UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    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 September 30, 2003


                                       OR


[ ] Transition 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


                              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)

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [x]

As of October 27, 2003 there were 15,960,839 shares of the Registrant's Common
Stock outstanding.
<PAGE>

                              APPLIED IMAGING CORP.

                                      INDEX



                                                                            Page

                          PART I. FINANCIAL INFORMATION


Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets as of
           September 30, 2003 and December 31,2002                             3

           Condensed Consolidated Statements of Operations and Comprehensive
           Income (Loss) for the three and nine months ended September 30, 2003
           and 2002                                                            4

           Condensed Consolidated Statements of Cash Flows for the
           nine months ended September 30, 2003 and 2002.                      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


Item 4.  Disclosure Controls and Procedures                                   16


                           PART II. OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K                                     17

         Signatures                                                           18
<PAGE>
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                     Condensed Consolidated Balance Sheets
                                 (In thousands)
<TABLE>
<CAPTION>

                                                           September 30,    December 31,
                                                              2003             2002
                                                          --------------   --------------
                                                           (Unaudited)
<S>                                                       <C>               <C>
ASSETS

Current assets:
       Cash and cash equivalents                                $ 2,117          $ 2,897
       Restricted cash                                              167              156
       Trade accounts receivable, net                             4,746            7,155
       Inventories                                                1,479            1,759
       Prepaid expenses and other current assets                    583              289
                                                          --------------   --------------
           Total current assets                                   9,092           12,256
Property and equipment, net                                         806            1,014
Goodwill                                                          2,364            2,364
Other assets                                                         61               62
                                                          --------------   --------------
           Total assets                                        $ 12,323         $ 15,696
                                                          ==============   ==============
  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable                                         $ 1,872          $ 2,372
       Accrued expenses                                           1,628            1,562
       Bank debt                                                    994            2,175
       Deferred revenue, current                                  2,494            2,880
                                                          --------------   --------------
           Total current liabilities                              6,988            8,989

Deferred revenue, non-current                                       301              333
                                                          --------------   --------------
           Total liabilities                                      7,289            9,322
                                                          --------------   --------------


Stockholders' equity:

       Common stock                                                  16               16
       Additional paid-in capital                                49,207           49,151
       Accumulated other comprehensive loss                        (367)            (367)
       Accumulated deficit                                      (43,822)         (42,426)
                                                          --------------   --------------
           Total stockholders' equity                             5,034            6,374
                                                          --------------   --------------
           Total liabilities and stockholders' equity          $ 12,323         $ 15,696
                                                          ==============   ==============
</TABLE>
    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.
                                       3
 <PAGE>
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                        and Comprehensive Income (Loss)
                      (in thousands, except per share data)
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                           Three months ended               Nine months ended
                                                             September 30,                      September 30,
                                                      ---------------------------      ----------------------------
                                                           2003           2002             2003            2002
                                                      -----------    ------------      ------------    ------------
<S>                                                   <C>            <C>                <C>            <C>

        Revenues                                         $ 4,833         $ 5,541          $ 15,063        $ 15,733
        Cost of revenues                                   2,147           2,111             6,312           5,947
                                                      -----------    ------------      ------------    ------------
            Gross profit                                   2,686           3,430             8,751           9,786
                                                      -----------    ------------      ------------    ------------
        Operating expenses:
            Research and development                         980             832             2,761           2,510
            Sales and marketing                            1,793           1,848             5,438           5,284
            General and administrative                       709             584             1,978           1,915
            Restructuring                                      -              (2)                -             220

                                                      -----------    ------------      ------------    ------------
                 Total operating expenses                  3,482           3,262            10,177           9,929
                                                      -----------    ------------      ------------    ------------
                 Operating income (loss)                    (796)            168            (1,426)           (143)

        Other income (expense), net                           (1)            (37)               30             (68)
                                                      -----------    ------------      ------------    ------------
            Net income (loss)                               (797)            131            (1,396)           (211)

