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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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AMENDMENT NO. 1

TO

FORM 10-Q/A



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



For the Quarterly Period ended March 31, 2004



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



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APPLIED IMAGING CORP.

(Exact name of registrant as specified in its charter)



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



120 Baytech Drive,

San Jose, California 95134

(Address of principal executive offices including zip code)



(408) 719-6400

(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 May 12, 2004 there were 19,072,502 shares of the Registrants Common Stock
outstanding.



EXPLANATORY NOTE



THIS AMENDMENT NO. 1 TO OUR QUARTERLY REPORT ON THIS FORM 10-Q/A IS
BEING FILED FOR THE PURPOSE OF REFLECTING THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED MARCH 31, 2004 AND MARCH 31, 2003. THE RESTATEMENT RESULTS FROM APPLIED IMAGINGS AUDIT COMMITTEE INVESTIGATION,
AS DESCRIBED HEREIN AND AS PREVIOUSLY ANNOUNCED IN ITS FORM 8-K FILED ON NOVEMBER 15, 2004. WE HAVE MADE NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-Q TO REFLECT ANY SUBSEQUENT INFORMATION OR DEVELOPMENTS.



APPLIED IMAGING HAS NOT AMENDED ITS ANNUAL REPORT ON FORM 10-K FOR THE PERIOD
ENDED DECEMBER 31, 2002 OR QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS AFFECTED BY THE RESTATEMENT DURING THE YEARS ENDED DECEMBER 31, 2003 OR 2002. INSTEAD, APPLIED IMAGING HAS AMENDED SUCH FINANCIAL INFORMATION AS A PART OF THE RESTATEMENT
OF ITS AMENDMENT NO. 2 TO ITS FORM 10-K/A FOR THE PERIOD ENDED DECEMBER 31, 2003. THEREFORE WHEN CONSIDERING 2002 OR 2003 FINANCIAL INFORMATION YOU SHOULD RELY ONLY ON APPLIED IMAGINGS AMENDMENT NO. 2 TO ITS FORM 10-K/A FOR THE
PERIOD ENDED DECEMBER 31, 2003, AND NOT ITS FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2002 NOR ITS QUARTERLY REPORTS ON FORM 10-Q FOR THE YEARS ENDED DECEMBER 31, 2003 OR 2002.



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##### Table of Contents

APPLIED IMAGING CORP.



INDEX



|        |  |                                                                                                                                                  |  |      
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----
|        |  |                                                                                                                                                  |  | Page 
|        |  | PART I. FINANCIAL INFORMATION                                                                                                                    |  |      
|        |  |                                                                                                                                                 
|Item 1. |  | Financial Statements (Unaudited)                                                                                                                 |  |      
|        |  |                                                                                                                                                 
|        |  | Condensed Consolidated Balance Sheets (as Restated) as of March 31, 2004 and December 31, 2003                                                   |  | 3    
|        |  |                                                                                                                                                 
|        |  | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (as Restated) for the three months ended March 31, 2004 and 2003 |  | 4    
|        |  |                                                                                                                                                 
|        |  | Condensed Consolidated Statements of Cash Flows (as Restated) for the three months ended March 31, 2004 and 2003                                 |  | 5    
|        |  |                                                                                                                                                 
|        |  | Notes to Condensed Consolidated Financial Statements (as Restated)                                                                               |  | 6-13 
|        |  |                                                                                                                                                 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                            |  | 14-21
|        |  |                                                                                                                                                 
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk Derivatives and Financial Instruments                                                 |  | 22   
|        |  |                                                                                                                                                 
|Item 4. |  | Disclosure Controls and Procedures                                                                                                               |  | 22-23
|        |  |                                                                                                                                                 
|        |  | PART II. OTHER INFORMATION                                                                                                                       |  |      
|        |  |                                                                                                                                                 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                 |  | 24   
|        |  |                                                                                                                                                 
|        |  | Signatures                                                                                                                                       |  | 25   



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. Financial Statements



APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)



|                                           |  |               |         |   |                  |   |         |  
|------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                           |  | March 31,2004 |         |   | December 31,2003 |  
|                                           |  | Restated      |         |   | Restated         |  
|ASSETS                                     |  |               |         |   |                  |   |         |  
|                                           |  |              
|Current assets:                            |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                  |  | $             | 1,845   |   |                  | $ | 2,047   |  
|Restricted cash                            |  |               | 183     |   |                  |   | 178     |  
|Trade accounts receivable, net             |  |               | 5,166   |   |                  |   | 6,122   |  
|Inventories                                |  |               | 1,098   |   |                  |   | 1,190   |  
|Prepaid expenses and other current assets  |  |               | 1,467   |   |                  |   | 1,024   |  
|                                           |  |               |         |   |                  |   |         |  
|Total current assets                       |  |               | 9,759   |   |                  |   | 10,561  |  
|Property and equipment, net                |  |               | 818     |   |                  |   | 812     |  
|Goodwill                                   |  |               | 2,364   |   |                  |   | 2,364   |  
|Other assets                               |  |               | 52      |   |                  |   | 151     |  
|                                           |  |               |         |   |                  |   |         |  
|Total assets                               |  | $             | 12,993  |   |                  | $ | 13,888  |  
|                                           |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |               |         |   |                  |   |         |  
|                                           |  |              
|Current liabilities:                       |  |               |         |   |                  |   |         |  
|Accounts payable                           |  | $             | 1,496   |   |                  | $ | 1,491   |  
|Accrued expenses                           |  |               | 1,966   |   |                  |   | 1,888   |  
|Bank debt                                  |  |               | 1,111   |   |                  |   | 1,728   |  
|Deferred revenue, current                  |  |               | 5,662   |   |                  |   | 5,114   |  
|Other current liabilities                  |  |               | 100     |   |                  |   |        |  
|                                           |  |               |         |   |                  |   |         |  
|Total current liabilities                  |  |               | 10,335  |   |                  |   | 10,221  |  
|                                           |  |              
|Deferred revenue, non-current              |  |               | 433     |   |                  |   | 801     |  
|                                           |  |               |         |   |                  |   |         |  
|Total liabilities                          |  |               | 10,768  |   |                  |   | 11,022  |  
|                                           |  |               |         |   |                  |   |         |  
|Stockholders equity:                      |  |               |         |   |                  |   |         |  
|Common stock                               |  |               | 16      |   |                  |   | 16      |  
|Additional paid-in capital                 |  |               | 49,209  |   |                  |   | 49,207  |  
|Accumulated other comprehensive loss       |  |               | (367    | ) |                  |   | (367    | )
|Accumulated deficit                        |  |               | (46,633 | ) |                  |   | (45,990 | )
|                                           |  |               |         |   |                  |   |         |  
|Total stockholders equity                 |  |               | 2,225   |   |                  |   | 2,866   |  
|                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity |  | $             | 12,993  |   |                  | $ | 13,888  |  
|                                           |  |               |         |   |                  |   |         |  



