                                                                                   |  |                             |       |   |      |   |       |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                   |  | Three months EndedMarch 31, |      
|                                                                                   |  | 2006                        |       |   | 2005 |  
|Revenues                                                                           |  | $                           | 4,866 |   |      | $ | 4,890 |  
|Cost of revenues(a)                                                                |  |                             | 1,893 |   |      |   | 2,025 |  
|                                                                                   |  |                             |       |   |      |   |       |  
|Gross profit                                                                       |  |                             | 2,973 |   |      |   | 2,865 |  
|                                                                                   |  |                             |       |   |      |   |       |  
|Operating expenses                                                                 |  |                             |       |   |      |   |       |  
|Research and development(a)                                                        |  |                             | 746   |   |      |   | 890   |  
|Sales and marketing(a)                                                             |  |                             | 1,369 |   |      |   | 1,390 |  
|General and administrative(a)                                                      |  |                             | 893   |   |      |   | 1,059 |  
|                                                                                   |  |                             |       |   |      |   |       |  
|Total operating expenses                                                           |  |                             | 3,008 |   |      |   | 3,339 |  
|                                                                                   |  |                             |       |   |      |   |       |  
|Operating loss                                                                     |  |                             | (35   | ) |      |   | (474  | )
|Other expense, net                                                                 |  |                             | (27   | ) |      |   | (37   | )
|                                                                                   |  |                             |       |   |      |   |       |  
|Net loss                                                                           |  | $                           | (62   | ) |      | $ | (511  | )
|                                                                                   |  |                             |       |   |      |   |       |  
|Net loss per share - basic and diluted                                             |  | $                           | (0.01 | ) |      | $ | (0.11 | )
|                                                                                   |  |                             |       |   |      |   |       |  
|Weighted shares used to calculate basic and diluted net loss per share             |  |                             | 4,961 |   |      |   | 4,772 |  
|                                                                                   |  |                             |       |   |      |   |       |  
|__________ (a)SFAS 123R stock-based compensation expense was allocated as follows: |  |                             |       |   |      |   |       |  
|                                                                                   |  |                            
|Cost of revenues                                                                   |  | $                           | 16    |   |      | $ |      |  
|Research and development                                                           |  |                             | 47    |   |      |   |      |  
|Sales and marketing                                                                |  |                             | 20    |   |      |   |      |  
|General and administrative                                                         |  |                             | 77    |   |      |   |      |  
|                                                                                   |  |                             |       |   |      |   |       |  
|Total stock-based compensation expense                                             |  | $                           | 160   |   |      | $ |      |  
|                                                                                   |  |                             |       |   |      |   |       |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)



|                                                                                          |  |                              |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Three Months Ended March 31, |       
|                                                                                          |  | 2006                         |        |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Net loss                                                                                  |  | $                            | (62    | ) |      | $ | (511   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                              | 118    |   |      |   | 157    |  
|Stock-based compensation                                                                  |  |                              | 160    |   |      |   |       |  
|Changes in operating assets and liabilities:                                              |  |                              |        |   |      |   |        |  
|Trade accounts receivable, net                                                            |  |                              | 579    |   |      |   | 449    |  
|Inventories                                                                               |  |                              | 2      |   |      |   | 61     |  
|Prepaid expenses and other current assets                                                 |  |                              | 75     |   |      |   | (187   | )
|Other assets                                                                              |  |                              | 5      |   |      |   |       |  
|Accounts payable                                                                          |  |                              | 87     |   |      |   | 71     |  
|Accrued expenses                                                                          |  |                              | (257   | ) |      |   | (623   | )
|Deferred revenue                                                                          |  |                              | (102   | ) |      |   | 90     |  
|Deferred rent                                                                             |  |                              | 2      |   |      |   | (38    | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                              | 608    |   |      |   | (531   | )
|                                                                                          |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                                       |  |                              | (17    | ) |      |   | (89    | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                              | (17    | ) |      |   | (89    | )
|                                                                                          |  |                              |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Net proceeds from private placement                                                       |  |                              | 1,130  |   |      |   |       |  
|Bank and other loan proceeds                                                              |  |                              | 3,231  |   |      |   | 2,442  |  
|Bank and other loan payments                                                              |  |                              | (3,541 | ) |      |   | (2,990 | )
|Restricted cash                                                                           |  |                              | 15     |   |      |   | 5      |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                       |  |                              | 835    |   |      |   | (543   | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Effect of exchange rate changes                                                           |  |                              | (12    | ) |      |   |       |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                              | 1,414  |   |      |   | (1,163 | )
|                                                                                          |  |                             
|Cash and cash equivalents at beginning of quarter                                         |  |                              | 3,136  |   |      |   | 3,927  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash and cash equivalents at end of quarter                                               |  | $                            | 4,550  |   |      | $ | 2,764  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                         |  |                              |        |   |      |   |        |  
|Cash paid for interest                                                                    |  | $                            | 26     |   |      | $ | 22     |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                   |  |                              |        |   |      |   |        |  
|Inventory transfers to property and equipment                                             |  | $                            | 2      |   |      | $ | 29     |  
|                                                                                          |  |                              |        |   |      |   |        |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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APPLIED IMAGING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 1 - Basis of Presentation

The accompanying condensed consolidated financial statements include
the accounts of Applied Imaging Corp. and subsidiaries (the Company, we, us, our) for the three months ended March 31, 2006 and year end as of December 31, 2005. For the three months ended
March 31, 2006, the financial statements are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position, operating
results and cash flows for those interim periods presented. The year end condensed balance sheet data was derived from the December 31, 2005 audited financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America.

Unless the context otherwise indicates, all share and per share common stock
information in this Quarterly Report reflects a 1-for-4 reverse stock split of the common stock effected May 20, 2005.

The results of
operations for the three months ended March 31, 2006 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2006. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, for the year ended December 31, 2005, contained in our Form 10-K filed with the Securities and Exchange Commission on March 29, 2006.

Management Estimates. The preparation of the condensed consolidated 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 at the date of the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ from those estimates.

NOTE 2 - Significant Accounting Policy

During the first quarter of fiscal 2006, the Company adopted the provisions of, and account for stock-based compensation in accordance
with, the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No. 123revised 2004 (SFAS 123R), Share-Based Payment which replaced Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Under the fair value
recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a ratable basis over the requisite service period, which is the vesting
period. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are
subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs interpretation of SFAS 123R and the
valuation of stock-based payments for public companies. The Company has applied the provision of SAB 107 in its adoption of SFAS 123R.

The
adoption of SFAS 123R had a material impact on our consolidated financial position, and results of operations. See Note 6 for further information regarding our stock-based compensation assumptions and expenses, including pro- forma disclosures for
prior periods as if we had recorded stock-based compensation expense.



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NOTE 3  Inventories (in thousands)



|                    |  |               |     |                  |   |    
|------------------- |  | ------------- | --- | ---------------- | - | ---
|                    |  | March 31,2006 |     | December 31,2005
|Raw materials       |  | $             | 362 |                  | $ | 350
|Work in progress    |  |               | 55  |                  |   | 1  
|Finished goods      |  |               | 15  |                  |   | 83 
|                    |  |               |     |                  |   |    
|Total net inventory |  | $             | 432 |                  |   | 434
|                    |  |               |     |                  |   |    

NOTE 4  Commitments and Contingencies

In December 2006, the Companys Board of Directors approved equity and cash incentives to enhance benefits designed to retain employees of the
Company as the Board considers strategic alternatives. The cash component is payable upon the earlier of (i) January 1, 2007, (ii) six months after a change of control of the Company, or (iii) involuntary termination of the
employee at any time after October 1, 2006 or the earlier entry into a term sheet for a change of control. The Company presently anticipates this cash incentive to involve payment of a maximum of $809,000. The Company accrued $130,000 as of
March 31, 2006.

