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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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AMENDMENT NO. 3



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 March 31, 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 incorporation or organization) |  | (I.R.S. Employer 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 Amendment No.2 to Form 10-Q filed on October 3, 2002 for its fiscal quarter ended March 31, 2002 as set forth in this Amendment No. 3 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 March 31, 2002 and December 31, 2001                                        |  | 3    
|                                                        
|                                                         |  | Condensed Consolidated Statements of Operations and Comprehensive Loss Three months ended March 31, 2002 and 2001 |  | 4    
|                                                        
|                                                         |  | Condensed Consolidated Statements of Cash Flows Three months ended March 31, 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                             |  | 11-14
|                                                        
|Item 3.                                                  |  | Quantitative and Qualitative Disclosures about Market Risk Derivatives and Financial Instruments                  |  | 15   
|                                                        
|PART II.    OTHER INFORMATION                            |  |                                                                                                                  
|                                                        
|Item 6.                                                  |  | Exhibits and Reports on Form 8-K                                                                                  |  | 16   
|                                                        
|Signatures                                               |  | 17                                                                                                               
|                                                        
|CEO/CFO Certifications per Section 302 of Sarbanes-Oxley |  | 18                                                                                                               
|                                                        
|CEO/CFO Certifications per Section 906 of Sarbanes-Oxley |  | 19                                                                                                               



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PART IFINANCIAL
INFORMATION



Item 1.    Financial
Statements



APPLIED IMAGING CORP. AND
SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

|                                           |  | March 31, 2002 |         |   | December 31, 2001 |  
|------------------------------------------ |  | -------------- | ------- | - | ----------------- | -
|                                           |  | (Restated)     |         |   | (Restated)        |  
|                                           |  | (unaudited)    |         |   |                   |  
|ASSETS                                     |  |                |         |   |                   |  
|Current assets:                            |  |                |         |   |                   |  
|Cash and cash equivalents                  |  | $              | 3,581   |   |                   | $
|Restricted cash                            |  |                | 249     |   |                   |  
|Short-term investments                     |  |                |        |   |                   |  
|Trade accounts receivable, net             |  |                | 5,889   |   |                   |  
|Inventories                                |  |                | 1,313   |   |                   |  
|Prepaid expenses/other current assets      |  |                | 431     |   |                   |  
|                                           |  |                |         |   |                   |  
|Total current assets                       |  |                | 11,463  |   |                   |  
|Property and equipment, net                |  |                | 949     |   |                   |  
|Goodwill                                   |  |                | 2,352   |   |                   |  
|Other assets                               |  |                | 56      |   |                   |  
|                                           |  |                |         |   |                   |  
|Total assets                               |  | $              | 14,820  |   |                   | $
|                                           |  |                |         |   |                   |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                |         |   |                   |  
|Current liabilities:                       |  |                |         |   |                   |  
|Accounts payable                           |  | $              | 2,044   |   |                   | $
|Accrued expenses                           |  |                | 1,483   |   |                   |  
|Bank debt                                  |  |                | 1,928   |   |                   |  
|Capital lease obligation                   |  |                | 6       |   |                   |  
|Deferred revenue, current                  |  |                | 2,670   |   |                   |  
|                                           |  |                |         |   |                   |  
|Total current liabilities                  |  |                | 8,131   |   |                   |  
|                                          
|Deferred revenue, non-current              |  |                | 331     |   |                   |  
|                                           |  |                |         |   |                   |  
|Total liabilities                          |  |                | 8,462   |   |                   |  
|                                           |  |                |         |   |                   |  
|Commitments and contingencies (Note 4)     |  |                |         |   |                   |  
|                                          
|Stockholders equity:                      |  |                |         |   |                   |  
|                                          
|Common stock                               |  |                | 16      |   |                   |  
|Additional paid-in capital                 |  |                | 49,141  |   |                   |  
|Deferred stock compensation                |  |                | (9      | ) |                   |  
|Accumulated other comprehensive loss       |  |                | (367    | ) |                   |  
|Accumulated deficit                        |  |                | (42,423 | ) |                   |  
|                                           |  |                |         |   |                   |  
|Total stockholders equity                 |  |                | 6,358   |   |                   |  
|                                           |  |                |         |   |                   |  
|                                          
|Total liabilities and stockholders equity |  | $              | 14,820  |   |                   | $
|                                           |  |                |         |   |                   |  



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 Loss

( in thousands, except per
share data)