        Other comprehensive loss
            Change in unrealized loss on
                 short-term investments                        -               -                 -              (2)

                                                      -----------    ------------      ------------    ------------
            Comprehensive  income (loss)                  $ (797)          $ 131          $ (1,396)         $ (213)
                                                      ===========    ============      ============    ============
        Net  income (loss) per share
            - basic                                      $ (0.05)         $ 0.01           $ (0.09)        $ (0.01)
                                                      ===========    ============      ============    ============
            - diluted                                    $ (0.05)         $ 0.01           $ (0.09)        $ (0.01)
                                                      ===========    ============      ============    ============
            Weighted average shares outstanding
            - basic                                       15,961          15,885            15,938          15,788
                                                      ===========    ============      ============    ============
            - diluted                                     15,961          16,140            15,938          15,788
                                                      ===========    ============      ============    ============
</TABLE>

    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.
                                       4
<PAGE>

                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                   Nine months ended September 30,
                                                               --------------------------------------
                                                                    2003                  2002
                                                               -----------------    ----------------
<S>                                                             <C>                 <C>

Cash flows from operating activities:
     Net loss                                                          $ (1,396)             $ (211)
     Adjustments to reconcile net loss to net cash
        provided by (used in) operating activities:
        Depreciation and amortization                                       465                 466
        Provision for doubtful accounts                                    (100)                (24)
        Loss on sale of fixed assets                                          2                  77
        Changes in operating assets and liabilities:
           Trade accounts receivable                                      2,509              (1,252)
           Inventories                                                      280                (402)
           Prepaid expenses and other current assets                       (294)                195
           Accounts payable                                                (500)                287
           Accrued expenses                                                  66                 268
           Deferred revenue                                                (418)               (333)
                                                               -----------------    ----------------
           Net cash provided by (used in) operating activities:             614                (929)
                                                               -----------------    ----------------
Cash flows from investing activities:
     Proceeds from sale and maturities of investments                         -                 650
     Goodwill                                                                 -                 (20)
     Purchases of property and equipment                                   (259)               (540)
     Other assets                                                             1                   -
                                                               -----------------    ----------------
        Net cash provided by (used in) investing activities:               (258)                 90
                                                               -----------------    ----------------
  Cash flows from financing activities:
     Net proceeds from issuance of common stock                              56               1,034
     Restricted cash                                                        (11)                 89
     Bank and other loan proceeds                                         9,009               9,950
     Bank and other loan payments                                       (10,190)             (9,768)
     Capital lease payments, principal portion                                -                 (14)
                                                               -----------------    ----------------
        Net cash provided by (used in) financing activities:             (1,136)              1,291
                                                               -----------------    ----------------


Net increase in cash and cash equivalents                                  (780)                452

Cash and cash equivalents at beginning of period                          2,897               2,538
                                                               -----------------    ----------------
Cash and cash equivalents at end of period                              $ 2,117             $ 2,990
                                                               =================    ================
</TABLE>

    The accompanying notes are an integral part of these unaudited condensed
                       consolidated financial statements.
                                       5
<PAGE>



                     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 nine months ended  September  30, 2003 and 2002.  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 nine  months  ended  September  30,  2003 are not  necessarily
indicative  of results to be expected  for the fiscal year ending  December  31,
2003.  These  condensed  consolidated  financial  statements  should  be read in
conjunction with the consolidated  financial  statements and notes thereto,  for
the year ended  December 31, 2002,  contained in our 2002 annual  report on Form
10-K.

Liquidity:  We expect negative cash flow from operations to continue  through at
least the first quarter of 2004, as we continue  research and development of new
applications  for our SPOT(TM) and Ariol(TM)  systems,  conduct  clinical trials
required  for the U.S.  Food and Drug  Administration  ("FDA")  clearance of new
products, expand our marketing, sales and customer support capabilities, and add
additional infrastructure. We currently estimate that our capital resources will
enable us to meet our capital needs for at least the next twelve months.

