10-K405

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

                                ---------------

                                   FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange 
     Act of 1934

     For the Fiscal Year Ended December 31, 1997 or

[_]  Transition Report Pursuant to Section 13 or 15 (d) of the Securities 
     Exchange Act of 1934

Commission File Number: 0-21371

                             APPLIED IMAGING CORP.
             (Exact name of registrant as specified in its charter)


              DELAWARE                                    77-012490
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                    (Identification No.)

            2380 WALSH AVENUE,                               
                Building B,                                   
         Santa Clara, California                            95051  
(Address of principal executive offices)                 (Zip Code) 


Registrant's telephone number, including area code:   (408) 562-0250

Securities registered pursuant to Section 12 (b) of the Act:

                                                     
              TITLE OF                              NAME OF EACH EXCHANGE
             EACH CLASS                              ON WHICH REGISTERED 
          ---------------                             ------------------
                None                                          N/A


Securities registered pursuant to Section 12 (g) of the Act:

                         COMMON STOCK, $0.001 PAR VALUE
                                (Title of Class)

  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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

  The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 12,
1998, as reported on the Nasdaq National Market, was approximately $23,487,715.

  The number of shares of Common Stock outstanding as of March 12, 1998:
7,668,206 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Part III of this Form 10-K incorporates information by reference from the
  Registrant's definitive proxy statement to be filed with the Securities and
 Exchange Commission within 120 days after the close of the fiscal year.
                                        
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                                    PART I

ITEM 1.   BUSINESS

  This Report on Form 10-K contains certain forward looking statements regarding
future events with respect to Applied Imaging Corp. Actual events or results may
differ materially as a result of the factors described herein and in the
documents incorporated herein by reference, including, in particular, those
factors described under ''Additional Risk Factors.''

THE COMPANY

  Applied Imaging Corp (''Applied Imaging'' or the ''Company'') was incorporated
in California in July 1986, and reincorporated in Delaware in October 1996.
Applied Imaging designs, develops, manufactures and markets automated clinical
analysis systems used by cytogenetic laboratories for prenatal and other genetic
testing applications.  The Company's cytogenetic instrumentation and reagent
business, which has sold systems to over 600 sites in more than 35 countries
since its inception, markets computer-based microscopic image analysis systems
that enable laboratories to automate the analysis of chromosomal abnormalities
associated with conditions such as Down Syndrome. The Company is also developing
a proprietary genetic screening technology designed to  facilitate prenatal
screening for genetic abnormalities by isolating ''fetal blood cells'' from a
routine maternal blood sample. This new technology is designed to improve
current prenatal testing methods by providing a timely and cost-effective
screening procedure without the risks of miscarriage or fetal damage associated
with invasive prenatal tests such as amniocentesis or chorionic villus sampling.
The Company also markets specialized imaging systems used in basic research and
pharmaceutical discovery for the real-time analysis of changes in intracellular
ion concentrations, a key method for determining the function of biologically-
active compounds.

  Applied Imaging is a leading provider of automated chromosomal image analysis
systems to clinical and research laboratories worldwide.  The Company's
CytoVision karyotyping systems are widely accepted because of their ability to
analyze standard human chromosome preparations using powerful software
classification algorithms along with a specialized cytogenetic user interface.
The CytoVision systems also incorporate the capability to analyze and record
images derived from advanced genetic research assays employing fluorescent in
situ hybridization (''FISH'') or comparative genomic hybridization (''CGH'')
methods.  The Company recently announced its first proprietary assay for color
chromosome analysis (called RxFISH(TM)), a rapidly developing area of research
interest.  Based upon a novel method developed by scientists at The University
of Cambridge, the Company's RxFISH(TM) assay develops a unique fluorescent color
banding pattern for human chromosomes that is then analyzed by the CytoVision
software.  The future development of specialized reagent products that can be
optimized for use on the Company's installed base of over 1100 chromosome
analysis workstations worldwide is a key aspect of the Company's business
strategy.

  The Company's prenatal genetic screening development program is focused on the
isolation of specific fetal cells from a blood sample taken from the expectant
mother using normal venipuncture techniques. This allows prenatal genetic
testing to be performed without the need to obtain a fetal tissue sample by an
invasive procedure, such as amniocentesis, which can pose a physical risk to the
fetus.  The Company's proprietary screening technology incorporates (i) a
patented  hematological procedure to enrich the concentration of fetal blood
cells found in maternal blood, (ii) a fetal hemoglobin test kit, (iii) automated
image analysis instrumentation to identify fetal blood cells and (iv) third-
party DNA probes to identify certain chromosomal abnormalities present in these
fetal blood cells. This prenatal screening system is expected to be both safe
and accurate because it evaluates actual fetal cells while posing no direct risk
to the fetus. The Company's prenatal screening products are currently in
preclinical evaluation.

  In late 1996 and early 1997, the Company submitted three medical device
applications to the United States Food and Drug Administration (''FDA'') under
section 510(k) of the Federal Food, Drug and Cosmetic Act (''510(k) ''). The
first submission was for the Company's ENRICH Kit, a product that enriches the
concentration of certain types of cells from whole blood based on the Company's
patented hematological techniques. The Company received notification in December
of 1997 from the FDA that it may market the ENRICH Kit for these purposes.  The
second submission was for the automated image analysis instrument which is able
to automatically detect and locate nucleated red blood cells on a microscope
slide. The instrument presents these cells for operator review and further

                                       1

 
testing and analysis. The third submission covers the reagents used to identify
cells containing fetal hemoglobin so that they may be further characterized.

  The Company anticipates that sales of its prenatal screening products, if
approved by the FDA, will include its proprietary consumable ENRICH Kit, the
reagents used to identify fetal hemoglobins and the imaging instrumentation used
to analyze the fetal cells. The Company believes that it can utilize its
existing infrastructure, worldwide distribution capabilities and extensive
cytogenetic laboratory relationships to support the introduction of these
prenatal screening products. Furthermore, the Company believes that its new cell
enrichment, identification and image analysis products may have clinical utility
for cancer testing and the prenatal diagnosis of single gene disorders.


GENETIC DISORDERS

  All genetic information in an organism is contained in its chromosomes, made
up of strands of DNA and associated protein molecules.  DNA is comprised of
paired nucleotide bases and genetic information is encoded by the specific order
of the nucleotide bases within units called genes. Genes are organized linearly
along the chromosomes and carry the required information for the synthesis of
the proteins that provide the structural components of cells and tissues, as
well as the enzymes needed for the basic biochemical and physiological functions
of the cells.

  Chromosomal Disorders

  The nuclei of normal human cells (except sperm and egg cells) contain two sets
of 23 different chromosomes, one set provided by each parent. Sperm and egg
cells are formed in a special cell division process called meiosis, and they
each contain only one set of the 23 individual chromosomes. When these cells
unite during fertilization, each contributes its set of 23 chromosomes to the
genetic information for a new human fetus, and the fertilized egg then has the
two sets of 23 chromosomes. Chromosomal disorders may occur when genes or
portions of genes move between chromosomes (chromosomal translocations), when
portions of chromosomes and the genes they contain are missing, or when an
abnormal number of chromosomes are present in the cell. Certain chromosomal
disorders are thought to occur during meiosis when the division of the
chromosomes to form the egg cell or the sperm cell takes place. During this
process the chromosomes may not divide properly resulting in an extra chromosome
being present in the cell, an extra piece of genetic material being attached to
a chromosome, or a piece of chromosome being broken.

  Chromosomes can be seen under a microscope and, when stained with certain
dyes, reveal light and dark bands reflecting regional variations in the DNA of
the cell.  Differences in size and banding pattern allow the chromosomes to be
distinguished from each other or may identify a chromosomal disorder.  The most
common chromosomal disorder, Down Syndrome, also known as trisomy 21, occurs
when there are three copies of chromosome 21 in the human cell.  Syndromes
caused by the most common chromosomal abnormalities may result in mental
retardation, impaired physical development and abnormal sexual development.

  There are approximately four million births in the United States annually.  Of
these, approximately 90% are to women under the age of 35.  The Company
estimates that there are approximately 11 million births in industrialized
countries where prenatal screening and diagnostic testing is routine.
Approximately 2% of newborns have birth defects, approximately 12% of which are
caused by chromosomal genetic disorders.  The risk of bearing a child with a
chromosomal abnormality increases with maternal age and more than doubles from
one in 526 births for mothers of age 20 to more than one in 192 births for
mothers of age 35.


  Single Gene Disorders

  In addition to chromosomal disorders caused by an abnormal number of
chromosomes, single gene disorders may occur when the DNA sequences of
individual genes are altered, resulting in the disruption of the normal balance
or function of essential human proteins.  Single gene disorders are responsible
for many inherited diseases such as cystic fibrosis, sickle cell anemia and Tay-
Sachs disease.

                                       2

 
  Cancer Cytogenetics

  Chromosomal analysis is also performed for clinical research purposes for the
precise characterization of certain types of cancers.  Cancerous cells
frequently demonstrate complex chromosomal abnormalities.  The patterns of these
chromosomal abnormalities may be associated with certain well-defined cancers.
The chromosomal analysis of leukemia and lymphomas, for example, may provide
researchers with supplementary information useful in the staging or
classification of the disease and may also provide useful prognostic indicators.
Similarly, advanced chromosomal analysis may allow a researcher to assess the
sources of new disease in a patient to determine if this is a recurrence of a
previous cancer or an entirely different neoplasm.

PRENATAL TESTING

  Prenatal testing is the process of detecting certain types of chromosomal
disorders in a fetus at an early stage of pregnancy.  Prenatal testing is
currently performed either invasively, by extracting fetal cells and inspecting
the chromosomes within such cells to diagnose specific disorders or non-
invasively, by an analysis of a maternal blood sample.

  The invasive diagnostic procedures yield accurate results on a broad range of
chromosomal disorders because actual fetal cells are obtained and analyzed.
However, these procedures involve the risk of spontaneous miscarriage and other
complications.  Due to the risk of spontaneous miscarriage, invasive diagnostic
procedures are usually recommended only to those women who are age 35 or older
(at which ages the risk of having a child with a chromosomal disorder is greater
than the risk of spontaneous miscarriage due to the procedure) or who have
another specific risk factor for fetal abnormalities.

  Those women younger than 35 are typically screened initially using non-
invasive techniques. For this group, an invasive diagnostic procedure is
generally recommended only to confirm the result of a non-invasive blood test if
such test indicates a heightened risk of a chromosomal disorder.  The blood test
presents no risk to the fetus, but is less accurate since it does not diagnose
chromosomal genetic disorders by direct analysis of fetal cells.  These non-
invasive tests are known to produce relatively high levels of false negative and
false positive test results.  A false negative test result is seen as a failure
to identify a chromosomal disorder when it is actually present, while a false
positive test result occurs when a test result indicates the presence of a
chromosomal disorder that is actually not present.

  Women under the age of 35 have a lower statistical risk of giving birth to an
infant with a chromosomal disorder than do women age 35 or older.  However,
because the majority of all births are among women under the age of 35, the
total number of newborns with chromosomal disorders born to women in this age
group is much higher than that among women age 35 and older. Consequently, women
younger than 35 bear over 75% of all infants with Down Syndrome.


  Invasive Diagnostic Procedures

  Amniocentesis.   Amniocentesis, usually performed between the 14th and 20th
  -------------
weeks of pregnancy, is the most common procedure used to obtain fetal cell
samples for prenatal genetic testing. In an amniocentesis procedure a small
amount of amniotic fluid is withdrawn from the amniotic sac via a long needle
inserted through the mother's abdominal wall.  During the procedure, the
physician typically uses ultrasound to guide the needle in order to minimize
potential harm to the unborn child.  Once the amniotic sample is extracted, it
is forwarded to a cytogenetic laboratory, where the cells are cultured and
deposited on a microscope slide.  The slide is then examined under a microscope
in order to locate and analyze a number of fetal cells in metaphase (undergoing
cell division).  During metaphase, a cell's chromosomes are individually visible
under the microscope.

  Chromosome analysis without the advantage of an automated imaging system is
both tedious and time consuming.  Typically, a laboratory technologist scans the
slide manually to locate cells in metaphase.  Once metaphase cells are found,
they are photographed using a camera attached to the microscope.  This
photograph is then printed and each photographed chromosome is manually cut out
of the photograph, arranged in order and pasted on a sheet to show the two sets
of 23 chromosomes present in the cell. This visual presentation of the
chromosomes is called a karyotype.  Alternatively, laboratories may eliminate
many of these steps by using an automated image 

                                       3

 
analysis system to scan the slides for cells in metaphase, to automatically
classify the chromosomes, to present them on a video display for review and
acceptance and to print final karyotype copies.

  Once the karyotype is completed it is then visually analyzed by a trained
geneticist or genetic counselor to determine if any chromosomal abnormalities
are present.  The processing and analysis of prenatal genetic samples obtained
by amniocentesis generally requires seven to 14 days. A significant portion of
this time is required to culture the fetal cells for use in the visual
karyotype.  In the United States, amniocentesis generally costs more than $1,000
for the procedure itself, tissue culture and karyotypic assessment.  With an
estimated fetal loss rate of approximately 0.5% (one in every 200 procedures)
one normal fetus will be lost by spontaneous miscarriage resulting from
amniocentesis for every one or two fetuses with chromosomal disorders detected
by this procedure for women at age 35.

  Amniocentesis is the most common and accurate of all prenatal screening
procedures. All principal chromosomal disorders can be detected and the Down
Syndrome detection rate is greater than 99%.

  Chorionic Villus Sampling (CVS).   CVS, typically performed between the 9th
  -------------------------------
and 11th weeks of pregnancy, involves the extraction of placental tissue
samples, generally through the pregnant woman's cervix. The tissue, which is
genetically representative of the fetus, is analyzed in the same manner as the
fetal cells obtained by amniocentesis to determine if chromosomal disorders are
present.  CVS is an alternative to amniocentesis and can be performed earlier in
the pregnancy, but poses a risk of miscarriage that is one in every 100 CVS
procedures, double that of amniocentesis.  CVS is generally as accurate as
amniocentesis for detecting chromosomal abnormalities. With an estimated fetal
loss rate of approximately 1% (one in every 100 procedures), two normal fetuses
will be lost by spontaneous miscarriage resulting from CVS for every one or two
fetuses with chromosomal disorders detected by this procedure for women at age
35.  Due to its higher associated risk and procedural complexity CVS is used
less frequently than amniocentesis for prenatal diagnostic purposes.


  Non-invasive Screening Procedures

  In the United States, approximately 2,000,000 pregnant women under the age of
35 are screened each year for chromosomal disorders and other birth defects.  Of
those screened, a majority are tested using the non-invasive serum tests
described below.

  Alpha-Fetoprotein Test.   A common serum prenatal screening test for certain
  ----------------------
chromosomal disorders involves the analysis of alpha-fetoprotein (''AFP'') in
the maternal blood.  This test is performed on a standard blood sample taken
from the mother that is tested for levels of serum AFP.  Down Syndrome and other
similar chromosomal disorders are associated with low levels of AFP. Although
this serum test is relatively accurate in detecting open neural tube defects
(such as spina bifida), studies indicate that the AFP test can detect only 20-
30% of fetuses with Down Syndrome.

  Triple Test.   In recent years, the accuracy of the AFP test has been improved
  -----------
by combining it with additional blood chemistry tests.  This combination is
commonly referred to as ''triple marker screening'' or the ''triple test.''
This test identifies Down Syndrome in 60% of the pregnancies where Down Syndrome
is present.  In 40% of the cases where Down Syndrome is present, this test
inaccurately concludes that Down Syndrome is not present (a false negative
result).  In approximately 5% of the cases, the triple test suggests the
presence of a chromosomal disorder where it is not present (a false positive
result).

  Women whose triple test screening results indicate a heightened risk of
chromosomal disorder are usually recommended to have an amniocentesis procedure
to confirm these results.  Due to the high false positive rate associated with
the triple test, clinically unnecessary amniocentesis procedures are performed
in many cases where no chromosomal disorder exists.  Assuming two million serum
screening tests per year and a 5% false positive rate, as many as 100,000
unnecessary amniocentesis procedures may be performed on women with healthy
fetuses each year in the U.S.  In addition, assuming an average cost of $1,000
per amniocentesis, the unnecessary cost to the health care system associated
with these false positive triple test results could be as high as $100 million
per year.  With an estimated fetal loss rate of 0.5%, approximately 500 normal
fetuses may be lost each year as a direct result of such unnecessary
amniocentesis procedures.

                                       4

 
  Summary

  The most accurate prenatal testing involves direct analysis of fetal cells,
which contain the chromosomes of the fetus.  The only routinely available
procedures to extract fetal cells in order to examine the fetal chromosomes are
invasive and pose risks of injury to the fetus and/or spontaneous miscarriage.
The non-invasive serum screening procedures, which do not pose such risks, are
much less accurate because they do not allow for the direct examination of fetal
chromosomes.  The Company believes that there is a significant need for a
prenatal testing procedure which would allow direct analysis of the fetal cells
without the risks associated with the currently available invasive procedures.

  Fetal blood cells exist in minute quantities in samples of maternal blood. In
contrast to adult red blood cells, many of these fetal red blood cells are
nucleated.  That is, they contain a nucleus with fetal chromosomes.  A number of
companies and research groups are attempting to isolate these fetal blood cells
for testing through a variety of methods, including immunologically-based
separation techniques using monoclonal antibodies, flow cytometry, or magnetic
separation techniques.  Although the feasibility of genetic analysis of fetal
blood cells isolated from maternal blood has been demonstrated, obtaining a
sufficient number of fetal blood cells for analysis has been difficult and must
be adapted further for routine clinical applications.


APPLIED IMAGING'S PRENATAL SCREENING PRODUCTS

  The Company is developing a prenatal screening test to detect chromosomal
abnormalities by identifying fetal blood cells from a routine maternal blood
sample. The Company's proprietary screening technology incorporates:  (i) a
patented hematologically-based procedure to enrich the concentration of fetal
blood cells utilizing the Company's consumable enrichment kit, (ii) a fetal
hemoglobin identification kit, (iii) automated image analysis instrumentation to
identify the fetal blood cells and (iv) the use of third-party DNA probes to
identify certain chromosomal disorders present in fetal blood cells.  This new
approach is designed to improve current prenatal screening procedures by
providing an accurate, timely and cost-effective technique without the risks of
miscarriage or fetal damage associated with invasive prenatal screening
techniques.

  In contrast to immunologically based procedures to isolate fetal blood cells
from maternal blood, the Company is developing a hematologically based procedure
for enriching the concentration of fetal blood cells from maternal blood
samples.  The Company's enrichment process is designed to increase the
concentration of fetal blood cells in a maternal sample approximately 10,000
times.  The fetal cell enriched sample is then harvested and deposited on a
microscope slide.  The fetal hemoglobin in the cell is stained using the
identification kit to facilitate examination through image analysis.  The
Company has developed a semi-automated product to automatically identify fetal
cells on the slide based on adaptations of the image analysis, pattern
recognition, and slide-scanning technologies incorporated in the Company's
current cytogenetic products.

  Once fetal cells are located by the automated scanning system, fluorescent DNA
probes are added that specifically bind to certain DNA sequences within the
fetal cells indicating the presence or absence of chromosomal disorders. DNA
probes can be designed to locate specific chromosomal changes, additions, or
deletions that result in genetic disorders.  The results of the DNA probe
analysis are captured and processed using the Company's automated visualization
technology for the detection, analysis, and documentation of the DNA probe
results.

                                       5

 
  Clinical/Regulatory Matters

  The Company believes that a key aspect of its prenatal screening products is
the ability to enrich and identify fetal blood cells so that they can be
directly analyzed using available DNA probe technology.