NOTE 5  Net loss per share

The computation of basic and diluted net loss per share (EPS) for the three months ended March 31, 2006 and March 31, 2005 is determined by dividing net loss as reported as the numerator by the
number of shares included in the denominator as shown in the following table (in thousands):



|                                          |  |            |  |           
|----------------------------------------- |  | ---------- |  | ----------
|                                          |  | March 31, 
|                                          |  | 2006Shares |  | 2005Shares
|Weighted average shares outstanding basic |  | 4,961      |  | 4,772     
|Dilutive shares - stock options           |  |           |  |          
|Dilutive shares - warrants                |  |           |  |          
|                                          |  |            |  |           
|Total                                     |  | 4,961      |  | 4,772     
|                                          |  |            |  |           

Securities excluded from the computation of EPS because their effect on EPS was antidilutive, but
could dilute basic EPS in future periods are as follows (in thousands):



|         |  |            |  |           
|-------- |  | ---------- |  | ----------
|         |  | March 31, 
|         |  | 2006Shares |  | 2005Shares
|Options  |  | 1,059      |  | 906       
|Warrants |  | 607        |  | 355       
|         |  |            |  |           
|Total    |  | 1,666      |  | 1,261     
|         |  |            |  |           



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NOTE 6  Stock Based Compensation

Stock Compensation

Beginning with the
Companys first quarter of fiscal 2006, we adopted SFAS 123R. See Note 2 for a description of our adoption of SFAS 123R. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair
value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as various assumptions. These assumptions include our expected stock price volatility over the term of the awards, actual
and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

Prior to the Adoption of SFAS.
123R

Prior to the adoption of SFAS 123R, the Company provided disclosures required under FAS No. 123 Accounting for
Stock-Based compensation, amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosures.

The pro-forma information for the three months ended March 31, 2005 was as follows (in thousands, except per share data):



|                                                                             |  |                                 |       |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ----- | -
|                                                                             |  | Three Months EndedMarch 31,2005 |      
|Net loss:                                                                    |  |                                 |       |  
|As reported                                                                  |  | $                               | (511  | )
|Stock-based employee compensation expense determined under fair-value method |  |                                 | (76   | )
|                                                                             |  |                                 |       |  
|Pro forma                                                                    |  | $                               | (587  | )
|                                                                             |  |                                 |       |  
|Net loss per share:                                                          |  |                                 |       |  
|As reported:                                                                 |  |                                 |       |  
|Basic and diluted                                                            |  | $                               | (0.11 | )
|                                                                             |  |                                 |       |  
|Pro forma                                                                    |  |                                 |       |  
|Basic and diluted                                                            |  | $                               | (0.12 | )
|                                                                             |  |                                 |       |  

For the period ending March 31, 2005, there was approximately $5,000 in pro forma
compensation expense related to employee stock purchases. All of the assumptions shown below were used for the Employee Stock Purchase Plan except that the expected life is six months and volatility was 95%.



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Impact of the Adoption of SFAS 123R

The Company elected to adopt the modified-prospective application method as provided by SFAS 123R The effect of recording stock-based compensation for the
three months ended March 31, 2006 was as follows (in thousands, except per share data):



|                                                                  |  |                                 |       |  
|----------------------------------------------------------------- |  | ------------------------------- | ----- | -
|                                                                  |  | Three Months EndedMarch 31,2006 |      
|Stock-based compensation-employee stock options by type of award: |  |                                 |       |  
|                                                                  | 
|Employee stock options                                            |  | $                               | 160   |  
|Employee stock purchase plans                                     |  |                                 |      |  
|Amounts capitalized as inventory                                  |  |                                 |      |  
|                                                                  |  |                                 |       |  
|Total stock-based compensation                                    |  |                                 | 160   |  
|Tax effect on stock-based compensation                            |  |                                 |      |  
|                                                                  |  |                                 |       |  
|Net effect on net loss                                            |  | $                               | 160   |  
|                                                                  |  |                                 |       |  
|Effect on basic and diluted net loss per share Basic and diluted  |  | $                               | (0.03 | )
|                                                                  |  |                                 |       |  

Valuation Assumptions

The Company estimates the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123R, SAB 107 and the
Companys prior period pro forma disclosures of net loss, including stock-based compensation (determined under a fair value method as prescribed by SFAS 123). The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model and the ratable attribution approach with the following weighted-average assumptions:



|                         |  |                              |   |  |      |  
|------------------------ |  | ---------------------------- | - |  | ---- | -
|                         |  | Three Months Ended March 31, |  
|                         |  | 2006                         |   |  | 2005 |  
|Expected life (in years) |  | 5.0                          |   |  | 5.0  |  
|Volatility               |  | 82                           | % |  | 92   | %
|Risk free interest rate  |  | 4.68                         | % |  | 3.66 | %
|Dividend yield           |  |                             | % |  |     | %



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Equity Incentive Program

The following table sets forth the summary of option activity under our stock option program for the three months ended March 31, 2006:



|                    |  |                           |   |  |                             |   |  |                               |     
|------------------- |  | ------------------------- | - |  | --------------------------- | - |  | ----------------------------- | ----
|                    |  | OptionsAvailable forGrant |   |  | Number ofOptionsOutstanding |   |  | WeightedAverageExercise Price
|Beginning of Period |  | 26,039                    |   |  | 1,076,903                   |   |  | $                             | 4.45
|Options granted     |  | (15,500                   | ) |  | 15,500                      |   |  | $                             | 2.03
|Options exercised   |  |                          |   |  |                            |   |  | $                             |    
|Options cancelled   |  | 33,902                    |   |  | (33,902                     | ) |  | $                             | 5.62
|Options expired     |  | (22,125                   | ) |  |                            |   |  | $                             | 7.20
|                    |  |                           |   |  |                             |   |  |                               |     
|End of Period       |  | 22,316                    |   |  | 1,058,501                   |   |  | $                             | 4.38
|                    |  |                           |   |  |                             |   |  |                               |     