(Unaudited)



|                                                      |  | Three months ended March 31, |       
|----------------------------------------------------- |  | ---------------------------- | ------
|                                                      |  | 2002                         |       
|                                                      |  | (Restated)                   |       
|Revenues                                              |  | $                            | 4,847 
|Cost of revenues                                      |  |                              | 1,805 
|                                                      |  |                              |       
|Gross profit                                          |  |                              | 3,042 
|                                                      |  |                              |       
|Operating expenses:                                   |  |                              |       
|Research and development                              |  |                              | 822   
|Sales and marketing                                   |  |                              | 1,736 
|General and administrative                            |  |                              | 697   
|Amortization of goodwill                              |  |                              |      
|Restructuring                                         |  |                              | 222   
|                                                      |  |                              |       
|Total operating expenses                              |  |                              | 3,477 
|                                                      |  |                              |       
|Operating loss                                        |  |                              | (435  
|Other income (expense), net                           |  |                              | (57   
|                                                      |  |                              |       
|Net loss                                              |  |                              | (492  
|Other comprehensive income (loss)                     |  |                              |       
|Change in unrealized loss on short-term investments   |  |                              | (2    
|                                                      |  |                              |       
|Comprehensive loss                                    |  | $                            | (494  
|                                                      |  |                              |       
|Net loss per sharebasic and diluted                  |  | $                            | (0.03 
|                                                      |  |                              |       
|Weighted average sharesoutstanding basic and diluted |  |                              | 15,627
|                                                      |  |                              |       







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)



|                                                                            |  | Three months ended March 31, |       
|--------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                            |  | 2002                         |       
|                                                                            |  | (Restated)                   |       
|Cash flows from operating activities:                                       |  |                              |       
|Net loss                                                                    |  | $                            | (492  
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                              |       
|Depreciation and amortization                                               |  |                              | 148   
|Provision for doubtful accounts                                             |  |                              | (10   
|Amortization related to deferred stock compensation                         |  |                              | (8    
|Loss on sale of fixed assets                                                |  |                              | 58    
|Changes in operating assets and liabilities:                                |  |                              |       
|Trade accounts and related party receivable                                 |  |                              | (467  
|Inventories                                                                 |  |                              | (251  
|Prepaid expenses/other current assets                                       |  |                              | 116   
|Accounts payable                                                            |  |                              | 286   
|Accrued expenses                                                            |  |                              | 84    
|Deferred revenue                                                            |  |                              | (152  
|                                                                            |  |                              |       
|Net cash used in operating activities:                                      |  |                              | (688  
|                                                                            |  |                              |       
|Cash flows from investing activities:                                       |  |                              |       
|Purchase of short-term investments                                          |  |                              |      
|Proceeds from sale and maturities of investments                            |  |                              | 650   
|Goodwill                                                                    |  |                              | (8    
|Purchases of equipment                                                      |  |                              | (134  
|                                                                            |  |                              |       
|Net cash provided by (used in) investing activities:                        |  |                              | 508   
|                                                                            |  |                              |       
|Cash flows from financing activities:                                       |  |                              |       
|Net proceeds from issuance of common stock                                  |  |                              | 994   
|Restricted cash                                                             |  |                              | (4    
|Bank and other loan proceeds                                                |  |                              | 3,150 
|Bank and other loan payments                                                |  |                              | (2,909
|Capital lease payments, principal portion                                   |  |                              | (8    
|                                                                            |  |                              |       
|Net cash provided by (used in) financing activities:                        |  |                              | 1,223 
|                                                                            |  |                              |       
|Net increase (decrease) in cash/cash equivalents                            |  |                              | 1,043 
|Cash and cash equivalents at beginning of period                            |  |                              | 2,538 
|                                                                            |  |                              |       
|Cash and cash equivalents at end of period                                  |  | $                            | 3,581 
|                                                                            |  |                              |       
|Supplemental disclosure of cash flow information:                           |  |                              |       
|Cash paid for interest during the period                                    |  | $                            | 22    
|                                                                            |  |                              |       
|Cash paid for taxes during the period                                       |  | $                            | 21    
|                                                                            |  |                              |       
|Supplemental disclosure of non-cash investing and financing
activities:     |  |                              |       
|Deferred stock compensation                                                 |  | $                            | (6    
|                                                                            |  |                              |       



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 I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, 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 months ended March 31, 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 MDSsystem, 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. 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 consolidating our manufacturing and
engineering facilities. This is expected to result in a reduction in our operating expenses beginning in the second quarter of 2002. 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 seek 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 MDSsystem, which may require additional
funds.