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 endedMarch 31, |       
|                                    |  | 2004 Restated               |        |   | 2003 Restated |  
|Revenues                            |  | $                           | 4,915  |   |               | $ | 5,095  |  
|Cost of revenues                    |  |                             | 1,878  |   |               |   | 1,994  |  
|                                    |  |                             |        |   |               |   |        |  
|Gross profit                        |  |                             | 3,037  |   |               |   | 3,101  |  
|                                    |  |                             |        |   |               |   |        |  
|Operating expenses:                 |  |                             |        |   |               |   |        |  
|Research and development            |  |                             | 891    |   |               |   | 847    |  
|Sales and marketing                 |  |                             | 1,707  |   |               |   | 1,855  |  
|General and administrative          |  |                             | 1,037  |   |               |   | 813    |  
|                                    |  |                             |        |   |               |   |        |  
|Total operating expenses            |  |                             | 3,635  |   |               |   | 3,515  |  
|                                    |  |                             |        |   |               |   |        |  
|Operating loss                      |  |                             | (598   | ) |               |   | (414   | )
|Other expense, net                  |  |                             | (45    | ) |               |   | (4     | )
|                                    |  |                             |        |   |               |   |        |  
|Net loss                            |  | $                           | (643   | ) |               | $ | (418   | )
|                                    |  |                             |        |   |               |   |        |  
|Net loss per share                  |  |                             |        |   |               |   |        |  
|- basic and diluted                 |  | $                           | (0.04  | ) |               | $ | (0.03  | )
|                                    |  |                             |        |   |               |   |        |  
|Weighted average shares outstanding |  |                             |        |   |               |   |        |  
|- basic and diluted                 |  |                             | 15,962 |   |               |   | 15,913 |  
|                                    |  |                             |        |   |               |   |        |  



The accompanying notes
are an integral part of these unaudited condensed

consolidated financial statements.



4



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APPLIED IMAGING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                          |  |                             |        |   |               |   |        |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------- | - | ------ | -
|                                                                                          |  | Three months endedMarch 31, |       
|                                                                                          |  | 2004 Restated               |        |   | 2003 Restated |  
|Cash flows from operating activities:                                                     |  |                             |        |   |               |   |        |  
|Net loss                                                                                  |  | $                           | (643   | ) |               | $ | (418   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |        |   |               |   |        |  
|Depreciation and amortization                                                             |  |                             | 141    |   |               |   | 166    |  
|Provision for doubtful accounts                                                           |  |                             |       |   |               |   | (43    | )
|Changes in operating assets and liabilities:                                              |  |                             |        |   |               |   |        |  
|Trade accounts receivable                                                                 |  |                             | 956    |   |               |   | 873    |  
|Inventories                                                                               |  |                             | 92     |   |               |   | 141    |  
|Prepaid expenses and other current assets                                                 |  |                             | (443   | ) |               |   | (195   | )
|Other assets                                                                              |  |                             | 99     |   |               |   |       |  
|Accounts payable                                                                          |  |                             | 5      |   |               |   | (757   | )
|Accrued expenses                                                                          |  |                             | 78     |   |               |   | (68    | )
|Deferred revenue                                                                          |  |                             | 180    |   |               |   | 88     |  
|Other current liabilities                                                                 |  |                             | 100    |   |               |   |       |  
|                                                                                          |  |                             |        |   |               |   |        |  
|Net cash provided by (used in) operating activities:                                      |  |                             | 565    |   |               |   | (213   | )
|                                                                                          |  |                             |        |   |               |   |        |  
|Cash flows from investing activities:                                                     |  |                             |        |   |               |   |        |  
|Purchases of property and equipment                                                       |  |                             | (147   | ) |               |   | (132   | )
|                                                                                          |  |                             |        |   |               |   |        |  
|Net cash used in investing activities:                                                    |  |                             | (147   | ) |               |   | (132   | )
|                                                                                          |  |                             |        |   |               |   |        |  
|Cash flows from financing activities:                                                     |  |                             |        |   |               |   |        |  
|Net proceeds from issuance of common stock                                                |  |                             | 2      |   |               |   |       |  
|Bank and other loan proceeds                                                              |  |                             | 2,781  |   |               |   | 3,441  |  
|Bank and other loan payments                                                              |  |                             | (3,398 | ) |               |   | (4,132 | )
|Restricted cash                                                                           |  |                             | (5     | ) |               |   | (1     | )
|                                                                                          |  |                             |        |   |               |   |        |  
|Net cash used in financing activities:                                                    |  |                             | (620   | ) |               |   | (692   | )
|                                                                                          |  |                             |        |   |               |   |        |  
|Net decrease in cash and cash equivalents                                                 |  |                             | (202   | ) |               |   | (1,037 | )
|                                                                                          |  |                            
|Cash and cash equivalents at beginning of period                                          |  |                             | 2,047  |   |               |   | 2,897  |  
|                                                                                          |  |                             |        |   |               |   |        |  
|Cash and cash equivalents at end of period                                                |  | $                           | 1,845  |   |               | $ | 1,860  |  
|                                                                                          |  |                             |        |   |               |   |        |  



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)



Throughout these notes to the condensed consolidated financial statements all referenced
amounts reflect the balances and amounts on a restated basis.



NOTE 1 
Restatement of Previously Issued Financial Statements



On
November 15, 2004, the Company announced its intent to restate the financial results for the fiscal year ended December 31, 2003 and the quarterly financial results for the first and second quarters of the fiscal year ending December 31, 2004.
During the third quarter of 2004, a transaction which was recorded in June, 2004 was identified where revenue was recognized in a manner inconsistent with the Companys policies and procedures then in effect. Following the identification of
this transaction, the Audit Committee commenced an investigation. During the course of its investigation, the Audit Committee identified several revenue transactions principally recorded in fiscal 2003 involving its Cytovision and Ariol systems in
which commitments were made for the future delivery of software applications then under development. Statement of Position (SOP) 97-2 Software Revenue Recognition requires that vendor specific objective evidence (VSOE) of the price
attributable to the fair value of such future deliverables be established in order to recognize a portion of revenue in the reporting period in which the sale was originally made. The Company did not have VSOE established for these
future deliverables at the time revenue was initially recognized. During the investigation, there were certain other transactions identified where the Company recognized revenue (a) upon the shipment of a product to a customer but had
not met all the customer acceptance criteria necessary to recognize revenue; (b) upon shipment of product to customer, but had not met all the revenue recognition criteria as it was a sale with participation by a third party financing company.
Additionally, during the investigation, certain transactions were identified where revenue on extended warranty/post customer support (software maintenance and service) arrangements were inappropriately recognized resulting in incorrect revenue
being recognized and/or deferred at the time of product shipment. As a result, the Company subsequently decided to restate its 2002 financial results as well.



Consequently, the condensed consolidated financial statements for the quarter ended March 31, 2004 are restated in this Amendment No. 1 to
Form 10-Q/A. These restated condensed consolidated financial statements reflect adjustments relating to the recording of revenue previously deferred and the deferral of revenue and cost of goods sold related to the premature recognition of
revenue.