Information regarding stock options outstanding and exercisable at March 31, 2006 is
summarized below:



|                         |  |                     |  |                                                  |  |                               |       |                  |         |                               |   |      
|------------------------ |  | ------------------- |  | ------------------------------------------------ |  | ----------------------------- | ----- | ---------------- | ------- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                             
|Range of exercise prices |  | Number of Options   |  | Weightedaverageremainingcontractual lifein years |  | Weightedaverageexercise price |       | Number ofOptions |         | Weightedaverageexercise price
|$  1.21 to $  1.21       |  | 419,000             |  | 9.73                                             |  | $                             | 1.21  |                  |        |                               | $ |     
|$  2.03 to $  2.28       |  | 181,135             |  | 9.00                                             |  |                               | 2.21  |                  | 43,925  |                               |   | 2.12 
|$  2.88 to $  4.76       |  | 117,776             |  | 5.85                                             |  |                               | 3.71  |                  | 97,136  |                               |   | 3.79 
|$  4.88 to $  8.12       |  | 106,368             |  | 6.42                                             |  |                               | 6.05  |                  | 72,602  |                               |   | 6.28 
|$  9.60 to $  9.75       |  | 139,681             |  | 2.97                                             |  |                               | 9.70  |                  | 139,681 |                               |   | 9.48 
|$10.56 to $12.00         |  | 42,041              |  | 3.18                                             |  |                               | 11.40 |                  | 41,416  |                               |   | 11.46
|$13.75 to $13.75         |  | 7,000               |  | 4.34                                             |  |                               | 13.76 |                  | 7,000   |                               |   | 13.75
|$14.50 to $14.50         |  | 9,750               |  | 4.40                                             |  |                               | 14.50 |                  | 9,750   |                               |   | 14.50
|$16.00 to $16.00         |  | 25,375              |  | 4.11                                             |  |                               | 16.00 |                  | 25,375  |                               |   | 16.00
|$16.12 to $16.12         |  | 10,375              |  | 4.61                                             |  |                               | 16.12 |                  | 10,375  |                               |   | 16.12
|                         |  |                     |  |                                                  |  |                               |       |                  |         |                               |   |      
|                         |  | 1,058,501           |  |                                                  |  | $                             | 4.38  |                  | 447,260 |                               | $ | 7.97 
|                         |  |                     |  |                                                  |  |                               |       |                  |         |                               |   |      

The aggregate intrinsic value of stock options outstanding at March 31, 2006 is $268,000. The
aggregate intrinsic value of stock options vested and expected to vest at March 31, 2006 is $215,000. There is no intrinsic value of stock options exercisable at March 31, 2006.

NOTE 7  Product Warranty

The Company
generally warrants its products against defects for a period of one year and records a liability for such product warranty obligations at the time of sale based upon historical experience. The Company sells separately priced service contracts to
provide additional service coverage on its systems when the warranty period expires. The related revenue on the service contracts is recognized on a straight-line basis over the life of the service contract, which is generally one year. Costs
associated with services performed under the service contract obligation are expensed as incurred.



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Changes in product warranty obligations are as follows (in thousands):



|                                           |  |                                   |     |   |                                   |   |     |  
|------------------------------------------ |  | --------------------------------- | --- | - | --------------------------------- | - | --- | -
|                                           |  | Three Months Ended March 31, 2006 |     |   | Three Months Ended March 31, 2005 |  
|Balances at Beginning of Quarter           |  | $                                 | 183 |   |                                   | $ | 102 |  
|Add accruals for warranties issued         |  |                                   | 28  |   |                                   |   | 57  |  
|Less cost incurred under warranties issued |  |                                   | (43 | ) |                                   |   | (39 | )
|                                           |  |                                   |     |   |                                   |   |     |  
|Balance end of quarter                     |  | $                                 | 168 |   |                                   | $ | 120 |  
|                                           |  |                                   |     |   |                                   |   |     |  

NOTE 8  Segment and Geographic

The Company has historically reported as one segment, namely, the imaging business. In late 2004, the Company formed a subsidiary CTC, Inc. with the
intent to develop a commercial system for the detection, quantification and analysis of circulating tumor cells in blood. The Company began very early stage research and development activities on CTC in 2005 and the program was managed as a research
and development project within existing management and financial reporting structures.

Beginning in the first quarter 2006, the
Companys Chief Executive Officer, considered the chief operating decision maker, now reviews financial results by two segments, namely, the imaging business and CTC. Managements determination for the change in segment reporting is that
CTC had moved from its early stage research and development activities to a research and development program, with initial funding, and separate financial information. Our chief operating decision maker now evaluates such separate financial
information in deciding how to allocate resources to and in assessing the performance of CTC.

A reconciliation of the totals reported for
the operating segments to the applicable line items in the unaudited condensed consolidated financial statements for the quarters ended March 31, 2006 and March 31, 2005 follows:



|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|---------------------------- |  | ---------------- | ----- | - | --- | - | ---- | ------------------ |  | - | ----- | -
|                             |  | Imaging Business |       |   | CTC |   |      | Total Consolidated | 
|Quarter ended March 31, 2006 |  |                  |       |   |     |   |      |                    |  |   |       |  
|Revenue                      |  | $                | 4,866 |   |     | $ |     |                    |  | $ | 4,866 |  
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|Operating expenses           |  | $                | 2,657 |   |     | $ | 351  |                    |  | $ | 3,008 |  
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|Net income (Loss)            |  | $                | 289   |   |     | $ | (351 | )                  |  | $ | (62   | )
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|Quarter ended March 31, 2005 |  |                  |       |   |     |   |      |                    |  |   |       |  
|Revenue                      |  | $                | 4,890 |   |     | $ |     |                    |  | $ | 4,890 |  
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|Operating expenses           |  | $                | 3,024 |   |     | $ | 315  |                    |  | $ | 3,339 |  
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  
|Net loss                     |  | $                | (196  | ) |     | $ | (315 | )                  |  | $ | (511  | )
|                             |  |                  |       |   |     |   |      |                    |  |   |       |  

Total operating expenses comprise research and development, sales and marketing and general and
administrative except for CTC which does not have general and administrative expenses. For fiscal 2006, operating expenses also included stock-based compensation.



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A reconciliation of the totals reported for the operating segments to the applicable line items in the
condensed consolidated financial statements for the quarters ended March 31, 2006 and December 31, 2005 is as follows in thousands:



|                    |  |               |        |                  |   |       
|------------------- |  | ------------- | ------ | ---------------- | - | ------
|Identifiable Assets |  | March 31,2006 |        | December 31,2005
|CTC                 |  | $             | 133    |                  | $ | 144   
|                    |  |               |        |                  |   |       
|Imaging Business    |  | $             | 13,056 |                  | $ | 12,384
|                    |  |               |        |                  |   |       
|Total Consolidated  |  | $             | 13,189 |                  | $ | 12,528
|                    |  |               |        |                  |   |       

The following table presents net revenues by geographic region (in thousands):



|                                 |  |                             |       |      |   |      
|-------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                 |  | Three months endedMarch 31,
|                                 |  | 2006                        |       | 2005
|Revenues                         |  |                             |       |      |   |      
|North America                    |  | $                           | 2,976 |      | $ | 3,166
|International-Principally Europe |  |                             | 1,890 |      |   | 1,724
|                                 |  |                             |       |      |   |      
|Total Revenues                   |  | $                           | 4,866 |      | $ | 4,890
|                                 |  |                             |       |      |   |      

NOTE 9  Goodwill

The carrying value of goodwill was $2.4 million as of March 31, 2006 and December 31, 2005, respectively, and was allocated to the Companys imaging business reporting segment pursuant to SFAS
No. 142, Goodwill and Other Intangible Assets, in accordance with SFAS 142, the Company completed its annual evaluation of the goodwill by reporting unit during the quarter ended March 31, 2006, and concluded that there was no
impairment.