  In December 1996, the Company submitted two 510(k) medical device applications
to the FDA.  The first submission is for a product that isolates mononuclear
cells with the use of a gel gradient separation medium.  The product is based on
the Company's patented hematological techniques.  The Company received
notification from the FDA on December 15, 1997 that this product may be marketed
in the US and, as labeled, is exempt from further 510(k) premarket notification
regulatory requirements.  The second submission is for an automated image
analysis instrument, which is a general laboratory tool able to automatically
detect and locate nucleated red blood cells on a microscope slide.  The
instrument presents these cells for operator review, further analysis, and
eventual use in a diagnostic or screening procedure.  The FDA review of this
submission is ongoing.

  In June of 1997, the Company submitted an additional 510(k) notification for
the fetal hemoglobin identification kit. The FDA review of this submission is
also ongoing.

  The DNA probe components of the Company's products will require either FDA
clearance of a 510(k) with a tier III level of review or FDA approval of a PMA.
The Company plans to market its prenatal screening products internationally upon
receipt of required regulatory clearances or approvals.


  Commercialization Strategy

  The Company's prenatal screening techniques under development are currently
expected to be introduced first in Europe and subsequently in the United States
and the Pacific Rim, subject to receipt of required clearances or approvals in
such jurisdictions.

  The technology is being designed to initially screen for chromosomal
abnormalities resulting in conditions such as Down Syndrome and certain sex
chromosome abnormalities such as Turner Syndrome, Klinefelter Syndrome, Triple X
Syndrome and certain other conditions.  These abnormalities account for a vast
majority of the incidence of all birth defects which result from chromosome-
based genetic disorders.  The proprietary prenatal screening products under
development will consist of:  (i) a prepackaged kit to enrich the concentration
of nucleated fetal red blood cells in the maternal blood sample; (ii) a reagent
kit to identify the hemoglobins in fetal cells; (iii) the Company's
instrumentation to automate the identification of fetal blood cells and the
acquisition and presentation of the DNA probe analysis; and (iv) may or may not
include a DNA probe kit that is comprised of DNA probes available from third
parties.

FUTURE APPLICATIONS OF THE PRENATAL SCREENING PRODUCTS

  The Company's prenatal screening products are being designed to accommodate
various chromosome-specific DNA probes, which are currently commercially
available.  The Company believes that its fetal cell identification and
enrichment technology developed for prenatal screening could have future
applications for cancer diagnosis and monitoring via the isolation of tumor
cells from bone marrow or peripheral blood and the genetic analysis of such
cells.  The Company is also developing proprietary uses for its fetal cell
isolation method that may facilitate the early detection of single gene
disorders such as cystic fibrosis, hemophilia, thalassemia, sickle-cell anemia
and Tay-Sachs.  If additional funding is obtained, the Company intends to pursue
these potential additional applications to leverage its proprietary technology.
Because evaluations of future applications are at an early stage, no assurance
can be given when, if ever, the Company's fetal cell identification and
enrichment technology may facilitate the early detection of single gene
disorders or cancers.


CURRENT CYTOGENETIC PRODUCTS

  In the United States, approximately 500,000 total cytogenetic test procedures
are performed annually.  Cytogenetic testing includes prenatal screening for
genetic disorders using amniotic fluid obtained through amniocentesis or fetal
tissue samples obtained through CVS.  Other cytogenetic testing includes tests
for the diagnosis and prognosis of cancerous conditions using bone marrow, blood
and tumor samples.  The Company currently manufactures, markets and sells its
CytoVision family of automated instruments for cytogenetic 

                                       6

 
applications. The Company's primary cytogenetic products are described below.
The Company has sold systems to over 600 sites worldwide in more than 35
countries. The Company's primary cytogenetic products currently sell for prices
ranging from $30,000 to $125,000, depending upon the instrument's capabilities
and final configurations.


  CytoVision Ultima

  The CytoVision Ultima is the Company's most comprehensive system for automated
chromosome analysis.  The Ultima integrates many of the key features of the
Company's earlier products into one system capable of automated microscope slide
scanning, advanced chromosome analysis, fluorescent image processing and
comparative genomic hybridization (CGH) measurements.  The Ultima allows
laboratories to automatically scan slides in either brightfield or fluorescent
modes to locate metaphase cells for chromosome analysis.  This eliminates one of
the most tedious and time-consuming aspects of cytogenetic analysis:  that of
manual slide scanning.  The system accomplishes this in the background while
simultaneously allowing the technologist to process and analyze images
previously identified.  The Company believes that no other commercially
available system for cytogenetic analysis incorporates this same range of
features in one integrated package.


  CytoVision Ultra

  The CytoVision Ultra is a flexible chromosome analysis system that allows
laboratories to customize their imaging system in whatever configuration best
suits their particular workflow requirements.  The Ultra can be designed around
the base Karyotyper system to include satellite workstations, laboratory
director review stations, fluorescent DNA probe analysis modules and a variety
of peripheral equipment, including high-resolution laser and color printers.
The Karyotyper itself consists of computerized image capture and analysis system
incorporating pattern recognition and automated chromosome classification
algorithms.  The system provides automated karyotyping capabilities, automatic
separation of touching or overlapping chromosomes (a common occurrence), a
variety of user-defined image enhancement features, report annotation
capabilities and full screen display options.  This system entirely replaces the
manual processing of photographic images that previously included photographing
individual cells in metaphase, photographic development, the manual "cut-and-
paste" of each chromosome, identifying the individual chromosomes, arranging
them in order and preparation of the final karyotype report.  This manual
process may take 30 minutes to one hour of a technologist's time to process an
individual sample.  The comparable CytoVision process requires only 10 minutes
or less of the same technologist's time. The DNA probe analysis module for the
CytoVision Ultra utilizes the same imaging equipment to detect and analyze DNA
probes that have been applied to cell nuclei.   CytoVision systems equipped with
the DNA probe analysis option enhance images of often-faint fluorescent DNA
probes and provide the operator with a range of optimized analytical tools. The
system may also be upgraded to detect genetic amplifications and deletions in
tumor cells utilizing a research technique known as comparative genomic
hybridization (CGH).


  CytoVision RxFISH and RxFISH DNA Probe Reagents

  The newest system offered by the Company consists of a specialized fluorescent
image analysis option for the CytoVision Ultra that allows laboratories to
process color banded chromosome images developed using the Company's RxFISH
research reagent system.  This system takes advantage of a novel DNA probe
technique for identifying each human chromosome with a unique color bar code
that allows the Company's proprietary image analysis software to rapidly and
accurately identify specific chromosomes, even in cases containing complex or
cryptic rearrangements.  The RxFISH system will be packaged with the CytoVision
Ultra's DNA probe and CGH analysis modules to create an image analysis system
well suited for use in those laboratories specializing in cancer cytogenetics
research studies.

                                       7

 
  All of the products in the CytoVision family are compatible and can be
integrated into a network with common data management protocols.  In addition to
its analysis systems, the Company also sells a number of peripherals including a
range of high quality printers and image capture workstations.  A typical
installation will include a number of interconnected CytoVision systems and
components.


SALES, DISTRIBUTION AND MARKETING

  The Company currently sells its cytogenetic products to government and private
clinical cytogenetic laboratories, hospital laboratories, research institutions,
universities and pharmaceutical companies.  The Company has sold such systems to
over 600 customers in more than 35 countries.  These customers utilize the
Company's cytogenetic products for prenatal genetic screening as well as for
certain cancer research studies. If regulatory clearance or approval is
received, the Company initially plans to sell and distribute its prenatal
screening products directly and through its established worldwide network of
distributors and agents through which it sells and distributes its current
products.

  In North America, the Company sells its cytogenetic products directly to its
customers.  The North American sales team is comprised of eight sales and
application support specialists.  Outside of North America, the Company sells
its products either directly through local agents who are remunerated on a
commission basis or through independent distributors.  The Company manages its
international sales and distribution activities from Applied Imaging
International Ltd., the Company's wholly owned subsidiary located in the United
Kingdom.  The international sales team is comprised of eight sales and
application support individuals, based in the United Kingdom and France.  The
Applied Imaging International Ltd. sales team supports all distributors and
agents upon request. The Company's distributors are located in Australia, Hong
Kong, Japan, Italy and South Korea.  In addition, the Company has agents selling
its cytogenetic products in a number of other countries primarily within Europe,
the Middle East and the Pacific Rim.

  Because the Company's products are technically sophisticated, the Company's
sales staff is supported by scientifically qualified and highly trained product
specialists.  The Company offers an annual maintenance program to its customers
through its own support organization.  The Company's marketing activities
include telemarketing, product advertising and participation in trade shows and
product seminars.



MANUFACTURING

  The Company assembles and tests components and subassemblies made by outside
vendors to the Company's specifications and manufactures only when it believes
significant value can be added.  The Company's current products are assembled
from a combination of (i) commodity technology components such as computers and
monitors, (ii) custom subassemblies, such as automated filter wheels, and (iii)
operating systems and application software.  Any disruption or delay in the
supply of components or custom subassemblies will have a material adverse effect
on the Company. While the Company typically uses components and subassemblies
that are available from alternate sources, any unanticipated interruption of the
supply of these components or subassemblies could require the Company to
redesign its products.

  The Company orders components and subassemblies to forecast and assembles
specific configurations on receipt of firm orders.  The Company's research,
investigational and clinical products are subject to regulation by the FDA and
all products are subject to regulation by the U.S. Department of Commerce export
controls, primarily as they relate to the associated computers and peripherals.
The Company has experienced no material difficulties in obtaining necessary
export licenses to date.

  The Company plans to initially subcontract third parties to manufacture the
consumable enrichment kit component of its fetal cell screening technology under
development and may ultimately manufacture such components on its own.  For
clinical trials, the Company will purchase the consumable enrichment kit from a
third party contracted to manufacture the kit.  The Company has no experience
manufacturing such components.  The Company may encounter difficulties in
scaling up production of the consumable component of its fetal cell screening

                                       8

 
technology under development or in hiring and training additional personnel to
manufacture its consumable enrichment kit products in commercial quantities.

  Under current law, if the Company manufactures finished devices in the United
States, it will be required to comply with the FDA's and the State of
California's current GMP regulations.  In addition, the FDA and/or the
California authorities will inspect the Company's manufacturing facilities on a
regular basis to determine such compliance. Failure to comply with applicable
FDA or other regulatory requirements can result in fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspensions of
production and criminal prosecutions.



RESEARCH AND DEVELOPMENT

  The Company's research and development efforts include various research,
product development, clinical evaluation and testing, quality assurance,
regulatory and process development activities.  The current focus of the
Company's research and development efforts is the completion of the development
of the Company's prenatal screening products and particularly the initiation of
clinical trials.  In addition, the Company is analyzing different methods for
facilitating image analysis of fetal cell enriched samples.  The Company's
future research and development efforts are expected to include development of
additional applications of the Company's current cytogenetic products and
additional applications of the fetal cell screening technology under
development.  These potential additional applications may include the use of
technology developed for fetal cell analysis for the characterization and
monitoring of certain cancers and the diagnosis of certain single gene
disorders.  Development of these applications would require substantial
additional funds and will be subject to technological, clinical, regulatory and
other risks associated with new medical technologies.  There can be no assurance
that the Company will develop its prenatal screening products or any other
future applications of such technology.


  Research and development expenses were approximately $7.4 million, $3.7
million and $2.9 million in 1997, 1996, and 1995, respectively.

PATENTS AND PROPRIETARY RIGHTS

  The Company actively seeks, when appropriate, protection for its products and
proprietary information by means of United States and foreign patents and
trademarks.  The Company has one issued United States patent relating to its
CytoVision System and has corresponding issued patents in certain European
countries.  In addition, the Company has three United States patents concerning
its technology for enriching the concentration of fetal nucleated red blood
cells from maternal blood samples.  Corresponding applications were filed
through the Patent Cooperation Treaty and preserve for the Company the right to
file applications in various countries.  The Company relies upon trade secrets,
know-how and contractual arrangements to protect certain of its proprietary
information and products.

  The fields of life science instrumentation and genetic screening processes are
covered by many issued patents and patent applications.  The Company is not
currently aware of any patents which it may be infringing; however, patent
applications in the United States remain confidential until a patent is issued,
and, therefore, the Company's products could infringe patents to be issued in
the future.  If the Company's technology is determined to use products,
processes or other subject matter that is claimed under other existing U.S. or
foreign patents, or if other patents claiming subject matter utilized by the
Company are issued, such companies may bring infringement actions against the
Company.  The Company may be required to obtain licenses to patents or
proprietary rights of others.  There can be no assurance that any such license
would be made available or, if available, would be available on commercially
acceptable terms.  Failure to obtain a required license could prevent the
Company from commercializing its products resulting in a material adverse affect
on the Company's business, financial condition and results of operations.

  The Company generally enters into confidentiality agreements with its
employees and consultants designed to both protect the Company's confidential
information and prevent the disclosure of confidential information of prior
employers and other parties.  There can, however, be no assurance that the
Company's trade secrets or proprietary technology will not become known or be
independently developed by competitors in such a manner that the 

                                       9

 
Company has no practical recourse. Certain employees of and consultants to the
Company are subject to the terms of confidentiality agreements with respect to
proprietary information of their former employers. The failure of these persons
to comply with the terms of their agreements could result in assertion of claims
against the Company and such persons which, if successful, might restrict their
roles within the Company.

  In 1996, the Company entered into a collaborative research agreement with
Leiden University (''Leiden'') in the field of enrichment, isolation and
analysis of fetal cells derived from maternal blood.  Under the terms of the
agreement, the Company has sole ownership of any jointly developed inventions
and has an exclusive license to any issued patents owned solely by Leiden.  The
royalty rate for the exclusive license shall not be more than 5% of associated
sales.  In 1996, the Company entered into an agreement to acquire an invention
for the use of certain antibodies in the identification of fetal cells from
maternal blood.  The agreement provides for the Company to pay certain expenses
associated with obtaining a U.S. patent for the invention and a royalty of not
more than 2% of net sales.

  In October, 1997, the Company entered into an exclusive worldwide licensing
agreement with the University of Cambridge for the commercialization of DNA-
probe technology recently developed by Cambridge researchers.  The technology,
known as Cross Species Color Banding, will be utilized by the Company in an
effort to develop a range of research test reagents to detect and analyze
chromosomal aberrations in various species.  The Company expects to develop an
initial test kit for color banding analysis of human chromosomes that will be
made available for research use.

  The Company also relies upon trademarks to protect certain of its products,
and holds a United States trademark registration for the mark ''CYTOSCAN.''
Registration for this mark and the mark ''CYTOVISION'' are held by the Company
in certain foreign jurisdictions.

  The Company also has certain other trademark rights in the United States and
other foreign countries.  It is possible that third parties may allege superior
rights to one or more of the Company's trademarks, or close variations, for
those countries in which the Company is presently conducting business or may do
so in the future.  The Company's rights to use and register its marks in a given
jurisdiction may depend on its rights relative to a third party's rights as
governed by the laws of the pertinent country.  Factors utilized to determine
the relevant rights between parties include priority of the use or registration
of the mark, how close the respective marks are in appearance, sound and/or
meaning, as well as the goods to which they are applied.  It is possible that
the Company could be prevented from using or registering its trademarks in
certain countries due to a superior third party right.


COMPETITION

  The market for the Company's current cytogenetic products is highly
competitive.  The Company believes that its primary competitors in this market
include Perceptive Scientific Instruments, Inc. (a subsidiary of International
Remote Imaging Systems, Inc.), and Vysis Inc.  The principal competitive factors
in this market are product features offered, ease of use, clarity of output,
customer service capabilities, price and installed base.  The Company believes
it competes favorably with regard to these factors.

  With respect to its prenatal screening products under development, the Company
is aware of other companies that are in the process of developing genetic
screening products based on competing technologies designed to specifically
isolate fetal blood cells in maternal blood samples.  Certain of these companies
have greater research and development, marketing and financial resources than
the Company.  These companies include Genzyme Inc. and Bioseparations Inc.
Genzyme, through its Integrated Genetics subsidiary, specializes in providing
genetic testing services and Bioseparations is a research-stage company focusing
on fetal cell isolation methods.

  The medical diagnostic and biotechnology industries are subject to intense
competition.  The Company's fetal cell screening technology, if commercially
marketed, will also be subject to intense competition from existing procedures
such as the triple test.  There can be no assurance that the Company's fetal
cell screening technology under development will replace any existing
procedures.  The Company expects the principal competitive factors in the fetal
cell screening market to be risk to the fetus, reliability, accuracy, range of
disorders detected, cost savings to health care systems and payers and the price
of testing.

                                       10

 
  Certain of the Company's competitors have greater financial and technical
resources and production and marketing capabilities than the Company.  There can
be no assurance that these competitors will not succeed in developing
technologies and products that are more effective, easier to use or less
expensive than those which are currently offered or being developed by the
Company or that would render the Company's technology and products obsolete and
noncompetitive.  In addition, some of the Company's competitors have
significantly greater experience than the Company in conducting clinical
investigations of new diagnostic products and in obtaining FDA and other
regulatory clearances and approvals of products.  Accordingly, the Company's
competitors may succeed in developing and obtaining regulatory approvals for
such products more rapidly than the Company.

GOVERNMENT REGULATION

  The testing, manufacturing, labeling, distribution, sales, and marketing of
the Company's products are subject to government regulation in the United States
and in other countries.  The Company believes that its future success will be
significantly dependent upon commercial sales of its prenatal screening products
under development. The Company will not be able to market these products for
commercial use in the United States until the Company obtains clearance or
approval from the FDA and will not be able to market such products overseas
until it meets the safety and quality regulations of each foreign jurisdiction
in which the Company seeks to sell such products.  In the United States, the
Company's products are also subject to regulation by state authorities.  The
State of California's requirements in this area require registration with the
state and compliance with state GMP regulations.

  Noncompliance with applicable FDA requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, distribution, sales, and marketing,
refusal of the government to grant approval of a pre-market approval application
(''PMA'') or clearance of a 510(k), withdrawal of marketing approvals or
clearances, a recommendation by the FDA that the manufacturer or distributor not
be permitted to enter into government contracts, and criminal prosecution.  In
certain circumstances, the FDA also has the authority to order the manufacturer
or distributor of a device to repair, replace or refund the cost of the device.
Failure to comply with regulatory requirements in the United States or abroad
could have a material adverse effect on the Company's business, financial
condition, and results of operations.

  Before a new medical device can be introduced into the market, the
manufacturer must obtain FDA clearance of a 510(k) or approval of a PMA, unless
the device is exempt from the requirement of such clearance or approval.  A
510(k) clearance will be granted if the submitted information establishes that
the device is substantially equivalent to a legally marketed Class I or II
medical device or to a legally marketed Class III device that does not itself
require an approved PMA prior to marketing (''predicate device'').  A 510(k)
must contain information to support a claim of substantial equivalence, which
may include laboratory test results or the results of clinical studies of the
device in humans.  Commercial distribution of a device for which a 510(k) is
required may begin only after the FDA issues a finding that the device is
''substantially equivalent'' to a predicate device.  A 510(k) for a device
incorporating new technology may be given a tier III level of review, which
requires the submission of data from human clinical trials.  The FDA is required
to review 510(k) submissions within 90 days, but it generally takes from five to
twelve months from the date of submission to obtain 510(k) clearance from the
FDA; it may take longer and 510(k) clearance may never be obtained.  The FDA may
determine that a device is not ''substantially equivalent'' to a predicate
device, or that additional information is needed before a substantial
equivalence determination can be made.