     However,  expenditures  required to achieve growth and profitability in the
long  term 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,
conducting   clinical  trials  for  FDA  clearance  of  new  products,   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(TM) and Ariol(TM)
systems, which may require additional funds.

     There can be no assurance that we will be able to obtain additional debt or
equity  financing  if needed  and 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.  Accordingly,  our failure to
obtain  sufficient  funds on acceptable  terms when needed could have a material
adverse effect on our ability to achieve our long-term business objectives.

     We had a one-year loan  agreement with Silicon Valley Bank ("SVB") that was
effective  through  September 27, 2003 with  borrowing  capability of up to $3.5
million  depending  on the  level of  certain  of our  North  American  accounts
receivable.  The loan agreement  included the  requirement  for us to maintain a
minimum level of tangible net worth.  The loan  agreement was amended on January
31, 2003 and on July 30, 2003 to reduce the minimum  level of tangible net worth
                                       6
<PAGE>

that we had to maintain  through the end of the loan  agreement.  The amendments
also provided us with a waiver of our  non-compliance  with the  requirement  to
maintain a minimum  level of tangible net worth as at December 31, 2002 and June
30, 2003, respectively.

     The loan  agreement was further  amended on September 3, 2003 to extend the
term of the  agreement  for an  additional  year through  September 26, 2004. At
September  30,  2003 we had used  $994,000  of the SVB  facility  with  $688,000
available but not used.  The interest rate on the facility was 6.0% at September
30,  2003,  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 $2.6
million at September 30, 2003. 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 September 30, 2003.

     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 (pounds)100,000 ($167,000) at September 30, 2003.

Note 2 - Inventories (in thousands)

               Balance as of           September 30, 2003      December 31, 2002
                                      -------------------    -------------------
               Raw materials                      $ 1,205                $ 1,210
               Work in process                         86                    306
               Finished goods                         188                    243
                                      -------------------    -------------------
               Total                              $ 1,479                $ 1,759
                                      ===================    ===================


Note 3 - Net Income (loss) per share

     The  computation  of basic and diluted net income  (loss) per share ("EPS")
for the three and nine months ended September 30, 2003 and September 30, 2002 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):
<TABLE>
<CAPTION>

                                                     Three months ended September 30,    Nine months ended September 30,
                                                  -----------------------------------------------------------------------
                                                      2003             2002                  2003             2002
                                                  --------------  ----------------       --------------   --------------
<S>                                               <C>             <C>                    <C>               <C>
Weighted average shares outstanding - basic              15,961            15,885               15,938           15,788
Dilutive shares - stock options                               -               245                    -                -
Dilutive shares - warrants                                    -                10                    -                -

                                                  --------------  ----------------       --------------   --------------
Weighted average shares outstanding - diluted            15,961            16,140               15,938           15,788
                                                  ==============  ================       ==============   ==============
</TABLE>

     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):
<TABLE>
<CAPTION>
                            Three months ended September 30,   Nine months ended September 30,
                            -----------------------------------------------------------------
                                2003          2002                   2003           2002
                            ------------  ------------          -------------   -------------
<S>                         <C>           <C>                   <C>             <C>
        Options                   3,139         2,143                  3,139          2,982
        Warrants                  1,222           651                  1,222            651

                            ------------  ------------          -------------   -------------
        Total                     4,361         2,794                  4,361          3,633
                            ============  ============          =============   +============
</TABLE>
                                       7
<PAGE>
Note 4 - Stock Based Compensation

     We account for stock-based employee compensation arrangements in accordance
with the  provisions of  Accounting  Principles  Board  ("APB")  Opinion No. 25,
"Accounting  for Stock  Issued to  Employees."  Under APB No.  25,  compensation
expense is based on the difference,  if any, between the fair value of our stock
and the exercise price on the date of the grant.

     We account for equity  instruments  issued to  non-employees  in accordance
with the provisions of Statement of Financial  Accounting Standards ("SFAS") No.
123  "Accounting for  Stock-based  Compensation"  and Emerging Issues Task Force
("EITF") Issue No. 96-18,  "Accounting for Equity Instruments That Are Issued to
Other Than  Employees  for  Acquiring or in  Conjunction  With Selling Goods and
Services."

