##### Table of Contents



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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AMENDMENT NO. 1



TO



FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
|- |  | -------------------------------------------------------------------

| |  | EXCHANGE ACT OF 1934
| |  | --------------------



For the Quarterly Period ended June 30, 2002



OR



| ̈ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
|- |  | -------------------------------------------------------------------

| |  | 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)



|Delaware                        |  | 77-0120490         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



2380
Walsh Avenue, Building B,

Santa Clara, California 95051

(Address of principal executive offices including zip code)



(408) 562-0250

(Registrants telephone number, including area code)



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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 90 days.  Yes  x    No ̈



As of March 31, 2003 there were
15,913,339 shares of the Registrants Common Stock outstanding.



EXPLANATORY NOTE



Applied Imaging Corp. amends and restates in its entirety Form 10-Q filed on August 13, 2002 for its fiscal quarter ended June 30, 2002 as set forth in this Amendment No. 1 Form 10-Q.



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##### Table of Contents



APPLIED
IMAGING CORP.



INDEX



|                                                         |  |                                                                                                                          |  | Page 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | -----
|                                                        
|PART I. FINANCIAL INFORMATION                            |  |                                                                                                                         
|                                                        
|Item 1.                                                  |  | Financial Statements (Unaudited)                                                                                         |  |      
|                                                        
|                                                         |  | Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001                                                |  | 3    
|                                                        
|                                                         |  | Condensed Consolidated Statements of Operations and Comprehensive Loss Three and six months ended June 30, 2002 and 2001 |  | 4    
|                                                        
|                                                         |  | Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001                                  |  | 5    
|                                                        
|                                                         |  | Notes to Condensed Consolidated Financial Statements                                                                     |  | 6-10 
|                                                        
|Item 2.                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 11-15
|                                                        
|Item 3.                                                  |  | Quantitative and Qualitative Disclosures about Market Risk Derivatives and Financial Instruments                         |  | 16   
|                                                        
|PART II. OTHER INFORMATION                               |  |                                                                                                                         
|                                                        
|Item 4.                                                  |  | Submission of Matters to a Vote of Security Holders                                                                      |  | 17   
|                                                        
|Item 5.                                                  |  | Other Information                                                                                                        |  | 17   
|                                                        
|Item 6.                                                  |  | Exhibits and Reports on Form 8-K                                                                                         |  | 17   
|                                                        
|Signatures                                               |  | 18                                                                                                                      
|                                                        
|CEO/CFO Certifications per Section 302 of Sarbanes-Oxley |  | 19                                                                                                                      
|                                                        
|CEO/CFO Certifications per Section 906 of Sarbanes-Oxley |  | 20                                                                                                                      



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##### Table of Contents



PART IFINANCIAL INFORMATION



Item 1. Financial Statements



APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)



|                                           |  | June 30, 2002 |         |   | December 31, 2001 |  
|------------------------------------------ |  | ------------- | ------- | - | ----------------- | -
|                                           |  | (Restated)    |         |   | (Restated)        |  
|                                           |  | (Unaudited)   |         |   |                   |  
|ASSETS                                     |  |               |         |   |                   |  
|Current assets:                            |  |               |         |   |                   |  
|Cash and cash equivalents                  |  | $             | 2,806   |   |                   | $
|Restricted cash                            |  |               | 246     |   |                   |  
|Short-term investments                     |  |               |        |   |                   |  
|Trade accounts receivable, net             |  |               | 7,058   |   |                   |  
|Inventories                                |  |               | 1,253   |   |                   |  
|Prepaid expenses/other current assets      |  |               | 477     |   |                   |  
|                                           |  |               |         |   |                   |  
|Total current assets                       |  |               | 11,840  |   |                   |  
|Property and equipment, net                |  |               | 955     |   |                   |  
|Goodwill                                   |  |               | 2,364   |   |                   |  
|Other assets                               |  |               | 56      |   |                   |  
|                                           |  |               |         |   |                   |  
|Total assets                               |  | $             | 15,215  |   |                   | $
|                                           |  |               |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS
EQUITY       |  |               |         |   |                   |  
|Current liabilities:                       |  |               |         |   |                   |  
|Accounts payable                           |  | $             | 2,067   |   |                   | $
|Accrued expenses                           |  |               | 1,604   |   |                   |  
|Bank debt                                  |  |               | 1,973   |   |                   |  
|Capital lease obligation                   |  |               | 2       |   |                   |  
|Deferred revenue, current                  |  |               | 2,657   |   |                   |  
|                                           |  |               |         |   |                   |  
|Total current liabilities                  |  |               | 8,303   |   |                   |  
|Deferred revenue, non-current              |  |               | 315     |   |                   |  
|                                           |  |               |         |   |                   |  
|Total liabilities                          |  |               | 8,618   |   |                   |  
|                                           |  |               |         |   |                   |  
|Stockholders equity:                      |  |               |         |   |                   |  
|Common stock                               |  |               | 16      |   |                   |  
|Additional paid-in capital                 |  |               | 49,228  |   |                   |  
|Deferred stock compensation                |  |               | (7      | ) |                   |  
|Accumulated other comprehensive loss       |  |               | (367    | ) |                   |  
|Accumulated deficit                        |  |               | (42,273 | ) |                   |  
|                                           |  |               |         |   |                   |  
|Total stockholders equity                 |  |               | 6,597   |   |                   |  
|                                           |  |               |         |   |                   |  
|Total liabilities and stockholders equity |  | $             | 15,215  |   |                   | $
|                                           |  |               |         |   |                   |  