NOTE 10 - Issuance of Common Stock and Warrants

On March 14, 2006, the Company completed a private placement of its common stock and warrants to purchase its common stock with gross proceeds of $1.3 million. The Company sold 773,812 common shares priced at
$1.68 per share and warrants to purchase 193,453 common shares priced at $2.52 per share. The common stock warrants become exercisable on or after August 14, 2006 and expire after March 14, 2011. The aggregate value of the common stock
warrants was valued at $190,000 using the Black-Scholes fair value model with the following inputs:



|                         |  |     |  
|------------------------ |  | --- | -
|Expected life (in years) |  | 4.0 |  
|Volatility               |  | 84  | %
|Risk free interest rate  |  | 4.7 | %
|Dividend yield           |  |    | %

The placement agent received a fee of $130,000 and the placement agent and individuals affiliated
therewith received warrants to purchase 77,382 common shares at $2.02 per share. Net proceeds after placement agent fees, legal and other costs were $1.1 million. The placement agent common stock warrants become exercisable on or after
August 14, 2006 and expire after March 14, 2011. The aggregate value of the common stock warrants was valued at $82,000 using the Black-Scholes fair value model using the above inputs.



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NOTE 11  Recently Issued Accounting Pronouncements

In November 2005, the FASB issued FASB Staff Position (FSP) No. 123R-3 Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards (FSP. 123(R)-3). FSP 123(R)-3 provides an alternative transition method of accounting for the tax effects of adopting SFAS 123R. This FSP grants one year from the later of the date of the FSP or the
adoption of SFAS 123R by the Company for determination of the one-time election for purposes of transition. The Company is evaluating the alternative methods.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes, and with our audited financial statements and notes for the fiscal year ended December 31, 2005.

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements include those statements concerning our progress on our CTC initiative, our expectations on revenues, margins, and operating expenses, and expenditure in CTC. Our actual results could differ materially from those predicted in the
forward-looking statements as a result of risks and uncertainties including, but not limited to, those discussed in Part II, Item 1A  Risk Factors commencing on page 16 of our quarterly report and those discussed under
Item 7  Managements Discussion And Analysis of Financial Condition And Results of Operations commencing on pages 11 and 22 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. You should not
rely on these forward-looking statements, which reflect our position as of the date of this report. We are under no obligation to revise or update any forward-looking statements.

Results of Operations

Revenues. Our revenues are derived primarily from the sale of systems, service
contracts, software maintenance and grant revenues. Revenues for the three months ended March 31, 2006 and 2005 were $4.9 million and $4.9 million, respectively.

Sales of systems were $3.4 million and $3.5 million in the three months ended March 31, 2006 and 2005, respectively. System sales were flat in the first quarter of 2006 as compared to 2005.

Service contract and software maintenance revenues were $1.5 million and $1.4 million in the three months ended March 31, 2005 and 2004,
respectively. Service contract and software maintenance revenues were flat in the first quarter of 2006 as compared to 2005.

We expect
quarterly revenue to trend upward in the second half of 2006.

Cost of revenues. Cost of revenues includes direct material and labor costs,
manufacturing overhead, installation costs, warranty-related expenses and service and application support expenses. Costs of revenues for the three months ended March 31, 2006 and 2005 were $1.9 million and $2.0 million, respectively. Cost of
revenues, as a percentage of total revenues, for the three months ended March 31, 2006 and 2005 were 39% and 41%, respectively. Lower costs were primarily due to managements focus during 2005 on reducing the material costs of systems
which benefited the period ending March 31, 2006. Stock-based compensation expense related to the cost of revenues was $16,000 for the quarter ending March 31, 2006.

We expect margin percent to remain relatively stable for the remainder of 2006.

Research and development expenses.For the three months ended March 31, 2006, compared to the same period in 2005, research and development expense decreased by $144,000, or 16% from $890,000 to $746,000.
This was primarily due to a $128,000 reduction in materials and supplies expense in the first quarter of 2006 as compared to the first quarter of 2005. Stock-based compensation expense related to research and development was $46,000 for the quarter
ending March 31, 2006.

Sales and marketing expenses. Sales and marketing expenses for the three months ended March 31, 2006 and 2005 were
$1.4 million and $1.4 million, respectively. Sales and marketing expenses remained constant when comparing the first quarter of 2006 to the first quarter of 2005. Stock-based compensation expense related to sales and marketing was $20,000 for the
quarter ending March 31, 2006.

General and administrative expenses. For the three months ended March 31, 2006, general and administrative
expense decreased by $166,000, or 16% from $1.1 million to $0.9 million. General and administrative expenses in the first quarter of 2006 were lower as compared to the first quarter of 2005 primarily due to a reduction of $213,000 in recruiting
fees, consulting, patent maintenance and loan renewal fees which were offset by stock-based compensation expense related to general and administrative of $76,000.



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##### Table of Contents

We expect operating expenses to remain fairly constant for the remainder of 2006 with the potential for
increased spending in CTC during the later half of the fiscal year.

Other expense, net.Other expense was $27,000 and $37,000, for the three months
ended March 31, 2006 and 2005, respectively.

Liquidity and Capital Resources

At March 31, 2006, we had cash and cash equivalents of $4.6 million and working capital of $923,000, compared to $3.1 million and $(494,000)
respectively, at December 31, 2005. Restricted cash, which collateralizes various credit card and bank guarantees in the United Kingdom, amounted to $157,000 at March 31, 2006 and $172,000 at December 31, 2005.

Cash provided by operations in the three months ended March 31, 2006 was $608,000 and cash used in operations for the three months ended
March 31, 2005 was $531,000. Cash provided by operations in 2006 included a reduction of $579,000 in accounts receivable. Cash used in operations in 2005 included a net loss of $511,000, a decrease of $623,000 in accrued expenses primarily
related to audit and legal fees offset by a decrease of $449,000 in accounts receivable.

Cash used in investing activities in the three
months ended March 31, 2006 and 2005 was $17,000 and $89,000, respectively.

Cash provided in financing activities in the three months
ended March 31, 2006 was $835,000 compared to cash used of $543,000 for the period ending March 31, 2005. In the first quarter of 2006, we completed a private placement financing with net proceeds of $1.1 million. Cash used for the three
months ending March 31, 2005 was related to net borrowing in support of operating cash needs.

We have a loan agreement with Silicon
Valley Bank SVB which provides for borrowing of up to $3.5 million based on the level of certain of our North American accounts receivable. We were in compliance with the covenant requiring us to maintain $(1,250,000) in minimum tangible
net worth as of March 31, 2006. Our tangible net worth was $1.2 million at March 31, 2006.

At March 31, 2006, we had used
$1.7 million of the facility with $0.2 million available but not used. The interest rate on the facility was 9.75% at March 31, 2006, computed as the SVB prime rate plus 2 percent. The loan is collateralized by substantially all of the assets
of the U.S. Corporation and requires maintenance of a minimum tangible net worth level. Other loan covenants include the need to maintain insurance on our property, monthly reporting to SVB, the need to obtain SVB approval for any extraordinary
action and a limitation on the U.S. corporations ability to transfer more than $600,000 to a foreign subsidiary.

We collateralize
various credit card and bank guarantees (used for customs clearance purposes) with cash deposits at an international bank in the United Kingdom. This amounted to $157,000 at March 31, 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivatives and Financial Instruments.

For the three months ended March 31, 2006, there were no material changes from the disclosures made in our Form 10-K for the year ended December 31, 2005. We maintain our funds as cash or cash equivalents, primarily in money
market investments with a maturity of less than 90 days. We invested these funds at a 30-day average yield of 4.3% during the first quarter of 2006. These investments are not subject to interest rate risk.