  If a device is not found by the FDA to be substantially equivalent to a
predicate device, the Company may be required to submit a PMA application.  A
PMA must be supported by valid scientific evidence that typically includes data
from preclinical testing and human clinical trials to demonstrate the safety and
effectiveness of the device.  Upon submission of a PMA, the FDA makes a
threshold determination regarding whether the application is sufficiently
complete to permit filing for a substantive review.  An FDA review of a PMA
generally takes one to two years from the date the PMA is accepted for filing,
but may take significantly longer if the FDA requires the Company to file any
major amendment to the PMA.  The review time is often significantly extended by
the FDA's asking for additional information.  An Advisory Panel, primarily
composed of clinicians, is convened to review and evaluate the application and
provide recommendations to the FDA regarding whether the PMA should be approved.
The FDA is not bound by the recommendations of the Advisory Panel. The FDA also
conducts an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with GMP requirements.

                                       11

 
  The Company submitted a protocol for clinical trials of the DNA probe product
to the FDA in November of 1996.  The Company intends to initiate a multisite,
United States and international, clinical trial of the DNA probe component of
its prenatal testing technology to detect chromosomal disorders in isolated
fetal cells.  There can be no assurance regarding the timing or nature of the
FDA response regarding the DNA probe related protocol or the timing for the
commencement of clinical trials.  There can be no assurance that 510(k)
clearance for any of the prenatal screening products under development or any
other future product or modification of an existing product will be granted or
that the clearance process will not be unduly lengthy and subjected to a
thorough FDA review.  The FDA has stated that the DNA probe product will require
at least a 510(k) tier III level of review.  Further, in its draft guidance for
in vitro diagnostic devices utilizing cytogenetic in situ hybridization
technology for the detection of genetic mutations, the FDA states that when such
devices are intended for use as a ''stand-alone'' for test reporting based on
interphase analysis, they will require a PMA that must be reviewed and approved
by the FDA prior to sales, distribution and marketing of these products in the
United States.  The PMA process is typically more complex, expensive and time
consuming than the 510(k) process.  While the Company has made determinations
regarding the appropriate form of approval, if any, required for its products,
there can be no assurance that such determinations are correct, that the FDA
will concur with such determinations or that such determinations may not be
altered due to new interpretations or new data that may become available or
changes in the FDA's policies.

  Export sales of investigational devices that are subject to PMA or
investigational device exemption application requirements and have not received
FDA marketing approval generally may be subject to FDA export permit
requirements depending upon, among other things, the purpose of the export
(investigational or commercial), the country to which the device is intended for
export, and on whether the device has valid marketing authorization in a country
listed in the FDA Export Reform and Enhancement Act of 1996.  In order to obtain
such a permit, when one is required, the Company must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the device has the approval of the
country.  In addition, the FDA must find that exportation of the device is not
contrary to the public health and safety of the country in order for the Company
to obtain the permit.

  In addition to domestic regulation of medical devices, the Company's current
products and its products under development are subject to corresponding
regulations governing safety processes, manufacturing processes and quality in
foreign jurisdictions in which it operates or such products are sold.  The sale
of the fetal cell screening products under development may be materially
affected by the policies of regulatory bodies or the domestic politics of the
countries involved.  There can be no assurance that an early prenatal screening
test for genetic disorders will not be prohibited or restricted in some
jurisdictions.  In addition, FDA export permits may be required for shipment of
the Company's fetal cell screening products under development to certain foreign
countries.  Failure to comply with applicable regulatory requirements can, among
other consequences, result in fines, injunctions, civil penalties, suspensions
or loss of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution.  In addition, future governmental
regulations may be established that could prevent or delay regulatory approval
of the Company's products.  The regulation of medical devices in a number of
such jurisdictions continues to develop and there can be no assurance that new
laws or regulations will not have a material adverse effect on the Company's
business.  The European Community and its member countries currently are
imposing more substantial regulation on in vitro diagnostic devices and
equipment-like medical devices, and such regulation may affect the Company's
current products and products under development.

  Delays in receipt of clearances or approvals to market its products, failure
to receive these clearances or approvals, the loss of previously received
clearances or approvals or the determination that 510(k) clearance, pre-market
approval or other approval is required for a product being marketed without such
clearance or approval could have a material adverse effect on the Company's
business, financial condition and results of operations.

  In addition, laboratories who purchase the Company's current products and/or
the prenatal screening products under development could be subject to the
Clinical Laboratory Improvement Amendments of 1988 (''CLIA''), which are
intended to ensure the quality and reliability of medical testing conducted in
laboratories in the United States.  The Company's products should comply with
CLIA regulations or the Company's ability to market its products could be
negatively affected.

                                       12

 
  Marketed devices are subject to pervasive and continuing regulatory oversight
by the FDA and other agencies, including record-keeping requirements and
reporting of adverse experiences with the use of the device.  Device
manufacturers are required to register their establishments and list their
devices with the FDA and certain state agencies.  The Federal Food, Drug and
Cosmetic Act and certain state laws require that medical devices be manufactured
in accordance with GMP regulations. Manufacturing facilities are subject to
periodic inspection by the FDA and certain state agencies on a periodic basis to
monitor compliance with GMP and other requirements.  If violations of the
applicable regulations are noted during such inspections of manufacturing
facilities, the Company can be prohibited from conducting further manufacturing,
distribution and sale of the devices until the violations are cured.

  The Company is also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to safe working conditions and good
laboratory practices.  The extent of government regulation that might result
from any future legislation or administrative action cannot be accurately
predicted.  Failure to comply with any federal or state regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.

THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM

  In the United States, the Company's products are purchased primarily by
medical institutions which then bill various third-party payors, such as
Medicare, Medicaid, other government programs and private insurance plans
("Third-Party Payors") for the health care services provided to their patients.
Third-Party Payors may deny reimbursement if they determine that the device used
in a treatment was unnecessary, inappropriate, experimental or investigational,
used for a non-approved indication, or not cost-effective and typically do not
reimburse for devices used for research and investigational purposes.
Accordingly, physicians must determine that the new clinical benefits of genetic
screening procedures justify the additional cost. The market for the Company's
current cytogenetic products could be adversely affected by changes in
governmental and private third-party payors' policies and the market for the
Company's fetal cell screening technology under development could be materially
adversely effected by the failure of governmental and Third-Party Payors
adopting policies to reimburse health care providers for the use of the
Company's fetal cell screening technology under development.  The unavailability
of third-party coverage or the inadequacy of the reimbursement for medical
procedures using the Company's products would adversely affect the Company's
business, financial condition and results of operations.  In both the United
States and internationally, Third-Party Payors are increasingly challenging the
prices charged for medical products and services.  There can be no assurance
that reimbursement for the procedures using the Company's products will be
available or, if currently available, will continue to be available, or that
future reimbursement policies of payors will not adversely affect the Company's
ability to sell its products on a profitable basis.  In addition, there can be
no assurance that third-party reimbursement will be available for diagnostic
procedures based on the Company's prenatal screening products under development.

  The levels of revenues and profitability of medical device companies may be
affected by the continuing efforts of governmental and Third-Party Payors to
contain or reduce the costs of health care through various means.  In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement government regulation of
health care costs.  It is uncertain what legislative proposals will be adopted
or what actions federal, state or private payers for health care goods and
services may take in response to any health care reform proposals or
legislation.  The Company cannot predict the effect health care reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company's business, financial condition
and results of operations.  Further, to the extent that such proposals or
reforms have a material adverse effect on the business, financial condition and
profitability of the clinical and research laboratories, hospitals and other
institutions that comprise the Company's customer base, the Company's business,
financial condition and results of operations could be adversely affected.

                                       13

 
PRODUCT LIABILITY AND INSURANCE

  The Company's business may involve the risk of product liability claims,
including those relating to inaccurate results from its screening products.
Although the Company has not experienced any product liability claims to date,
any such claims could have a material adverse impact on the Company.  The
Company maintains product liability insurance at coverage levels which it deems
commercially reasonable; however, there can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially acceptable terms,
or at all.  The Company intends to evaluate, depending on the circumstances that
exist at the time, whether or not to obtain any additional product liability
insurance coverage prior to the time that the Company engages in any extensive
marketing of its fetal cell screening technology under development.  Even if the
Company obtains additional product liability insurance, there can be no
assurance that it would prove adequate or that a product liability claim,
insured or uninsured, would not have a material adverse effect on the Company's
business, financial condition and results of operations.  Even if a product
liability claim is not successful, the time and expense of defending against
such a claim may adversely affect the Company's business, financial condition
and results of operations.

EMPLOYEES

  As of December 31, 1997, the Company had 107 employees, of whom 46 were
involved in research and development, 9 in manufacturing and manufacturing
engineering, 37 in sales, marketing and customer service and 15 in finance and
administration.  As of December 31, 1997, 43 of the employees were based in the
United Kingdom, 61 in the United States, 1 in Israel, and 2 in France.  A total
of 12 employees hold Ph.Ds, and 2 employees are M.D.'s.  The Company's employees
include a number of professional cytogeneticists who support and sell its
product range.  The Company believes its relationship with its employees to be
good.

ADDITIONAL RISK FACTORS


PRENATAL SCREENING PRODUCTS IN EARLY STAGE OF DEVELOPMENT; NO ASSURANCE OF
SUCCESSFUL DEVELOPMENT OR COMMERCIALIZATION

  The Company's prenatal screening products are in an early stage of development
and testing.  The isolation, identification, enrichment and analysis of fetal
cells from a maternal blood sample is difficult and poses a significant
technical challenge due to their rarity in maternal blood.  The Company has not
yet determined how many fetal cells, if any, can be routinely obtained using its
process.  In addition, fetal cells that circulate in maternal blood are not yet
completely understood in terms of their variety and characteristics, such as
longevity in maternal blood and fragility when exposed to various processes to
enrich their concentration in a maternal blood sample.  The Company has, and
continues to, refine its processes and test reformulated enrichment media to
determine if concentrations of fetal cells can be increased, but there can be no
assurance that these efforts will prove successful.  In addition, there can be
no assurance that the Company's prenatal screening products will be able to
detect fetal cells in amounts sufficient to allow for the detection and analysis
of chromosomal abnormalities.  There can be no assurance that the Company's
prenatal screening products will be able to effectively and accurately detect
Down Syndrome or other chromosomal abnormalities.  The development and potential
commercialization of the Company's prenatal screening products will require
significant research and development, substantial investment and clinical
testing and regulatory clearances or approvals.  The Company plans to continue
to conduct preclinical testing in order to analyze the feasibility of its
prenatal screening products.  Such efforts may disclose significant technical
obstacles that need to be overcome prior to pursuing clinical trials and seeking
necessary regulatory approvals. Such obstacles could have the effect of delaying
or preventing the successful development of the Company's prenatal screening
products.  There can be no assurance that the Company will be able to develop
this technology into reliable and effective prenatal screening products, that
required regulatory clearances or approvals for commercialization will be
obtained in a timely manner, or at all, or that the Company's prenatal screening
products or other products under development, if introduced commercially, will
be successful.  If the Company is unable to successfully develop and market its
prenatal screening products, the Company's business, financial condition and
results of operations would be materially and adversely affected.

                                       14

 
LACK OF CLINICAL DATA

  The Company has conducted no clinical trials of its prenatal screening
products pursuant to FDA reviewed protocols.  There can be no assurance that the
Company will commence such clinical testing, or once commenced, that such
testing can be completed successfully within the Company's expected time frame
and budget, if at all, or that the Company's products will prove to be reliable
and effective in clinical trials.  If clinical trials are initiated, such trials
may disclose significant technical obstacles having the effect of delaying or
preventing the development, testing, regulatory approval and commercialization
of the Company's prenatal screening products.  There can be no assurance that
the results of such clinical trials will be consistent with the Company's
limited preclinical results to date or would be sufficient to obtain regulatory
clearance or approval or clinical acceptance.  If the Company is unable to
initiate and conclude successfully clinical trials of its prenatal screening
products, the Company's business, financial condition and results of operations
would be materially and adversely affected.


NO ASSURANCE OF CLINICAL ACCEPTANCE

  The isolation of fetal cells from maternal blood is a new and novel
development.  The clinical acceptance of the Company's prenatal screening
products will depend upon its acceptance by the medical community and third-
party payors as clinically useful, reliable, accurate, and cost-effective
compared to existing and future procedures.  Clinical acceptance will depend on
numerous factors, including the establishment of the product's ability to
isolate sufficient numbers of fetal cells during the early stages of pregnancy,
to adequately enrich the concentration of nucleated fetal cells, and to reliably
analyze and detect the presence of chromosomal abnormalities.  Clinical
acceptance will also depend on the receipt of regulatory clearances in the
United States and internationally, the availability of third-party reimbursement
and the Company's ability to adequately train laboratory technicians and
cytogeneticists on how to use the prenatal screening products.  In addition,
there can be no assurance that the Company's prenatal screening products will be
a preferable alternative to existing procedures such as the maternal AFP test or
the triple test which detect neural tube defects in addition to chromosomal
abnormalities, or that the prenatal screening products will not be rendered
obsolete or noncompetitive by products under development by other companies.
The Company's products are intended to initially screen for Down Syndrome and
may not compete favorably with widely accepted methodologies such as
amniocentesis or CVS that are highly accurate and diagnose a broader range of
abnormalities from one sample of fetal cells.  Patient acceptance of the
Company's prenatal testing products will depend in part upon physician
recommendations as well as other factors, including the effectiveness and
reliability of the procedure as compared to amniocentesis, CVS and serum marker
procedures.  Even if the Company's prenatal screening products are clinically
adopted, physicians may elect not to recommend the procedure unless acceptable
reimbursement from health care payors is available.  There can be no assurance
that the Company's prenatal screening products under development will be
accepted by the medical community or that market demand for such products will
be sufficient to allow the Company to achieve profitable operations.  Failure of
the Company's prenatal screening procedure, for whatever reason, to achieve
significant clinical adoption or failure of the Company's products to achieve
any significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.


ACCUMULATED DEFICIT; FUTURE LOSSES

  From its inception in July 1986 through the end of 1997, the Company has
generated an accumulated deficit of approximately $19.5 million.  The Company
expects its operating losses to continue to increase as it continues its efforts
to develop and test its prenatal screening products.  There can be no assurance
that its prenatal screening products under development will be commercially
marketed or, if commercially marketed, that the Company will ever receive
sufficient revenue to achieve profitability and failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.

                                       15

 
QUARTERLY FLUCTUATIONS

  The Company has experienced and expects to continue to experience significant
fluctuations in its quarterly operating results.  Factors which may have an
influence on the Company's operating results in a particular quarter include (i)
demand for the Company's products, new product introductions by the Company or
its competitors or transitions to new products; (ii) the results of preclinical
or planned clinical trials and, if ever received, the timing of regulatory and
third-party reimbursement approvals; (iii) the timing of orders and shipments;
(iv) the mix of sales between distributors and the Company's direct sales force;
(iv) competition, including pricing pressures; (v) the timing and amount of
research and development expenses, including clinical trial-related
expenditures; (vi) seasonal factors; (vii) foreign currency fluctuation; and
(viii) the delay between incurrence of expenses to develop new products,
including related marketing and service capabilities, and realization of
benefits from such efforts.  The Company typically has experienced increased
sales in its first and fourth quarter.  The Company believes this pattern of
fluctuating revenues reflects the budgetary spending practices of the Company's
customer base which consists primarily of public and private cytogenetic
laboratories, research organizations and hospitals operating on annual budgets.
There can be no assurance that this trend will continue.  In addition, 
currency devaluations and slower economic growth in Asia are expected to 
decrease demand for the Company's products in Asian markets.  Due to all the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.


ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE

  The Company has expended and will continue to expend substantial funds for
research and development, preclinical testing, planned clinical investigations,
capital expenditures, and manufacturing and marketing of its products.  The
timing and amount of spending of such capital resources cannot be accurately
determined at this time and will depend upon several factors, including the
progress of its research and development efforts and planned clinical
investigations, competing technological and market developments,
commercialization of products currently under development, and market acceptance
and demand for the Company's products.  To the extent required, the Company may
seek to obtain additional funds through equity or debt financing, collaborative
or other arrangements with other companies and from other sources.  If
additional funds are raised by issuing equity securities, further dilution to
stockholders could occur.  There can be no assurance that additional financing
will be available when needed or on terms acceptable to the Company.  If
adequate funds are not available, the Company could be required to delay
development or commercialization of certain of its products, to license to third
parties the rights to commercialize certain products or technologies that the
Company would otherwise seek to commercialize for itself, or to reduce the
marketing, customer support or other resources devoted to certain of its
products each of which could have a material adverse effect on the Company's
business, financial condition and results of operations.


DEPENDENCE ON PRENATAL SCREENING PRODUCTS; RAPID TECHNOLOGICAL CHANGE AND RISK
OF TECHNOLOGICAL OBSOLESCENCE

  The Company is dependent on the successful development and commercialization
of the Company's prenatal screening products.  Unfavorable preclinical or
clinical results, failure to obtain regulatory clearances or approvals in a
timely manner, or at all, or failure to gain widespread market acceptance for
the products would have a material adverse effect on the Company's business,
financial condition and results of operations.

  The medical device industry, particularly the prenatal testing, diagnostic,
and screening markets, is characterized by rapid and significant technological
change.  The sale of the Company's current products is largely dependent upon
the continued use of prenatal testing methodologies that require the location of
fetal cells in metaphase and the karyotyping of chromosomes identified in the
metaphase cells.  In addition, the Company's current products require a testing
laboratory to make a large one-time investment, and the availability of less
expensive automated cytogenetic equipment could have a material adverse effect
on the Company's business financial condition, and results of operations.  The
Company's future success will depend in large part on the Company's ability to
continue to respond to such changes. There can be no assurance that the Company
will be able to respond to such changes or that new or improved competing
products will not be developed that render the 

                                       16

 
Company's products obsolete. Product research and development will require
substantial expenditures and will be subject to inherent risks, and there can be
no assurance that the Company will be successful in developing products that
have the characteristics necessary to screen or diagnose particular indications
or that any new product introduced will receive regulatory clearance or approval
or will be successfully commercialized.


UNCERTAINTY OF FDA OR OTHER REGULATORY CLEARANCES OR APPROVALS

  The testing, manufacturing, labeling, distribution, sale, and marketing, of
the Company's products are subject to government regulation in the United States
and other countries.  The Company's future success will be significantly
dependent upon commercial sales of its prenatal screening products under
development.  The Company will not be able to market these prenatal screening
products for commercial use in the United States until the Company obtains
clearance or approval from the United States Food and Drug Administration
(''FDA'') for each device and will not be able to market such products overseas
until it meets the safety and quality regulations of each foreign jurisdiction
in which the Company seeks to sell such products.  Noncompliance with applicable
FDA requirements can result in severe administrative, civil and criminal
sanctions.

  The Company's Cytoscan products were marketed until 1994 in the United States
pursuant to pre-market notifications to the FDA under Section 510(k) of the
Federal Food, Drug and Cosmetic Act (''510(k)'').  A 510(k) pre-market
notification must be supported by appropriate data establishing, to the
satisfaction of the FDA, that a newly developed device is ''substantially
equivalent'' to a legally marketed device that does not itself require FDA
approval of a PMA. The Company's CytoVision product is the current model of the
Cytoscan product, marketed pursuant to the original 510(k) filing.

  The Company has applied for three separate 510(k) clearances for the
enrichment product, automated scanning product and the Fetal Hemoglobin
Identification Kit.  The Company has been notified by the FDA that the
enrichment product may be marketed in the U.S.  The DNA probe product will
require either FDA clearance of a 510(k) with a tier III level of review or a
PMA.