The following table present amounts from operations
as previously reported and as restated (in thousands, except per share data):



|                                               |  |                                          |       |   |                                          |   |       |                        |  |   |             |   |  |   |       |  
|---------------------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------------------------- | - | ----- | ---------------------- |  | - | ----------- | - |  | - | ----- | -
|                                               |  | For the three months endedMarch 31, 2004 |       |   | For the three months endedMarch 31, 2003 |  
|Condensed Consolidated Statement of Operations |  | As Previously Reported                   |       |   | As Restated                              |   |       | As Previously Reported |  |   | As Restated |  
|Revenues (1)                                   |  | $                                        | 4,849 |   |                                          | $ | 4,915 |                        |  | $ | 5,415       |   |  | $ | 5,095 |  
|Cost of revenues (1)                           |  |                                          | 1,840 |   |                                          |   | 1,878 |                        |  |   | 2,164       |   |  |   | 1,994 |  
|Gross profit (2)                               |  |                                          | 3,009 |   |                                          |   | 3,037 |                        |  |   | 3,251       |   |  |   | 3,101 |  
|Operating loss (2)                             |  |                                          | (626  | ) |                                          |   | (598  | )                      |  |   | (264        | ) |  |   | (414  | )
|Net loss (2)                                   |  |                                          | (671  | ) |                                          |   | (643  | )                      |  |   | (268        | ) |  |   | (418  | )
|Net loss per share, basic and diluted          |  | $                                        | (0.04 | ) |                                          | $ | (0.04 | )                      |  | $ | (0.02       | ) |  | $ | (0.03 | )



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



|                                               |  |                        |         |   |             |   |         |  
|---------------------------------------------- |  | ---------------------- | ------- | - | ----------- | - | ------- | -
|                                               |  | March 31, 2004         |        
|Condensed Consolidated Balance Sheet           |  | As Previously Reported |         |   | As Restated |  
|Accounts receivable, net (3)                   |  | $                      | 5,204   |   |             | $ | 5,166   |  
|Inventories (3)                                |  |                        | 1,092   |   |             |   | 1,098   |  
|Prepaid expenses and other current assets (4)  |  |                        | 795     |   |             |   | 1,467   |  
|Total current assets (6)                       |  |                        | 9,119   |   |             |   | 9,759   |  
|Total assets (6)                               |  |                        | 12,353  |   |             |   | 12,993  |  
|Deferred revenue, current (5)                  |  |                        | 3,621   |   |             |   | 5,662   |  
|Deferred revenue, non-current (5)              |  |                        | 430     |   |             |   | 433     |  
|Total liabilities (6)                          |  |                        | 8,724   |   |             |   | 10,768  |  
|Accumulated deficit (6)                        |  |                        | (45,229 | ) |             |   | (46,633 | )
|Total liabilities and stockholders equity (6) |  |                        | 12,353  |   |             |   | 12,993  |  



|                                               |  |                                          |       |   |                                          |   |      |                       |  |   |             |   |  |   |      |  
|---------------------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------------------------- | - | ---- | --------------------- |  | - | ----------- | - |  | - | ---- | -
|                                               |  | For the three months endedMarch 31, 2004 |       |   | For the three months endedMarch 31, 2003 |  
|Condensed Consolidated Statement of Cash Flows |  | As PreviouslyReported                    |       |   | As Restated                              |   |      | As PreviouslyReported |  |   | As Restated |  
|Net loss (2)                                   |  | $                                        | (671  | ) |                                          | $ | (643 | )                     |  | $ | (268        | ) |  | $ | (418 | )
|                                               |  |                                          |       |  
|Changes in assets and liabilities:             |  |                                          |       |   |                                          |   |      |                       |  |   |             |   |  |   |      |  
|Accounts receivable                            |  |                                          | 1,161 |   |                                          |   | 956  |                       |  |   | 906         |   |  |   | 873  |  
|Inventories, net                               |  |                                          | 2     |   |                                          |   | 92   |                       |  |   | 253         |   |  |   | 141  |  
|Prepaid expenses and other current assets      |  |                                          | (258  | ) |                                          |   | (443 | )                     |  |   | (136        | ) |  |   | (195 | )
|Other assets                                   |  |                                          | (34   | ) |                                          |   | 99   |                       |  |   |            |   |  |   |     |  
|Deferred revenue                               |  |                                          | 41    |   |                                          |   | 180  |                       |  |   | (266        | ) |  |   | 88   |  
|Net cash used in operating activities          |  |                                          | 599   |   |                                          |   | 565  |                       |  |   | (213        | ) |  |   | (213 | )

---

|(1) | Restated revenues include a net increase of $66,000 and a net decrease of $320,000 for the quarters ended March 31, 2004 and 2003 due to adjustments relating to the recording of
revenue previously deferred and the deferral of revenue related to (a) $210,000 net decrease and $0 related to certain Cytovision and Ariol system sales which included the future delivery of software applications for which VSOE was not established
at the time of sale for the quarters ended March 31, 2004 and 2003, respectively (b) $10,000 and $97,000 net decrease related to sales with participation of third party financing companies for the quarters ended March 31, 2004 and 2003,
respectively; (c) $168,000 net increase and $221,00 net decrease related to certain transactions that required customer acceptance for the quarters ended March 31, 2004 and 2003, respectively; and (d) $118,000 net increase and $2,000 net decrease
related to extended warranty/post customer support arrangements for the quarters ended March 31, 2004 and 2003, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The restatement of revenues resulted in a corresponding adjustment to cost of revenues. Cost of revenues increased by $38,000 and decreased $170,000 for the quarters ended March 31,
2004 and 2003, respectively;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The adjustments related to the recording of revenue previously deferred and the deferral of revenues and cost of revenue resulted in a net increase to gross profit and a
corresponding net decrease in operating loss and net loss available to stockholders of $28,000 and a net decrease to gross profit and a corresponding net increase in operating loss and net loss available to stockholders of $150,000 for the quarters
ended March 31, 2004 and 2003, respectively. There was no change to net loss per share for the quarter ended March 31, 2004. Net loss per share increased $.01 for the quarter ended March 31, 2003;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



|(3) | Accounts receivable includes a reduction of $38,000 for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the
cumulative effect of current and prior period reversals to accounts receivable as a result of certain revenue that required customer acceptance which was not obtained. There was a corresponding increase of $6,000 to inventories due to the cumulative
effect of current and prior period adjustments for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | As a result of the net revenue reversals relating primarily to Cytovision and Ariol, deferred costs (included in prepaid expenses and current assets) increased $672,000 for the
quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the cumulative effect of current and prior period adjustments to corresponding reductions of cost of revenues;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Deferred revenue, current increased $2.0 million for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 and deferred revenue
non-current increased $3,000 for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the cumulative effect of the deferral of revenues related to certain Ariol system transactions which
included the future delivery of software applications for which VSOE was not available and the deferral of revenues related to extended warranty/post customer support arrangements;
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Total current assets, total assets, total liabilities and stockholders equity includes an increase of $640,000 due to the cumulative effect of current and prior period
adjustments. As a result of the adjustments noted in (1) through (5) above accumulated deficit increased $1.4 million over amounts previously recorded as of March 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As reflected on the restated consolidated financial statements, the Company has recorded certain other adjustments, the net
effect of which is presented above. None of these entries is significant individually or in its aggregate.



NOTE 2 - Basis of Presentation



The accompanying condensed consolidated financial statements include the accounts of Applied Imaging Corp. and subsidiaries (the Company, we, us, our) for the three
months ended March 31, 2004 and 2003. These financial statements are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial
position, operating results and cash flows for those interim periods presented. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of results to be expected for the fiscal year ending December 31,
2004. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, for the year ended December 31, 2003, contained in our Form 10-K amendment No. 2.



Liquidity



The Company expects negative cash flow from operations through at least 2004, as it continues research and development of
new applications for its OncoPathTMsystems, conducts clinical trials required for the U.S. Food and Drug
Administration (FDA) clearance of new products, litigates against ChromaVision, expands the Companys marketing, sales and customer support capabilities, expands its program detecting circulating tumor cells in peripheral blood and
adds additional infrastructure. The Company currently estimates that its capital resources will enable it to meet its capital needs for at least the next twelve months.



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##### Table of Contents

APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



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, the Companys long-term capital needs may require it to try to obtain additional funds through equity or debt financing, collaborative or other
arrangements with other companies, bank financing and other sources. The Company has expended and will continue to expend substantial amounts of money for research and development, litigation, preclinical testing, conducting clinical trials for FDA
clearance of new products, capital expenditures, working capital needs and manufacturing and marketing of our products. The Companys future research and development efforts, in particular, are expected to include development of additional
applications of current cytogenetic products and additional applications for the OncoPath systems, which may require additional funds.



