##### Table of Contents




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 June 30, 2002
| |  |  | --------------------------------------------




OR





| |  ̈ |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | for the Transition Period From
 To
.
| |  |  | ------------------------------------




Commission File Number: 0-21371











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)





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 August 8, 2002 there were 15,885,281 shares of
the Registrants Common Stock outstanding.




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APPLIED IMAGING CORP.





INDEX





PagePART I.    FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Condensed Consolidated Balance SheetsJune 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations and Comprehensive LossThree and six months ended June 30, 2002 and 2001

4.

Condensed Consolidated Statements of Cash FlowsSix months ended June 30, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6-9Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

10-13Item 3.

Quantitative and Qualitative Disclosures about Market RiskDerivatives and Financial Instruments

14PART II.    OTHER INFORMATIONItem 4.

Submission of Matters to a Vote of Security Holders

15Item 5.

Other Information

15Item 6.

Exhibits and Reports on Form 8-K

15Signatures

16




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PART IFINANCIAL INFORMATION





Item 1.    Financial Statements





APPLIED IMAGING CORP. AND SUBSIDIARIES


Condensed Consolidated Balance Sheets


(In thousands)





June 30, 2002


December 31, 2001(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
2,806


$
2,538Restricted cash


246



245Short-term investments






652Trade accounts receivable, net


7,467



5,684Inventories


1,157



1,010Prepaid expenses/other current assets


477



547Total current assets


12,153



10,676Property and equipment, net


955



1,021Goodwill, net


2,364



2,344Other assets


56



56Total assets

$
15,528


$
14,097LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,067


$
1,758Accrued expenses


1,615



1,404Bank debt


1,973



1,687Capital lease obligation


2



14Deferred revenue, current


2,690



2,779Total current liabilities


8,347



7,642Deferred revenue, non-current


315



396Total liabilities


8,662



8,038Stockholders equity:Common stock


16



15Additional paid-in capital


49,228



48,154Deferred stock compensation


(7
)


(7
)Accumulated other comprehensive loss


(367
)


(365
)Accumulated deficit


(42,004
)


(41,738
)Total stockholders equity


6,866



6,059Total liabilities and stockholders equity

$
15,528


$
14,097





The accompanying notes are an integral part of these unaudited condensed


consolidated financial statements.




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APPLIED IMAGING CORP. AND SUBSIDIARIES


Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)


(in thousands, except per share data)


(Unaudited)





Three months ended June
30,


Six months ended June
30,2002

2001


2002


2001Revenues

$
5,319

$
4,528


$
10,318


$
8,458Cost of revenues


2,040


1,793



3,886



3,736Gross profit


3,279


2,735



6,432



4,722Operating expenses:Research and development


856


1,029



1,678



1,964Sales and marketing


1,700


1,812



3,436



3,838General and administrative


634


692



1,331



1,451Amortization of goodwill





77







155Restructuring









222



Total operating expenses


3,190


3,610



6,667



7,408Operating income (loss)


89


(875
)


(235
)


(2,686
)Other income (expense), net


26


7



(31
)


56Net income (loss)


115


(868
)


(266
)


(2,630
)Other comprehensive income (loss)Change in unrealized loss on short-term investments





2



(2
)


6Comprehensive income (loss)

$
115

$
(866
)

$
(268
)

$
(2,624
)Net income (loss) per sharebasic

$
0.01

$
(0.06
)

$
(0.02
)

$
(0.17
)diluted

$
0.01

$
(0.06
)

$
(0.02
)

$
(0.17
)Weighted average shares outstandingbasic


15,851


15,184



15,739



15,167diluted


16,229


15,184



15,739



15,167





The accompanying notes are an integral part of these unaudited condensed


consolidated financial statements.




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APPLIED IMAGING CORP. AND SUBSIDIARIES


Condensed Consolidated Statements of Cash Flows


(In thousands)


(Unaudited)





Six months ended June 30,2002


2001Cash flows from operating activities:Net loss

$
(266
)

$
(2,630
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


297



434Provision for doubtful accounts


(10
)


50Amortization related to deferred stock compensation






2Loss on sale of fixed assets


61



Changes in operating assets and liabilities:Trade accounts receivable


(1,773
)


898Inventories


(147
)


162Prepaid expenses/other current assets


70



100Accounts payable


309



(34
)Accrued expenses


211



(877
)Deferred revenue


(170
)


509Net cash used in operating activities


(1,418
)


(1,386
)Cash flows from investing activities:Purchase of short-term investments






(9,082
)Proceeds from sale and maturities of investments


650



8,702Goodwill


(20
)


Purchases of equipment


(292
)


(264
)Other assets






(21
)Net cash provided by (used in) investing activities


338



(665
)Cash flows from financing activities:Net proceeds from issuance of common stock


1,075



61Restricted cash


(1
)


(430
)Bank and other loan proceeds


5,855



Bank and other loan payments


(5,567
)


(596
)Capital lease payments, principal portion


(14
)


Net cash provided by (used in) financing activities


1,348



(965
)Net increase (decrease) in cash and cash equivalents


268



(3,016
)Cash and cash equivalents at beginning of period


2,538



4,447Cash and cash equivalents at end of period

$
2,806


$
1,431Supplemental disclosure of non-cash investing and financing activities:Deferred stock compensation

$



$
(18
)





The accompanying notes are an integral part of these unaudited condensed


consolidated financial statements.