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 and
Comprehensive Income (Loss)

(in thousands, except per share data)

(Unaudited)



|                                                    |  | Three months endedJune 30, |        |      | Six months endedJune 30, |       
|--------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------ | ------
|                                                    |  | 2002                       |        | 2001 |                          |       
|                                                    |  | (Restated)                 |        |      |                          |       
|Revenues                                            |  | $                          | 5,345  |      | $                        | 4,528 
|Cost of revenues                                    |  |                            | 2,031  |      |                          | 1,793 
|                                                    |  |                            |        |      |                          |       
|Gross profit                                        |  |                            | 3,314  |      |                          | 2,735 
|                                                    |  |                            |        |      |                          |       
|Operating expenses:                                 |  |                            |        |      |                          |       
|Research and development                            |  |                            | 856    |      |                          | 1,029 
|Sales and marketing                                 |  |                            | 1,700  |      |                          | 1,812 
|General and administrative                          |  |                            | 634    |      |                          | 692   
|Amortization of goodwill                            |  |                            |       |      |                          | 77    
|Restructuring                                       |  |                            |       |      |                          |      
|                                                    |  |                            |        |      |                          |       
|Total operating expenses                            |  |                            | 3,190  |      |                          | 3,610 
|                                                    |  |                            |        |      |                          |       
|Operating income (loss)                             |  |                            | 124    |      |                          | (875  
|Other income (expense), net                         |  |                            | 26     |      |                          | 7     
|                                                    |  |                            |        |      |                          |       
|Net income (loss)                                   |  |                            | 150    |      |                          | (868  
|Other comprehensive income (loss)                   |  |                            |        |      |                          |       
|Change in unrealized loss on short-term investments |  |                            |       |      |                          | 2     
|                                                    |  |                            |        |      |                          |       
|Comprehensive income (loss)                         |  | $                          | 150    |      | $                        | (866  
|                                                    |  |                            |        |      |                          |       
|Net income (loss) per share                         |  |                            |        |      |                          |       
|basic                                              |  | $                          | 0.01   |      | $                        | (0.06 
|                                                    |  |                            |        |      |                          |       
|diluted                                            |  | $                          | 0.01   |      | $                        | (0.06 
|                                                    |  |                            |        |      |                          |       
|Weighted average shares outstanding                 |  |                            |        |      |                          |       
|basic                                              |  |                            | 15,851 |      |                          | 15,184
|                                                    |  |                            |        |      |                          |       
|diluted                                            |  |                            | 16,229 |      |                          | 15,184
|                                                    |  |                            |        |      |                          |       



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

(In thousands)

(Unaudited)