     We have  adopted  the pro  forma  disclosure  provisions  of SFAS  No.  148
"Accounting for Stock-Based Compensation Transition and Disclosure" for the 1998
Stock Plan and Employee Stock Purchase Plan. The fair value of the stock options
granted to employees is calculated using the Black-Scholes  option pricing model
as of the date of grant. Had compensation cost for our stock-based  compensation
plans  been  determined  in a manner  consistent  with the fair  value  approach
described in SFAS No. 123, our net income (loss) and net income (loss) per share
as reported would have been changed to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>

                                                                Three months ended                  Nine months ended
                                                                    September 30,                     September 30,
                                                           --------------------------------     ----------------------------
                                                                 2003             2002              2003            2002
                                                           ---------------  ---------------     ------------    ------------
<S>                                                        <C>              <C>                 <C>              <C>
Net income (loss):
         As reported                                               $ (797)           $ 131         $ (1,396)         $ (211)
         Stock-based employee compensation expense
               determined under fair-value method                    (177)            (195)            (513)           (539)
                                                           ---------------  ---------------     ------------    ------------
         Pro forma                                                 $ (974)           $ (64)        $ (1,909)         $ (750)
                                                           ===============  ===============     ============    ============
Net income (loss) per share:
         As reported - basic:                                     $ (0.05)          $ 0.01          $ (0.09)        $ (0.01)
                                                           ===============  ===============     ============    ============
         As reported - diluted:                                   $ (0.05)          $ 0.01          $ (0.09)        $ (0.01)
                                                           ===============  ===============     ============    ============
         Pro forma - basic:                                       $ (0.06)         $ (0.00)         $ (0.12)        $ (0.05)
                                                           ===============  ===============     ============    ============
         Pro forma - diluted:                                     $ (0.06)         $ (0.00)         $ (0.12)        $ (0.05)
                                                           ===============  ===============     ============    ============
</TABLE>


     The fair value of each option is  estimated  on the date of grant using the
fair value method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
                                   Three months ended       Nine months ended
                                      September 30,            September 30,
                                  --------------------   -----------------------
                                    2003        2002        2003         2002
                                  ---------  ---------   ----------   ----------
<S>                                <C>         <C>          <C>         <C>
     Risk-free interest rate        2.19%       2.64%        2.03%       3.73%
     Expected life (in years)          3           3            3           3
     Dividend Yield                    -%          -%           -%          -%
     Expected volatility              75%        111%          84%        129%
</TABLE>

     All of the above assumptions were used for the Employee Stock Purchase Plan
except that the expected life is six months.
                                       8
<PAGE>

Note 5 - Product Warranty

     We generally  warrant our products against defects for a period of one year
and record a liability for such product warranty obligations at the time of sale
based upon historical  experience.  We do not provide separately priced extended
warranty  coverage.  However,  we sell  separately  priced service  contracts to
provide  additional  service  coverage on our systems when the  warranty  period
expires.  The  related  revenue on the  service  contracts  is  recognized  on a
straight-line  basis over the life of the service  contract,  which is generally
one year.  Costs  associated with services  performed under the service contract
obligation are expensed as incurred.

     Changes in product warranty obligations for the nine months ended September
30, 2003 are as follows (in thousands):

               Balance as of December 31, 2002                     $127

               Add accruals for warranties issued                    15

               Less costs incurred under warranties issued          (49)
                                                               -----------
               Balance as of September 30, 2003                     $93
                                                               ===========

Note 6 - Restructuring

     In January  2002, we instituted a series of actions to reduce our operating
costs.  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  ($132,000)  and closing the League City,  Texas office
($90,000).  The  employee  separation  costs were all cash and the  League  City
office  costs were made up of $40,000 in cash  charges  and  $50,000 in non-cash
charges.  All payments  were made in 2002,  and the reserve  balance was zero at
September 30, 2003 and December 31, 2002.