  The Company submitted a protocol for clinical trials of the DNA probe product
to the FDA in November of 1996.  The Company intends to initiate a multisite,
U.S. and international, clinical trial of the DNA probe product to detect
chromosomal disorders in isolated fetal cells during 1998, based upon the review
of the protocol by the FDA. There can be no assurance regarding the timing or
nature of the FDA response regarding the DNA probe related protocol or the
timing for the commencement of clinical trials.  There can be no assurance that
510(k) clearance for any of the Company's products under development or any
other future product or modification of an existing product will be granted or
that the clearance process will not be unduly lengthy and subjected to a
thorough FDA review.  The FDA has stated that the DNA probe product will require
at least a 510(k) tier III level of review.  Further, in its draft guidance for
in vitro diagnostic devices utilizing cytogenetic in situ hybridization
technology for the detection of genetic mutations, the FDA states that when such
devices are intended for use as a ''stand-alone'' for test reporting based on
interphase analysis, they will require a PMA that must be reviewed and approved
by the FDA prior to sales, distribution and marketing of these products in the
United States.

  The regulation of medical devices continues to develop and there can be no
assurance that new laws or regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Delays in receipt of clearance or approvals to market its products, failure to
receive these clearances or approvals, the loss of previously received
clearances or approvals, the determination that 510(k) clearance, pre-market
approval or other approval is required for a product being marketed without such
clearance or approval, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.

                                       17

 
NEED TO COMPLY WITH INTERNATIONAL GOVERNMENT REGULATION

  The regulatory review process varies from country to country.  Currently, the
Company's products are subject to pre-market approval in several of the
countries that are members of the European Union (''EU'') and subject to other
regulatory requirements in those and other countries.  In addition, the
regulation of in vitro diagnostic devices (''IVDs'') and other medical devices
continues to change.  The Company may rely, in some circumstances, on its
international distributors for compliance with regulatory requirements in those
countries where the Company intends to use distributors.  Any enforcement action
by regulatory authorities with respect to regulatory noncompliance may have a
material adverse effect on the Company's business, financial condition and
results of operations.

  The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA clearance and the requirements may
differ.  In addition, there may be foreign regulatory barriers other than
approval for sale.

  The Company plans to bring its instruments, when required, into compliance
with the European Parliament's Electromagnetic Compatibility Directive
(89/336/EEC) (the ''ECD'') and to be entitled to apply the CE mark, with respect
to the ECD, to its instruments.  The European Parliament has made a distinction
between Medical Devices (''MDs'') and IVDs.  The Company's instruments are not
now subject to the requirements or advantages of the Medical Device Directive
(93/42/EEC).  There can be no assurance, however, that some or all of the
Company's products will not be redefined as M.D.'s and made subject to this
Directive by the EU or its member states, which may have a material adverse
effect on the Company's business, financial condition, and results of
operations. There can be no assurance, moreover, that member states, or any
other European country, will not adopt other statutes or regulations that
require approval to sale the Company products, or that will otherwise have a
material adverse effect on the Company's business, financial condition, or
results of operations.


DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT

  The Company relies on trade secret protection and on its unpatented
proprietary know-how in the development and manufacturing of its products.
There can be no assurance that the Company's trade secrets or proprietary
technology will not become known or be independently developed by competitors in
such a manner that the Company has no practical recourse.  Nor can there be any
assurance that others will not develop or acquire equivalent expertise or
develop products that render the Company's current or future products
noncompetitive or obsolete. There can be no assurance that the claims allowed
under its patents will be sufficiently broad to protect what the Company
believes to be its proprietary rights. In addition, there can be no assurance
that issued patents will not be disallowed or circumvented by competitors, or
that the rights granted thereunder will provide competitive advantages to the
Company.  Companies have filed applications for, or have been issued patents
relating to, products or processes that may be competitive with certain of the
Company's products or processes.  The Company is unable to predict how the
courts would resolve issues relating to the validity and scope of such patents.

  The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.  No
assurance can be given that any issued patent or patents based on pending patent
applications or any future patent application will exclude competitors, that any
of the Company's patents in which it has licensed rights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held or licensed by the Company.
Furthermore, no assurance can be given that others have not developed or will
not develop similar products, duplicate any of the Company's products or design
around any patents issued to or licensed by the Company or that may be issued in
the future to the Company.  Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's pending patent applications, nor can the Company be certain that it
will not infringe any patents that may issue to others on such applications.

                                       18

 
  In addition, patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications.  The Company has not conducted an extensive search
of patents issued to other companies, research or academic institutions, or
others, and no assurances can be given that such patents do not exist, have not
been filed, or could not be filed or issued, which contain claims relating to
the Company's technology, products or processes.  Patents issued and patent
applications filed in the United States or internationally relating to medical
devices are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company.  There are pending
applications, which if issued with claims in their present form, might provide
proprietary rights to third parties relating to products or processes used or
proposed to be used by the Company. The Company may be required to obtain
licenses to patents or proprietary rights of others.

  The medical device industry in general, and the industry segment that includes
products for prenatal diagnostic screening in particular, have been
characterized by substantial competition.  Litigation regarding patent and other
intellectual property rights, whether with or without merit, could be time
consuming and expensive to respond to and could divert the Company's technical
and management personnel.  The Company may be involved in litigation to defend
against claims of infringement by the Company, to enforce patents issued to the
Company, or to protect trade secrets of the Company.  If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain licenses
from the patent owners of each such patent, or to redesign its products or
processes to avoid infringement.  In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful in
any attempt to redesign its products or processes to avoid such infringement.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Costly and time-consuming litigation brought by the Company may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, or to determine the enforceability, scope and validity of
the proprietary rights of others.


LIMITED MANUFACTURING EXPERIENCE; NO MANUFACTURING EXPERIENCE FOR THE CONSUMABLE
ENRICHMENT KIT

  To date, the Company's manufacturing activities have consisted primarily of
the assembly and testing of its cytogenetic products.  If the Company obtains
necessary regulatory clearances, registrations and approvals for its prenatal
screening products and such technology is successfully introduced, the Company
will be required to increase its manufacturing capacity.  The Company has no
experience in manufacturing the consumable enrichment kit or fetal hemoglobin
identification kit portions of its prenatal screening products.  Manufacturers
often encounter difficulties in commencing and increasing production, including
problems involving production yields, adequate supplies of components, quality
control and assurance (including failure to comply with the FDA's and State of
California's GMP regulations, international quality standards and other
regulatory requirements) and shortages of qualified personnel.  Difficulties
experienced by the Company in manufacturing could have a material adverse effect
on its business, financial condition and results of operations.  There can be no
assurance that the Company will be successful in commencing manufacture of the
prenatal screening products in commercial quantities, increasing manufacturing
capacity or that it will not experience manufacturing difficulties or product
recalls in the future.


NEED TO MANAGE GROWTH

  Significant future growth in the Company's sales and expansion in the scope of
its operations, should they occur, may place considerable strain on the
Company's management, financial, manufacturing and other capabilities,
procedures and controls.  There can be no assurance that any existing or
additional capabilities, procedures or controls will be adequate to support the
Company's operations or that its capabilities, procedures or controls will be
designed, implemented or improved in a timely and cost-effective manner.
Failure to implement, improve and 

                                       19

 
expand such capabilities, procedures and controls in an efficient manner at an
appropriate pace could have a material adverse effect on the Company's business,
financial condition and results of operations.


SINGLE SOURCE COMPONENTS; DEPENDENCE ON KEY DISTRIBUTORS

  Certain components of the Company's prenatal screening products under
development are expected to be in consumable enrichment kit form.  The Company
intends to initially subcontract the manufacture of such consumable enrichment
kits; however, given the stage of the product's development, neither internal
nor third party manufacturing processes have been established.  The Company
currently relies on a sole supplier for a certain component of its consumable
enrichment kit.  There can be no assurance that reliable, high volume commercial
supplies of such component can be established at commercially reasonable costs
or that a new supplier could be qualified in a timely manner if the supply of
such component were interrupted.  There can be no assurance that reliable high
volume manufacturing of such gradients can be established at commercially
reasonable costs or that a new supplier could be qualified in a timely manner if
the supply of such gradients were interrupted.  In addition, the Company
proposes to use DNA probes in a prenatal screening kit under development, which
are currently provided by a limited number of vendors.  The Company purchases
certain types of DNA probes from a particular supplier subject to such supplier
meeting various performance standards.  Such probes require FDA clearance or
approval for marketing for clinical diagnostic procedures in the United States
and may require FDA approval for export.  The DNA probe market is characterized
by extensive patent litigation and any court order with respect to infringement
of intellectual property could adversely affect the supply of available and
cost-effective DNA probes.  While the Company believes that other sources for
such DNA probes are available, if there were to be interruptions in obtaining
supplies from its present source, the Company would have to qualify new sources
of approved supply.  Outside of North America and the United Kingdom, the
Company relies substantially on independent distributors and sales agents to
market and sell its products.  There can be no assurance that distributors and
agents will devote adequate resources to support sales of the Company's
products.  Moreover, agreements with a number of its distributors require that
the Company indemnify such distributors against costs, expenses and liabilities
relating to litigation regarding the Company's products and, despite these
obligations of the Company, distributors may decide to reduce or end their
selling efforts until an infringement dispute is resolved or settled.


RELIANCE ON INTERNATIONAL SALES AND OPERATIONS

  The Company has significant international operations based in the United
Kingdom employing at December 31, 1997, approximately 43 employees.  In 1997,
1996, and 1995, approximately 59%, 60% and 61% respectively, of the Company's
total revenues were derived from customers and distributors outside of the
United States and Canada.  Until such time, if ever, as the FDA clears or
approves the Company's fetal cell screening technology for marketing in the
United States, the Company expects that international sales of cytogenetic
products will continue to account for a significant portion of its revenues.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.  The
international nature of the Company's business subjects it and its
representatives, agents and distributors to laws and regulations of the foreign
jurisdictions in which it operates or in which its products are sold.  The
regulation of medical devices in a number of such jurisdictions, particularly in
the European Community, continues to develop and there can be no assurance that
new laws or regulations will not have a material adverse effect on the Company's
business.  The laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent, as do the laws of the United
States.

  Currently, most of the Company's international sales are denominated in U.S.
dollars or the U.K. pound sterling.  The Company has significant operations in
the U.K., and therefore, incurs significant operating expenses denominated in
U.K. pounds.  Accordingly, the Company has not historically attempted to reduce
the risk of currency fluctuations by hedging, as changes in exchange rates
between the U.S. dollar and the U.K. pound sterling immaterially affect the
Company's results of operations. However, there can be no assurance that the
Company will 

                                       20

 
not be disadvantaged with respect to its competitors operating in a foreign
country by foreign currency exchange rate fluctuations that make the Company's
products more expensive relative to those of local competitors.

INTERNATIONAL AVAILABILITY OF THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM AND
RELATED MATTERS

  In the United States, hospitals, physicians and other health care providers
that purchase medical devices generally rely on Third-Party Payors, and other
sources of reimbursement for health care costs to reimburse all or part of the
cost of the procedure in which the medical device is being used.  Certain Third-
Party Payors are moving toward a managed care system in which they contract to
provide comprehensive health care for a fixed cost per person.  The fixed cost
per person established by these Third-Party Payors may be independent of the
hospital's cost incurred for the specific case and the specific devices used.
Medicare and other Third-Party Payors are increasingly scrutinizing whether to
cover new products and the level of reimbursement for covered products.  Because
the Company's fetal cell screening technology is currently under development and
has not received FDA clearance or approval, uncertainty exists regarding the
availability of third-party reimbursement for procedures that would use the
Company's fetal cell screening technology.  Failure by physicians, hospitals and
other potential users of the Company's products or products currently under
development to obtain sufficient reimbursement from Third-Party Payors for the
procedures in which the Company's products or products currently under the
development are intended to be used could have a material adverse effect on the
Company's business, financial condition and results of operations.

  Third-Party Payors that do not use prospectively fixed payments increasingly
use other cost-containment processes that may pose administrative hurdles to the
use of the Company's products and products currently under development. In
addition,  Third-Party Payors may deny reimbursement if they determine that the
device used in a treatment is unnecessary, inappropriate, experimental, used for
a non-approved indication or is not cost-effective.  Potential purchasers must
determine that the clinical benefits of the Company's products justify the
additional cost or the additional effort required to obtain prior authorization
or coverage and the uncertainty of actually obtaining such authorization or
coverage.

  If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products and products currently
under development in international markets would be dependent, in part, upon the
availability of reimbursement within prevailing health care payment systems.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government-sponsored health care and
private insurance.  There can be no assurance that any international
reimbursement approvals will be obtained in a timely manner, if at all.  Failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.

  The Company believes that in the future, reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development.  There can be no assurance in either United States or international
markets that third-party reimbursement and coverage will be available or
adequate, that future legislation, regulation or reimbursement policies of
Third-Party Payors will not otherwise adversely affect the demand for the
Company's products or products currently under development or its ability to
sell its products on a profitable basis.  The unavailability of Third-Party
Payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, fundamental reforms in the health care industry in the United
States and Europe continue to be considered, and there can be no assurance that
such reform will not materially adversely affect the Company's business,
financial condition and results of operations.

                                       21

 
DEPENDENCE UPON KEY PERSONNEL

  The Company's future success depends in significant part upon the continued
service of certain key scientific, technical and management personnel, and its
continuing ability to attract and retain highly qualified scientific, technical
and managerial personnel.  Competition for such personnel is intense and there
can be no assurance that the Company can retain its key scientific, technical
and managerial personnel or that it can attract, assimilate or retain other
highly qualified scientific, technical and managerial personnel in the future.
The loss of key personnel especially if without advanced notice, or the
inability to hire or retain qualified personnel could have a material adverse
effect upon the Company's business, results of operations and financial
condition.


RISK OF SOFTWARE DEFECTS

  The Company's cytogenetic and prenatal screening products currently under
development involve a software component that facilitates the detection of
chromosomal and genetic abnormalities through the interaction of certain imaging
algorithms with the genetic sample under examination.  The software, including
any new versions that may be released, may contain undetected errors or
failures.  There can be no assurance that, despite testing by the Company and
current and potential customers, errors will not be found in the software
components of the Company's cytogenetic or prenatal screening products,
resulting in loss or delay in market acceptance, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.


PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE

  The manufacture and sale of the Company's products involves the risk of
product liability claims.  There can be no assurance that the coverage limits of
the Company's insurance policies will be adequate.  The Company intends to
evaluate its coverage on a regular basis and in connection with the introduction
of products currently under development.  Such insurance is expensive and may
not be available on acceptable terms, in sufficient amount of coverage, or at
all.  A successful claim brought against the Company in excess of its insurance
coverage would have a material adverse effect on the Company's business, results
of operations and financial condition.


POSSIBLE VOLATILITY OF STOCK

  The market prices for securities of medical diagnostic instrument companies
have historically been highly volatile.  Announcements of technological
innovations or new products by the Company or its competitors, developments
concerning proprietary rights, including patents and litigation matters,
publicity regarding actual or potential results with respect to products under
development by the Company or others, regulatory developments in both the United
States and foreign countries and public concern as to the safety of new
technologies, changes in financial estimates by securities analysts or failure
of the Company to meet such estimates and other factors, may have a significant
impact on the market price of the Common Stock.  In addition, the Company
believes that fluctuations in its operating results may cause the market price
of its Common Stock to fluctuate, perhaps substantially.

                                       22

 
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS

  Certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions provide for the elimination of the right of
stockholders to act by written consent without a meeting and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings.  In addition, the Company's Board of
Directors has the authority to issue up to 6,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions of
those shares without any further vote or action by the stockholders.  The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future.  The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company.  The Company has no
present plans to issue shares of Preferred Stock.  Certain provisions of
Delaware law applicable to the Company could also delay or make more difficult a
merger, tender offer or proxy contest involving the Company, including Section
203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met.  The
inability of stockholders to act by written consent without a meeting, the
procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock.  These provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.

                                       23

 
ITEM 2.   PROPERTIES

  In the United States, Applied Imaging leases an approximately 14,000 square
foot facility in Santa Clara, California, under a lease which terminates in
November 30, 1998. The Company is currently reviewing its options which may
include renewing its existing lease or moving to a new facility.  The Company
also leases an approximately 2,700 square foot facility in Pittsburgh,
Pennsylvania, under a lease that terminates in July 1999. In the United Kingdom,
Applied Imaging International Ltd. (''AII'') leases an approximately 10,000
square foot facility in Sunderland, which lease terminates in June 1998.  AII
has recently negotiated a new 10 year lease for a 12,000 foot facility in
Newcastle and expects to take occupancy in June 1998.  The Company believes that
its facilities are adequate to meet its requirements through 1998.


ITEM 3.   LEGAL PROCEEDINGS

  The Company is not party to any legal proceedings.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  Not applicable.

                                       24

 
                                    PART II
                                        
Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "AICX."  The following table sets forth the range of the high and low
sale prices by quarter as reported on the Nasdaq National Market from November
1996, when the Company's Common Stock commenced trading.

                                                 HIGH     LOW
                                                ------  -------
1996
Fourth Quarter                                   9 1/4    6  1/4
 
1997
First Quarter                                    9 1/4    5
Second Quarter                                   6 7/8    3  3/8
Third Quarter                                    6 7/8    4  1/8
Fourth Quarter                                   6 1/8    1 13/16
 
  As of March 12, 1998, the number of common stockholders of record was 165.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future.

  On November 7, 1996, the Company commenced and completed its initial public
offering (the "IPO") of 1,650,000 shares of its Common Stock, $0.001 par value
per share, at a public offering price of $7.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-06703) filed with the
Securities and Exchange Commission.  All of the shares registered were sold.
Montgomery Securities, Dillon, Read & Co. Inc. and Vector Securities
International, Inc., were the managing underwriters of the IPO. Aggregate gross
proceeds to the Company from the IPO (prior to deduction of underwriting
discounts and commissions and expenses of the offering) were $11,550,000.  There
were no selling stockholders in the IPO.

  The Company paid underwriting discounts and commissions of $808,500 and other
expenses of approximately $1,020,500 in connection with the IPO.  The total
expenses paid by the Company in the IPO were approximately $1,829,000, and the
net proceeds to the Company in the IPO were approximately $9,721,000.

  From November 7, 1996, the effective date of the Registration Statement, to
December 31, 1997, the approximate amount of net proceeds used were $7,200,000
for the development and commercialization of the Company's prenatal screening
system; including costs related to clinical trials and regulatory approval,
$258,000 for repayment of the Company's bank line of credit due in November
1996, and $909,000 for working capital and general corporate purposes.