There can be no assurance that the Company will be able to obtain additional debt or equity financing if needed and on terms acceptable to the Company. If
adequate and acceptable funding is not available, the Company 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 it would
otherwise seek to commercialize internally, or to reduce the marketing, customer support, or other resources devoted to product development. Accordingly, the Companys failure to obtain sufficient funds on acceptable terms when needed could
have a material adverse effect on the Companys ability to achieve its long-term business objectives.



The Company established a loan agreement with Silicon Valley Bank (SVB) on September 28, 2001. This new facility replaced a three-year term loan and a
revolving line of credit that had an outstanding balance of $1.2 million on September 28, 2001. The new loan agreement provided the capability to borrow up to $2.0 million based on the level of certain of the Companys North American accounts
receivable and inventories. On August 15, 2002 and on October 4, 2002, the loan agreement was amended to extend the term of the loan for an additional year, through September 27, 2003, to increase borrowing capability to $3.5 million (based on the
level of certain of our North American accounts receivable) and to increase the requirement for the Company to maintain a minimum level of tangible net worth. On September 3, 2003, the loan agreement was amended to extend the term of the loan for an
additional year, through September 26, 2004, and to establish the minimum level of net tangible worth that the Company had to maintain through the end of the loan agreement. The Company was not in compliance with the covenant requiring us to
maintain $2.2 million in minimum tangible net worth at December 31, 2003 and the Company obtained a waiver for this covenant violation and potential non-compliance with the minimum net tangible worth covenant in January and February 2004. On March
31, 2004, the loan agreement was amended to extend the term of the loan through March 31, 2005 and to establish the minimum level of net tangible worth that the Company had to maintain through the end of the loan agreement. The Company was in
compliance with the loan covenant at March 31, 2004.



At March
31, 2004, the Company had used $1.1 million of the facility with $1.0 million available but not used. The interest rate on the facility was 6.0% at March 31, 2004, computed as the SVB prime rate plus 2.0 percent. The loan is collateralized by
substantially all of the assets of the U.S. corporation and requires maintenance of a minimum level of tangible net worth. Other loan covenants include the need to maintain insurance on the 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.



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



The Company collateralizes 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 £100,000 ($183,000) at March 31, 2004.



NOTE 3  Inventories (in thousands)



|                |  |                        |       |                           |   |      
|--------------- |  | ---------------------- | ----- | ------------------------- | - | -----
|Balance as of   |  | March 31, 2004Restated |       | December 31, 2003Restated
|Raw materials   |  | $                      | 942   |                           | $ | 994  
|Work in process |  |                        | 61    |                           |   | 25   
|Finished goods  |  |                        | 95    |                           |   | 171  
|                |  |                        |       |                           |   |      
|Total           |  | $                      | 1,098 |                           | $ | 1,190
|                |  |                        |       |                           |   |      



NOTE 4  Net income (loss)
per share



The computation
of basic and diluted net loss per share (EPS) for the three months ended March 31, 2004 and March 31, 2003 is determined by dividing net loss as reported as the numerator by the number of shares included in the denominator as shown in
the following table (in thousands):



|                                              |  |                              |  |       
|--------------------------------------------- |  | ---------------------------- |  | ------
|                                              |  | Three months ended March 31,
|                                              |  | 2004                         |  | 2003  
|Weighted average shares outstanding - basic   |  | 15,962                       |  | 15,913
|Dilutive shares - stock options               |  |                             |  |      
|Dilutive shares - warrants                    |  |                             |  |      
|                                              |  |                              |  |       
|Weighted average shares outstanding - diluted |  | 15,962                       |  | 15,913
|                                              |  |                              |  |       



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



|         |  |           |  |      
|-------- |  | --------- |  | -----
|         |  | March 31,
|         |  | 2004      |  | 2003 
|Options  |  | 3,277     |  | 3,153
|Warrants |  | 800       |  | 1,222
|         |  |           |  |      
|Total    |  | 4,077     |  | 4,375
|         |  |           |  |      



NOTE 5  Stock Based
Compensation



The Company accounts 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 the Companys stock and the exercise price on the date of the grant.



The Company has adopted the pro forma disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure  An amendment of FASB No. 123 for the 1998 Stock Plan and Employee Stock Purchase Plan. The fair value of the stock options granted to employees is



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



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, the Companys net loss and net loss per share as reported would have been changed to the pro forma amounts indicated
below (in thousands, except per share data):



|                                                                             |  |                             |       |   |              |   |       |  
|---------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------ | - | ----- | -
|                                                                             |  | Three months endedMarch 31, |      
|                                                                             |  | 2004Restated                |       |   | 2003Restated |  
|Net loss:                                                                    |  |                             |       |   |              |   |       |  
|As reported                                                                  |  | $                           | (643  | ) |              | $ | (418  | )
|Stock-based employee compensation expense determined under fair-value method |  |                             | (189  | ) |              |   | (167  | )
|                                                                             |  |                             |       |   |              |   |       |  
|Pro forma                                                                    |  | $                           | (832  | ) |              | $ | (585  | )
|                                                                             |  |                             |       |   |              |   |       |  
|Net loss per share:                                                          |  |                             |       |   |              |   |       |  
|As reported - basic and diluted                                              |  | $                           | (0.04 | ) |              | $ | (0.03 | )
|                                                                             |  |                             |       |   |              |   |       |  
|Pro forma - basic and diluted                                                |  | $                           | (0.05 | ) |              | $ | (0.04 | )
|                                                                             |  |                             |       |   |              |   |       |  



The fair value of each
option is estimated on the date of grant using the fair value method with the following weighted-average assumptions:



|                                    |  |                             |   |  |      |  
|----------------------------------- |  | --------------------------- | - |  | ---- | -
|                                    |  | Three months endedMarch 31, |  
|                                    |  | 2004                        |   |  | 2003 |  
|Risk-free interest rate             |  | 2.03                        | % |  | 2.07 | %
|Expected life (in years) (restated) |  | 5                           |   |  | 5    |  
|Dividend yield                      |  |                            | % |  |     | %
|Expected volatility                 |  | 74                          | % |  | 83   | %



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



The Company accounts for equity instruments issued to non-employees in accordance with the provisions of 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.