Note 7 Recent Accounting Pronouncements

     In January  2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to  February  1, 2003,  the  provisions  of FIN 46 must be applied for the first
interim or annual period  beginning  after December 15, 2003. We do not have any
ownership in any variable  interest  entities as of September  30, 2003. We will
apply the consolidation requirement of FIN 46 in future periods if we should own
any interest in any variable interest entity.
                                       9
<PAGE>
     In  November  2002,  the  Emerging  Issues  Task Force  ("EITF")  reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides  guidance on how to account for arrangements  that
involve the delivery or performance of multiple products, services and/or rights
to use  assets.  The  provisions  of EITF  Issue  No.  00-21  apply  to  revenue
arrangements  entered into in fiscal periods  beginning after June 15, 2003. The
adoption of this standard had no material impact on our financial statements.
                                       10
<PAGE>
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, 2002.

     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 11 and 23,  respectively,  in our  Annual  Report  on Form 10-K for the
fiscal year ended December 31, 2002. These risks and uncertainties  include, but
are not limited to,  competition,  medical device  regulation,  general economic
conditions  in the United  States and  internationally,  adverse  changes in the
specific  markets  for our  products  or  reimbursement  levels to our  clinical
customers,  adverse changes in customer order patterns, the effectiveness of our
sales force, pricing pressures, risks associated with foreign operations,  delay
or failure to launch new products,  failure to reduce costs or improve operating
efficiencies,  the availability of debt or equity financing when needed, and the
sufficiency of our capital  resources to meet our capital needs.  You should not
rely on these forward-looking  statements,  which reflect our position as of the
date of this  report.  We are  under no  obligation  to  revise  or  update  any
forward-looking statements.

Results of Operations

     Revenues.  Our  revenues are derived  primarily  from the sale of products,
service  contracts,  software  maintenance and grant revenues.  Revenues for the
three and nine  months  ended  September  30,  2003 were $4.8  million and $15.1
million,  respectively,  compared  to $5.5  million  and $15.7  million  for the
corresponding periods in 2002. The decrease in revenues in the third quarter and
nine months was due  primarily to lower sales in the U.S.  caused by slower than
projected  conversion of customers using older generation  systems to our newest
CytoVision(R)systems.

     Sales of systems were $3.5 million and $11.2  million in the three and nine
months  ended  September  30, 2003,  respectively,  compared to $4.3 million and
$12.2  million for the  corresponding  periods in 2002.  The decrease in systems
sales was due  primarily to the impact in the U.S. of slower  conversion  to our
newest CytoVision systems.

     Service contract, software maintenance and grant revenues were $1.3 million
and $3.9  million  in the  three  and nine  months  ended  September  30,  2003,
respectively,  compared to $1.2 million and $3.5  million for the  corresponding
periods in 2002.  The  increase  in the first nine months was due  primarily  to
collaboration  revenues  received  in the  first  and  third  quarters  from the
agreement with the Sanger  Institute in the U.K. There were no  collaboration or
grant revenues in the first nine months of 2002.

     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 nine months  ended  September  30, 2003 were $2.1 million and $6.3
                                       11
<PAGE>
million,  respectively,  compared  to $2.1  million  and  $5.9  million  for the
corresponding  periods  in 2002.  Cost of  revenues,  as a  percentage  of total
revenues,  for the three and nine months ended  September  30, 2003 were 44% and
42%, respectively, compared to 38% for the corresponding prior year periods. The
increase is primarily due to the sale of a number of our Ariol(TM)systems during
2003 at a lower gross margin percent for market development purposes.

     Research and development  expenses.  Research and development  expenses for
the three and nine  months  ended  September  30,  2003 were  $980,000  and $2.8
million, respectively,  compared to $832,000 and $2.5 million in the comparative
prior year  periods.  This  increase in the third  quarter is due  primarily  to
$70,000 in costs  associated with additional  research staff in the U.S. and the
payment of a $55,000  license  fee. The increase in the first nine months is due
primarily to the  unfavorable  impact  ($100,000)  of the  weakening of the U.S.
dollar on our U.K.-based R&D expense and $60,000 in costs associated with hiring
additional research staff.