                                       25

 
ITEM 6.   SELECTED FINANCIAL DATA


                                                                                  YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------------------------
                                                                  1997            1996          1995        1994       1993
                                                             --------------  --------------  -----------  ---------  ---------
                                                                             (IN THOUSANDS, EXCEPT PER  SHARE DATA)     
                                                                                                      
Statement of Operations Data:
Revenues:
 Product sales.............................................     $   10,457      $    9,259   $    8,106   $  7,021   $  6,189
 Software maintenance and service..........................          2,677           2,663        2,692      2,550      2,499
                                                                ----------      ----------   ----------   --------   --------
  Total revenues...........................................         13,134          11,922       10,798      9,571      8,681
Cost of revenues...........................................          6,284           5,974        5,484      5,350      4,965
                                                                ----------      ----------   ----------   --------   --------
  Gross profit.............................................          6,850           5,948        5,314      4,221      3,716
Operating Expenses:
 Research and development..................................          7,381           3,667        2,919      2,821      1,756
 Sales and marketing.......................................          3,740           3,088        2,918      2,524      2,543
 General and administrative................................          3,639           2,088        2,094      1,898      1,229
                                                                ----------      ----------   ----------   --------   --------
 
  Total operating expenses.................................         14,760           8,843        7,931      7,243      5,528
                                                                ----------      ----------   ----------   --------   --------
 
  Operating loss...........................................         (7,910)         (2,895)      (2,617)    (3,022)    (1,812)
Other income, net..........................................            398              14           71         52         39
                                                                ----------      ----------   ----------   --------   --------
 
Net loss...................................................     $   (7,512)     $   (2,881)  $   (2,546)  $ (2,970)  $ (1,773)
                                                                ==========      ==========   ==========   ========   ========
 
 
Net loss per share  Basic and diluted                               $(1.03)         $(1.43)      $(2.46)    $(3.07)    $(1.88)
                                                                ==========      ==========   ==========   ========   ========
 
 
Shares used to calculate Basic and diluted 
  net loss per share                                             7,324,194       2,020,369    1,033,020    967,686    941,764
                                                                ==========      ==========   ==========   ========   ========




                                                                                   DECEMBER 31,
                                                                --------------------------------------------------
                                                                  1997       1996       1995      1994      1993
                                                                ---------  ---------  --------  --------  --------
                                                                                           
                                                                                 (IN THOUSANDS)
Balance Sheet Data:
 Cash, cash equivalents and short-term investments............  $  8,378   $ 12,318   $ 5,156   $ 2,503   $ 4,461
 Working capital..............................................     7,171     10,700     3,249     1,712     4,756
 Total assets.................................................    14,714     16,473     9,373     7,441     9,666
 Non-current portion of long-term debt and capital
     lease obligations                                                89        229       231       336       173
 Accumulated deficit..........................................   (19,533)   (12,021)   (9,140)   (6,594)   (3,625)
 Total stockholders' equity(1)................................     8,943     12,005     4,714     2,811     5,813

___________
(1)  No cash dividends have been declared with respect to the Company's Common
    and Preferred Stock.

                                       26

 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

  The information set forth in this Item 7 below contains forward-looking
statements, (designated by an *), and the Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth below under "Factors
That May Affect Future Results," and those set forth under Item One on this
document, including "Additional Risk Factors".

OVERVIEW

  Since its inception in 1986, the Company has principally been engaged in the
design, development, manufacture and marketing of automated clinical analysis
systems used by cytogenetic laboratories for prenatal and other genetic
screening.  The Company's cytogenetic instrumentation products include systems
that enable laboratories to automate aspects of the detection of chromosomal
abnormalities associated with conditions such as Down Syndrome.  The Company
sells its cytogenetic systems to government and private clinical cytogenetic
laboratories, research institutions, universities and pharmaceutical companies,
and has sold such systems to approximately 600 sites in over 35 countries.

  In 1993, the Company established a research project to develop proprietary
prenatal screening products to detect chromosomal genetic disorders through the
enrichment and analysis of fetal blood cells from a routine maternal blood
sample.  Since that time, the Company has devoted substantial resources to the
development of these prenatal screening products.  The Company's prenatal
screening products, which the Company is developing, incorporate (i) a patented
hematologically-based procedure to enrich and separate the fetal blood cells,
(ii) a fetal hemoglobin test kit, (iii) automated image analysis instrumentation
to identify the fetal cells and (iv) the use of third-party DNA probes to
identify certain chromosomal disorders present in fetal cells.  The prenatal
screening products under development are currently in preclinical evaluations,
and the Company intends to continue preclinical and clinical evaluations of the
products to establish them as a broadly applicable prenatal screening procedure.
The Company anticipates that sales of the products, if cleared or approved by
the FDA, will include a consumable enrichment kit used to separate fetal blood
cells from maternal blood, a consumable hemoglobin identification kit and
imaging instrumentation used to analyze these cells.  The implementation of the
Company's strategy is dependent upon the successful development and
commercialization of the Company's prenatal screening products.

  The operating results of the Company have fluctuated significantly in the past
on an annual and quarterly basis.  The Company expects that its operating
results will fluctuate significantly from quarter to quarter and year to year in
the future and will depend on a number of factors, some of which may affect
future sales of the Company's cytogenetic products.  These factors include, but
are not limited to, demand for the Company's products, timing of orders and
shipments, competition and its related pricing pressures, and seasonal factors,
many of which are outside the Company's control. If FDA clearance or approval is
received, the Company intends to increase the amount of expenditures for
research and development and sales and marketing activities, principally for the
commercial launch of its prenatal screening system.  If additional funding is
obtained, the Company intends to increase its research and development expenses
related to follow-on products and additional applications of its prenatal
screening technology. The Company also intends to increase the amount of
expenditures related to marketing and administrative activities.

  The Company markets its products worldwide from its operations in the United
States and the United Kingdom and performs research and development in the
United States and Israel.  Sales from the United States are primarily to
customers within the United States.  Revenues in the United Kingdom result from
drop shipments of products from the United States directly to customers and from
direct shipments from the United Kingdom.


RESULTS OF OPERATIONS


  Revenues.   Revenues increased to $13.1 million in 1997 from $11.9 million in
  --------
1996, and from $10.8 million in 1995, or annual increases of 10% for 1997 and
1996.  The 1997 and 1996 increases in revenues were primarily attributable to
continued demand by cytogenetic laboratories to automate aspects of otherwise
labor-intensive analyses, to increase capacity of existing systems, or to
replace older generation systems with the Company's 

                                       27

 
CytoVision products. Software and service contract revenues have remained
relatively flat at $2.7 million for 1997, 1996 and 1995, and as a percentage of
total revenues, decreased to 20% in 1997 from 22% in 1996 and from 25% in 1995.
Software and service contract pricing is derived from product pricing, and with
unit selling prices of the Company's CytoVision products, sold since 1994,
significantly lower than earlier generation products, software and service
contract pricing has decreased accordingly. For 1997, 1996 and 1995, revenues
derived outside of North America have remained relatively consistent at
approximately 59%, 60% and 61% of total revenues, respectively.

  Cost of Revenues.   Cost of revenues increased to $6.3 million in 1997, from
  ----------------
$6.0 million in 1996 and from $5.5 million in 1995, or 48%, 50% and 51% as a
percentage of total revenues, respectively.  This decrease in cost of revenues
as a percentage of total revenues from year to year was attributable to
increased product shipment volume and engineering design changes to reduce
direct material and production costs.  The decrease in cost of software
maintenance and service is primarily due to lower staffing and material costs as
a result of improved components which reduced the number of service calls.

  Research and Development Expenses.   Research and development expenses
  ---------------------------------
increased to approximately $7.4 million in 1997 from $3.7 million in 1996 and
from $2.9 million in 1995. These year to year increases were due to increasing
expenditures on the development of the prenatal screening products.

  Sales and Marketing Expenses.   Sales and marketing expenses increased to $3.7
  ----------------------------
million in 1997 from $3.1 million in 1996 and from $2.9 million in 1995.  In
1997, 1996 and 1995, sales and marketing expenses as a percentage of total
revenues remained relatively consistent ranging from 26% to 28%.  The increase
in 1997 is primarily attributable to additional marketing and sales management
personnel and the associated recruitment and relocation costs.

  General and Administrative Expenses.   General and administrative expenses in
  -----------------------------------
1997 amounted to $3.6 million, increasing $1.5 million over 1996 and 1995.  The
increase is primarily due to increased administrative and management staff and
associated costs related to public company reporting requirements and management
infrastructure changes in anticipation of future growth.  In addition, the
Company incurred a charge of $480,000 in 1997 associated with executive
management changes.  In 1997, 1996 and 1995 general and administrative expenses
were 28%, 18% and 19% of total revenues, respectively.


FACTORS THAT MAY AFFECT FUTURE RESULTS

  The Company's operating results may vary significantly depending on certain
factors, including the effect of delays in its research and development program,
adverse results in its clinical studies, delay in the introduction or shipment
of new products, increased competition, adverse changes in the economic
conditions in any of the several countries in which the Company does business, a
slower growth rate in the Company's target markets, order deferrals in
anticipation of new product releases, lack of market acceptance of new products,
the uncertainty of FDA or other domestic and international regulatory clearances
or approvals.  For example, the Company expects a decline in 1998 first quarter
revenues primarily as a result of the currency issues involving Southeast Asia
and certain other Asian countries. *

  Due to the factors noted above, as well as the size of the Company's initial
public offering completed in November, 1996, the Company's future earnings and
stock price may be subject to significant volatility, particularly on a
quarterly basis.  Any shortfall in revenues or earnings from levels expected by
security analysts could have an immediate and significant adverse effect on the
trading price of the Company's common stock.


LIQUIDITY AND CAPITAL RESOURCES

  Since its inception in July 1986 through December 1997, the Company has
generated an accumulated deficit of approximately $19.5 million.  As of December
31, 1997, the Company had cash, cash equivalents and short-term investments of
$8.4 million and working capital of $7.2 million, compared to $12.3 million and
$10.7 million, respectively, at December 31, 1996.  For the year ended December
31, 1997, cash used by operations totaled $7.2 

                                       28

 
million, compared to $1.8 million for the corresponding prior year. The increase
in cash used by operations was primarily attributable to increased operating
expenses associated with the Company's fetal cell screening program, increased
general and administrative expenses to support future growth, public company
reporting and compliance requirements, and a $1.9 million increase in accounts
receivable. In addition, the Company consumed $1.1 million in 1997 for purchases
of capital equipment compared to $0.5 million for the comparable prior year.
Cash consumption from operations and property and equipment purchases was
partially offset by cash generated from financing activities which were
primarily the result of a private equity placement in May 1997 that netted $3.9
million.

  The Company expects negative cash flow from operations to continue into at
least 1999, as it continues the development of its fetal cell technology,
conducts clinical trials required for FDA clearance of the DNA probe portion of
that technology, expands its marketing, sales and customer support capabilities,
and adds administrative infrastructure. *  The Company currently estimates that
its capital resources will enable it to sustain through 1998*.  There can be no
assurance, however, that the Company will not be required to seek capital at an
earlier date.  The timing and amount of spending of such capital resources
cannot be accurately determined at this time and will depend on several factors,
including but not limited to, the progress of its research and development
efforts and clinical investigation, the timing of regulatory approvals or
clearances, competing technological and market developments, commercialization
of products currently under development, and market acceptance and demand for
the Company's products.  In addition, as opportunities arise, proceeds may also
be used to acquire businesses, technologies or products that complement any such
acquisitions. *  The Company may seek to obtain additional funds through equity
or debt financing, collaborative or other arrangements with other companies, and
from other sources. *  No assurance can be given that additional financing will
be available when needed or on terms acceptable to the Company.  If adequate
funds are 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 the Company would otherwise
seek to commercialize itself, or to reduce the marketing, customer support, or
other resources devoted to certain products. *

  Year 2000 Compliance

  The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches.  The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00.  The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000.  Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.  Management
is in the process of working with its software vendors to assure that the
Company is prepared for the year 2000*.  Management does not anticipate that the
Company will incur significant operating expenses or be required to invest
heavily in computer systems improvements to be year 2000 compliant*.  However,
significant uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance.  The Company will implement an upgrade
to its management information system that the Company believes is year 2000
compliant*.  Any year 2000 compliance problem of either the company or its
suppliers or partners or customers, could materially adversely affect the
Company's business, results of operation, financial condition and prospects*.

  New Accounting Pronouncements

  On February 3, 1998, the Securities and Exchange Commission (''SEC'') issued
Staff Accounting Bulletin (''SAB'') No. 98.  SAB No. 98 requires certain stock
options and warrants issued for nominal consideration to be treated as
outstanding for all reporting periods in the same manner as shares issued in a
stock split or a recapitalization effected contemporaneously with the initial
public offering.  The Company originally included shares issued to employees at
less than fair market value as nominal issuances in the earnings per share
(''EPS'') calculation, as presented in the Company's press release on February
10, 1998.  Subsequently, the SEC indicated that nominal shares generally do not
include options issued to employees for services rendered.  The Company
recomputed EPS in accordance with the most recent guidance provided by the SEC
with respect to SAB No. 98.

                                       29

 
  In October 1997, the American Institute of Certified Public Accounts issued
Statement of Position (''SOP'') No. 97-2, "Software Revenue Recognition," which
supersedes SOP No. 91-1.  The Company will be required to adopt SOP 97-2
prospectively for software transactions entered into beginning January 1, 1998.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements such as software products, upgrades, enhancements,
post-contract customer support, installation, and training to be allocated to
each element based on the relative fair values of the elements.  The fair value
of an element must be based on evidence that is specific to the vendor.  If a
vendor does not have evidence of the fair value for all elements in a multiple-
element arrangement, all revenue from the arrangement is deferred until such
evidence exists or until all elements are delivered.  The Company's management
anticipates that the adoption of SOP No. 97-2 will not have a material effect on
the Company's operating results.

  In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the financial statements.  It requires that a
company classify items of other comprehensive income, as defined by accounting
standards, by their nature (e.g. unrealized gains or losses on securities) in a
financial statement, but does not require a specific format for that statement.
The Company is in the process of determining its preferred format.  The
accumulated balance of other comprehensive income is to be displayed separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet.  This Statement is effective with fiscal 1998 financial
statements.  Reclassification of financial statements for earlier periods
provided for comparative purposes is required.

  In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information".  The Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.  This statement is effective with fiscal 1998 financial statements.
The Company is currently evaluating the implications of this statement.

                                       30

 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                        

The Board of Directors
Applied Imaging Corp.:

  We have audited the accompanying consolidated balance sheets of Applied
Imaging Corp. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements to based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Imaging Corp. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles. 


                                  KPMG Peat Marwick LLP

Mountain View, California
February 6, 1998

                                       31

 
                             APPLIED IMAGING CORP.
                                AND SUBSIDIARIES
                                        
                          Consolidated Balance Sheets
                                        



                                                                        1997             1996
                                                                     -----------      -----------
                                                                                
                                     Assets
Current assets:
  Cash and cash equivalents..........................................  $ 2,918,000      $12,318,000
  Short-term investments.............................................    5,460,000               --
  Trade accounts receivable (less allowance for doubtful
    accounts of $ 191,000 and $228,000)..............................    3,358,000        1,454,000
  Inventories........................................................      849,000          831,000
  Prepaid expenses and other assets..................................      268,000          336,000
                                                                       -----------      -----------
Total current assets.................................................   12,853,000       14,939,000
Property and equipment...............................................    1,793,000        1,234,000
Other assets.........................................................       68,000          300,000
                                                                       -----------      -----------
                                                                       $14,714,000      $16,473,000
                                                                       ===========      ===========

                         Liabilities and Stockholders' Equity
Current liabilities:
  Current portion of bank debt.......................................   $  299,000        $   33,000
  Current portion of capital lease obligation........................       34,000                --
  Accounts payable...................................................    1,754,000         1,679,000
  Accrued expenses...................................................    2,434,000         1,304,000
  Deferred revenue...................................................    1,161,000         1,223,000
                                                                         ---------         ---------
    Total current liabilities........................................    5,682,000         4,239,000
Bank debt, less current portion......................................           --           229,000
Capital lease obligation, less current portion.......................       89,000                --

Commitments

Stockholders' equity:
  Common stock; $0.001 par value; 20,000,000 shares authorized;
    7,667,956 and 6,823,835 shares issued and outstanding............        8,000             7,000
  Additional paid-in capital.........................................   29,636,000        25,569,000
  Accumulated deficit................................................  (19,533,000)      (12,021,000)
  Deferred stock compensation........................................     (801,000)       (1,183,000)
  Cumulative translation adjustment..................................     (367,000)         (367,000)
                                                                      ------------      ------------
    Total stockholders' equity.......................................    8,943,000        12,005,000

                                                                      $ 14,714,000      $ 16,473,000
                                                                      ============      ============

                                                                                


          See accompanying notes to consolidated financial statements.

                                       32

 
                             APPLIED IMAGING CORP.
                                AND SUBSIDIARIES
                                        
                     Consolidated Statements of Operations


 
                                                                                        December 31,
                                                                   ------------------------------------------------------
                                                                         1997              1996               1995
                                                                   ----------------  -----------------  -----------------
                                                                                               
Revenues:
  Product sales..................................................      $10,457,000        $ 9,259,000        $ 8,106,000
  Software maintenance and service...............................        2,677,000          2,663,000          2,692,000
                                                                       -----------        -----------        -----------
   Total revenues................................................       13,134,000         11,922,000         10,798,000
                                                                       -----------        -----------        -----------
 
Cost of revenues:
  Product sales..................................................        5,188,000          4,501,000          4,171,000
  Software maintenance and service...............................        1,096,000          1,473,000          1,313,000
                                                                       -----------        -----------        -----------
   Total cost of revenues........................................        6,284,000          5,974,000          5,484,000
                                                                       -----------        -----------        -----------
   Gross profit..................................................        6,850,000          5,948,000          5,314,000
                                                                       -----------        -----------        -----------
 
Operating expenses:
  Research and development.......................................        7,381,000          3,667,000          2,919,000
  Sales and marketing............................................        3,740,000          3,088,000          2,918,000
  General and administrative.....................................        3,639,000          2,088,000          2,094,000
                                                                       -----------        -----------        -----------
   Total operating expenses......................................       14,760,000          8,843,000          7,931,000
                                                                       -----------        -----------        -----------
   Operating loss................................................       (7,910,000)        (2,895,000)        (2,617,000)
 
Other income, net................................................          398,000             14,000             71,000
                                                                       -----------        -----------        -----------
 
   Net loss......................................................      $(7,512,000)       $(2,881,000)       $(2,546,000)
                                                                       ===========        ===========        ===========
 
Net loss per share-Basic and diluted.............................           $(1.03)            $(1.43)            $(2.46)
                                                                       ===========        ===========        ===========
 
Shares used to calculate Basic and diluted net loss per share....        7,324,194          2,020,369          1,033,020
                                                                       ===========        ===========        ===========

                                                                                



          See accompanying notes to consolidated financial statements.

                                       33

 
                             APPLIED IMAGING CORP.
                                AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity




                                  PREFERRED STOCK          COMMON STOCK      ADDITIONAL                    DEFERRED
                             ------------------------    ----------------     PAID-IN     ACCUMULATED       STOCK
                                SHARES      AMOUNT       SHARES    AMOUNT     CAPITAL       DEFICIT     COMPENSATION
                             -----------  -----------    -------  -------   ----------    -----------   ------------
                                                                                  
Balances as of December 31,
1994.......................   2,812,962      $ 3,000     973,510  $ 1,000  $ 9,768,000  $ (6,594,000)            --
Exercise of common stock
 options...................          --           --      94,275       --       44,000            --             --
Compensation expense
 related to employee
 stock options.............          --           --          --       --       59,000            --             --
Issuances of Series J
 preferred stock, net of
 $356,000 offering costs...   1,106,217        1,000          --       --    4,345,000            --             --
Net loss...................          --           --          --       --           --    (2,546,000)            --
                             ----------   ----------   ---------  -------  -----------  ------------   ------------
Balances as of December 31,
1995.......................   3,919,179        4,000   1,067,785    1,000   14,216,000    (9,140,000)            --
Exercise of common stock
 options...................          --           --      89,250       --      161,000            --             --
Initial public offering
 (IPO) of common stock,
 net of $1,829,000
 offering costs............          --           --   1,650,000    2,000    9,719,000            --             --
Preferred stock converted
 to common stock in
 connection with IPO.......  (3,919,179)      (4,000)  3,960,017    4,000           --            --             --
Net exercise of 110,416
 Series F preferred stock
 warrants in connection
 with IPO..................          --           --      56,783       --           --            --             --
Deferred employee stock
 option compensation.......          --           --          --       --    1,473,000            --     (1,473,000)
Amortization of deferred
 stock compensation........          --           --          --       --           --            --        290,000
Net loss...................          --           --          --       --           --    (2,881,000)            --
                             ----------   ----------   ---------  -------  -----------  ------------   ------------
Balances as of December 31,
 1996......................          --           --   6,823,835    7,000   25,569,000   (12,021,000)    (1,183,000)
Exercise of common stock...
 options...................          --           --      34,003       --       72,000            --             --
Private placement of
 common stock net of 
 $59,000 offering
  costs....................          --           --     796,020    1,000    3,940,000            --             --
Stock issued in connection
  with employee stock purchase
  plan.....................          --           --          --   14,098           --        55,000             --
Amortization of deferred
 stock compensation........          --           --          --       --           --            --        382,000
Net Loss...................          --           --          --       --           --    (7,512,000)            --

Balances as of December 31,
1997.......................          --           --   7,667,956  $ 8,000  $29,636,000  $(19,533,000)   $  (801,000)
                             ==========   ==========   =========  =======  ===========  ============   ============





                               CUMULATIVE       TOTAL
                              TRANSLATION   STOCKHOLDERS'
                               ADJUSTMENT       EQUITY
                              ------------  --------------
                                      
Balances as of December 31,
1994.......................     $(367,000)    $ 2,811,000
Exercise of common stock
 options...................            --          44,000
Compensation expense
 related to employee
 stock options.............            --          59,000
Issuances of Series J
 preferred stock, net of
 $356,000 offering costs...            --       4,346,000
Net loss...................            --      (2,546,000)
                              -----------     -----------
Balances as of December 31,
1995.......................      (367,000)      4,714,000
Exercise of common stock
 options...................            --         161,000
Initial public offering
 (IPO) of common stock,
 net of $1,829,000
 offering costs............            --       9,721,000
Preferred stock converted
 to common stock in
 connection with IPO.......            --              --
Net exercise of 110,416
 Series F preferred stock
 warrants in connection
 with IPO..................            --              --
Deferred employee stock
 option compensation.......            --              --
Amortization of deferred
 stock compensation........            --         290,000
Net loss...................            --      (2,881,000)
                              -----------     -----------
Balances as of December 31,
 1996......................      (367,000)     12,005,000
Exercise of common stock...
 options...................            --          72,000
Private placement of
 common stock net of 
 $59,000 offering costs....            --       3,941,000
Stock issued in connection
 with employee stock purchase
  plan.....................            --          55,000
Amortization of deferred
 stock compensation........            --         382,000
Net Loss...................            --      (7,512,000)

Balances as of December 31,
1997.......................     $(367,000)    $ 8,943,000
                              ===========     ===========


          See accompanying notes to consolidated financial statements.