NOTE 6  Product Warranty



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



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



Changes in product warranty obligations for the three months ended March 31, 2004 and March 31, 2003
are as follows (in thousands):



|                                            |  |      |     |   |      |   |     |  
|------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                            |  | 2004 |     |   | 2003 |  
|Balance as of beginning of quarter          |  | $    | 102 |   |      | $ | 127 |  
|Add accruals for warranties issued          |  |      | 56  |   |      |   | 29  |  
|Less costs incurred under warranties issued |  |      | (20 | ) |      |   | (7  | )
|                                            |  |      |     |   |      |   |     |  
|Balance as of end of quarter                |  | $    | 138 |   |      | $ | 149 |  
|                                            |  |      |     |   |      |   |     |  



NOTE 7  Other Income
(Expense)



The details of other income (expense) are
shown below (in thousands):



|                             |  |                             |     |   |      |   |     |  
|---------------------------- |  | --------------------------- | --- | - | ---- | - | --- | -
|                             |  | Three months endedMarch 31, |    
|                             |  | 2004                        |     |   | 2003 |  
|Interest income              |  | $                           | 4   |   |      | $ | 6   |  
|Interest expense             |  |                             | (22 | ) |      |   | (32 | )
|Foreign exchange gain (loss) |  |                             | (26 | ) |      |   | 18  |  
|Income taxes                 |  |                             | (4  | ) |      |   | (3  | )
|Miscellaneous                |  |                             | 3   |   |      |   | 7   |  
|                             |  |                             |     |   |      |   |     |  
|Total                        |  | $                           | (45 | ) |      | $ | (4  | )
|                             |  |                             |     |   |      |   |     |  



NOTE 8  Recent Accounting
Pronouncements



In December 2003, the Financial
Accounting Standards Board (FASB) issued a revised FASB Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. The FASB published the revision to clarify and
amend some of the original provisions of FIN 46, which was issued in January 2003, and to exempt certain entities from its requirements. A variable interest entity (VIE) refers to an entity subject to consolidation according to the
provisions of this Interpretation. FIN 46R applies to entities whose equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support provided by any parties, including
equity holders, or where the equity investors (if any) do not have a controlling financial interest. FIN 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be
consolidated in the entitys financial statements. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN 46R
were effective for the Companys fiscal 2004 first quarter. The adoption of FIN 46R did not have a material impact on our financial position or results of operations.



NOTE 9  Commitments and Contingencies



On February 24, 2004 the Company received notice of a lawsuit alleging patent infringement filed against Applied Imaging
Corp by ChromaVision Medical Systems, Inc. The lawsuit, as subsequently amended, claims that the Companys Ariol system infringes on four ChromaVision patents. ChromaVision is seeking unspecified damages, as well as an injunction barring
the Company from, among other things, making, using, or selling any device in the United States that incorporates ChromaVisions patented technology.



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APPLIED IMAGING CORP. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)

(Unaudited)



On April 15, 2004, the Company filed a motion in the United States District Court for the Southern
District of California to transfer the litigation to the United States District Court for the Northern District of California, based in the San Francisco Bay Area. A hearing has been scheduled by the court on this motion for May 24, 2004.



On April 20, 2004, the Company responded to
ChromaVisions complaint by denying ChromaVisions infringement allegations and by asserting the invalidity of ChromaVisions alleged patents, trademarks and copyrights. In addition, the Company is countersuing ChromaVision for
infringing Applied Imaging Corps valid US Patent 6,633,662. The Company is seeking an injunction against ChromaVisions continued manufacture, sale and use of the Automated Cellular Imaging System (ACIS®) in the United States and
enhanced economic damages for ChromaVisions willful infringement. The Company has also asserted claims against ChromaVision for intentionally interfering with its relationships with customers, unfair competition and false advertising under the
Lanham Act, as well as misappropriation of trade secrets.



The
companies met in a settlement conference in US District Court on August 2, 2004. Discussions are continuing between the companies and will be reviewed periodically by the Magistrate Judge supervising the case. The next review date is scheduled for
February 1, 2005.



Because of the inherent complexity and
unpredictable nature of patent litigation the Company is not able to make any predictions regarding the outcome of this litigation. As a result, the company has not made any provisions for an unfavorable outcome to this litigation.



NOTE 10  Subsequent Events



On April 13, 2004, the Company completed the private placement of 3.1
million shares of common stock and warrants to purchase 620,000 additional shares of common stock for an aggregate purchase price of $4.25 million. Each warrant is exercisable for one share of common stock at an exercise price of $1.70 per share,
from six months following the closing date of April 13, 2004 until October 13, 2009.



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##### Table of Contents

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



The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes, and with our
audited financial statements and notes for the fiscal year ended December 31, 2003.



This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, commencing on page 12, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 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.



Restatement



On November 15, 2004, we
announced our intent to restate our financial results for the fiscal year ended December 31, 2003 and our quarterly financial results for the first and second quarters of the fiscal year ending December 31, 2004. During the third quarter of 2004, a
transaction was identified where revenue was recognized in a manner inconsistent with our policies and procedures then in effect. Following the identification of this transaction, the Audit Committee commenced an investigation. During the course of
its investigation, the Audit Committee identified several revenue transactions generally involving its Cytovision and Ariol systems in which commitments were made for the future delivery of software applications then under development. Statement of
Position (SOP) 97-2 Software Revenue Recognition requires that vendor specific objective evidence (VSOE) of the price attributable to the fair value of such future deliverables be established in order to recognize a portion
of revenue in the reporting period in which the sale was originally made. We did not have VSOE established for these future deliverables at the time revenue was recognized. During the investigation, there were certain transactions
identified where we recognized revenue (a) upon the shipment of product to a customer but had not met all the customer acceptance criteria necessary to recognize revenue; (b) upon shipment of product to customer, but had not met all the revenue
recognition criteria as it was a sale with participation by a third party financing company. Additionally, during the investigation, certain transactions were identified where revenue on extended warranty/post customer support (software maintenance
and service) arrangements were inappropriately recognized resulting in incorrect revenue being recognized and/or deferred at the time of product shipment. As a result, the Company subsequently decided to restate its 2002 financial results as well.



Consequently, the condensed consolidated financial statements
for the quarter ended March 31, 2004 are restated in this Form 10-Q/A Amendment No. 1. These restated condensed consolidated financial statements reflect adjustments relating to the deferral and reversal of revenue and cost of goods.



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##### Table of Contents

The principal effects of these adjustments on the accompanying condensed consolidated financial
statements are as follows (in thousands, except per share data):



|                                               |  |                                           |       |   |                                           |   |       |                        |  |   |             |   |  |   |       |  
|---------------------------------------------- |  | ----------------------------------------- | ----- | - | ----------------------------------------- | - | ----- | ---------------------- |  | - | ----------- | - |  | - | ----- | -
|                                               |  | For the three months ended March 31, 2004 |       |   | For the three months ended March 31, 2003 |  
|Condensed Consolidated Statement of Operations |  | As Previously Reported                    |       |   | As Restated                               |   |       | As Previously Reported |  |   | As Restated |  
|Revenues (1)                                   |  | $                                         | 4,849 |   |                                           | $ | 4,915 |                        |  | $ | 5,415       |   |  | $ | 5,095 |  
|Cost of revenues (1)                           |  |                                           | 1,840 |   |                                           |   | 1,878 |                        |  |   | 2,164       |   |  |   | 1,994 |  
|Gross profit (2)                               |  |                                           | 3,009 |   |                                           |   | 3,037 |                        |  |   | 3,251       |   |  |   | 3,101 |  
|Operating loss (2)                             |  |                                           | (626  | ) |                                           |   | (598  | )                      |  |   | (264        | ) |  |   | (414  | )
|Net loss (2)                                   |  |                                           | (671  | ) |                                           |   | (643  | )                      |  |   | (268        | ) |  |   | (418  | )
|Net loss per share, basic and diluted          |  | $                                         | (0.04 | ) |                                           | $ | (0.04 | )                      |  | $ | (0.02       | ) |  | $ | (0.03 | )