|                                                                            |  | Six months ended June 30, |       
|--------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                            |  | 2002                      |       
|                                                                            |  | (Restated)                |       
|Cash flows from operating activities:                                       |  |                           |       
|Net loss                                                                    |  | $                         | (342  
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                           |       
|Depreciation and amortization                                               |  |                           | 297   
|Provision for doubtful accounts                                             |  |                           | (10   
|Amortization related to deferred stock compensation                         |  |                           |      
|Loss on sale of fixed assets                                                |  |                           | 61    
|Changes in operating assets and liabilities:                                |  |                           |       
|Trade accounts receivable                                                   |  |                           | (1,636
|Inventories                                                                 |  |                           | (191  
|Prepaid expenses/other current assets                                       |  |                           | 70    
|Accounts payable                                                            |  |                           | 309   
|Accrued expenses                                                            |  |                           | 205   
|Deferred revenue                                                            |  |                           | (181  
|                                                                            |  |                           |       
|Net cash used in operating activities:                                      |  |                           | (1,418
|                                                                            |  |                           |       
|Cash flows from investing activities:                                       |  |                           |       
|Purchase of short-term investments                                          |  |                           |      
|Proceeds from sale and maturities of investments                            |  |                           | 650   
|Goodwill                                                                    |  |                           | (20   
|Purchases of equipment                                                      |  |                           | (292  
|Other assets                                                                |  |                           |      
|                                                                            |  |                           |       
|Net cash provided by (used in) investing activities:                        |  |                           | 338   
|                                                                            |  |                           |       
|Cash flows from financing activities:                                       |  |                           |       
|Net proceeds from issuance of common stock                                  |  |                           | 1,075 
|Restricted cash                                                             |  |                           | (1    
|Bank and other loan proceeds                                                |  |                           | 5,855 
|Bank and other loan payments                                                |  |                           | (5,567
|Capital lease payments, principal portion                                   |  |                           | (14   
|                                                                            |  |                           |       
|Net cash provided by (used in) financing activities:                        |  |                           | 1,348 
|                                                                            |  |                           |       
|Net increase (decrease) in cash and cash equivalents                        |  |                           | 268   
|Cash and cash equivalents at beginning of period                            |  |                           | 2,538 
|                                                                            |  |                           |       
|Cash and cash equivalents at end of period                                  |  | $                         | 2,806 
|                                                                            |  |                           |       
|Supplemental disclosure of non-cash investing and financing
activities:     |  |                           |       
|Deferred stock compensation                                                 |  | $                         |      
|                                                                            |  |                           |       



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 and six months ended June 30, 2002 and 2001. These 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 results
of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2002. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, for the year ended December 31, 2001, contained in our 2001 annual report on Form 10-K.



Liquidity: We expect negative cash flow from operations to continue through at least 2002, as we continue the development of our SPOTTMand AriolTMsystems, conduct clinical trials required for FDA clearance of new products, expand our marketing, sales and customer support capabilities, and add additional administrative infrastructure. In January 2002, we raised
approximately $1.0 million with a private placement of 571,500 shares of our common stock at a price of $1.75 per share. The private placement also included the issuance, in July 2002, of warrants exercisable for 571,500 shares of our common stock
at an exercise price of $2.25 per share. In addition, in January 2002, we instituted a series of actions to rationalize our operations to provide a lower operating cost. We are closing our League City, Texas office and have consolidated our
manufacturing and engineering facilities. As a result of these actions, we currently estimate that our capital resources will enable us to meet our short-term capital needs through at least 2002.



However, expenditures required to achieve our plans may be
greater than projected or the cash flow generated from operations may be less than projected. As a result, our long-term capital needs may require us to try to obtain additional funds through equity or debt financing, collaborative or other
arrangements with other companies, bank financing and other sources. We have expended and will continue to expend substantial amounts of money for research and development, preclinical testing, planned clinical investigations, capital expenditures,
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 of our current cytogenetic products and additional
applications for the SPOTand Ariolsystems, which may require additional funds.



There can be no assurance that we will be able to obtain additional funding when needed or on terms acceptable to us. If adequate and
acceptable funding is not available, we could be required to delay development or commercialization of certain products, to license to third parties the rights to commercialize certain products or technologies that we would otherwise seek to
commercialize internally, or to reduce the marketing, customer support, or other resources devoted to product development. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business,
results of operations and financial condition.



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We have a
one-year loan agreement with Silicon Valley Bank (SVB) that was effective beginning on September 28, 2001. The loan agreement provides the capability to borrow up to $2 million based on the level of certain of our North American accounts receivable
and inventories. At June 30, 2002 we had used $1,973,000 of the facility with $27,000 available but not used. The interest rate on the facility was 6.75% at June 30, 2002, 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 us to maintain a minimum level of tangible net worth amounting to $2,000,000 at June 30, 2002. 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 subsidiary. We were in compliance with the SVB loan covenants as of June 30,
2002.



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 ($246,000) at June 30, 2002.



NOTE 2Inventories (in thousands)



|Balance as of   |  | June 30, 2002 |       | December 31, 2001
|--------------- |  | ------------- | ----- | -----------------
|                |  | (Restated)    |       | (Restated)       
|Raw materials   |  | $             | 1,123 |                  
|Work in process |  |               | 6     |                  
|Finished goods  |  |               | 124   |                  
|                |  |               |       |                  
|Total           |  | $             | 1,253 |                  
|                |  |               |       |                  



NOTE 3Income
(loss) per share



The computation of basic and diluted net income (loss) per share (EPS) for the three and six months ended June 30, 2002 and June 30, 2001 is determined by dividing net income (loss) as reported as the numerator by the number of
shares included in the denominator as shown in the following table (in thousands):



|                                            |  | Three months ended June 30, |  | Six months ended June 30,
|------------------------------------------- |  | --------------------------- |  | -------------------------
|                                            |  | 2000                        |  | 2001                     
|Weighted average shares outstandingbasic   |  | 15,851                      |  | 15,184                   
|Dilutive sharesstock options               |  | 378                         |  |                         
|                                            |  |                             |  |                          
|Weighted average shares outstandingdiluted |  | 16,229                      |  | 15,184                   
|                                            |  |                             |  |                          