Item 4. Disclosure Controls and Procedures.

(a)Evaluation of disclosure controls and procedures.
Based on an evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal control over financial
reporting.There has been no change in our internal control over financial reporting during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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##### Table of Contents

PART II - OTHER INFORMATION

Item 1A. Risk Factors

The following represent some of the factors that create risk and uncertainty for
our business and us. If any of the following factors actually occur, our business, financial condition or results of operations could be materially adversely affected.

We are evaluating our strategic options which could result in the sale of our assets, the sale of some or all of our business or a debt or equity financing, any of which may have a negative impact on our business
and our stock price.

We do not have sufficient funds to fully implement our growth strategy. We have, therefore, engaged an investment
bank to work with our management to evaluate our strategic options. Such evaluation could result in the sale of certain of our product lines, the licensing of certain of our intellectual property to third parties, the sale of our entire business, or
the sale of our debt or equity securities. The terms of such transactions, if any, may be unfavorable to our stockholders. A sale of less than our entire business may result in a surviving entity that is materially different from what we are today.
A sale of our entire business may not provide adequate proceeds to both discharge our liabilities and provide a return to our stockholders. A financing transaction may be highly dilutive to existing stockholders, impose constraints on our
operations, or otherwise have a negative impact on our share price. The availability of strategic options will depend, in part, on market conditions, and the outlook for us. If these transactions do not occur, we may have to delay development or
commercialization of certain of our products, license to third parties the rights to commercialize certain of our products or technologies that we would otherwise seek to commercialize, reduce our marketing, customer support or other resources
devoted to our existing products, or otherwise cease certain or all of our operations.

We have a history of operating losses and may
never achieve profitability.

We have not been profitable on a fiscal year basis since our inception in 1986. We incurred net losses of
$1.0 million and $3.3 million in 2005 and 2004, respectively. As of March 31, 2006, we had an accumulated deficit of $50.4 million. We will continue to incur significant costs as we continue our efforts to develop and market our current systems
and related applications. If we do achieve profitability in any period, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

The detection, quantification and characterization of tumor cells in circulating blood involve complex and unproven technologies. Our CTC initiative may never become commercially successful.

We are developing a system for the detection, quantification and characterization of tumor cells in circulating blood. Some of the technologies involved
are complex and unproven. The timing of the systems development may not meet our expectations. It is possible that we may never be successful in developing a system. Successful development of a system will require us to optimize a protocol for
the enrichment of tumor cells. Optimizing a protocol for the enrichment of tumor cells is an effort that entails adapting existing research technology for a clinical setting, a challenging effort that neither we nor our competitors have yet
succeeded in accomplishing. We may have to partner with one or more parties in our efforts to develop and optimize the system. We are now assessing, testing and optimizing other cell selection and depletion technologies and methods with partners.
Such partnerships may not ultimately be on terms favorable to us. Even if we were successful in developing a system, we may not have sufficient resources to commercialize the system. We may have to engage one or more commercialization partners and
such relationships may not result in returns adequate to justify our investment.



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##### Table of Contents

Our common stock is currently traded on the over-the-counter market, and the liquidity of our stock
may be seriously limited.

We have been delisted from the Nasdaq Capital Market. Our common stock is currently traded on the
over-the-counter bulletin board. Trading on the over-the-counter bulletin board may adversely impact our stock price and liquidity, and the ability of our stockholders to purchase and sell our shares in an orderly manner. Furthermore, the delisting
of our shares could damage our general business reputation and impair our ability to raise additional funds.

We expect quarterly
revenue and operating results to vary significantly in future periods, which could cause our stock price to fluctuate. If our operating results are below expectations, our stock price could drop.

We have experienced significant fluctuations in our quarterly operating results, and we expect to continue to experience fluctuations in the future. Our
customers, who are primarily public and private clinical laboratories, research organizations and hospitals, generally operate on annual budgets. Their budgeting cycles and spending practices affect our revenues. Factors that may have an influence
on our operating results in any particular quarter include:



| |  |  | demand for our products,
| | - |  | ------------------------



| |  |  | seasonality of our sales,
| | - |  | -------------------------



| |  |  | accounting, tax, consulting and other professional fees,
| | - |  | --------------------------------------------------------



| |  |  | new product introductions by us or our competitors, and the costs and time required for a transition to the new products,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in the timing of introduction of new products, systems or applications due to longer research and development cycles than anticipated,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the amount of reimbursement to our customers by insurance companies and other third parties for tests conducted on our systems,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timing of orders and shipments for capital equipment sales,
| | - |  | -----------------------------------------------------------



| |  |  | our mix of sales between our distributors and our direct sales force,
| | - |  | ---------------------------------------------------------------------



| |  |  | competition, including pricing pressures,
| | - |  | -----------------------------------------



| |  |  | timing and amount of research and development expenses, including clinical and pre-clinical trial-related expenditures,
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | foreign currency fluctuations, and
| | - |  | ----------------------------------



| |  |  | delays between our incurrence of expenses to develop new products, including expenses related to marketing and service capabilities, and the timing of sales and payments received
for the new products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, because we develop applications for our imaging systems, a delay in the release of a
system would result in the delay of applications for the system.

It is possible in the future that our operating results will be below the
expectations of public market analysts and investors. If our operating results fall below market expectations, the price of our common stock could drop significantly.

Our operating and capital expenditures are difficult to predict and can depend on a number of factors that are not entirely within our control.

The exact timing and amount of our operating and capital spending cannot be accurately determined and will depend on several factors, including:



| |  |  | market acceptance and demand for our products,
| | - |  | ----------------------------------------------



| |  |  | competing technological and market developments,
| | - |  | ------------------------------------------------



| |  |  | progress of our research and development efforts and planned clinical investigations, and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | commercialization of products currently under development by us and our competitors.
| | - |  | ------------------------------------------------------------------------------------



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We have expended and will continue to expend substantial amounts of money for research and development,
preclinical testing, clinical investigations, working capital needs and manufacturing and marketing of our products. Our future research and development efforts, in particular, are expected to include development of additional applications for our
current cytogenetic and pathology systems, as well as a system to detect circulating tumor cells which will likely require additional funds.

Our internal controls and procedures for financial reporting may not ensure that our public filings include timely and reliable financial information.

The effectiveness of our controls and procedures is limited by a variety of factors including:



| |  |  | faulty human judgment and simple error, omissions or mistakes,
| | - |  | --------------------------------------------------------------



| |  |  | fraudulent action of an individual or collusion of two or more people,
| | - |  | ----------------------------------------------------------------------



| |  |  | inappropriate management override of procedures, and
| | - |  | ----------------------------------------------------



| |  |  | the possibility that our enhanced controls and procedures may still not be adequate to assure timely and accurate information.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

If we fail to maintain effective internal controls and procedures for financial reporting in place, we could be unable to provide timely and accurate
financial information, be subject to, civil and criminal sanctions. By way of example, in March 2005, as a result of an internal investigation by our Audit Committee, we restated our consolidated financial statements for the years ended
December 31, 2003 and 2002 and for the quarters ended March 31, 2004 and June 30, 2004 to reflect adjustments to our previously reported financial information. Also, as a result of the investigation, we were unable to timely file the
Form 10-Q for the quarter ended September 30, 2004 or to announce our financial results for that period.