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APPLIED IMAGING CORP. AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE 1Basis
of Presentation





The accompanying condensed consolidated financial statements include the accounts of
Applied Imaging Corp. and subsidiaries (the Company, we, us, our) for the three and six months ended June 30, 2002 and 2001. These financial statements are unaudited and reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position, operating results and cash flows for those interim periods presented. The results of operations
for the three and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2002. These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended December 31, 2001, contained in our 2001 annual report on Form 10-K.





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





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





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




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We have a one-year loan agreement with Silicon Valley Bank (SVB) that was
effective beginning on September 28, 2001. The loan agreement provides the capability to borrow up to $2 million based on the level of certain of our North American accounts receivable and inventories. At June 30, 2002 we had used $1,973,000 of the
facility with $27,000 available but not used. The interest rate on the facility was 6.75% at June 30, 2002, computed as the SVB prime rate plus 2 percent. The loan is collateralized by substantially all of the assets of the U.S. corporation and
requires us to maintain a minimum level of tangible net worth amounting to $2,000,000 at June 30, 2002. Other loan covenants include the need to maintain insurance on our property, monthly reporting to SVB, the need to obtain SVB approval for any
extraordinary action and a limitation on the U.S. corporations ability to transfer more than $600,000 to a subsidiary. We were in compliance with the SVB loan covenants as of June 30, 2002.





We collateralize various credit card, and bank guarantees (used for customs clearance purposes) with cash deposits at an international bank in the United Kingdom. This
amounted to £157,000 ($246,000) at June 30, 2002.





NOTE 2Inventories (in thousands)





Balance as of

June 30, 2002

December 31, 2001Raw materials

$
1,123

$
898Work in process


6


49Finished goods


28


63Total

$
1,157

$
1,010





NOTE 3Income (loss) per share





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





Three months ended June 30,

Six months ended June 30,2002

2001

2002

2001Weighted average shares outstandingbasic

15,851

15,184

15,739

15,167Dilutive sharesstock options

378





Weighted average shares outstandingdiluted

16,229

15,184

15,739

15,167




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





Three months ended June 30,

Six months ended June 30,Balance as of

2002

2001

2002

2001Options

1,059

2,456

2,980

2,456Warrants

651

651

651

651Total

1,710

3,107

3,631

3,107





NOTE 4Goodwill





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





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





Three months ended June 30,


Six months ended June 30,2002

2001


2002


2001Reported net income (loss)

$
115

$
(868
)

$
(266
)

$
(2,630
)Add back: goodwill amortization





77







155Adjusted net income (loss)

$
115

$
(791
)

$
(266
)

$
(2,475
)Basic net income (loss) per share:as reported

$
0.01

$
(0.06
)

$
(0.02
)

$
(0.17
)adjusted

$
0.01

$
(0.05
)

$
(0.02
)

$
(0.16
)Diluted net income (loss) per shareas reported

$
0.01

$
(0.06
)

$
(0.02
)

$
(0.17
)adjusted

$
0.01

$
(0.05
)

$
(0.02
)

$
(0.16
)




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NOTE 5Restructuring





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





Description




NoteEmployee separation costs

$
132


All cash chargesLeague City office closure costs


90


$40 of cash charges and $50 of non-cash chargesTotal costs

$
222Reserve balance at March 31, 2002

$
63Cash payments


(35
)Reserve balance at June 30, 2002

$
28


Expected to be paid in 2002





NOTE 6Recent Accounting Pronouncements





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




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





The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes, and with our audited financial statements and notes for the fiscal year
ended December 31, 2001.





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





Results of Operations





Revenues.    Our revenues are derived primarily from the sale of products, service contracts, software maintenance and grant revenues. Revenues for the three and six months
ended June 30, 2002 were $5.3 million and $10.3 million, respectively, compared to $4.5 million and $8.5 million for the corresponding periods in 2001. This 17% and 22% increase in revenues in the quarter and first half, respectively, was due
primarily to increased sales volume of our MDS  and SPOT  systems, which were $0.6 million in the quarter and $1.3 million in the first half compared to no sales in the second quarter of 2001 and $0.1
million of sales in the first half of 2001. The SPOT  genetic analysis system is a new product that
was introduced in the second quarter of 2002. Sales of the SPOT  system are expected to continue to
favorably impact the growth of overall revenues through at least the end of 2002.





Sales of systems were $4.1 million and $8.0 million in
the three and six months ended June 30, 2002, respectively, compared to $3.4 million and $6.3 million for the corresponding periods in 2001. This 21% and 26% increase in revenues in the quarter and first half, respectively, was due primarily to
increased sales volume of our MDS  and SPOT  systems discussed above.