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):



|              |  | Three months ended June 30, |  | Six months ended June 30,
|------------- |  | --------------------------- |  | -------------------------
|Balance as of |  | 2000                        |  | 2001                     
|Options       |  | 1,059                       |  | 2,456                    
|Warrants      |  | 651                         |  | 651                      
|              |  |                             |  |                          
|Total         |  | 1,710                       |  | 3,107                    
|              |  |                             |  |                          



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NOTE 4Goodwill



In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets
and supersedes APB Opinion No. 17, Intangible Assets. The Company has adopted SFAS No. 142 beginning with the first quarter of fiscal 2002. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives will not
be amortized but rather they will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The goodwill test for impairment consists of a two-step process that
begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. SFAS 142 requires an entity to complete the first step of the
transitional goodwill impairment test within six months of adopting the Statement. The Company has completed the adoption of SFAS 142 and has determined that no impairment of the recorded goodwill exists.



The following table reconciles the Companys fiscal 2002
and 2001 second quarter and first half net income (loss), net income (loss) per sharebasic and diluted adjusted to exclude goodwill amortization pursuant to SFAS No. 142 to amounts previously reported (in thousands, except per share data):



|                                    |  | Three months ended June 30, |        |      | Six months ended June 30, |       
|----------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------
|                                    |  | 2002                        |        | 2001 |                           |       
|                                    |  | (Restated)                  |        |      |                           |       
|Reported net income (loss)          |  | $                           | 150    |      | $                         | (868  
|Add back: goodwill amortization     |  |                             |       |      |                           | 77    
|                                    |  |                             |        |      |                           |       
|Adjusted net income (loss)          |  | $                           | 150    |      | $                         | (791  
|                                    |  |                             |        |      |                           |       
|Basic net income (loss) per share:  |  |                             |        |      |                           |       
|as reported                        |  | $                           | 0.01   |      | $                         | (0.06 
|adjusted                           |  | $                           | 0.01   |      | $                         | (0.05 
|Diluted net income (loss) per share |  |                             |        |      |                           |       
|as reported                        |  | $                           | 0.01   |      | $                         | (0.06 
|adjusted                           |  | $                           | 0.01   |      | $                         | (0.05 
|Weighted average shares outstanding |  |                             |        |      |                           |       
|basic                              |  |                             | 15,851 |      |                           | 15,184
|diluted                            |  |                             | 16,229 |      |                           | 15,184



NOTE
5Restructuring



In January 2002,
we instituted a series of actions to rationalize our operations to provide a lower operating cost. We consolidated our manufacturing and engineering facilities and are closing our League City, Texas office. We recorded a restructuring charge of
$222,000 in the first quarter of 2002 that was reflected in the Condensed Consolidated Statement of Operations and Comprehensive Loss as a separate line item under operating expenses. This charge is related to the costs of terminating 12 employees
(five in engineering, three in manufacturing, two in administration and two in sales and support) and closing the League City, Texas office.



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The following table summarizes
the costs that were charged and whether they were cash or non-cash charges (in thousands):



|Description                       |  |   |     |   | Note
|--------------------------------- |  | - | --- | - | ----
|Employee separation costs         |  | $ | 132 |   |     
|League City office closure costs  |  |   | 90  |   |     
|                                  |  |   |     |   |     
|Total costs                       |  | $ | 222 |   |     
|                                  |  |   |     |   |     
|Reserve balance at March 31, 2002 |  | $ | 63  |   |     
|                                  |  |   |     |   |     
|Cash payments                     |  |   | (35 | ) |     
|                                  |  |   |     |   |     
|Reserve balance at June 30, 2002  |  | $ | 28  |   |     
|                                  |  |   |     |   |     



NOTE 6Recent
Accounting Pronouncements



In June 2002,
the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and
disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The
Company will adopt SFAS 146 during the first quarter ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of
SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.