There can be no assurance that we will be
able to obtain additional debt or equity financing 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 internally, 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.



We had a £750,000 ($1,073,000) gross and £500,000 ($715,000) net unsecured revolving line of credit with an international bank
in the United Kingdom that was guaranteed by the U.S. corporation. The line of credit expired on March 31, 2001. The international bank subsequently provided us with a £750,000 ($1,073,000) gross and net zero borrowing facility with various



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renewals through October 31,
2001. The line of credit expired at that time and we had no loans under that facility at March 31, 2002. We collateralized various credit card, and bank guarantees (used for custom clearance purposes) with cash deposits at the international bank
amounting to £174,000 ($249,000) at March 31, 2002.



We executed a new loan agreement with Silicon Valley Bank (SVB) on September 28, 2001. This new facility replaced a three-year term loan and a $500,000 revolving line of credit that had an outstanding balance of $1.2 million on
September 28, 2001. The new 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 March 31, 2002 we had used $1.9 million of the facility with
$46,000 available but not used. The interest rate on the new facility was 6.75% at March 31, 2002, computed as the SVB prime rate plus 2 percent. The loan is collateralized by 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 March 31, 2002. We were in compliance with the SVB loan covenants through March 31, 2002.



NOTE 2Inventories (in thousands):



|Balance as of   |  | March 31, 2002 |       | December 31, 2001
|--------------- |  | -------------- | ----- | -----------------
|                |  | (Restated)     |       | (Restated)       
|Raw materials   |  | $              | 1,188 |                  
|Work in process |  |                | 7     |                  
|Finished goods  |  |                | 118   |                  
|                |  |                |       |                  
|Total           |  | $              | 1,313 |                  
|                |  |                |       |                  



NOTE 3Loss
per share



There were no reconciling items of the numerators and denominators of the basic and diluted EPS computations. 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:



|Balance as of |  | March 31, 2002 |  | March 31, 2001
|------------- |  | -------------- |  | --------------
|             
|Options       |  | 3,003,802      |  | 2,393,799     
|Warrants      |  | 650,790        |  | 650,790       
|              |  |                |  |               
|Total         |  | 3,654,592      |  | 3,044,589     
|              |  |                |  |               



NOTE
4Commitments and Contingencies



We
have various noncancelable operating leases for equipment, vehicles, and facilities expiring through 2006. The facility leases generally contain renewal options for periods ranging from two to five years and require us to pay all executory costs
such as maintenance, property taxes, and insurance.



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We have future
minimum lease payments under non-cancelable operating leases amounting to: $882,000 in 2002, $796,000 in 2003, $501,000 in 2004, $84,000 in 2005 and $70,000 in 2006, totaling $2,333,000.



We are subject to claims and assessments from time to time in the ordinary course of business. We do not
believe that any such matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.



NOTE 5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. Effective January 1, 2002, the
Company adopted SFAS 142 and has determined that no impairment of the recorded goodwill exists.



The following table reconciles the Companys fiscal 2002 and 2001 first quarter net loss, 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 March 31, |       
|------------------------------------- |  | ---------------------------- | ------
|                                      |  | 2002                         |       
|                                      |  | (Restated)                   |       
|Reported net loss                     |  | $                            | (492  
|Add back: goodwill amortization       |  |                              |      
|                                      |  |                              |       
|Adjusted net loss                     |  | $                            | (492  
|                                      |  |                              |       
|Earnings per sharebasic and diluted: |  |                              |       
|as reported                          |  | $                            | (0.03 
|adjusted                             |  | $                            | (0.03 
|Weighted average shares outstanding   |  |                              |       
|basic and diluted                    |  |                              | 15,627



NOTE
6Restructuring



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 consolidating our manufacturing and engineering facilities. 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



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manufacturing, two in
administration and two in sales and support) and closing the League City, Texas office. The following table summarizes the costs that were charged and whether they were cash or non-cash charges (in thousands):



|Description                       |  | March 31, 2002 |     | Note
|--------------------------------- |  | -------------- | --- | ----
|Employee separation costs         |  | $              | 132 |     
|League City office closure costs  |  |                | 90  |     
|                                  |  |                |     |     
|Total costs                       |  | $              | 222 |     
|                                  |  |                |     |     
|Reserve balance at March 31, 2002 |  | $              | 63  |     
|                                  |  |                |     |     



The
restructuring program is expected to result in a reduction in our operating expenses beginning in the second quarter of 2002.



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.