     Sales and marketing  expenses.  Sales and marketing  expenses for the three
and nine months ended  September  30, 2003 were $1.8  million and $5.4  million,
respectively,  compared  to $1.8  million and $5.3  million for the  comparative
prior year periods.  The slight increase in sales and marketing  expenses in the
first nine months is due primarily to the unfavorable  impact  ($200,000) of the
weakening of the U.S. dollar on our U.K.-based sales and marketing expenses.

     General and administrative  expenses.  General and administrative  expenses
for the third  quarter  and first  nine  months of 2003 were  $709,000  and $2.0
million, respectively,  compared to $584,000 and $1.9 million in the comparative
prior year periods.  The increase in general and administrative  expenses in the
third  quarter was primarily  attributable  to the reversal of a reserve for bad
debts in 2002 in the amount of $120,000 that was no longer deemed necessary.  In
the first nine months of the year,  the  increase in general and  administrative
costs in the third quarter was offset by decreased  costs in the second  quarter
associated  with  the  receipt  of a grant  from our  landlord  (net  effect  of
$170,000)  in the U.K.  that was  treated  as an offset to rent  expense  in the
second quarter.

     Restructuring.  There were no restructuring  costs in the first nine months
of 2003. The  restructuring  costs in 2002 were due to a series of actions taken
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  of  2002  that  was  due to the  costs  of
terminating 12 employees  ($132,000)  and closing the League City,  Texas office
($90,000.)

     Other  income  (expense),  net.  The other  expense of $37,000 in the third
quarter of 2002 was due  primarily  to net  interest  expense.  Other  income of
$30,000 in the first nine months of 2003 was primarily  comprised of $101,000 of
foreign  currency  gains incurred in the  translation  of various  balance sheet
items from foreign  currencies  into the U.S. dollar and $57,000 in net interest
expense  payable on our bank  borrowings.  There was $68,000 of other expense in
the first nine months of 2002  primarily  comprised  of $64,000 of net  interest
expense,  $28,000 of income tax expense and  $18,000 of foreign  currency  gains
incurred  in the  translation  of  various  balance  sheet  items  from  foreign
currencies into the U.S. dollar.
                                       12
<PAGE>
Liquidity and Capital Resources

     At September 30, 2003, we had cash, restricted cash and cash equivalents of
$2.3 million and working  capital of $2.1  million  compared to $3.1 million and
$3.3  million  respectively  at  December  31,  2002.   Restricted  cash,  which
collateralizes  various credit card and bank  guarantees in the United  Kingdom,
amounted to $167,000 at September 30, 2003 and $156,000 at December 31, 2002.

     Cash  provided by operations  for the nine months ended  September 30, 2003
was $614,000  compared to cash used in operations of $929,000 for the first nine
months of 2002.  Changes in the components of cash used in operations  included:
an increase in net loss amounting to $1.2 million (a net loss of $1.4 million in
the first nine  months of 2003  versus a net loss of  $211,000 in the first nine
months of 2002), and decreased  requirements  for trade accounts  receivables of
$3.8 million (a decrease of $2.5 million in 2003 reflecting improved collections
versus an increase of $1.3 million in 2002) and for  inventories  of $682,000 (a
decrease of $280,000 in 2003  reflecting a reduction in the components  that had
been built up for new products,  versus an increase of $402,000 in 2002 due to a
build-up in components for new products).  These decreases were partially offset
by increases in the need for funds for accounts  payable and accrued expenses of
$787,000 and $202,000,  respectively.  Accounts payable decreased by $500,000 in
the first nine  months of 2003  compared to an increase of $287,000 in the first
nine  months of 2002.  The  decrease  in the first  nine  months of 2003 was due
primarily  to a  reduction  in  accounts  payable  to vendors  supplying  system
components, reflecting lower inventory at the end of the September 2003.