Note 7Restatement



In December 2002, the Company became aware that some of its
sales employees had given verbal undertakings to certain distributors in Asia and Europe that were not in compliance with the Companys revenue recognition policies. These verbal undertakings affected a limited number of transactions beginning
in December 2001. On further investigation, the Company determined that these verbal undertakings, had they been known at the time, would have served to defer the recognition of the related revenue by, generally, one or two quarters. The impact of
the revenue deferral on the Companys previously-issued financial statements is to: (i) reduce revenue in the fourth quarter and full year 2001 by $250,000, reduce revenue in the first quarter of 2002 by $152,000, increase revenue in the second
quarter of 2002 by $26,000, reduce revenue in the third quarter of 2002 by $239,000, and (ii) increase the net loss in the fourth quarter and full year 2001 by $193,000, increase the net loss in the first quarter of 2002 by $111,000, increase net
profit in the second quarter of 2002 by $35,000 and reduce the net profit in the third quarter of 2002 by $176,000. There was also a small impact on inventories, accounts receivables and deferred revenue in the quarters under discussion.



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The impact of
the revenue deferral on the previously-issued financial statements for the three and six months ended June 30, 2002 and on the Condensed Consolidated Balance Sheets as of December 31, 2001 is as follows (in thousands):



Condensed Consolidated Statement of Operations



|                                                |  | Three months ended June 30, 2002 (Unaudited) |        | Six months ended June 30, 2002 (Unaudited) |  
|----------------------------------------------- |  | -------------------------------------------- | ------ | ------------------------------------------ | -
|                                                |  | Previously Reported                          |        | As Restated                                |  
|Total revenues                                  |  | $                                            | 5,319  |                                            | $
|Operating income (loss)                         |  |                                              | 89     |                                            |  
|Net income (loss)                               |  |                                              | 115    |                                            |  
|Net income (loss) per share-basic and diluted   |  |                                              | 0.01   |                                            |  
|                                               
|Condensed Consolidated Balance Sheets          
|                                               
|                                                |  | June 30, 2002 (Unaudited)                    |        | December 31, 2001                          |  
|                                                |  | Previously Reported                          |        | As Restated                                |  
|ASSETS                                          |  |                                              |        |                                            |  
|Cash, restricted cash and marketable securities |  | $                                            | 3,052  |                                            | $
|Trade accounts receivable                       |  |                                              | 7,467  |                                            |  
|Inventories                                     |  |                                              | 1,157  |                                            |  
|Other current assets                            |  |                                              | 477    |                                            |  
|Non current assets                              |  |                                              | 3,375  |                                            |  
|                                                |  |                                              |        |                                            |  
|Total assets                                    |  | $                                            | 15,528 |                                            | $
|                                                |  |                                              |        |                                            |  
|LIABILITIES AND STOCKHOLDERS EQUITY            |  |                                              |        |                                            |  
|Accrued expenses                                |  | $                                            | 1,615  |                                            | $
|Deferred revenue                                |  |                                              | 2,690  |                                            |  
|Other current liabilities                       |  |                                              | 4,042  |                                            |  
|Non-current liabilities                         |  |                                              | 315    |                                            |  
|Stockholders equity                            |  |                                              | 6,866  |                                            |  
|                                                |  |                                              |        |                                            |  
|Total liabilities and stockholders equity      |  | $                                            | 15,528 |                                            | $
|                                                |  |                                              |        |                                            |  



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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 condensed consolidated financial statements and notes, and with
our audited financial statements and notes for the fiscal year ended December 31, 2001.



This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements relating to
operating performance, the adequacy of our current capital resources and the timing of future capital requirements. 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 this quarterly report and those discussed under Item 1  Business, Additional Factors That Might Affect Future Results, and under Item 7Managements
Discussion And Analysis Of Financial Condition And Results Of Operations; Factors that May Affect Future Results, commencing on pages 8 and 21, respectively, in our Annual Report on Amendment No. 1 to Form 10-K/A for the fiscal year ended
December 31, 2001. These risks and uncertainties include, but are not limited to, competition, continued adverse changes in general economic conditions in the United States and internationally, adverse changes in the specific markets for our
products, adverse changes in customer order patterns, pricing pressures, risks associated with foreign operations, delay or failure to launch new products and failure to reduce costs or improve operating efficiencies. 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



In December 2002, we became aware that some of our sales employees had given verbal undertakings to certain distributors in Asia and
Europe that were not in compliance with our revenue recognition policies. These verbal undertakings affected a limited number of transactions beginning in December 2001. On further investigation, we determined that these verbal undertakings, had
they been known at the time, would have served to defer the recognition of the related revenue by, generally, one or two quarters. The impact of the revenue deferral on our previously-issued financial statements is to: (i) reduce revenue in the
fourth quarter and full year 2001 by $250,000, reduce revenue in the first quarter of 2002 by $152,000, increase revenue in the second quarter of 2002 by $26,000, reduce revenue in the third quarter of 2002 by $239,000, and (ii) increase the net
loss in the fourth quarter and full year 2001 by $193,000, increase the net loss in the first quarter of 2002 by $111,000, increase net profit in the second quarter of 2002 by $35,000 and reduce the net profit in the third quarter of 2002 by
$176,000. There was also a small impact on inventories, accounts receivables and deferred revenue in the quarters under discussion. While we concluded that the impact of the revenue recognition matter on each quarter in question was not necessarily
material, we decided to restate our financial results for fiscal year 2001 and the first three quarters of fiscal 2002.