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





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|Condensed Consolidated Statement of Operations 
|-----------------------------------------------
|                                               
|                                               
|Total revenues                                 
|Operating loss                                 
|Net loss                                       
|Net loss per sharebasic and diluted           
|Condensed
Consolidated Balance Sheets          
|                                               
|                                               
|ASSETS                                         
|Cash, restricted cash and marketable securities
|Trade accounts receivable                      
|Inventories                                    
|Other current assets                           
|Non-current assets                             
|                                               
|Total assets                                   
|                                               
|                                               
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Accrued expenses                               
|Deferred revenue                               
|Other current liabilities                      
|Non-current liabilities                        
|Stockholders equity                           
|                                               
|Total liabilities and stockholders equity     
|                                               
|                                               
|                                               
|                                               
|ASSETS                                         
|Cash, restricted cash and marketable securities
|Trade accounts receivable                      
|Inventories                                    
|Other current assets                           
|Non-current assets                             
|                                               
|Total assets                                   
|                                               
|                                               
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Accrued expenses                               
|Deferred revenue                               
|Other current liabilities                      
|Non-current liabilities                        
|Stockholders equity                           
|                                               
|Total liabilities and stockholders equity     
|                                               



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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
thereto, and with our audited financial statements and notes thereto 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 9 and 25, respectively, in our Annual Report on
Form 10-K 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 by 2001 $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.



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The impact of
the revenue deferral on the previously issued financial statements for the quarter ended March 31, 2002 is shown in Note 7 to the Financial Statements.



Revenues.    Our revenues are derived primarily from the sale of products, instrument service contracts and grant revenues.
Revenues for the three months ended March 31, 2002 were $4.8 million, compared to $3.9 million for the corresponding period in 2001. This 23% increase in revenues in the quarter was due primarily to increased sales volume of our MDSsystems, which were $0.7 million in the quarter compared to $0.1 million in the first quarter of 2001. Revenues
increased by 63% in North America and decreased by 17% in overseas markets.



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, as a percentage of total revenues, for the three months ended March 31, 2002 were 37% compared to 49% for the corresponding prior year period. The decrease is primarily due to the increase in sales of our MDSsystems, discussed above, at a lower cost percent and lower sales of our QUIPS®systems that had a higher cost percent.



Research and development expenses.    Research and development expenses for the three months ended March 31, 2002 were $822,000
compared to $935,000 for the comparative prior year period. The decrease over the prior year period 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 months ended March 31, 2002 were $1.7 million compared to $2.0 million in the first quarter of 2001. The decrease is primarily related to reduced international sales
expenses ($200,000) and reduced travel expenses in the U.S. ($90,000). Included in the sales and marketing expenses for the first quarter of 2002 was $108,000 for the termination of an under-performing sales distributor in Europe.



General and administrative expenses.    General and
administrative expenses for the first quarter were $697,000, compared to $759,000, a decrease of $62,000 (8%) from the first quarter of 2001 due primarily to expenses incurred in the first quarter of 2001 for our investor relations program.



Amortization of
goodwill.    Amortization of goodwill amounted to $78,000 for the first quarter of 2001 with no such expense in the first quarter of 2002. This represents the amortization of goodwill resulting from the acquisition of the
cytogenetic imaging business of Vysis, Inc. in July 1999 and the purchase of the United States-based PowerGene®business of Perceptive Scientific Instruments, LLC in July 2000.



Restructuring costs.    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 consolidating our manufacturing and engineering facilities. We recorded a restructuring charge of $222,000 in the first quarter of 2002 that is due to the costs of terminating 12 employees ($132,000) and closing the League City,
Texas office ($90,000). These actions are expected to result in a reduction in our operating expenses of approximately $0.4 - $0.5 million per quarter, beginning in the second quarter of 2002. There were no restructuring costs in the first quarter
of 2001.



Other income (expense),
net.    There was $57,000 of other expense in the first quarter of 2002 primarily comprised of $36,000 of foreign currency losses incurred in the translation of various



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balance sheet items from foreign currencies into the U.S. dollar and $21,000 of tax expense.The
$49,000 of other income in the first quarter 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 March 31, 2002, we had cash, restricted cash, cash
equivalents and securities available for sale of $3.8 million and working capital of $3.3 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 $0.2 million at March 31, 2002 and at December 31, 2001.