|                                               |  |                        |         |   |             |   |         |  
|---------------------------------------------- |  | ---------------------- | ------- | - | ----------- | - | ------- | -
|                                               |  | March 31, 2004         |        
|Condensed Consolidated Balance Sheet           |  | As Previously Reported |         |   | As Restated |  
|Accounts receivable, net (3)                   |  | $                      | 5,204   |   |             | $ | 5,166   |  
|Inventories (3)                                |  |                        | 1,092   |   |             |   | 1,098   |  
|Prepaid expenses and other current assets (4)  |  |                        | 795     |   |             |   | 1,467   |  
|Total current assets (6)                       |  |                        | 9,119   |   |             |   | 9,759   |  
|Total assets (6)                               |  |                        | 12,353  |   |             |   | 12,993  |  
|Deferred revenue, current (5)                  |  |                        | 3,621   |   |             |   | 5,662   |  
|Deferred revenue, non-current (5)              |  |                        | 430     |   |             |   | 433     |  
|Total liabilities (6)                          |  |                        | 8,724   |   |             |   | 10,768  |  
|Accumulated deficit (6)                        |  |                        | (45,229 | ) |             |   | (46,633 | )
|Total liabilities and stockholders equity (6) |  |                        | 12,353  |   |             |   | 12,993  |  



|                                               |  |                                          |       |   |                                          |   |      |                       |  |   |             |   |  |   |      |  
|---------------------------------------------- |  | ---------------------------------------- | ----- | - | ---------------------------------------- | - | ---- | --------------------- |  | - | ----------- | - |  | - | ---- | -
|                                               |  | For the three months endedMarch 31, 2004 |       |   | For the three months endedMarch 31, 2003 |  
|Condensed Consolidated Statement of Cash Flows |  | As PreviouslyReported                    |       |   | As Restated                              |   |      | As PreviouslyReported |  |   | As Restated |  
|Net loss (2)                                   |  | $                                        | (671  | ) |                                          | $ | (643 | )                     |  | $ | (268        | ) |  | $ | (418 | )
|                                               |  |                                          |       |  
|Changes in assets and liabilities:             |  |                                          |       |   |                                          |   |      |                       |  |   |             |   |  |   |      |  
|Accounts receivable                            |  |                                          | 1,161 |   |                                          |   | 956  |                       |  |   | 906         |   |  |   | 873  |  
|Inventories, net                               |  |                                          | 2     |   |                                          |   | 92   |                       |  |   | 253         |   |  |   | 141  |  
|Prepaid expenses and other current assets      |  |                                          | (258  | ) |                                          |   | (443 | )                     |  |   | (136        | ) |  |   | (195 | )
|Other assets                                   |  |                                          | (34   | ) |                                          |   | 99   |                       |  |   |            |   |  |   |     |  
|Deferred revenue                               |  |                                          | 41    |   |                                          |   | 180  |                       |  |   | (266        | ) |  |   | 88   |  
|Net cash used in operating activities          |  |                                          | 599   |   |                                          |   | 565  |                       |  |   | (213        | ) |  |   | (213 | )

---

|(1) | Restated revenues include a net increase of $66,000 and a net decrease of $320,000 for the quarters ended March 31, 2004 and 2003 due to adjustments relating to the recording of
revenue previously deferred and the deferral of revenue related to (a) $210,000 net decrease and $0 related to certain Cytovision and Ariol system sales which included the future delivery of software applications for which VSOE was not established
at the time of sale for the quarters ended March 31, 2004 and 2003, respectively (b) $10,000 and $97,000 net decrease related to sales with participation of third party financing companies for the quarters ended March 31, 2004 and 2003,
respectively; (c) $168,000 net increase and $221,00 net decrease related to certain transactions that required customer acceptance for the quarters ended March 31, 2004 and 2003, respectively; and (d) $118,000 net increase and $2,000 net decrease
related to extended warranty/post customer support arrangements for the quarters ended March 31, 2004 and 2003, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The restatement of revenues resulted in a corresponding adjustment to cost of revenues. Cost of revenues increased by $38,000 and decreased $170,000 for
the quarters ended March 31, 2004 and 2003, respectively;



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##### Table of Contents

|(2) | The adjustments related to the recording of revenue previously deferred and the deferral of revenues and cost of revenue resulted in a net increase to gross profit and a
corresponding net decrease in operating loss and net loss available to stockholders of $28,000 and a net decrease to gross profit and a corresponding net increase in operating loss and net loss available to stockholders of $150,000 for the quarters
ended March 31, 2004 and 2003, respectively. There was no change to net loss per share for the quarter ended March 31, 2004. Net loss per share increased $.01 for the quarter ended March 31, 2003;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Accounts receivable includes a reduction of $38,000 for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the
cumulative effect of current and prior period reversals to accounts receivable as a result of certain revenue that required customer acceptance which was not obtained. There was a corresponding increase of $6,000 to inventories due to the cumulative
effect of current and prior period adjustments for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | As a result of the net revenue reversals relating primarily to Cytovision and Ariol, deferred costs (included in prepaid expenses and current assets) increased $672,000 for the
quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the cumulative effect of current and prior period adjustments to corresponding reductions of cost of revenues;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Deferred revenue, current increased $2.0 million for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 and deferred revenue
non-current increased $3,000 for the quarter ended March 31, 2004 over the amount previously reported for the quarter ended March 31, 2004 due to the cumulative effect of the deferral of revenues related to certain Ariol system transactions which
included the future delivery of software applications for which VSOE was not available and the deferral of revenues related to extended warranty/post customer support arrangements;
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Total current assets, total assets, total liabilities and stockholders equity includes an increase of $640,000 due to the cumulative effect of current and prior period
adjustments. As a result of the adjustments noted in (1) through (5) above accumulated deficit increased $1.4 million over amounts previously recorded as of March 31, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As reflected on the restated consolidated financial statements, the Company has recorded certain other adjustments, the net
effect of which is presented above. None of these entries is significant individually or in its aggregate.



Results of Operations, as restated



Revenues. Our revenues are derived primarily from the sale of systems, service contracts, software maintenance and grant revenues. Revenues as restated for the three months ended March 31, 2004 were $5.0 million compared to $5.1
million for the corresponding restated period in 2003. The decrease is primarily related to $144,000 of grant revenues during the first quarter of 2003. There were no grant revenues in the first quarter of 2004



Sales of systems were $3.6 million as restated in the three months ended
March 31, 2004, essentially the same level as in the corresponding restated period in 2003 ($3.6 million).



Service contract, software maintenance and grant revenues were $1.4 million as restated in the three months ended March 31, 2004, compared to $1.5 million
for the corresponding restated period in 2003. The decrease is primarily related to $144,000 of grant revenues during the first quarter of 2003. There were no grant revenues in the first quarter of 2004.



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##### Table of Contents

Cost of revenues. Cost of revenues includes direct material and labor costs, manufacturing overhead, installation
costs, warranty-related expenses and service and application support expenses. Costs of revenues as restated for the three months ended March 31, 2004 were $1.9 million, essentially the same for the corresponding restated period in 2003. Cost of
revenues, as a percentage of total restated revenues, for the three months ended March 31, 2004 were 38% compared to 39% for the corresponding prior year period. The decrease is primarily due to the sale of a number of our Ariol systems during
the first quarter of 2003 at a lower gross margin percent for market development purposes. There were no such sales during the first quarter of 2004.



Research and development expenses.Research and development expenses for the three months ended March 31, 2004 were $891,000, compared to $847,000 in the
comparative prior year period. This increase in the first quarter is due primarily to $46,000 in costs associated with additional research staff in the U.S.



Sales and marketing expenses. Sales and marketing expenses for the three months ended March 31, 2004 were $1.7 million, compared to $1.9 million in the comparative
prior year period. The decline was due primarily to lower commissions paid to our distributors outside North America.



General and administrative expenses. General and administrative expenses for the first quarter of 2004 were $1.0 million, compared to $813,000 in the comparative
prior year quarter. The increase in general and administrative expenses in the first quarter was primarily attributable to outside professional accountant services of $105,000 and $80,000 for additional personnel costs in the U.S.