We have revised our internal controls and procedures related to revenue recognition. Some of our new internal controls and procedures
include: requiring sub-certifications from all sales managers and officers regarding revenue recognition, additional communication to sales employees to reinforce our revenue recognition policy, clarification of certain parts of our revenue
recognition policy, and requiring a counter signature by the Chief Financial Officer of significant sales orders.



The impact of the revenue deferral on previously issued financial statements for the quarter and six months ended June 30, 2002 is shown
in Note 7 to the Financial Statements.



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Revenues. Our revenues
are derived primarily from the sale of products, service contracts, software maintenance and grant revenues. Revenues for the three and six months ended June 30, 2002 were $5.3 million and $10.2 million, respectively, compared to $4.5 million and
$8.5 million for the corresponding periods in 2001. This 18% and 21% increase in revenues in the quarter and first half, respectively, was due primarily to increased sales volume of our MDSand SPOTsystems, which were $0.6 million in the quarter and $1.3 million in the first half compared to no sales in the second quarter of 2001 and $0.1 million of sales in the first half of 2001. The SPOTgenetic analysis system is a new product that was introduced in the second quarter of 2002. Sales of the SPOTsystem are expected to continue to favorably impact the growth of overall revenues through at least the end of 2002.



Sales of systems were $4.1 million and $7.8 million in the three and six
months ended June 30, 2002, respectively, compared to $3.4 millionand $6.3 million for the corresponding periods in 2001. This 22% and 24% increase in revenues in the quarter and first half, respectively, was due primarily to increased sales volume
of our MDSand SPOTsystems discussed above.



Service contract, software maintenance and grant revenues were $1.2 million and $2.4 million in the three and six months ended June 30, 2002, respectively, compared to $1.1 million and $2.1 million for the corresponding periods in
2001. The slower growth of service contract, software maintenance and grant revenues (7% in the second quarter and 10% in the first half) was due primarily to the completion of a grant project in 2001. Grant revenues were zero in the second quarter
and first half of 2002 and amounted to $85,000 in the second quarter of 2001 and $149,000 in the first half of 2001.



Cost of revenues. Cost of revenues includes direct material and labor costs, manufacturing overhead, installation costs, warranty-related expenses
and post-warranty service and application support expenses. Costs of revenues for the three and six months ended June 30, 2002 were $2.0 million and $3.8 million, respectively, compared to $1.8 million and $3.7 million for the corresponding periods
in 2001. The increase in cost of revenues was due primarily to the increase in sales discussed above. Cost of revenues, as a percentage of total revenues, for the three and six months ended June 30, 2002 were 38% compared to 40% and 44% for the
corresponding prior year periods. The decrease is primarily due to favorable product mix.



Research and development expenses.Research and development expenses for the three and six months ended June 30, 2002 were $0.9 million and $1.7 million, respectively, compared to $1.0 million and $2.0 million for the
comparative prior year periods. The decrease over the prior year periods is primarily due to the consolidation of our software support operations in January 2002 resulting in the elimination of five personnel positions.



Sales and marketing expenses. Sales and marketing expenses for the
three and six months ended June 30, 2002 were $1.7 million and $3.4 million, respectively, compared to $1.8 million and $3.8 million for the comparative prior year periods. For the second quarter, the decrease is primarily related to reduced
personnel expenses in the U.S. caused by timing of hiring for open positions. For the first half, the decrease is primarily related to reduced international sales expenses ($183,000), reduced personnel expenses in the U.S. caused by timing of hiring
for open positions ($82,000) and reduced travel expenses in the U.S. ($77,000.) Included in the sales and marketing expenses for the first half of 2002 was $108,000 for the termination of an under-performing sales distributor in Europe. Sales and
marketing expenses are expected to increase from the current level through the end of 2002 due to higher sales commission expenses.



General and administrative expenses. General and administrative expenses for the second quarter and first half of 2002 were $634,000 and $1.3
million, respectively, compared to $692,000 and $1.5 million in the comparative prior year periods. The decreases in the second quarter and first half of 2002 versus 2001 are due primarily to reduced expenditures on our investor relations program
and annual report preparation.