     Trade accounts  receivable as a percent of third quarter  revenues were 98%
at  September  30,  2003  compared  to 121% at  September  30,  2002 and 130% at
December 31, 2002 reflecting  improved  collections in the quarter.  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 a capital equipment  business.  Although our payment terms are net 30
days, certain customers, specifically government, university, Asian and European
customers, tend to take longer to pay their receivable balances.

     Cash used in investing  activities was $258,000 in the first nine months of
2003 compared to cash  provided by investing  activities of $90,000 in the first
nine  months  of 2002.  This  change  was  primarily  due to a  decrease  in our
short-term  investments of $650,000 in 2002 versus no change in 2003 since we no
longer have any short-term  investments.  We invested  $259,000 for purchases of
capital  equipment in the first nine months of 2003  compared to $540,000 in the
first nine months of 2002.

     Cash used in financing activities was $1.1 million in the first nine months
of 2003, primarily due to repayments on our bank line with SVB, compared to cash
provided by  financing  activities  of $1.3  million in the first nine months of
2002.  We received  $1.0  million from the issuance of common stock in a private
placement in the first nine months of 2002 and $182,000 from an increase in bank
loans.

     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.  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. All warrants remain  outstanding as
of September 30, 2003.
                                       13
<PAGE>
     We had a one-year loan  agreement with Silicon Valley Bank ("SVB") that was
effective  through  September 27, 2003 with  borrowing  capability of up to $3.5
million  depending  on the  level of  certain  of our  North  American  accounts
receivable.  The loan agreement  included the  requirement  for us to maintain a
minimum level of tangible net worth.  The loan  agreement was amended on January
31, 2003 and on July 30, 2003 to reduce the minimum  level of tangible net worth
that we had to maintain  through the end of the loan  agreement.  The amendments
also provided us with a waiver of our  non-compliance  with the  requirement  to
maintain a minimum  level of tangible net worth as at December 31, 2002 and June
30, 2003, respectively.

     The loan  agreement was further  amended on September 3, 2003 to extend the
term of the  agreement  for an  additional  year through  September 26, 2004. At
September  30,  2003 we had used  $994,000  of the SVB  facility  with  $688,000
available but not used.  The interest rate on the facility was 6.0% at September
30,  2003,  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 $2.6
million at September 30, 2003. 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 September 30, 2003.

     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 (pounds)100,000 ($167,000) at September 30, 2003.

     We expect negative cash flow from  operations to continue  through at least
the first  quarter of 2004, as we continue the research and  development  of new
applications  for our SPOT(TM) and Ariol(TM)  systems,  conduct  clinical trials
required for FDA  clearance of new  products,  expand our  marketing,  sales and
customer support capabilities,  and add additional infrastructure.  We currently
estimate that our capital resources will enable us to meet our capital needs for
at least the next twelve months.

     However,  expenditures  required to achieve growth and profitability in the
long  term 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,
conducting   clinical  trials  for  FDA  clearance  of  new  products,   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(TM)  and
Ariol(TM)systems, which may require additional funds.

     There can be no assurance that we will be able to obtain additional debt or
equity  financing  if needed  and 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.  Accordingly,  our failure to
obtain  sufficient  funds on acceptable  terms when needed could have a material
adverse effect on our ability to achieve our long-term business objectives.
                                       14
<PAGE>
     We have received from SVB various  waivers of our  non-compliance  with the
loan  covenant  requiring us to maintain a minimum  level of tangible net worth.
There is no  assurance  that SVB will  continue to provide  such  waivers in the
future.  In the event  that we are  unable to  remain  in  compliance  with this
covenant,  we would have to repay any outstanding balance on the SVB loan, which
could limit our ability to fund our working capital and growth objectives.

     We transferred  our listing from the Nasdaq  National  Market to the Nasdaq
SmallCap Market, which has less stringent listing  requirements,  as of February
4, 2003. As a result, we may find it more difficult to raise additional  capital
should the need arise in the future.