                                       34

                             APPLIED IMAGING CORP.
                                AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows
 


                                                                                       December 31,
                                                                   -----------------------------------------------------
                                                                         1997              1996               1995
                                                                   ----------------  -----------------  -----------------
                                                                                               
Cash flows from operating activities:
  Net loss.......................................................      $(7,512,000)       $(2,881,000)       $(2,546,000)
  Adjustments to reconcile net loss to net cash used for
         operating activities:
   Depreciation and amortization.................................          695,000            583,000            556,000
   Unrealized exchange (gain) loss...............................               --             33,000            (17,000)
   Compensation expense related to employee stock options........          382,000            290,000            153,000
   Loss on sale of other assets..................................           29,000                 --                 --
   Changes in operating assets and liabilities:
     Trade accounts receivable...................................       (1,904,000)            47,000            439,000
     Inventories.................................................          (18,000)            49,000            253,000
     Prepaid expenses and other assets...........................           68,000           (196,000)           290,000
     Accounts payable............................................           75,000            538,000           (309,000)
     Accrued expenses............................................        1,130,000           (126,000)           497,000
     Deferred revenue............................................          (62,000)          (163,000)            91,000
                                                                       -----------        -----------        -----------
     Net cash used for operating activities......................       (7,117,000)        (1,826,000)          (593,000)
Cash flows from investing activities:
  Purchase of short-term investments.............................       (7,456,000)                --         (2,997,000)
  Proceeds from sales and maturities of investments..............        1,996,000          2,997,000                 --
  Purchase of equipment..........................................       (1,119,000)          (498,000)          (808,000)
  Other assets...................................................          203,000             71,000              9,000
                                                                       -----------        -----------        -----------
     Net cash provided by (used for) investing activities........       (6,376,000)         2,570,000         (3,796,000)
                                                                       -----------        -----------        -----------
 
Cash flows from financing activities:
  Proceeds from issuance of preferred stock......................               --                 --          4,346,000
  Net proceeds from issuance of common stock.....................        4,068,000          9,882,000             44,000
  Bank loan proceeds/(payments) - net............................           38,000           (467,000)          (345,000)
  Capital lease payments.........................................          (13,000)                --                 --
                                                                       -----------        -----------        -----------
     Net cash provided by financing activities...................        4,093,000          9,415,000          4,045,000
                                                                       -----------        -----------        -----------
Net increase (decrease) in cash and cash equivalents.............       (9,400,000)        10,159,000           (344,000)
Cash and cash equivalents at beginning of year...................       12,318,000          2,159,000          2,503,000
                                                                       -----------        -----------        -----------
Cash and cash equivalents at end of year.........................      $ 2,918,000        $12,318,000        $ 2,159,000
                                                                       ===========        ===========        ===========
Supplemental disclosure of cash paid for interest................      $    39,000        $    86,000        $   110,000
                                                                       ===========        ===========        ===========
Supplemental disclosure of non-cash investing and financing
 activities:
       Equipment acquired through capital leases.................      $   135,000                 --                 --
                                                                       ===========        ===========        ===========
       Deferred compensation relating to employee stock options..               --        $ 1,473,000                 --
                                                                       ===========        ===========        ===========
   Conversion of preferred stock and preferred stock warrants
     into common stock...........................................               --        $     4,000                 --
                                                                       ===========        ===========        ===========

                                                                                


          See accompanying notes to consolidated financial statements.

                                       35

 
                             APPLIED IMAGING CORP.
                                AND SUBSIDIARIES
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        
(1)   Summary of the Company and Significant Accounting Policies

 The Company

  Applied Imaging Corp. (the Company) was incorporated in 1986 to develop,
manufacture, and market automated clinical analysis systems used by cytogenetic
laboratories in prenatal genetic screening. The Company sells its products to
government and private clinical cytogenetic laboratories, research institutions,
universities, and pharmaceutical companies located primarily in the United
States, Canada, Europe, and the Pacific Rim.  The Company is currently devoting
significant resources to the development of a new prenatal screening designed to
enable the detection of prenatal chromosomal disorders through the analysis of
fetal blood cells drawn from maternal blood. There have been no revenues earned
in relation to this new prenatal screening system.


 Principles of Consolidation

  The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Applied Imaging International,
Limited (United Kingdom) and Applied Imaging, Limited (Israel).  All significant
intercompany accounts and transactions have been eliminated in consolidation.


Foreign Exchange

  The Company accounts for its foreign operations in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation.
Prior to April 1994, the functional currency for Applied Imaging International,
Limited was the British pound and, accordingly, translation adjustments
resulting from the conversion of the subsidiary's financial statements into U.S.
dollars were accumulated and reported as a separate component of stockholders'
equity.  Beginning in April 1994, certain operational and organizational changes
within the Company caused the functional currency for the Company's subsidiary
to become the U.S. dollar.  Therefore, monetary assets and liabilities of the
subsidiary are remeasured at year-end exchange rates while nonmonetary items are
remeasured at historical rates.  Revenue and expense accounts related to
monetary assets and liabilities are remeasured at the average rates in effect
during the year.  Revenue and expenses related to non-monetary assets and
liabilities are translated at historical rates.  Translation adjustments
resulting from the conversion of the subsidiary's financial statements into U.S.
dollars are currently recognized in the consolidated statement of operations in
the year of occurrence.  The functional currency of Applied Imaging, Limited is
also the U.S. dollar.

 Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

 Initial Public Offering

  The Company completed its initial public offering on November 7, 1996, whereby
1,650,000 shares of common stock were issued for approximately $9,721,000 in
proceeds, net of underwriters' discounts and issuance costs of $1,829,000.
Amounts included in the accompanying balance sheet as of December 31, 1997 and
1996, reflect the conversion of all outstanding shares of preferred stock into
3,960,017 shares of common stock and the net exercise of the Series F warrants
into 56,783 shares of common stock.

                                       36

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
 Revenue Recognition

  The Company recognizes revenue on product sales upon shipment and concurrently
accrues for expected hardware warranty expenses, and product returns.  Revenue
on renewed maintenance contracts, including amounts attributable to software
maintenance bundled in original product sale agreements, is deferred and
recognized ratably over the period of the contract, generally one year.

 Research and Development Expenditures

  Research and development expenditures are charged to expense as incurred.

 Earnings (loss) per Share

  The company has reported losses per share in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 128 ''Earnings Per Share.''  SFAS No. 128 which requires the presentation of
basic earnings per share (''EPS'') and, for companies with complex capital
structures (or potentially dilutive securities, such as convertible debt,
options and warrants), diluted EPS.

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


 
                          1997                1996                1995
                   ------------------  ------------------  ------------------
                                                  
Options                     1,199,272             481,250             356,250
Warrants                      681,744             508,734             565,517
Preferred Stock                    --                  --           3,960,017
                            ---------             -------           ---------
Total                       1,881,016             989,984           4,881,784
                            =========             =======           =========

                                                                                

 Cash Equivalents and Short-Term Investments

  All investments with original maturities of three months or less are
considered by the Company to be cash equivalents.

 Inventories

  Inventories are stated at the lower of cost (first in, first out) or market.

 Property and Equipment

  Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.
Recoverability of property and equipment is measured by comparison of its
carrying amount to future net cash flows the property and equipment are expected
to generate.  If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property and equipment exceeds its fair market value.  To date, the company has
made no adjustments to the carrying values of its long-lived assets.

                                       37

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Short-Term Investments

  Short-term investments consist of investments acquired with maturities
exceeding three months.  While the Company's intent is to hold debt securities
to maturity, consistent with Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified all securities as available-for-sale, as the sale of such
securities may be required prior to maturity to implement management strategies.
Such securities are reported at fair value with unrealized gains or losses
excluded from earnings and reported as a separate component of shareholder's
equity, net of applicable taxes.

  The cost and estimated fair value of available-for-sale securities as of
December 31, 1997, by contractual maturity consisted of the following:

 
 

                                 DUE IN ONE YEAR OR LESS      DUE IN MORE THAN ONE YEAR
                                 -----------------------      -------------------------
                                                         
Certificate of deposits                   $1,000                       $2,269
Bonds                                     $2,191                       $   --
                                          ------                    ---------
                                          $3,191                       $2,269
                                          ======                       ======

                                        

 Capitalized Software Costs

   Computer software development costs incurred subsequent to the determination
of product technological feasibility are capitalized in accordance with the
provisions of SFAS No. 86, Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed.  Amortization of these capitalized costs is
provided using the greater of the ratio of revenues generated in the period over
total future revenues of the product, or the straight-line method over the
estimated market life of the related products, generally three years, commencing
when the product becomes generally available to customers.  For the years ended
December 31, 1997, 1996 and 1995, software development costs incurred subsequent
to the establishment of technological feasibility have not been material.  The
net book value of capitalized costs is not significant and is included in other
assets in the consolidated balance sheets.


 Stock Based Compensation

  The Company uses the intrinsic value method to account for stock-based
compensation.

 Income Taxes

  The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which prescribes an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns.  Valuation
allowances are provided when necessary to reduce deferred tax assets to the
amount expected to be realized.  In estimating future tax consequences, SFAS No.
109 generally considers all expected future events other than enactment of
changes in tax laws or rates.

                                       38

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
                                        
 Fair Value of Financial Instruments

  Financial instruments consist principally of cash equivalents, short-term
investments, trade receivables, notes receivable, accounts payable, and bank
debt.  The carrying amounts of these financial instruments approximate fair
value.

  Financial instruments that potentially subject the Company to concentrations
of credit risk are cash equivalents and short-term investments which the Company
places with high-credit qualified financial institutions and, by policy, limits
the amount of credit exposure to any one financial institution.  The Company
sells its products to government and private clinical cytogenetic laboratories,
research institutions, universities, and pharmaceutical companies located
primarily in the United States, Canada, Europe, and the Pacific Rim.  The
Company's credit risk is concentrated primarily in the United States and Europe.
The Company does not have a significant concentration of credit risk with any
single customer.  The Company performs on-going credit evaluations of its
customer's financial condition and, generally requires no collateral from its
customers.  The Company maintains an allowance for doubtful accounts to cover
potential credit losses.
 
(2)   INVENTORIES
                                     
  A summary of inventories follows:    
                                                 December 31,
                                          -----------------------
                                            1997           1996
                                          --------       --------
Raw materials..........................   $721,000       $759,000
Work in process........................     85,000         46,000
Finished goods.........................     43,000         26,000
                                          --------       --------
                                          $849,000       $831,000
                                          ========       ========
(3)   PROPERTY AND EQUIPMENT

  A summary of property and equipment follows:

                                                    December 31,
                                             -----------------------
                                               1997           1996
                                             --------       --------
Equipment.................................   $2,793,000     $2,187,000
Demonstration equipment...................    1,275,000        875,000
Furniture and fixtures....................     489,000        242,000
                                            ----------     ----------
                                             4,557,000      3,304,000
Less accumulated depreciation.............   2,764,000      2,070,000
                                            ----------     ----------
                                            $1,793,000     $1,234,000
                                            ==========     ==========
(4)   ACCRUED EXPENSES

    A summary of accrued expenses follows:

                                                      December 31,
                                               -----------------------
                                                 1997           1996
                                               --------       --------
Compensation and related costs............. $  649,000     $  625,000
Severance..................................    480,000             --
Other......................................  1,305,000        679,000
                                            ----------     ----------
                                            $2,434,000     $1,304,000
                                            ==========     ==========

                                       39

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(5)   BANK DEBT
 
  A summary of bank debt follows:

 
 
                                                                     DECEMBER 31,
                                                               ----------------------
                                                                  1997         1996
                                                               ---------     --------
                                                                        
Applied Imaging International, Limited:
 Bank note payable in monthly installments through 
   June 2004; bearing interest at the bank's base 
   rate plus 3% (9.00% as of December 31, 1996).............   $      --     $262,000
                                                               ---------     --------
                                                                      --      262,000
Less current portion........................................          --       33,000
                                                               ---------     --------
                                                               $      --     $229,000
                                                               =========     ========
 

  The bank note relating to Applied Imaging International, Limited is
denominated in British pounds and relates to the purchase of real property from
a related party in March 1994. The real property is recorded at cost, which
approximates market value, and is included in other assets in the accompanying
1996 consolidated balance sheet. Such real property was sold in 1997.

  Applied Imaging International, Limited has a (Pounds)500,000 unsecured line of
credit with an international bank which is guaranteed by the Company.  The line
of credit is available until April 15, 1998, and bears interest at 3% above the
bank's base rate, which was 7.25% as of December 31, 1997.  As of December 31,
1997 amounts outstanding under this facility amounted to $299,000.

(6)   STOCKHOLDERS' EQUITY

  Common Stock

  The Company is authorized to issue 20,000,000 shares of common stock. As of
December 31, 1997, there were warrants outstanding to purchase 173,010 shares of
common stock at $5.78 per share, 368,734 shares at $5.25 per share and 140,000
shares at $4.25 per share. These warrants expire in 2000, 1998 and 2000,
respectively.

   As of December 31, 1997, 1,378,985 shares of common stock were reserved for
issuance under the Company's 1988 Amended and Restated Incentive Stock Option
Plan (the 1988 Option Plan). Under the 1988 Option Plan, stock options may be
granted to Board members, officers, key employees, and consultants at the fair
market value of the common stock at the date of the grant, as determined by the
Board. Options are exercisable over 5 to 10 years from the date of grant, and
typically vest ratably over 4 years. In 1994, the Company enacted a Directors
Option Plan designed to encourage participation on the Company's Board. Under
this plan, 5,000 shares per year are automatically granted to non-employee
directors. The terms of the plan allow the granting of stock options upon
initial election to the Board and for each subsequent term on the Board. As of
December 31, 1997 there were 120,000 shares reserved for issuance under this
plan and a total of 30,000 options have been granted.

                                       40

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
  Accounting for Stock-Based Compensation

  As of December 31, 1997, there were 209,713 options available for grant under
the 1988 Option Plan.  In 1996, the Company recorded a deferred charge of
$1,473,000, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for 246,750 shares subject to
common stock options granted in the 12-month period preceding the IPO. The
deferred stock compensation is being amortized to compensation expense over the
period during which the options become exercisable, generally four years.

  The Company has adopted the pro forma disclosure provisions of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined in a manner consistent with the fair value approach described in SFAS
No. 123 ''Accounting for Stock-Based Compensation'', the Company's net loss and
pro forma net loss per share as reported would have been increased to the pro
forma amounts indicated below.


 
                                              YEAR ENDED
                                             DECEMBER 31,
                                    ------------------------------
                                      1997       1996      1995
                                    ---------  --------  ---------
                                                
           Net loss:
             As reported..........   $(7,512)  $(2,881)   $(2,546)
             Pro forma............   $(8,218)  $(2,965)   $(2,558)
           Net loss per share:
             As reported:
               Basic and diluted..   $ (1.03)  $ (1.43)   $ (2.46)
             Pro forma:
               Basic and diluted..   $ (1.12)  $ (1.47)   $ (2.48)


  Pro forma net loss reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not in the pro forma net loss amounts presented above
because compensation cost is reflected over the period equivalent to the
options' vesting period of 4 years and compensation cost for options granted
prior to January 1, 1995 is not considered.

  On February 2, 1998, the Company's board of directors approved an amendment
to reprice options outstanding under the Company's 1988 Stock Option Plan with
exercise prices over $3.00 per share. On February 2, 1998, holders of such
options were offered the choice of retaining their existing options without
amendment or accepting the amendment of their stock options. The exercise
price of the amended options is $2.44 per share, which equals the fair market
value of the Company's common stock on February 2, 1998. Vesting of the amended
options occurs over four years and begins on February 2, 1998. Holders of the
options had until March 30, 1998 to make an irrevocable decision to either
retain their existing options without amendment or accept the amendment to
their options. The amendment of the options is treated for accounting
purposes as if the Company cancelled the existing options and issued on
February 2, 1998 new options with the lower exercise price and new vesting
schedule.

  The fair value of each option is estimated on the date of grant using the fair
value method with the following weighted-average assumptions: volatility of 60%,
no dividends, an expected life of three years, and risk-free interest rates of
6.16% for the year ended December 31, 1997, 5.71% for the year ended December
31, 1996, and 6.63% for the year ended December 31, 1995.

                                       41

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
  A summary of the status of the Company's fixed stock option activity for the
years ended December 31, 1997, 1996 and 1995, is as follows:


                                                                  WEIGHTED-  WEIGHTED
                                                                   AVERAGE   AVERAGE
                                                                  EXERCISE     FAIR
                                                        SHARES      PRICE     VALUE
                                                      ----------  ---------  --------
                                                                    
Outstanding at December 31, 1994....................    396,550       $1.86
Granted--Exercise price equals market value.........     58,500        1.98     $0.95
Granted--Exercise price less than market value......      8,000        1.98      7.53
Canceled............................................    (12,525)       2.27
Exercised...........................................    (94,275)       0.47
                                                      ---------
Outstanding at December 31, 1995....................    356,250        2.24
Granted--Exercise price equals market value.........    238,750        2.66      7.38
Granted--Exercise prices less than market value.....     53,750        2.66      2.90
Canceled............................................    (78,250)       2.80
Exercised...........................................    (89,250)       1.80
                                                      ---------
Outstanding at December 31, 1996....................    481,250        2.48
Granted--Exercise price equals market value.........    443,750        5.67      2.93
Granted--Exercise prices greater than market value..    269,400        3.87      1.88
Granted--Exercise prices less than market value.....     60,250        4.05     $2.15
Canceled............................................    (21,375)       3.90
Exercised...........................................    (34,003)       2.15
                                                      ---------
Outstanding at December 31, 1997....................  1,199,272       $4.04
 

  The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:


                                    OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                       ------------------------------------------  -------------------
                                         WEIGHTED
                                          AVERAGE        WEIGHTED            WEIGHTED
      RANGE OF                           REMAINING       AVERAGE              AVERAGE
      EXERCISE           NUMBER         CONTRACTUAL      EXERCISE            EXERCISE
       PRICES          OUTSTANDING         LIFE           PRICE     NUMBER     PRICE
- ---------------------  -----------  -------------------  --------  --------  ---------
                                                              
From $1.80 to $2.75        487,022           8.32 years     $2.11   143,688      $1.80
From $2.80 to $5.63        580,750           9.07 years      5.15    49,125       2.95
From $6.13 to $7.00        131,500           9.28 years      6.26     3,501       7.00
                         ---------  -------------------     -----   -------      -----
                         1,199,272           8.79 years     $4.04   196,314      $2.18
 


  On June 19, 1996, the Board adopted, effective upon the closing of the IPO,
the Company's Employee Stock Purchase Plan (the Plan) whereby eligible employees
may purchase common stock through payroll deductions of up to 10% of
compensation, at a per share price of 85% of the fair market value of the
Company's common stock on the enrollment date or the exercise date six months
later, whichever is lower.  As of December 31, 1997 there were 185,902 shares
reserved for issuance under the Plan.