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Amortization of goodwill.Amortization of goodwill amounted to $77,000 and $155,000 for the second quarter and first half of 2001, respectively, with no such expenses in the second quarter and first half of 2002. With the adoption of SFAS 142 in 2002, our goodwill is no
longer being amortized in 2002. The amortization expenses in 2001 represent the amortization of goodwill resulting from the acquisition of the cytogenetic imaging business of Vysis, Inc. in July 1999 and the acquisition of the United States-based
PowerGene®business of Perceptive Scientific Instruments, LLC in July 2000.



Restructuring. In January 2002, we instituted a series of actions to
rationalize our operations to provide a lower operating cost while increasing efficiencies. We are closing our League City, Texas office and have consolidated our manufacturing and engineering facilities. We recorded a restructuring charge of
$222,000 in the first quarter and first half of 2002 that was due to the costs of terminating 12 employees ($132,000  five employees in engineering, three in manufacturing, two in administration and two in sales and support) and closing the
League City, Texas office ($90,000.) There were no restructuring costs in the second quarter of 2002 and first half of 2001.



Other income (expense), net.There was $31,000 of other expense in the first half of 2002 primarily comprised of $43,000 of net interest expense
and $24,000 of foreign currency gains incurred in the translation of various balance sheet items from foreign currencies into the U.S. dollar.The $56,000 of other income in the first half of 2001 was primarily due to foreign currency gains
incurred in the translation of various balance sheet items from foreign currencies into the U.S. dollar.



Liquidity and Capital Resources



At June 30, 2002, we had cash, restricted cash, cash equivalents and securities available for sale of $3.1 million and working capital of $3.5 million compared to $3.4 million and $2.8 million
respectively at December 31, 2001. Restricted cash, which collateralizes various credit card and bank guarantees in the United Kingdom, amounted to $0.3 million at June 30, 2002 and at December 31, 2001.



Cash used in operations for the six months ended June 30, 2002
was $1.4 million, the same as in the first half of 2001. Changes in the components of cash used in operations included: a reduction in net loss amounting to $2.3 million (a decrease from a net loss of $2.6 million in the first half of 2001 to a net
loss of $342,000 in the first half of 2002), offset by increased requirements for trade accounts receivables of $2.5 million (an increase of $1.6 million in 2002 reflecting higher sales versus a decrease of $898,000 in 2001) and for inventories of
$0.4 million (an increase of $191,000 in 2002 reflecting a build-up in components for new products versus a decrease of $162,000 in 2001.) These increases were partially offset by reductions in the need for funds for accounts payable and accrued
expenses of $343,000 and $1.1 million, respectively. Accrued expenses increased by $205,000 in the first half of 2002, compared to a decrease of $877,000 in the first half of 2001 that was due primarily to a reduction in the accrual for bonuses
($142,000), a reduction in customer advance payments ($125,000) and a reduction in the accrual for annual report preparation ($60,000.)



Trade accounts receivable as a percent of second quarter revenues were 132% at June 30, 2002 compared to 128% at June 30, 2001. This
strong relationship between quarter-end receivables and that quarters sales is primarily due to the fact that most of our sales occur late in the quarter as is typical of capital equipment business. Although our payment terms are net 30 days,
certain customers, specifically government, university, Japanese, Chinese and European customers, tend to take longer to pay their receivable balances.



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Cash provided
by investing activities was $338,000 in the first half of 2002 compared to cash used in investing activities of $665,000 in the first half of 2001. This change was primarily due to a decrease in our short-term investments of $650,000 in 2002 versus
an increase in our short-term investments of $380,000 in 2001. We invested $0.3 million in the first half of 2002 for purchases of capital equipment the same amount as in the first half of 2001.



Cash provided by financing activities was $1.3 million in the
first half of 2002 compared to cash used in financing activities of $1.0 million in the first half of 2001. We received $1.0 million from the issuance of common stock in a private placement in the first quarter of 2002 and $288,000 from bank loans.
In the first half of 2001, we repaid $596,000 of bank loans and had a $430,000 increase in restricted cash related to the need to collateralize bank loans in the U.K. with cash deposits.



On January 31, 2002, we completed a private placement of 571,500 shares of our common stock to an
institutional investor (purchasing for three separate funds) at a purchase price of $1.75 per share. Additional shares may be issuable to the investors under provisions contained in the Stock Purchase Agreement between the investors and us, which we
filed with the Securities & Exchange Commission on Form S-3 on March 27, 2002, as amended. On July 29, 2002, each investor received a warrant exercisable for the number of shares of our common stock equal to the number of shares of common stock
purchased by that investor in the January 31, 2002 financing. The warrants are exercisable for four years from July 29, 2002 at a price of $2.25 per share.