The marketing and sale of
our products requires regulatory approval and on-going certifications. Failure to obtain and maintain required regulatory approvals and certifications could prevent or delay our ability to market and sell our products and may subject us to
significant regulatory fines or penalties.

The FDA regulates design, testing, manufacturing, labeling, distribution, marketing, sales
and service of our products. Our products are marketed in the United States according to premarket notifications to the FDA under Section 510(k) of the Food, Drug and Cosmetic Act.

Unless an exemption applies, each medical device that we wish to market in the United States must first receive either 510(k) clearance or premarket
approval from the FDA. The FDAs 510(k) clearance process usually takes from three to twelve months, but may take longer. The premarket approval process generally takes from one to three years from the time FDA files the application, but it can
be significantly longer and can be significantly more expensive. Although we have obtained the necessary 510(k) clearance for our products, our 510(k) clearance can be revoked if safety or effectiveness problems develop.

We may need to seek additional regulatory approval for clearances if we modify existing products or intend to market other products under development and
cannot be certain that we would obtain 510(k) clearance or premarket approval in a timely manner or at all. If the FDA requires us to seek 510(k) clearance or premarket approval for any modification to a previously cleared product, we also may be
required to cease marketing or recall the modified device until we obtain such clearance or approval. Delays in obtaining clearances or approvals will adversely affect our ability to market and sell our products and may subject us to significant
regulatory fines or penalties, which would result in a decline in revenue and profitability. We have in the past received, and may in the future receive, warning letters from the FDA related to improper promotion of an unapproved use of our
products. As a result of such warning letters, the FDA could request that we modify our promotional materials or could subject us to regulatory enforcement actions, including injunction, seizure, civil fine and criminal penalty.

Intellectual property litigation, can be costly, lead to payment of substantial damages or royalties and/or prevent us from manufacturing and selling
our current and future products.

The medical diagnostic equipment industry, in general, is extremely competitive. Litigation among the
participants regarding patent and other intellectual property rights is common. For example, in February 2004, we were sued by Clarient, Inc. The lawsuit claimed that our Ariol system infringed on three Clarient patents. Clarient sought damages, as
well as an injunction barring us from, among other things, making, using, or selling any device in the United States that used Clarients patents-in-suit. The case settled in March 2005. Whether or not intellectual property infringement claims
have merit, they are time consuming and expensive to litigate and divert the attention of technical and management personnel from other work.



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We may be involved in other litigation to defend against claims of infringement, to enforce our patent rights or to
protect our trade secrets. If any other partys claims are upheld in any litigation or administrative proceeding, we could be prevented from exploiting the subject matter of those claims or forced to obtain licenses from the patent owners or to
redesign our products or processes to avoid infringement. In the event of any infringement by us, we cannot assure you that we will be able to successfully redesign our products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products and could require us to pay substantial damages and/or royalties and/or prevent us from
manufacturing and selling our current and future products.

Our success depends, in part, on our ability to protect our intellectual
property rights. We could lose sales and our competitive advantage could be harmed if we are not able to prevent infringement of our intellectual property rights.

We rely primarily on trade secret protection and on our unpatented proprietary know-how in the development and manufacturing of our products. Our trade secrets or proprietary technology could become known or be
independently developed by our competitors. In addition, the patents we hold may not be sufficiently broad to protect what we believe to be our proprietary rights. Our issued patents could also be disallowed, challenged or circumvented by our
competitors.

We cannot assure you that competitors or other parties have not filed or in the future will not file applications for, or
have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products or processes used or proposed to be used by us. In that case, our competitive position could be harmed and we may be required
to obtain licenses to patents or proprietary rights of others.

The market for medical diagnostic equipment for cancer, prenatal and
other genetic tests is extremely competitive. Our competitors may succeed in developing products and obtaining related regulatory approvals faster than us.

The medical diagnostic equipment industry is highly competitive and competition is likely to intensify. Certain of our competitors have greater financial and technical resources and production and marketing
capabilities than us. We cannot assure you that these competitors will not succeed in developing technologies and products that are more effective, easier to use or less expensive than those which are currently offered or being developed by us or
that would render our technology and products obsolete and noncompetitive. In addition, some of our competitors have significantly greater experience than we have in conducting clinical investigations of new diagnostic products and in obtaining FDA
and other regulatory clearances and approvals of products. Accordingly, our competitors may succeed in developing and obtaining regulatory approvals for such products more rapidly than us.

We operate in a consolidating industry which creates barriers to our market penetration.

The healthcare industry in recent years has been characterized by consolidation. Large hospital chains and groups of affiliated hospitals prefer to
negotiate comprehensive supply contracts for all of their supply needs at once. Large suppliers can often equip an entire laboratory and offer these hospital chains and groups one-stop shopping for laboratory instruments, supplies and
services. Larger suppliers also typically offer annual rebates to their customers based on the customers total volume of business with the supplier. The convenience and rebates offered by these larger suppliers are administrative and financial
incentives that we do not offer our customers. The success of our future plans will depend in part on our ability to overcome these and any new barriers resulting from continued consolidation in the healthcare industry.

Any disruption or delay in the supply of components or custom subassemblies could require us to redesign our products or otherwise delay our ability
to assemble our products, which could cause our sales to decline and result in continued net losses.

We assemble our products from a
combination of (i) commodity technology components, such as computers and monitors, (ii) custom subassemblies, such as automated filter wheels, (iii) proprietary hardware for scanning microscopy and (iv) operating systems and
proprietary applications software. While we typically use components and subassemblies that are available from alternate sources, any unanticipated interruption of the supply of these components or subassemblies could require us to redesign our
products or otherwise delay our ability to assemble our products, which could cause our sales to decline and result in continued net losses.

If we fail to comply with Quality System Regulations, our manufacturing operations could be delayed, and our product sales and profitability could suffer.

Our manufacturing processes and those of our suppliers are required to comply with the FDAs Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production,
control, quality



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assurance, labeling, packaging, storage and shipping of our products. The FDA enforces the QSR through inspections. We
were subject to a QSR inspection in December 2001 and May 2003, as a result of which, the FDA made observations to which we responded. Following our response, the FDA informed us that it did not intend to take further action. We may be inspected in
the future and we cannot assure you that we would pass any future inspections. If we fail a QSR inspection, our operations could be disrupted and our manufacturing delayed. Failure to take adequate corrective action in response to a QSR inspection
could force a shutdown of our manufacturing operations and a recall of our products, which would cause our product sales and profitability to suffer.

The marketing and sale of our products outside of the United States is subject to regulations, which vary from those in the United States. Failure to obtain and maintain required regulatory approvals could prevent
or delay our ability to market and sell our products in international markets.