Other expenseThe other expense of $45,000 in the first quarter of 2004 was due
primarily to interest expense of $22,000 and foreign exchange losses of $26,000. Other expense of $4,000 in the first three months of 2003 was primarily comprised of $32,000 in interest expense payable on our bank borrowings and $18,000 of foreign
currency gains. The foreign currency losses incurred in the first three months of 2004 were due to the impact of the weakening of the U.S. dollar versus foreign currencies on the translation of various balance sheet items from foreign currencies
into the U.S. dollar. The foreign currency gains incurred in the first three months of 2003 were due to the impact of the strengthening of the U.S. dollar versus the foreign currencies on the translation of various balance sheet items from foreign
currencies into the U.S. dollar.



Liquidity and Capital Resources, as
restated



At March 31, 2004, we had cash and cash
equivalents of $1.8 million and working capital of ($576,000), compared to $2.0 million and $340,000, respectively, at December 31, 2003. Restricted cash, which collateralizes various credit card and bank guarantees in the United Kingdom, amounted
to $183,000 at March 31, 2004 and $178,000 at December 31, 2003.



Cash provided by operations for the three months ended March 31, 2004 was $565,000, compared to cash used in operations of $213,000 for the first three months of 2003. Changes in the restated components of cash used in operations included:
an increase in net loss amounting to $225,000 (a net loss of $643,000 in the first three months of 2004 versus a net loss of $418,000 in the first three months of 2003); and decreased requirements for trade accounts receivables of $83,000 (a
decrease of $956,000 in the first quarter of 2004 reflecting improved collections versus a decrease of $873,000 in the first three months of 2003) and for inventories of $49,000 (a decrease of $92,000 in 2004 and a decrease of $141,000 in 2003
reflecting a reduction in the components that had been built up for new products.) Accounts payable



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increased $762,000 (an increase of $5,000 in the first three months of 2004 and a decrease of $757,000 in 2003). The decrease in the first quarter of 2003
was due primarily to a reduction in accounts payable to vendors supplying system components, reflecting lower inventory at the end of the quarter.



Trade accounts receivable as a percent of first quarter restated revenues were 105% at March 31, 2004, compared to 123% at March 31, 2003 and 120% at
December 31, 2003, 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 $147,000 in the first three months of
2004, compared to $132,000 in the first three months of 2003. We invested $147,000 for purchases of capital equipment in the first three months of 2004, compared to $132,000 in the first three months of 2003.



Cash used in financing activities was $620,000 in the first three months of
2004, compared to $692,000 in the first three months of 2003. In both quarters, this was primarily due to repayments on our bank line with Silicon Valley Bank (SVB).



We established a loan agreement with SVB on September 28, 2001. This new facility replaced a three-year term loan and a
revolving line of credit that had an outstanding balance of $1.2 million on September 28, 2001. The new loan agreement provided the capability to borrow up to $2.0 million based on the level of certain of our North American accounts receivable and
inventories. On August 15, 2002 and on October 4, 2002, the loan agreement was amended to extend the term of the loan for an additional year, through September 27, 2003, to increase borrowing capability to $3.5 million (based on the level of certain
of our North American accounts receivable) and to increase the requirement for us to maintain a minimum level of tangible net worth. On September 3, 2003, the loan agreement was amended to extend the term of the loan for an additional year, through
September 26, 2004, and to establish the minimum level of net tangible worth that we had to maintain through the end of the loan agreement. We were not in compliance with the covenant requiring us to maintain $2.2 million in minimum tangible net
worth at December 31, 2003 and we obtained a waiver for this covenant violation and potential non-compliance with the minimum net tangible worth covenant in January and February, 2004. On March 31, 2004, the loan agreement was amended to extend the
term of the loan through March 31, 2005 and to establish the minimum level of net tangible worth that we had to maintain through the end of the loan agreement. We were in compliance with the loan covenant at March 31, 2004.



At March 31, 2004, we had used $1.1 million of the facility with $1.0 million
available but not used. The interest rate on the facility was 6.0% at March 31, 2004, computed as the SVB prime rate plus 2 percent. The loan is collateralized by substantially all of the assets of the U.S. corporation and requires maintenance of a
minimum level of tangible net worth. 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
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.



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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 £100,000 ($183,000) at March 31, 2004.



We expect negative cash flow from operations through at least 2004, as we continue research and development of new applications for our OncoPath
systems, conduct clinical trials required for the U.S. Food and Drug Administration (FDA) clearance of new products, litigate against ChromaVision, 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
OncoPath 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 are restating our consolidated financial statements to reflect adjustments
to our previously reported financial information. The adjustments arose out of an investigation by our Audit Committee, as reported in our Form 8-K filed with the SEC on November 15, 2004. As a result of the then active investigation, we were unable
to timely file the Form 10-Q for the quarter ended September 30, 2004 or to announce our financial results for that period.



As part of the Audit Committees investigation, the Audit Committee evaluated the effectiveness of certain internal controls and procedures. The
Audit Committee concluded that there existed material weaknesses in a number of areas in our system of internal controls and procedures as of the date of our initial filing of our December 31 2003 Form 10-K. As a result of the evaluation, the Audit
Committee has directed management to implement and management is in the process of implementing measures designed to ensure that information required to be disclosed in our periodic reports is complete, recorded, processed, summarized accurately and
reported timely. These measures include:



| |  |  | adoption of a disclosure policy, which specifically addresses documentation on commitments made to customers;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | hiring of a contracts administrator to review all sales contracts and identify all commitments made to customers in each contract;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | moving of the international sales order processing and finance functions from our UK office to our US headquarters office;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | adoption of a policy regarding future software application commitments;
| | - |  | -----------------------------------------------------------------------



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| |  |  | priority given to the hiring of a new CFO;
| | - |  | ------------------------------------------



| |  |  | updating of our revenue recognition policy to specifically address the revenue recognition requirements of SOP 97-2 as it relates to our business; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | creation of an education program with our sales force and management team on our new policies and procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------



Once these additional measures have been fully implemented, we believe that
our internal controls and procedures will be effectively designed to ensure that information we are required to disclose in reports that we file with the SEC is recorded, processed, summarized accurately and reported within the time periods
specified in Securities and Exchange Commission rules and forms. However, the effectiveness of our controls and procedures is still limited by a variety of factors including:



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



| |  |  | Fraudulent action of an individual or collusion of two or more people;
| | - |  | ----------------------------------------------------------------------



| |  |  | Inappropriate management override of procedures; and
| | - |  | ----------------------------------------------------



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



If we fail to maintain effective internal controls and procedures for
financial reporting in place, we could be unable to provide timely and accurate financial information, be subject to delisting, and to civil and criminal sanctions.



Due to the investigation commenced by our Audit Committee, we were unable to file our September 30, 2004 Form 10-Q on a
timely basis. As a result, the Nasdaq Listing Qualifications Department notified us that we were not in compliance with the requirements of Nasdaq Marketplace Rule 4310(c)(14), affixed an E to the end of our trading symbol, and subjected
us to delisting proceedings. We appealed this delisting determination and participated in a hearing before a Nasdaq panel in December 2004. On July 29, 2004, we received notice from Nasdaq that our stock price had closed below $1.00 per share for 30
consecutive business days. As a result, we had failed to comply with the minimum bid price requirement for continued listing on The Nasdaq SmallCap Market. The Nasdaq staff further notified us that our stock might be subject to delisting from the
Nasdaq SmallCap Market if we fail to regain compliance with the minimum bid price requirement by having the bid price on our stock close above $1.00 per share for a minimum of 10 consecutive business days by January 25, 2005. Since our stock price
failed to close above $1.00 per share for a minimum of 10 consecutive business days by January 25, 2005, we requested an additional 180 day period to regain compliance with the minimum bid price requirement to continue our listing on the Nasdaq
SmallCap Market and avoid delisting.