We have a one-year loan agreement with Silicon Valley Bank (SVB) that was effective beginning on September 28, 2001. The loan agreement
provides the capability to borrow up to $2 million based on the level of certain of our North American accounts receivable and inventories. At June 30, 2002 we had used $1,973,000 of the facility with $27,000 available but not used. The interest
rate on the loan facility was 6.75% at June 30, 2002, 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 us to maintain a minimum level of tangible net
worth amounting to $2,000,000 at June 30, 2002. 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 subsidiary. We were in compliance with the SVB loan covenants as of June 30, 2002.



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 ($246,000) at June 30, 2002.



We expect negative cash flow from operations to continue through at least 2002, as we continue the research and development of our SPOTand Ariolsystems, conduct clinical trials required for FDA clearance of new products, expand our marketing, sales and customer support capabilities and add administrative infrastructure. We currently estimate that our existing capital
resources will enable us to meet our short-term capital needs through at least 2002. There can be no assurance, however, that we will not be required to seek capital at an earlier date. Our long-term capital needs may require us to try to obtain
additional funds through equity or debt financing, collaborative or other arrangements with other companies, bank financing and other sources. If we raise funds by issuing equity securities, there will be dilution of existing shareholders
holdings in our common stock.



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There can be
no assurance that additional financing will be available when needed or on terms acceptable to us. If adequate funds are not available, we could be required to delay development or commercialization of certain products, to license to third parties
the rights to commercialize certain products or technologies that we would otherwise seek to commercialize ourselves, or to reduce the marketing, customer support, or other resources devoted to product development. Accordingly, our failure to obtain
sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition. The timing and amount of spending of such capital resources cannot be accurately determined at
this time and will depend on several factors, including but not limited to, the progress of our research and development efforts and clinical investigations, the timing of regulatory approvals or clearances, competing technological and market
developments, commercialization of products currently under development and market acceptance and demand for our products. In addition, as opportunities arise, capital may also be used to acquire businesses, technologies or products.



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



For the six months ended June 30, 2002, there were no material changes from the disclosures made in our Form 10-K for the year ended
December 31, 2001, as amended. We maintain our funds as cash or cash equivalents, primarily money market investments with a maturity of less than 90 days. We invested these funds at an average interest rate of 1.9% during the second quarter of 2002.
These investments are not subject to interest rate risk.



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PART IIOTHER
INFORMATION



Item 4: Submission of matters to a vote of security holders



The Company solicited proxies for an annual meeting of stockholders on May 22, 2002 to all of the Companys stockholders.



The election of directors was conducted and the following nominees were elected: Andre F. Marion and Pablo
Valenzuela . The vote with respect to each nominee was as follows:



|                 |  | Votes     
|---------------- |  | ----------
|Name             |  | For       
|Andre F. Marion  |  | 12,287,148
|Pablo Valenzuela |  | 12,287,148



Continuing directors whose terms of office extended beyond the Annual Meeting were: John F. Blakemore, Jr., Jack Goldstein, Carl Hull and G. Kirk Raab.



PricewaterhouseCoopers LLP was ratified as the independent accountants of the company for the fiscal year
ending December 31, 2002 with 12,370,675 votes in favor, 15,938 votes against and 19,662 abstentions.



Item 5: Other Information



During the quarterly period covered by this filing, we did not enter into any additional engagements with our independent accountants, PricewaterhouseCoopers LLP, for non-audit services.



Item 6. Exhibits and Reports on Form 8-K.



(a) Exhibits - None.



(b) Reports on Form 8-K. - There were no reports on Form 8-K during the quarter ended June 30, 2002.



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APPLIED IMAGING CORP.



SIGNATURES



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: April 15, 2003 |  |  |  | By:                               
|                     |  |  |  |                                   



|                    
|--------------------
|Date: April 15, 2003
|                    



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CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Carl Hull, certify that:



| | 1. |  | I have reviewed Amendment No. 1 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended June 30, 2002;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this amended quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended quarterly report; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this amended quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended quarterly report.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date: April 15, 2003
|                    





CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Barry Hotchkies, certify that:



| | 1. |  | I have reviewed Amendment No. 1 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended June 30, 2002;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this amended quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended quarterly report; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this amended quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended quarterly report.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date: April 15, 2003
|                    



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Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002



I, Carl Hull, certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that Amendment No. 1 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such amended Quarterly Report fairly presents in all material respects the financial condition and results of operations of Applied Imaging Corp.



|                    
|--------------------
|Date: April 15, 2003
|                    





I, Barry Hotchkies, certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that Amendment No. 1
to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such amended
Quarterly Report fairly presents in all material respects the financial condition and results of operations of Applied Imaging Corp.



|                    
|--------------------
|Date: April 15, 2003
|                    



20