The regulatory environment for testing, manufacturing,
labeling, distributing, marketing and sale of our products varies from country to country. Currently, some of our products, and modifications to these products, may be subject to pre-market approval in selected countries that are members of the
European Union. Our products, and modifications to these products, are also subject to other regulatory requirements in those and other countries. Our failure to comply with applicable regulatory requirements could result in fines, injunctions,
civil penalties, suspensions or loss of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Our products have been classified in Europe as diagnostic devices (IVDs), which are regulated under a different standard than medical devices. As such, our products are subject to the requirements of the
In Vitro Diagnostic Medical Device Directive (IVDD). An IVD is defined as a device which is a reagent, reagent product, kit, instrument, equipment or system, whether used alone or in combination, intended by the manufacturer to be used in
vitro for the examination of samples derived from the human body with a view to providing information on a physiological state, state of health or disease, or congenital abnormality. IVDs are specifically excluded from the provisions of the
Medical Device Directive (MDD), although IVDs are subject to equally stringent but different controls under the IVDD and other directives. If it is determined that our products are marketed as or intended to be issued as equipment that
can produce therapeutic effects or alleviate the symptoms of any disability, injury or illness, the equipment may then fall within the scope of the MDD and product registration and appropriate documentation, including possible clinical trials would
be required prior to commercialization. That same medical equipment, if also intended and promoted by us for use in the examination of samples derived from the human body with a view to providing information on a physiological state, state of health
or disease, or congenital, abnormality, would also be regulated under the IVDD, requiring performance data, including where appropriate, analytical sensitivity, diagnostic sensitivity, analytical specificity, diagnostic specificity, accuracy,
repeatability and reproducibility.

Although our products are currently regulated under the IVDD, European regulatory authorities may
independently interpret our marketing and promotional claims as falling within the scope of the MDD, and require us to comply with its differing requirements, including substantiating any therapeutic claims. A redefinition could harm our marketing
and sales if we were restricted from marketing or selling our products until we are able to comply with the MDD. Moreover, a member state of the EU or any other European country could adopt other laws or regulations that require approval to market
and sell our products.

We depend on distributors to sell our products outside of North America. Sales through our distributors may be
lower than direct sales efforts.

We rely substantially on independent distributors and sales agents to market and sell our products
outside of North America. We cannot assure you that distributors and agents will devote adequate resources to support sales of our products.

Our international sales and operations are a significant portion of our business. Changes in international markets and currency fluctuations could lead to a decline in our revenues or result in continued net losses.

We have significant international operations based in the United Kingdom. As of March 13, 2006, 27 employees, constituting approximately 40% of the
total number of our employees, were based outside the United States. We generate a substantial portion of our revenues from outside of the United States. In 2005 and 2004, we derived approximately 35% and 45% of our total revenues, respectively,
from our customers and distributors outside of North America. We expect that international sales will continue to account for a significant portion of our revenues.

The international nature of our business subjects us and our representatives, agents and distributors to laws and regulations of the jurisdictions in which we operate and sell our products. Changes in overseas
economic conditions, currency exchange rates, foreign tax laws or tariffs or other trade regulations could have an adverse effect on our financial condition or results of operations. For example, most of our international sales are denominated in
U.S. dollars, U.K. pounds sterling or



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Euros. We do not attempt to reduce the risk of currency fluctuations by hedging. Currency fluctuations against the U.S.
dollar could substantially reduce our U.S. dollar revenue or increase our costs. Changes in currency exchange rates could also make the products of our competitors less expensive than ours, which could result in our customers purchasing our
competitors products instead of ours.

Export controls could prevent us from exporting our products to foreign countries or
customers, which could cause our sales to decline and result in continued net losses.

Our research, investigational and clinical
products are subject to regulation by U.S. Department of Commerce export controls, primarily as they relate to the associated computers. These controls could prevent us from exporting our products to certain countries or customers, which could cause
our sales to decline and result in continued net losses.

Our customers rely substantially on the availability of third-party
reimbursement. Our customers failure to obtain sufficient reimbursement from third-party payors could cause our sales and the future growth of our business to decline.

Hospitals, physicians and other health care providers in the United States that purchase our products generally rely on third-party payors and other
sources for reimbursement of health care costs to reimburse all or part of the cost of the procedures in which our products are used. If hospitals, physicians and other health care providers are unable to obtain adequate reimbursement from
third-party payors for the procedures in which our products or products currently under development are intended to be used, our sales and future growth of our business could be adversely affected.

Market acceptance of our products and products under development in countries outside of the United States is also dependent on availability of
reimbursement within prevailing health care payment systems in those countries. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government-sponsored health care and private
insurance. We cannot assure you that we will be able to obtain international reimbursement approvals in a timely manner, if at all. Failure to receive international reimbursement approvals could harm the market acceptance of our products in the
international markets in which such approvals are sought.

We depend on key technical, scientific and management personnel. Any
difficulty in retaining our current employees or in hiring new employees could harm our ability to maintain and build our business operations.

Our future success depends in significant part upon the continued service of key scientific, technical and management personnel, and our continuing ability to attract and retain them. Competition for these personnel is intense and we cannot
assure you that we can retain our key scientific, technical and managerial personnel or that we can attract or retain other highly qualified scientific, technical and managerial personnel in the future. Our key employees include Robin Stracey, our
President and Chief Executive Officer, Terence Griffin, our Chief Financial Officer, and Diane Day, our Corporate Vice President-Regulatory, Quality and Clinical Affairs.

We have taken steps to retain our key employees, including the granting of stock options that vest over time, and we have entered into employment agreements with key employees. The loss of key personnel, especially if
without advance notice, or the inability to hire or retain qualified personnel, could harm our ability to maintain and build our business operations. Furthermore, we have no key man life insurance on any of our key employees.

In addition, some companies have adopted a strategy of suing or threatening to sue former employees and their new employers to discourage those employees
from leaving. As we hire new employees from our current or potential competitors, we may become a party to one or more lawsuits involving our employees. Any future litigation against us or our employees, regardless of the merit or outcome, may
result in substantial costs and expenses to us and may divert managements attention away from the operation of our business.

Undetected errors or failures in our software could result in loss or delay in the market acceptance for our product, lost sales or costly litigation.

Our existing products and products under development involve one or more software components that facilitate the detection of chromosomal, genetic or protein abnormalities through the interaction of certain imaging
algorithms with the sample under examination. This software, including any new versions that may be released, may contain undetected errors or failures. We cannot assure you that, despite testing by us and our customers, all errors will be found in
the software components of our products. Errors in our software could result in loss or delay in the market acceptance for our products, lost sales or costly litigation.



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A successful products liability claim brought in excess of our insurance coverage could require us to
pay substantial damages and result in harm to our business reputation.

The manufacture and sale of our products involve the risk of
product liability claims. We cannot assure you that the coverage limits of our insurance policies will be adequate in the event we are successfully sued. We evaluate our coverage limits on a regular basis and in connection with the introduction of
products currently under development. However, liability insurance is expensive and may not be available on commercially reasonably terms, if at all, or in sufficient coverage amounts to cover all eventualities. A successful claim brought against us
in excess of our insurance coverage could require us to pay substantial damages and result in harm to our business reputation.

A small
number of our stockholders, together with our officers and directors have substantial control over our stock and could delay or prevent a change in corporate control.

Four of our stockholders who are institutions beneficially own over 43% of our outstanding common stock. Officers and directors as a group beneficially own 7% of our stock as of March 14, 2006. These stockholders
will, to the extent they act together, have the ability to exert significant influence and control over matters requiring the approval of our stockholders. Their interests may be different from yours. Matters that typically require stockholder
approval include: (i) election of directors; (ii) approval of a merger or consolidation; and (iii) approval of a sale of all or substantially all of our assets. Accordingly, you may not be able to influence any action we take or
consider taking, even if it requires a stockholder vote.