Cash used in operations for the quarter ended March 31, 2002 was $0.7 million compared to $1.1 million for the 2001 first quarter. The
$0.4 million decrease in cash used in operations was primarily due to the reduced net loss amounting to $1.3 million (a decrease from a net loss of $1.8 million in the first quarter of 2001 to a net loss of $05 million in the first quarter of 2002),
offset by increased requirements for accounts receivables of $1.6 million (an increase of $0.5 million in 2002 reflecting higher sales versus a decrease of $1.1 million in 2001) and for inventories of $0.3 million (an increase of $0.2 million in
2002 reflecting a build-up in components for new products versus a decrease of $0.1 million in 2001.) These increases were partially offset by reduction in the need for funds for accounts payable and accrued expenses of $0.7 million and $0.8
million, respectively.



Cash provided by
investing activities was $0.5 million in the first quarter of 2002 compared to cash used in investing activities of $0.3 million in the first quarter of 2001. This change was primarily due to a decrease in our short-term investments of $0.7 million
in 2002 versus an increase in our short-term investments of $0.1 million in 2001. We invested $0.1 million in the first quarter of 2002 for purchases of capital equipment compared to $0.2 million in the first quarter of 2001.



Cash provided by financing activities was $1.2 million in the
first quarter of 2002 compared to cash used in financing activities of $0.3 million in the first quarter of 2001. We received $1.0 million from the issuance of common stock in a private placement in the first quarter of 2002 and $0.2 million from
bank loans. In the first quarter of 2001, we repaid $0.5 million of bank loans offset by a $0.2 million decrease in restricted cash.



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. Beginning on July 29, 2002, subject to the occurrence of triggering events contained in the Stock Purchase Agreement, each investor shall be entitled to a warrant exercisable for a number of shares
of our common stock equal to the number of shares of common stock purchased in the January 31, 2002 financing. The warrants would be exercisable for four years from issuance at a price of $2.25 per share.



We had a £750,000 ($1,073,000) gross and £500,000
($715,000) net unsecured revolving line of credit with an international bank in the United Kingdom that was guaranteed by the U.S. Corporation. The line of credit expired on March 31, 2001. The international bank subsequently provided us with a
£750,000 ($1,073,000) gross and net zero borrowing facility with various renewals through October 31, 2001. The line of credit expired at that time and we had no loans under that facility at March 31, 2002. We collateralized various credit
card, and



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bank guarantees (used for custom clearance purposes) with cash deposits at the international bank
amounting to £174,000 ($249,000) at March 31, 2002.



We executed a new loan agreement with Silicon Valley Bank (SVB) on September 28, 2001. This new facility replaced a three-year term loan and a $500,000 revolving line of credit that had an outstanding balance of $1.2 million on
September 28, 2001. The new loan agreement provides the capability to borrow up to $2 million, with the amount of the loan depending on the level of our North American accounts receivable and inventories. At March 31, 2002 we had used $1.9 million
of the facility with $46,000 available but not used. The interest rate on the new facility was 6.75% at March 31, 2002, computed as the SVB prime rate plus 2 percent. The loan is collateralized by 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 March 31, 2002. We were in compliance with the SVB loan covenants through March 31, 2002.



We expect negative cash flow from operations to continue through at least 2002, as we continue the research
and development of our MDSSystem, 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 seek 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. 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 three months ended March 31, 2002, there were no material changes from the disclosures made in our Form 10-K for the year ended
December 31, 2001.



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PART IIOTHER
INFORMATION



Item 6.    Exhibits and Reports on Form 8-K



(a) ExhibitsNone.



(b) Reports on Form 8-KDuring the quarter ended March 31, 2002, we filed the following Current Reports on Form 8-K:



| | *    (1) |  | Current Report on Form 8-K dated February 13, 2002 to disclose the private placement of 571,500 shares of common stock to an institutional investor (purchasing for
three separate funds) at a purchase price of $1.75 per share.
| | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *    (2) |  | Current Report on Form 8-K dated February 19, 2002 to disclose that we were in compliance with the Nasdaq Marketplace Rules for continued listing of our common stock
on the Nasdaq National Market.
| | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | * |  | Previously filed.
| | - |  | -----------------



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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.



|                    
|--------------------
|                    
|                    
|Date: April 15, 2003
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|                    
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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. 3 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended March 31, 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 |  |  |  | By:
|                     |  |  |  |    





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. 3 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended March 31, 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 |  |  |  | By:
|                     |  |  |  |    



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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. 3 to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended March 31, 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 |  |  |  | By:
|                     |  |  |  |    





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. 3
to the Quarterly Report of Applied Imaging Corp. on Form 10-Q for the quarter ended March 31, 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 |  |  |  | By:
|                     |  |  |  |    



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