(7)  INCOME TAXES

  The Company has not recorded an income tax benefit in 1997, 1996, and 1995 due
to the recording of a valuation allowance as an offset to net deferred tax
assets. A valuation allowance is provided due to uncertainties relating to the
realization of deferred tax assets.

                                       42

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
  The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are presented below:


                                                                                    December 31,
                                                                         ----------------------------------
                                                                            1997        1996        1995
                                                                         ----------  ----------  ----------
                                                                                        
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful
 accounts..............................................................  $   43,000  $   43,000  $   24,000
Inventories, principally due to the allowance for obsolete inventory,
 and additional costs inventoried for tax purposes.....................     146,000     131,000      96,000
Tangible and intangible assets, principally due to differences in
 depreciation and amortization.........................................          --          --      45,000
Revenue deferred for financial statement purposes, not for tax
 reporting purposes....................................................          --     220,000     241,000
Deferred compensation not currently deductible.........................     122,000     101,000          --
Accrued expenses, not currently deductible.............................     415,000      90,000      75,000
Net operating loss carryforwards.......................................   6,109,000   4,055,000   3,081,000
Business credit carryforwards..........................................     540,000     386,000     282,000
                                                                         ----------  ----------  ----------
Total gross deferred tax assets........................................   7,375,000   5,026,000   3,844,000
Less valuation allowance...............................................   7,368,000   4,967,000   3,844,000
                                                                         ----------  ----------  ----------
Net deferred tax assets................................................  $    7,000  $   59,000  $       --
Deferred tax liabilities:
 Tangible and intangible assets, principally due to
 differences in depreciation and amortization..........................       7,000      59,000          --
                                                                         ----------  ----------  ----------
Total gross deferred tax liability.....................................       7,000      59,000          --
                                                                         ----------  ----------  ----------
Net deferred tax assets................................................  $       --  $       --  $       --
                                                                         ==========  ==========  ==========


  As of December 31, 1997, the Company had net operating loss carryforwards for
U.S. federal, U.K., and California state tax return purposes of approximately
$15,693,000, $1,808,000, and $3,034,000, respectively. The federal and
California net operating loss carryforwards expire in the years 2012 and 2002,
respectively. The Company's U.K. net operating loss carryforward is available
indefinitely to offset its U.K. trading profits arising from distribution
operations. The difference between the tax loss carryforwards and the
accumulated deficit primarily relates to timing differences in the recognition
of deferred revenue, accrued compensation, and certain reserves.

  The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change". The several
issuances of preferred stock and the initial public offering have resulted in
multiple ownership changes since inception of the Company.  Approximately
$10,300,000 of the federal net operating loss carryforward will be subject to an
annual limitation in the aggregate of $800,000. Any unused annual limitation can
be carried over and added to the succeeding year's annual limitation within the
allowable carryforward period.

                                       43

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(8)   COMMITMENTS

  The Company has various noncancelable operating leases for equipment,
vehicles, and facilities expiring through 2005. The facility leases generally
contain renewal options for periods ranging from two to three years and require
the Company to pay all executory costs such as maintenance, property taxes, and
insurance. Rent expense under operating leases aggregated $351,000, $264,000,
and $326,000 during 1997, 1996 and 1995, respectively. The Company's primary
lease commitments are for its facilities in the United Kingdom, which aggregate
approximately (Pounds)114,000 per year through 2002, with a five-year renewal
option held by the Company, and for its facilities in the United States, which
aggregate approximately $248,000 and $26,000 for 1998 and 1999, respectively.

  The Company has a capital lease commitment of $151,000, including interest of
$28,000 at 10%, which calls for annual payments of $34,000 through the year 2001
and a payment of $15,000 in 2002.

  In October 1997, the Company entered into an exclusive worldwide licensing
agreement with the University of Cambridge for the commercialization of DNA-
probe technology recently developed by the Cambridge researchers.  The agreement
requires minimum annual royalty payments of $30,000 and the payment for specific
research related projects. The agreement will remain in full force and effect
until the expiration of the last patent right or ten years whichever is the
later

(9)  EMPLOYEE BENEFIT PLANS

  In January, 1994, the Company implemented a retirement savings and investment
plan that is intended to qualify under Section 401(k) of the Internal Revenue
Code  (the 401(k) Plan) covering all of the Company's United States-based
employees.  An employee may elect to defer, in the form of contributions to the
401(k) Plan on his or her behalf, up to 15% of the total compensation that would
otherwise be paid to the employee, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines.  The Company matches 100% of the
amounts deferred by the employee participants up to 3% of such employee's total
compensation and such matching amounts vest over a three-year period from the
initial participation date.  Contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan.  Contributions by the Company
are deductible by the Company when made.  The Company contributed $85,000,
$69,000 and $51,000 in 1997, 1996 and 1995, respectively.

  The Company's United Kingdom-based employees are covered by retirement savings
plans (the International Retirement Plans).  Under such plans, an employee may
elect to make contributions of 3.5% of such employee's earnings.  Amounts
contributed by the Company range 5.5% to 10.5% of such employee's earnings.
During 1997, 1996 and 1995, respectively, the Company made contributions to the
Internal Retirement Plans totaling $60,000, $47,000 and $43,000, respectively.
Contributions by employees or by the Company to the International Retirement
Plans, and income earned on plan contributions, are not taxable to employees
until withdrawn from such plans.  Contributions by the Company are deductible by
the Company when made.

                                       44

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
(10)   Other Income, Net

  The components of other income, net are as follows:


                                                December 31,
                                     ----------------------------------
                                        1997        1996        1995
                                     ----------  ----------  ----------
                                                    
  Interest income..................  $ 595,000   $ 208,000   $ 143,000
  Interest expense.................    (49,000)    (86,000)   (110,000)
  Gain (loss) on foreign exchange..   (163,000)   (112,000)     34,000
  Miscellaneous income.............     15,000       4,000       4,000
                                     ---------   ---------   ---------
                                     $ 398,000   $  14,000   $  71,000
                                     =========   =========   =========

(11)   Foreign Operations

  The Company markets its products worldwide from its operations in the United
States and the United Kingdom and performs research and development in the
United States and Israel. Sales from the United States are primarily to
customers within the United States. Revenues in the United Kingdom resulted from
drop shipments of product from the United States directly to customers and from
direct shipments from the United Kingdom.  Selected financial data by primary
geographic area for the years ended December 31, 1997, 1996, and 1995 follow.
In 1995 and 1996, operating losses incurred by Israel are offset by funding
received in connection with the grant discussed at Note 12.


 
                                            Year Ended December 31,
                                    ----------------------------------------
                                        1997          1996          1995
                                    ------------  -------------  -----------
                                                        
 
Sales to unaffiliated customers:
  United States...................  $ 5,328,000    $ 4,797,000   $ 4,254,000
  United Kingdom..................    7,806,000      7,125,000     6,544,000
                                    -----------    -----------   -----------
     Total........................  $13,134,000    $11,922,000   $10,798,000
                                    ===========    ===========   ===========
 
Operating loss:
  United States...................  $ 6,856,000    $ 2,794,000   $ 2,548,000
  United Kingdom..................      546,000         31,000        69,000
  Israel..........................      508,000         70,000            --
                                    -----------    -----------   -----------
     Total........................  $ 7,910,000    $ 2,895,000   $ 2,617,000
                                    ===========    ===========   ===========
 
                                                  December 31,
                                    ----------------------------------------
                                       1997           1996          1995
                                    -----------    -----------   -----------
Total assets:
  United States...................  $11,051,000    $13,032,000   $ 6,473,000
  United Kingdom..................    3,438,000      3,046,000     2,755,000
  Israel..........................      225,000        395,000       145,000
                                    -----------    -----------   -----------
     Total........................  $14,714,000    $16,473,000   $ 9,373,000
                                    ===========    ===========   ===========
 
Net assets:
  United States...................  $ 8,414,000    $11,393,000   $ 4,183,000
  United Kingdom..................    1,073,000        736,000       491,000
  Israel..........................     (544,000)      (124,000)       40,000
                                    -----------    -----------   -----------
     Total........................  $ 8,943,000    $12,005,000   $ 4,714,000
                                    ===========    ===========   ===========


  Substantially all of the sales within the U.K. are denominated in British
pounds. The Company generally does not enter into any arrangements to hedge the
effect of foreign currency changes on its foreign currency denominated assets
and liabilities.

                                       45

 
                     APPLIED IMAGING CORP. AND SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
(12)   Research and Development Arrangement

  During 1995, the Company was awarded a grant by the Israel-United States
Binational Industrial Research and Development (BIRD) Foundation.  With the
funding received from the grant, the Company began research operations in its
Israel subsidiary relating to its fetal cell program.  All funds received by the
Company in advance of performing the related research and development are
recorded as a deferred credit in the accompanying consolidated balance sheets
and, as expenses are incurred, the deferred credit is depleted.  Over the life
of the grant, the Company could receive up to $543,000 in matching funds.  These
funds, as well as any accrued interest, will be required to be paid back to the
BIRD Foundation if future revenues are realized from the related research and
development activities, at the rate of 2 1/2 % of such future revenues generated
in the first year such revenues occur, and 5% of revenues in succeeding years,
over a six-year period, up to a maximum of 150% of the funds received.  As of
December 31, 1997, the Company has received a total of $492,000 in funding and
no further funding is expected.  The Company has recognized credits to its
expenses of approximately $34,000 during 1997, $361,000 during 1996 and $97,000
during 1995.

(13) PRIVATE PLACEMENT TRANSACTION

  On May 22, 1997, the Company consummated a private sale of 796,020 shares of
its Common Stock to certain partnerships affiliated with New Enterprise
Associates, a principal owner of the Company at $5.025 per share.  The price per
share was calculated as the average of the closing prices of the Company's
Common Stock as reported on the Nasdaq National Market System for the previous
five trading days prior to the day of the transaction closing date.  Thomas C.
McConnell, a director of the company, is an affiliate of New Enterprise
Associates.  In connection with this transaction, the Company also issued
warrants, which may be exercised within a three-year period ending May 21, 2000
to acquire an aggregate of 173,010 shares of the Company's Common Stock at a
purchase price of $5.78 per share.  The Company allocated a portion of the
proceeds to the warrants based on the fair value using the Black-Scholes model
and such amount is included within common stock.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

  None.

                                       46

 
                                    PART III
                                        
  Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A with respect to
the 1998 Annual Meeting of Stockholders (the ''Proxy Statement'') and certain
information included therein is incorporated herein by reference.


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Certain of the information required by this item relating to directors is
incorporated by reference to the information under the caption ''Proposal No. 1
- -- Election of Directors'' in the Proxy Statement.

  The executive officers of the Registrant, who are elected by the board of
directors, are as follows:

NAME                             Age       POSITION
- ------------------------------  -----      ------------------------------------
Jack Goldstein, Ph.D.              50      Chief Executive Officer and President
Abraham I. Coriat (1).........     49      Chairman of the Board of Directors
Michael W. Burgett, Ph.D......     52      Executive Vice President
Leslie G. Grant, Ph.D.........     45      Executive Vice President
Neil E. Woodruff (2)..........     51      Chief Financial Officer and Secretary
Carl Hull.....................     40      Vice President Worldwide Marketing

(1)  Mr. Coriat resigned as Chief Executive Officer in April 1997 and was
     replaced by Dr. Goldstein.  Mr. Coriat resigned as Chairman of the Board
     and as a Director in February 1998.

(2)  Mr. Woodruff resigned as Chief Financial Officer and Secretary in
     February 1998.

  Jack Goldstein, Ph.D. joined the Company as Chief Executive Officer and
President in April 1997.  Dr. Goldstein has 23 years of management experience at
leading healthcare companies.  From 1986 to 1997, Dr. Goldstein worked for
Johnson & Johnson in various executive management positions including President
of Ortho Diagnostic Systems and Executive Vice President of Professional
Diagnostics at Johnson & Johnson World Headquarters.  Prior to his tenure at
Johnson & Johnson, Dr. Goldstein served in management positions at Baxter
Healthcare Corporation and American Home Products Corporation.  Dr. Goldstein
holds a B.A. degree in Biology from Rider University, an M.S. in Immunology and
a Ph.D. in Microbiology from St. John's University.

  Abraham I. Coriat the founder of the Company, has been with the Company since
1986.  He served as Chief Executive Officer until April 1997, and Chairman of
the Board until his resignation in February 1998.  From 1981 to 1986, he served
as Business Area Manager and Engineering Manager for International Imaging
Systems in their medical and industrial imaging divisions.  Mr. Coriat has 23
years of experience in the imaging and medical industry, including various
senior engineering positions in England, Belgium and Italy.  He holds an
Electrical Engineering degree from INSA (Institut National de Sciences
Appliquees), France.

  Michael W. Burgett Ph.D., joined the Company as President of the Genetic
Diagnostics Division in February 1996.  In 1997 he became an Executive Vice
President of the Company.  Dr. Burgett has 23 years of experience in the medical
diagnostics industry, including 14 years in senior management positions.  From
1987 to 1996, Dr. Burgett held various general management, operations and
product development positions with Ortho Diagnostic System Inc., a Johnson &
Johnson Company, most recently acting as Vice President and General Manager of
their blood bank business.  Prior to that, Dr. Burgett held various research and
development and program management positions with SmithKline Beckman, Inc.,
International Diagnostics Technology, Inc., and BioRad Laboratories, Inc. Dr.
Burgett holds a B.A. and an M.A. in Biology from San Francisco State University
and a Ph.D. in Chemistry from the University of Texas at Austin.

                                       47

 
  Leslie G. Grant Ph.D., has been President and Chief Operating Officer of the
Company's Cytogenetics Division since February 1992.  In 1997 he became and
Executive Vice President of the Company.  He joined the Company in October 1991
as Managing Director of Applied Imaging International Ltd. From 1980 to 1991,
Dr. Grant held various general management and senior engineering positions with
GEC-Marconi.  Dr. Grant has 20 years experience in the instrumentation and
medical industry, including 11 years in senior management positions.  Dr. Grant
holds a B.S. in Mathematics and a Ph.D. in Mathematics and Electronic
Engineering from the University of Hull, United Kingdom.

  Neil E. Woodruff served as Chief Financial Officer of the Company from April
1990 until his resignation in February 1998, and Secretary from 1993 until
February 1998. Mr. Woodruff has 25 years experience in finance and the high
technology industry.  From 1983 to 1990, Mr. Woodruff held various financial and
general management positions with General Signal Corp.  Prior to that, Mr.
Woodruff held various finance posts with Epitaxy, Inc., National Semiconductor
and General Instrument Corp. Mr. Woodruff holds a B.S. in Finance from the
University of Santa Clara.  Mr. Woodruff resigned from the Company in February
1998.

  Carl Hull joined the Company as Vice President of Worldwide Marketing in
August 1997.  Prior to joining the Company, Mr. Hull served as Vice President of
Marketing and Business Development for Ventana Medical Systems.  From 1982 to
1996, he served in various marketing and sales management positions at Abbott
Laboratories, including Vice President and General Manager of Abbott
Laboratories, Puerto Rico.  He also served as Marketing Manager Far-East,
Marketing manager for Hematology Products, District Sales Manager as well as
Product Manager for several diagnostic product lines.  Mr. Hull received his MBA
from University of Chicago and a B.A. in Political Science and International
Relations at Johns Hopkins University.

                                       48

 
ITEM 11.   EXECUTIVE COMPENSATION

  The information required by this item is incorporated by reference to the
information under the caption ''Executive Compensation'' in the Proxy Statement.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is incorporated by reference to the
information under the caption ''Record Date and Stock Ownership'' in the Proxy
Statement.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item is incorporated by reference to the
information under the caption ''Certain Transactions'' in the Proxy Statement.

                                       49

 
                                    PART IV
                                        
Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1.   Financial Statements

          The following Financial Statements of Applied Imaging Corp. and Report
          of KPMG Peat Marwick LLP, have been provided as Item 8, above:

          Report of KPMG Peat Marwick LLP, Certified Public Accountants

          Consolidated Balance Sheets, 1997 and 1996

          Consolidated Statements of Operations, Years Ended December 31, 1997,
          1996 and 1995

          Consolidated Statements of Stockholders' Equity, Years Ended December
          31, 1997, 1996 and 1995

          Consolidated Statements of Cash Flows, Years Ended December 31, 1997,
          1996 and 1995

          Notes to Consolidated Financial Statements

  2.      FINANCIAL STATEMENT SCHEDULES

          The financial statement schedule entitled ''Valuation and Qualifying
          Accounts'' is included at page 54 of this Form 10-K.

          All other schedules are omitted because they are not applicable or the
          required information is shown in the Financial Statements or the notes
          thereto.

  3.      EXHIBITS

          Refer to (c) below.


(b)       REPORTS ON FORM 8-K

          The Company was not required to and did not file any reports on Form 
          8-K during the three months ended December 31, 1997.
 
(c)       EXHIBITS



EXHIBIT NO.                                                 Description
- ----------------  -----------------------------------------------------------------------------------------------
               
          3.1(1)  Restated Certificate of Incorporation of the Registrant.
          3.2     Bylaws of the Registrant, as amended.
          4.1(1)  Specimen Common Stock Certificate.
         10.1(1)  Form of Indemnification Agreement for directors and officers.
         10.2(1)  Amended and Restated 1988 Incentive Stock Option Plan and form of agreement thereunder.
         10.3(1)  1994 Director Option Plan and form of subsequent agreement thereunder.
         10.4(1)  Employee Stock Purchase Plan.
         10.5(1)  Amended and Restated Registration Rights Agreements.
         10.6(1)  License Agreement dated December 1, 1993 between the Registrant and Chronomed, Inc.
         10.7(1)  Assignment dated December 1, 1993 by and between the Registrant and Alex Saunders, M.D.
         10.8(1)  Lease dated February 15, 1994 for the Registrant's headquarters in Santa Clara, CA.
      10.9(a)(1)  Lease for Site No. BT. 2003/1A, Hylton Park, Sunderland, England, between English Industrial
                  Estates Corporation and Applied Imaging International Ltd., dated June 12, 1992.
      10.9(b)(1)  Lease for Site No. BT.2003/3A, Hylton Park, Sunderland, England, between English Industrial
                  Estates Corporation and Applied Imaging International Ltd., dated June 12, 1992.