On February 10, 2005, the
Nasdaq notified the Company that it had determined to grant our request for continued listing on the Nasdaq SmallCap Market subject to several conditions, including: 1.) the filing of the Companys Form 10-Q for the quarter ended September 30,
2004 and any required restatements on or before February 25, 2005 2.) the receipt of board approval to implement a reverse stock split sufficient to remedy the bid price deficiency on or before March 1, 2005 and the filing of a proxy statement
evidencing the Companys intent to seek stockholder approval for such reverse stock split on or before March 30, 2005 3.) evidence of a closing bid price of $1.00 per share on or before May 20, 2005 and a closing bid price of at least $1.00 per
share for a minimum of ten consecutive business days immediately thereafter, and 4.) the timely filing of all periodic reports for all reporting periods ending on or before December 31, 2005.



While our board of directors has given approval to seek shareholder approval
to implement a reverse stock split for up to one share for each existing four shares, our shareholders may not approve a reverse stock split. Our share price post a reverse stock split



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may not trade above a $1.00 per share for ten consecutive trading days. While it is our intent to make timely filings of all periodic reports for all
reporting periods ending on or before December 31, 2005, the company may not complete its filings on a timely basis. If any of these events were to occur, our shares would be delisted from the Nasdaq SmallCap Market. Additionally, should our
shareholders approve a reverse stock split, the reverse stock split may adversely impact our stock price.



If de-listed, our stock may be quoted using the Pink Sheets, LLC or other similar market. A de-listing from the Nasdaq SmallCap Market may adversely
impact our stock price, as well as our liquidity and the ability of our stockholders to purchase and sell their shares in an orderly manner, or at all. Furthermore, a delisting of our shares from the Nasdaq SmallCap Market could damage our general
business reputation and impair our ability to raise additional funds. Any of the foregoing events could have a material adverse effect on our business, financial condition and operating results.



We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. These principles are subject to interpretation by the Securities and Exchange Commission (the SEC) and various bodies formed to interpret and create appropriate accounting policies. A
change in these policies can have a significant effect on our reported results and may even retroactively affect previously reported transactions. In particular, changes to FASB guidelines relating to accounting for stock-based compensation will
likely increase our compensation expense, could make our net income less predictable in any given reporting period and could change the way we compensate our employees or cause other changes in the way we conduct our business.



Recent Accounting Pronouncements



In December 2003, the FASB issued a revised FASB Interpretation No. 46
(FIN 46R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. The FASB published the revision to clarify and amend some of the original provisions of FIN 46, which was issued in January 2003, and to
exempt certain entities from its requirements. A variable interest entity (VIE) refers to an entity subject to consolidation according to the provisions of this Interpretation. FIN 46R applies to entities whose equity investment at risk
is insufficient to finance that entitys activities without receiving additional subordinated financial support provided by any parties, including equity holders, or where the equity investors (if any) do not have a controlling financial
interest. FIN 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be consolidated in the entitys financial statements. In addition, FIN 46R requires that both
the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN 46R are effective for the Companys fiscal 2004 first quarter. The adoption of FIN 46R did not
have a material impact on our financial position or results of operations.



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



For the three months ended March 31, 2004, there were no material changes from the disclosures made in our Form 10-K for the year ended December 31, 2003.
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 0.85% during the first quarter of 2004. These investments are not
subject to interest rate risk.



Item 4. Disclosure Controls and Procedures.



(a) Evaluation of disclosure controls and procedures. Based on an evaluation as of the end of the period covered by this report, our chief executive officer and principal accounting officer has concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) were not 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.



We have restated our financial results for the years ended December 31, 2003 and 2002 and for the quarters ended June 30,
2004 and March 31, 2004 to reflect adjustments to our previously reported financial results. The restatements arose out of an investigation by the Audit Committee.



As a result of the investigation, the Audit Committee determined that the Company had incorrectly recorded revenue on sales
contracts that included commitments for as yet undeveloped software upgrade applications for which vendor specific objective evidence (VSOE) for the fair value had not yet been established. The Audit Committee further determined that the
Company had incorrectly recorded revenue on certain sales contracts upon shipment rather than recording revenue when customer acceptance criteria had been met; and on certain other transactions where the Company had recorded revenue upon shipment of
sales with participation by a third party financing company, but had not met all the revenue recognition criteria necessary to recognize revenue. In addition, the Audit Committee determined that the Company had incorrectly recorded revenue on
certain transactions where additional revenue on extended warranty/post customer support (software maintenance and service) arrangements were inappropriately recognized resulting in incorrect revenue being recognized and/or deferred at the time of
product shipment.



As a result, the Audit Committee concluded
that the Company had material weaknesses in its system of internal controls as follows:



| |  |  | The Company does not have a policy for mandatory disclosures in sales contracts including disclosures for commitments for as yet developed software applications and has not properly
trained its sales personnel and management on sales contract disclosure or on SOP 97-2 (Statement of Position 97-2, Software Revenue Recognition);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Personnel reviewing sales contracts are not qualified or properly trained to review sales contracts particularly as it relates to SOP 97-2 and customer acceptance criteria.
Furthermore, this review is not a formalized process.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Audit Committee has therefore directed management to implement a number of additional measures designed to further ensure that the Companys financial results are reported accurately. These measures include:



| |  |  | The adoption of a disclosure policy to insure that all commitments to customers in a sales contract are fully disclosed so the Company can correctly account for the sales contract;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The hiring of a contracts administrator who will review all sales contracts and identify all commitments to customers to insure that sales contracts are properly accounted for;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The adoption of a future software commitment policy so the Companys sales personnel have guidelines regarding future software application commitments to customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The adoption of an updated revenue recognition policy which specifically addresses SOP 97-2 as it relates to the Companys business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The prioritization of hiring a new Chief Financial Officer ;
| | - |  | ------------------------------------------------------------



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| |  |  | The planned realignment of the international sales order processing and finance function to move these functions from the Companys UK affiliate to the Companys US head
quarters;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The education of the Companys management and sales force on these new policies and procedures.
| | - |  | -----------------------------------------------------------------------------------------------



These changes either have been, or are in the process of being implemented. We believe the planned and implemented changes
to our system of internal controls and our disclosure controls and procedures will be adequate to provide reasonable assurance that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of disclosure controls and procedures in Rule 13-a-14(c). However, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or
mistake.



(b) Changes in internal control over financial
reporting. There were no changes in our internal control over financial reporting or in other factors during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.





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PART II - OTHER INFORMATION



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



| | (a) | Exhibits.
| | --- | ---------



|            |  |                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                    
|31.1        |  | Chief Executive Officer and Principal Financial Officers Certification Pursuant to 15 U.S.C. Section 7241                                                                     
|            | 
|32.1        |  | Certificate of Chief Executive Officer and Principal 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 March 19, 2004, we filed a Current Report on Form 8-K which contained as an exhibit a copy of our press release announcing earnings for the fourth
quarter of fiscal 2003.



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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: February 25, 2005 |  | By:                   |  | /s/ ROBIN STRACEY                                      
|                        |  |                       |  | Robin Stracey                                          
|                        |  |                       |  | Chief Executive Officer and Principal Financial Officer



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