Our stock price has been volatile. It will likely be volatile in the future.
You could lose all or a portion of your investment.

The market prices for securities, generally, and for medical diagnostic instrument
companies, in particular, including our common stock, have historically been highly volatile. Investment in our common stock is risky, and you could lose all or part of your investment. Many factors could cause the market price of our stock to
fluctuate, perhaps substantially, including the announcement of:



| |  |  | an Audit Committee investigation,
| | - |  | ---------------------------------



| |  |  | our need to seek additional funding in the near future to maintain our operations as planned,
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | material weakness in our internal controls or procedures,
| | - |  | ---------------------------------------------------------



| |  |  | technological innovations or new competitor products,
| | - |  | -----------------------------------------------------



| |  |  | developments concerning proprietary rights, including patents and litigation matters,
| | - |  | -------------------------------------------------------------------------------------



| |  |  | publicity regarding actual or potential results with respect to products under development,
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | regulatory developments in the United States or other countries,
| | - |  | ----------------------------------------------------------------



| |  |  | changes or potential changes in reimbursement rates to our customers,
| | - |  | ---------------------------------------------------------------------



| |  |  | developments in relationships with partners or distributors,
| | - |  | ------------------------------------------------------------



| |  |  | public concern as to the safety of new technologies, or
| | - |  | -------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts or our failure to meet those estimates,
| | - |  | ---------------------------------------------------------------------------------------------

In addition, changes in our operating results may cause the market price of our common stock to fluctuate.

Any future sale of a substantial number of shares eligible for resale could depress the trading price of our stock, lower our value and make it more
difficult for us to raise capital.

According to Forms 4, 13D and 13G filed by our stockholders, approximately 2.8 million shares
of our common stock, stock options and warrants (representing approximately 43% of the total shares outstanding) are held by affiliates. Should anyone of our affiliates sell any or all of their holdings in our common stock, it may have the effect of
depressing the trading price of our common stock. In addition, such sales could lower our value and make it more difficult for us to raise capital.



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Our preferred shares rights plan, certificate of incorporation, bylaws and Delaware law contain
provisions that could prevent or delay a takeover of Applied Imaging and negatively impact shareholder value.

On May 28, 1998, we
adopted a preferred shares rights plan. The purpose of the plan is to assure fair value in the event of a future unsolicited business combination or similar transaction involving Applied Imaging. If an individual or entity accumulates or solicits a
tender or exchange offer for 20% of our common stock, or 25% in the case of Special Situation Funds and affiliates, the rights become exercisable for additional shares of our preferred stock. The intent of these rights is to encourage a potential
acquirer to negotiate with our Board of Directors to increase the consideration paid for our stock. The existence of this plan, however, may deter a potential acquirer, which could negatively impact stockholder value. We also are authorized to issue
6,000,000 shares of undesignated preferred stock, which we may issue without stockholder approval and upon such terms as our Board of Directors may determine.

In addition, our basic corporate documents and Delaware law contain provisions that might enable our management to resist a takeover. Any of these provisions might discourage, delay or prevent a change in the control
of Applied Imaging or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common
stock.

Changes in, or interpretations of, accounting principles, such as expensing of stock options, could result in unfavorable
accounting charges.

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles.
These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even
retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:



| |  |  | software revenue recognition
| | - |  | ----------------------------



| |  |  | accounting for share-based payments
| | - |  | -----------------------------------



| |  |  | accounting for business combinations and related goodwill
| | - |  | ---------------------------------------------------------

In particular, the FASB recently issued SFAS 123R which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in
our consolidated statements of income. The accounting provisions of SFAS 123R are effective for annual periods beginning after June 15, 2005. We adopted SFAS 123R in the first quarter of fiscal year 2006.

The adoption of SFAS 123R had a material impact on our consolidated financial position and results of operations. See Note 6 for further information
regarding our stock-based compensation assumptions and expenses, including pro-forma disclosures for prior periods as if we had recorded stock-based compensation expense. Please refer to the section entitled Recently Issued Accounting
Pronouncements and Stock-based Compensation for further information regarding SFAS 123R.

Item 6. Exhibits.

(a) Exhibits.



|            |  |                                                                                                                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                   
|3.1(1)      |  | Certificate of Incorporation of the Registrant                                                                                                                                                                                                                                
|            | 
|3.2(2)      |  | Bylaws of the Registrant as amended                                                                                                                                                                                                                                           
|            | 
|3.3(3)      |  | Certificate of Amendment of the Certificate of Incorporation of the Registrant                                                                                                                                                                                                
|            | 
|4.1(1)      |  | Specimen Common Stock Certificate                                                                                                                                                                                                                                             
|            | 
|4.3(4)      |  | Preferred Shares Rights Agreement dated as of May 29, 1998, between the Registrant and Norwest Bank Minnesota, N.A. including the form of Rights Certificate, the Certificate of Designation
and the summary of Rights attached thereto as Exhibits A, B, and C, respectively.



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|         |  |                                                                                                                                                 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|10.58(5) |  | Purchase Agreement between the Registrant and certain investors in connection with sales of Common Stock on March 14, 2006.                     
|         | 
|10.59(5) |  | Form of Warrant delivered to investors in connection with sales of Common Stock on March 14, 2006.                                              
|         | 
|10.60(5) |  | Registration Rights Agreement executed with investors in connection with sales of common Stock on March 14, 2006.                               
|         | 
|10.61(6) |  | Amendment to Loan Documents dated February 25, 2005 between Registrant and Silicon Valley Bank.                                                 
|         | 
|10.62(6) |  | Amendment to Loan Documents dated April 22, 2005 between Registrant and Silicon Valley Bank.                                                    
|         | 
|10.63(6) |  | Amendment to Loan Documents dated February 22, 2006 between Registrant and Silicon Valley Bank.                                                 
|         | 
|10.64(7) |  | 2006 Management Incentive Compensation Plan.                                                                                                    
|         | 
|31.1     |  | Chief Executive Officers Certification Pursuant to 15 U.S.C. Section 7241.                                                                     
|         | 
|31.2     |  | Chief Financial Officers Certification Pursuant to 15 U.S.C. Section 7241.                                                                     
|         | 
|32.1     |  | Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|         | 
|32.2     |  | Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) | Filed as an exhibit to the Registrants Post-Effective Amendment No. 1 Registration Statement on Form S-1 to Form S-3 filed on August 15, 2005, as amended, and
incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Filed as an exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Commission on March 31, 1998, and incorporated
herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed as an exhibit to the Registrants Annual Report on Form 10-K filed with Commission on March 25, 2002 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to the Registrants Current Report on Form 8-A filed with the Commission on June 5, 1998 and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Commission on March 16, 2005, and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as an exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Commission on March 29, 2006, and incorporated
herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Commission on April 11, 2006, and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



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APPLIED IMAGING CORP.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.



|                   |  |                                    |  |                        
|------------------ |  | ---------------------------------- |  | -----------------------
|                   |  | APPLIED IMAGING CORP. (Registrant)
|                   |  |                                   
|Date: May 15, 2006 |  | By:                                |  | /S/ ROBIN STRACEY      
|                   |  |                                    |  | Robin Stracey          
|                   |  |                                    |  | Chief Executive Officer



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