     In July 2003, we learned of a change in U.S. Medicare reimbursement for the
imaging component of certain  pathology tests. This change reduced,  through the
end of 2003, the payments (or reimbursements) that clinical laboratory customers
receive from Medicare for certain  pathology  tests  performed  using  automated
imaging systems.  The Centers for Medicare & Medicaid  Services ("CMS") notified
laboratories  that  they had made an NCCI  edit for a  specific  image  analysis
procedural  code  retroactive  to April 1 this year. CMS has also indicated that
they would  implement a new  reimbursement  ("CPT")  code with a specific  image
analysis   component   beginning  January  1,  2004  at  a   yet-to-be-announced
reimbursement  level.  Although  we are not yet able to  quantify  the impact of
these changes on our clinical laboratory  customers in the U.S., we believe that
some clinical  laboratory  customers have  deferred,  and may continue to defer,
decisions to purchase our Ariol(TM) systems until the new reimbursement level is
determined.

Recent Accounting Pronouncements

     In January  2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to  February  1, 2003,  the  provisions  of FIN 46 must be applied for the first
interim or annual period  beginning  after December 15, 2003. We do not have any
ownership in any variable  interest  entities as of September  30, 2003. We will
apply the consolidation requirement of FIN 46 in future periods if we should own
any interest in any variable interest entity.

     In  November  2002,  the  Emerging  Issues  Task Force  ("EITF")  reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides  guidance on how to account for arrangements  that
involve the delivery or performance of multiple products, services and/or rights
to use  assets.  The  provisions  of EITF  Issue  No.  00-21  apply  to  revenue
arrangements  entered into in fiscal periods  beginning after June 15, 2003. The
adoption of this standard had no material impact on our financial statements.
                                       15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivatives
and Financial Instruments.

     For the nine  months  ended  September  30,  2003,  there were no  material
changes from the  disclosures  made in our Form 10-K for the year ended December
31, 2002. We maintain our funds as cash or cash equivalents,  primarily in money
market investments with a maturity of less than 90 days. We invested these funds
at an average  interest  rate of 0.90% during the third  quarter of 2003.  These
investments are not subject to interest rate risk.

Item 4. Disclosure Controls and Procedures.

     (a)  Evaluation  of  disclosure  controls  and  procedures.  Based on their
evaluation as of the end of the period covered by this Quarterly  Report on Form
10-Q, our chief  executive  officer and chief  financial  officer have concluded
that our disclosure  controls and procedures (as defined in Rules  13a-15(e) and
15d-15(e)  under the Securities  Exchange Act of 1934 (the "Exchange  Act") are
effective to ensure that  information  required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and  reported  within the time  periods  specified  in  Securities  and Exchange
Commission rules and forms.

     (b) Changes in internal  control over  financial  reporting.  There were no
significant changes in our internal control over financial reporting or in other
factors during our last fiscal  quarter that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.
                                       16
<PAGE>
PART II - OTHER INFORMATION
Item 6.  Exhibits and Reports on Form 8-K.

         (a)  Exhibits.

Exhibit No.                                     Description
10.47 Amendment to Loan Documents dated September 3, 2003 between Registrant and
      Silicon Valley Bank
31-1  Chief Executive Officer's Certification Pursuant to 15 U.S.C. Section 7241
31-2  Chief Financial Officer's Certification Pursuant to 15 U.S.C. Section 7241
32-1  Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32-2  Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



          (b) Reports on Form 8-K

          On July 31, 2003, we filed a Current Report on Form 8-K which
contained as an exhibit a copy of our press release announcing earnings for the
second quarter of fiscal 2003.

                                       17
<PAGE>

                             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: October 31, 2003        By: /S/ CARL HULL
                               --------------------------
                               Carl Hull
                               President and
                               Chief Executive Officer
                                       18


Date: October 31, 2003        By: /S/ BARRY HOTCHKIES
                               -------------------------
                               Barry Hotchkies
                               Executive Vice President, Chief Financial Officer