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





Cost of
revenues.    Cost of revenues includes direct material and labor costs, manufacturing overhead, installation costs, warranty-related expenses and post-warranty service and application support expenses. Costs of revenues for
the three and six months ended June 30,




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2002 were $2.0 million and $3.9 million, respectively, compared to $1.8 million and $3.7 million for the corresponding periods in 2001. The increase in cost of revenues was due primarily to the
increase in sales discussed above. Cost of revenues, as a percentage of total revenues, for the three and six months ended June 30, 2002 were 38% compared to 40% and 44% for the corresponding prior year periods. The decrease is primarily due to
favorable product mix.





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





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





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





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





Restructuring 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 have consolidated our manufacturing and engineering facilities. We recorded a restructuring charge of $222,000 in the first quarter and first half of 2002 that was
due to the costs of terminating 12 employees ($132,000five employees in engineering, three in manufacturing, two in administration and two in sales and support) and closing the League City, Texas office ($90,000.) There were no restructuring
costs in the second quarter of 2002 and first half of 2001.





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




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Liquidity and Capital Resources





At June 30, 2002, we had cash, restricted cash, cash equivalents and securities available for sale of $3.1 million and working capital of $3.8 million compared to $3.4
million and $3.0 million respectively at December 31, 2001. Restricted cash, which collateralizes various credit card and bank guarantees in the United Kingdom, amounted to $0.3 million at June 30, 2002 and at December 31, 2001.





Cash used in operations for the six months ended June 30, 2002 was $1.4 million, the same as in the first half of 2001. Changes
in the components of cash used in operations included: a reduction in net loss amounting to $2.4 million (a decrease from a net loss of $2.6 million in the first half of 2001 to a net loss of $266,000 in the first half of 2002), offset by increased
requirements for trade accounts receivables of $2.7 million (an increase of $1.8 million in 2002 reflecting higher sales versus a decrease of $898,000 in 2001) and for inventories of $0.3 million (an increase of $147,000 in 2002 reflecting a
build-up in components for new products versus a decrease of $162,000 in 2001.) These increases were partially offset by reductions in the need for funds for accounts payable and accrued expenses of $343,000 and $1.1 million, respectively. Accrued
expenses increased by $211,000 in the first half of 2002, compared to a decrease of $877,000 in the first half of 2001 that was due primarily to a reduction in the accrual for bonuses ($142,000), a reduction in customer advance payments ($125,000)
and a reduction in the accrual for annual report preparation ($60,000.)





Trade accounts receivable as a percent of
second quarter revenues were 140% at June 30, 2002 compared to 128% at June 30, 2001. This strong relationship between quarter-end receivables and that quarters sales is primarily due to the fact that most of our sales occur late in the
quarter as is typical of capital equipment business. Although our payment terms are net 30 days, certain customers, specifically government, university, Japanese, Chinese and European customers, tend to take longer to pay their receivable balances.





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





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





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




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the number of shares of our common stock equal to the number of shares of common stock purchased by that investor in the January 31, 2002 financing. The warrants are exercisable for four years
from July 29, 2002 at a price of $2.25 per share.





We have a one-year loan agreement with Silicon Valley Bank
(SVB) that was effective beginning on September 28, 2001. The loan agreement provides the capability to borrow up to $2 million based on the level of certain of our North American accounts receivable and inventories. At June 30, 2002 we had used
$1,973,000 of the facility with $27,000 available but not used. The interest rate on the loan facility was 6.75% at June 30, 2002, computed as the SVB prime rate plus 2 percent. The loan is collateralized by substantially all of the assets of the
U.S. corporation and requires us to maintain a minimum level of tangible net worth amounting to $2,000,000 at June 30, 2002. Other loan covenants include the need to maintain insurance on our property, monthly reporting to SVB, the need to obtain
SVB approval for any extraordinary action and a limitation on the U.S. corporations ability to transfer more than $600,000 to a subsidiary. We were in compliance with the SVB loan covenants as of June 30, 2002.





We collateralize various credit card, and bank guarantees (used for customs clearance purposes) with cash deposits at an international
bank in the United Kingdom. This amounted to £157,000 ($246,000) at June 30, 2002.





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





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




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





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




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PART IIOTHER INFORMATION





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





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





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





VotesName

For

Against

AbstentionsAndre F. Marion

12,287,148

5,888

113,239Pablo Valenzuela

12,287,148

5,888

113,239





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





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





Item 5:    Other Information





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





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





(a)  Exhibits.





Exhibit No.

Description99.1

Certification 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There were no reports on
Form 8-K during the quarter ended June 30, 2002.




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APPLIED IMAGING CORP.





SIGNATURES





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





APPLIED IMAGING CORP. (Registrant)Date:

August 13, 2002



By:

/s/    CARL HULLCarl Hull President and Chief Executive OfficerDate:

August 13, 2002



By:

/s/    BARRY HOTCHKIESBarry Hotchkies Vice President, Chief Financial Officer




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