                                       50

 


EXHIBIT NO.                                               Description
- -------------  --------------------------------------------------------------------------------------------------
               
   10.9(c)(1)  Underlease for Site No. BT.2003/1A between Applied Imaging International Ltd. And RTC North
               Limited, dated February 14, 1996.
   10.9(d)(1)  Supplement to Underlease for Site No. BT.2003/1A between Applied Imaging International Ltd.
               And RTC North Limited, dated February 14, 1996.
     10.10(1)  Employment Letter Agreement dated August 12, 1991 between the Registrant and Leslie G. Grant.
     10.11(1)  Amendment to Employment Letter Agreement between the Registrant and Leslie G. Grant, dated
               February 12, 1996.
     10.12(1)  Employment Letter Agreement dated January 12, 1996 between the Registrant and Michael W.
               Burgett, Ph.D., and supplement thereto, dated January 20, 1996.
     10.13(1)  Know-How License Agreement dated November 1989 between Medical Research Council and
               Shandon Scientific Limited (assigned to the Registrant in November 1989), as amended, July 5,
               1994.
     10.14(1)  Cooperative Research and Development Agreement, dated June 10, 1995 between Registrant and
               the National Institute of Health.
     10.15(1)  Supply & Distribution Agreement dated March 3, 1994 between Cytocell Ltd. And Registrant.
     10.16(1)  Research Purchase Agreement dated March 26, 1996 between Pharmacia Biotech AB and
               Registrant.
     10.17(1)  Development Agreement dated February 5, 1996 between Em Industries and Registrant.
     10.18(1)  Security and Loan Agreement dated September 5, 1995 between Registrant and Imperial Bank.
     10.19(1)  Extension to Security and Loan Agreement dated September 16, 1996 between Registrant and
               Imperial.
     10.20(1)  Agreement dated October 3, 1996 between Mitchell S. Golbus and the Registrant.
     10.21(2)  License Agreement dated October 24, 1997 between Cambridge University and the Registrant.
     10.22     Employment Letter Agreement dated July 21, 1997 between the Company and Carl Hull.
     10.23     Employment Letter Agreement dated April 2, 1997 between the Company and Jack Goldstein, Ph.D. and
               amendment dated April 4, 1997.
      21.1(1)  List of Subsidiaries of the Registrant.
      23.1     Consent of KPMG Peat Marwick LLP.
      24.1     Power of Attorney (included at page 52 below).
      27.1     Financial Data Schedule.

- --------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
    (File No. 333-06703) and incorporated herein by reference.
(2) Confidential Treatment requested for portions of this exhibit.

                                       51

 
                                   SIGNATURES
                                        
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                  Applied Imaging Corp.


                                 
Date:  March 31, 1998             By:  /s/ Jack Goldstein  
                                      -----------------------
                                           JACK GOLDSTEIN
                                      Chief Executive Officer

                               POWER OF ATTORNEY
                                        
  KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jack Goldstein his or her attorney-in-
fact, with the power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue thereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.


 
              Signatures                              TITLE                       DATE
- ---------------------------------------  -------------------------------   ------------------
                                                                     
           /S/ Jack Goldstein          Chief Executive Officer and          March 31, 1998
- ----------------------------------       Director (Principal
           (JACK GOLDSTEIN)              Executive Officer)
 

        /S/ Michael J. Braden          Corporate Controller                 March 31, 1998
- ----------------------------------      (Principal
           (MICHAEL J. BRADEN)          Accounting Officer)


     /s/   John F. Blakemore, Jr.      Director                             March 31, 1998
- ---------------------------------- 
        (JOHN F. BLAKEMORE, JR.)


                                       Director                             
- ---------------------------------- 
        (GILBERT J.R. MCCABE)

 

                                       52

 


 
              Signatures                              TITLE                       DATE
- ---------------------------------------  -------------------------------   ------------------
                                                                     

    /s/  Thomas C. McConnell           Director                             March 31, 1998
- ---------------------------------- 
      (THOMAS C. MCCONNELL)


     /s/   Andre F. Marion             Director                             March 31, 1998
- ---------------------------------- 
          (ANDRE F. MARION)


      /s/  Robert C. Miller            Director                             March 31, 1998
- ---------------------------------- 
        (ROBERT C. MILLER)


                                       Director                             
- ---------------------------------- 
           (G. KIRK RAAB)
 

                                       53

 
                             APPLIED IMAGING CORP.
                                        

                 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)




                                                          BALANCE AT      CHARGED TO                      BALANCE AT
                                                         BEGINNING OF     COSTS AND      DEDUCTIONS/        END OF
                                                             YEAR          EXPENSES       RECOVERIES         YEAR
                                                        --------------  --------------  --------------  --------------
                                                                                            
Allowance for doubtful accounts
   Year ended December 31, 1997                               $228             $10             $47            $191
   Year ended December 31, 1996                               $166             $76             $14            $228


                                       54

 
                                 EXHIBIT INDEX
                                        


  Exhibit
    No.                                                  DESCRIPTION
- ------------  --------------------------------------------------------------------------------------------------
           
         3.2  Bylaws of the Registrant, as amended.
       10.21  License Agreement dated October 24, 1997 between Cambridge University and the Registrant.
       10.22  Employment Letter Agreement dated July 21, 1997 between the Company and Carl Hull.
       10.23  Employment Letter Agreement dated April 2, 1997 between the Company and Jack Goldstein, Ph.D. and
              amendment dated April 4, 1997.
        24.1  Power of Attorney, included at page 52, above.
        27.1  Financial Data Schedule.


                                       55

EX-3.2

 

                                                            Exhibit 3.2

 
                                     BYLAWS
                                    
                                       OF
                                      
                             APPLIED IMAGING CORP.
                            
                            (a Delaware corporation)

 
                                   BYLAWS OF

                             APPLIED IMAGING CORP.
                            (a Delaware corporation)


                               TABLE OF CONTENTS



                                                                           Page
                                                                         
 
ARTICLE I - CORPORATE OFFICES............................................... 1

     1.1      REGISTERED OFFICE............................................. 1
     1.2      OTHER OFFICES................................................. 1

ARTICLE II - MEETINGS OF STOCKHOLDERS....................................... 1

     2.1      PLACE OF MEETINGS............................................. 1
     2.2      ANNUAL MEETING................................................ 1
     2.3      SPECIAL MEETING............................................... 1
     2.4      NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
     2.5      ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
                STOCKHOLDER BUSINESS........................................ 2
     2.6      MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 3
     2.7      QUORUM........................................................ 4
     2.8      ADJOURNED MEETING; NOTICE..................................... 4
     2.9      VOTING........................................................ 4
     2.10     RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.................... 5
     2.11     PROXIES....................................................... 5
     2.12     ORGANIZATION.................................................. 6
     2.13     LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 6
     2.14     WAIVER OF NOTICE.............................................. 6

ARTICLE III - DIRECTORS..................................................... 7

     3.1      POWERS........................................................ 7
     3.2      NUMBER OF DIRECTORS........................................... 7
     3.3      ELECTION AND TERM OF OFFICE OF DIRECTORS...................... 7
     3.4      RESIGNATION AND VACANCIES..................................... 7
     3.5      REMOVAL OF DIRECTORS.......................................... 8
     3.6      PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 9
     3.7      REGULAR MEETINGS.............................................. 9
     3.8      SPECIAL MEETINGS; NOTICE...................................... 9


                                      -i-

 
                               TABLE OF CONTENTS

                                  (Continued)

 
 

                                                                           Page
                                                                           ----
                                                                         

     3.9      QUORUM.......................................................  9
     3.10     WAIVER OF NOTICE............................................. 10
     3.11     ADJOURNMENT.................................................. 10
     3.12     NOTICE OF ADJOURNMENT........................................ 10
     3.13     BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ 10
     3.14     FEES AND COMPENSATION OF DIRECTORS........................... 10
     3.15     APPROVAL OF LOANS TO OFFICERS................................ 11

ARTICLE IV - COMMITTEES.................................................... 11

     4.1      COMMITTEES OF DIRECTORS...................................... 11
     4.2      MEETINGS AND ACTION OF COMMITTEES............................ 12
     4.3      COMMITTEE MINUTES............................................ 12

ARTICLE V - OFFICERS....................................................... 12

     5.1      OFFICERS..................................................... 12
     5.2      ELECTION OF OFFICERS......................................... 12
     5.3      SUBORDINATE OFFICERS......................................... 13
     5.4      REMOVAL AND RESIGNATION OF OFFICERS.......................... 13
     5.5      VACANCIES IN OFFICES......................................... 13
     5.6      CHAIRMAN OF THE BOARD........................................ 13
     5.7      PRESIDENT.................................................... 13
     5.8      VICE PRESIDENTS.............................................. 14
     5.9      SECRETARY.................................................... 14
     5.10     CHIEF FINANCIAL OFFICER...................................... 14
     5.11     ASSISTANT SECRETARY.......................................... 15
     5.12     ADMINISTRATIVE OFFICERS...................................... 15
     5.13     AUTHORITY AND DUTIES OF OFFICERS............................. 15

ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
              OTHER AGENTS................................................. 16

     6.1      INDEMNIFICATION OF DIRECTORS AND OFFICERS.................... 16
     6.2      INDEMNIFICATION OF OTHERS.................................... 17
     6.3      INSURANCE.................................................... 17
 

                                     -ii-

 
                              TABLE OF CONTENTS

                                 (Continued)


 
 
                                                                          Page
                                                                          ----
                                                                        
 
ARTICLE VII - RECORDS AND REPORTS.......................................... 17

     7.1      MAINTENANCE AND INSPECTION OF RECORDS........................ 17
     7.2      INSPECTION BY DIRECTORS...................................... 18
     7.3      ANNUAL STATEMENT TO STOCKHOLDERS............................. 18
     7.4      REPRESENTATION OF SHARES OF OTHER CORPORATIONS............... 18
     7.5      CERTIFICATION AND INSPECTION OF BYLAWS....................... 18

ARTICLE VIII - GENERAL MATTERS............................................. 18

     8.1      RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND
                VOTING..................................................... 18
     8.2      CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................... 19
     8.3      CORPORATE CONTRACTS AND INSTRUMENTS:  HOW EXECUTED........... 19
     8.4      STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES............. 19
     8.5      SPECIAL DESIGNATION ON CERTIFICATES.......................... 20
     8.6      LOST CERTIFICATES............................................ 20
     8.7      TRANSFER AGENTS AND REGISTRARS............................... 21
     8.8      CONSTRUCTION; DEFINITIONS.................................... 21

ARTICLE IX - AMENDMENTS.................................................... 21


                                     -iii-

 
                                    BYLAWS
                                    ------

                                      OF
                                      --

                             APPLIED IMAGING CORP.
                             ---------------------
                           (a Delaware corporation)


                                   ARTICLE I

                               CORPORATE OFFICES
                               -----------------

      1.1  REGISTERED OFFICE
           -----------------

      The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.

      1.2  OTHER OFFICES
           -------------

      The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.


                                   ARTICLE II

                            MEETINGS OF STOCKHOLDERS
                            ------------------------

      2.1  PLACE OF MEETINGS
           -----------------

      Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors.  In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.

      2.2  ANNUAL MEETING
           --------------

      The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.

      2.3  SPECIAL MEETING
           ---------------

      A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the

 
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.  No other person or persons are permitted to call a special meeting.

      If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation.  The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request.  If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice.  Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.

      2.4  NOTICE OF STOCKHOLDERS' MEETINGS
           --------------------------------

      All notices of meetings of stockholders shall be sent or otherwise given
in accordance with Section 2.6 of these bylaws not less than ten (10) nor more
than sixty (60) days before the date of the meeting. The notice shall specify
the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.

      2.5  ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
           ---------------------------------------------------------------

      Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,

      (a)  nominations for the election of directors, and

      (b)  business proposed to be brought before any stockholder meeting

may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting.  However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of their intent to make such nomination or nominations or to
propose such business.  To be timely, such stockholder's notice

                                      -2-

 
must be delivered to or mailed and received at the principal executive offices
of the corporation not less than one hundred twenty (120) calendar days in
advance of the date specified in the corporation's proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received a reasonable time before the solicitation is made.  To be in proper
form, a stockholder's notice to the secretary shall set forth:

      (i)   the name and address of the stockholder who intends to make the
      nominations or propose the business and, as the case may be, of the person
      or persons to be nominated or of the business to be proposed;

      (ii)  a representation that the stockholder is a holder of record of
      stock of the corporation entitled to vote at such meeting and, if
      applicable, intends to appear in person or by proxy at the meeting to
      nominate the person or persons specified in the notice;

      (iii) if applicable, a description of all arrangements or understandings
      between the stockholder and each nominee and any other person or persons
      (naming such person or persons) pursuant to which the nomination or
      nominations are to be made by the stockholder;

      (iv)  such other information regarding each nominee or each matter of
      business to be proposed by such stockholder as would be required to be
      included in a proxy statement filed pursuant to the proxy rules of the
      Securities and Exchange Commission had the nominee been nominated, or
      intended to be nominated, or the matter been proposed, or intended to be
      proposed by the board of directors; and

      (v)   if applicable, the consent of each nominee to serve as director of
      the corporation if so elected.

      The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.

      2.6   MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
            --------------------------------------------

      Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication.  Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice.  Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.

                                      -3-

 
      An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.

      2.7  QUORUM
           ------

      The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation.  If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.

      When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.

      If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.

      2.8  ADJOURNED MEETING; NOTICE
           -------------------------

      When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken.  At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting.  If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

      2.9  VOTING
           ------

      The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).

      Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.

                                      -4-

 
      Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to be
voted for, or for any two or more of them, as he or she may see fit.

      2.10  RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
            ------------------------------------------

      For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.

      If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.

      A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.

      The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.

      2.11  PROXIES
            -------

      Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period.  A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact.  The

                                      -5-

 
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.

      2.12  ORGANIZATION
            ------------

      The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting.  In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting.  The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business.  The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.

      2.13  LIST OF STOCKHOLDERS ENTITLED TO VOTE
            -------------------------------------

      The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder.  Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held.  The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

      2.14  WAIVER OF NOTICE
            ----------------

      Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice.  Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.  Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.

                                      -6-

 
                                   ARTICLE III

                                   DIRECTORS
                                   ---------

      3.1  POWERS
           ------

      Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.


      3.2  NUMBER OF DIRECTORS
           -------------------

      The board of directors shall not be less than five (5) nor more than
nine(9) members.  The exact number of directors shall be eight (8) until
changed, within the limits specified above by a bylaw amending this Section 3.2
duly adopted by the board of directors or the stockholders.  The indefinite
number of directors may be changed, or a definite number may be fixed without
provision for an indefinite number, by an amendment to this bylaw, duly adopted
by the board of directors or by the stockholders, or by a duly adopted amendment
to the certificate of incorporation.  No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.

      Upon the closing of the first sale of the corporation's common stock
pursuant to a firmly underwritten registered public offering (the "IPO"), the
directors shall be divided into three classes, with the term of office of the
first class, which class shall initially consist of three directors, to expire
at the first annual meeting of stockholders held after the IPO; the term of
office of the second class, which class shall initially consist of three
directors, to expire at the second annual meeting of stockholders held after the
IPO; the term of office of the third class, which class shall initially consist
of two directors, to expire at the third annual meeting of stockholders held
after the IPO; and thereafter for each such term to expire at each third
succeeding annual meeting of stockholders held after such election.

      3.3  ELECTION AND TERM OF OFFICE OF DIRECTORS
           ----------------------------------------

      Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.

      3.4  RESIGNATION AND VACANCIES
           -------------------------

      Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.

                                      -7-

 
      Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next election of the class for which such director shall have been
chosen and until a successor has been elected and qualified.

      Unless otherwise provided in the certificate of incorporation or these
bylaws:

               (i)   Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.

               (ii)  Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.

      If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.

      If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.

      3.5  REMOVAL OF DIRECTORS
           --------------------

      Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.

                                      -8-

 
      3.6  PLACE OF MEETINGS; MEETINGS BY TELEPHONE
           ----------------------------------------

      Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.

      Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.

      3.7  REGULAR MEETINGS
           ----------------

      Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors. If
any regular meeting day shall fall on a legal holiday, then the meeting shall be
held at the same time and place on the next succeeding full business day.

      3.8  SPECIAL MEETINGS; NOTICE
           ------------------------

      Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.

      Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.

      3.9  QUORUM
           ------

      A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.

                                      -9-

 
      A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.


      3.10  WAIVER OF NOTICE
            ----------------

      Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.

      3.11  ADJOURNMENT
            -----------

      A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.

      3.12  NOTICE OF ADJOURNMENT
            ---------------------

      Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.

      3.13  BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
            -------------------------------------------------

      Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.

      3.14  FEES AND COMPENSATION OF DIRECTORS
            ----------------------------------

      Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.

                                     -10-

 
      3.15  APPROVAL OF LOANS TO OFFICERS
            -----------------------------

      The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation.  The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation.  Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.


                                   ARTICLE IV

                                   COMMITTEES
                                   ----------

      4.1  COMMITTEES OF DIRECTORS
           -----------------------

      The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.  The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors.  Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.

                                     -11-

 
      4.2  MEETINGS AND ACTION OF COMMITTEES
           ---------------------------------

      Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section
3.13 (notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.

      4.3  COMMITTEE MINUTES
           -----------------

      Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.


                                   ARTICLE V

                                   OFFICERS
                                   --------

      5.1  OFFICERS
           --------

      The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents (however denominated), one or more assistant secretaries, a treasurer
and one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.

      In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the corporation
in accordance with the provisions of Section 5.12 of these bylaws.

      5.2  ELECTION OF OFFICERS
           --------------------

      The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.

                                     -12-

 
      5.3  SUBORDINATE OFFICERS
           --------------------

      The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.

      The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.

      5.4  REMOVAL AND RESIGNATION OF OFFICERS
           -----------------------------------

      Subject to the rights, if any, of a Corporate Officer under any contract
of employment, any Corporate Officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the board
or, except in case of a Corporate Officer chosen by the board of directors, by
any Corporate Officer upon whom such power of removal may be conferred by the
board of directors.

      Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.

      Any Administrative Officer designated and appointed by the president may
be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.

      5.5  VACANCIES IN OFFICES
           --------------------

      A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.

      5.6  CHAIRMAN OF THE BOARD
           ---------------------

      The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.

      5.7  PRESIDENT
           ---------

      Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the

                                     -13-

 
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and the officers of
the corporation.  He or she shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a chairman of the board, at all meetings
of the board of directors.  He or she shall have the general powers and duties
of management usually vested in the office of president of a corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or these bylaws.

      5.8  VICE PRESIDENTS
           ---------------

      In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.

      5.9  SECRETARY
           ---------

      The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders.  The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.

      The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.

      The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.

      5.10  CHIEF FINANCIAL OFFICER
            -----------------------

      The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director for a purpose reasonably related to his
position as a director.

                                     -14-

 
      The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.

      5.11  ASSISTANT SECRETARY
            -------------------

      The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.

      5.12  ADMINISTRATIVE OFFICERS
            -----------------------

      In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation.  Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties.  In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.

      5.13  AUTHORITY AND DUTIES OF OFFICERS
            --------------------------------

      In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.

                                     -15-

 
                                  ARTICLE VI

               INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
               -------------------------------------------------
                                AND OTHER AGENTS
                                ----------------

      6.1  INDEMNIFICATION OF DIRECTORS AND OFFICERS
           -----------------------------------------

      The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware as the same now exists or may
hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.

      The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.

      The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.

      The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.

      Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.

                                     -16-

 
      6.2  INDEMNIFICATION OF OTHERS
           -------------------------

      The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.

      6.3  INSURANCE
           ---------

      The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.


                                  ARTICLE VII

                              RECORDS AND REPORTS
                              -------------------

      7.1  MAINTENANCE AND INSPECTION OF RECORDS
           -------------------------------------

      The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.

      Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom.  A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder.  In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the

                                     -17-

 
stockholder. The demand under oath shall be directed to the corporation at its
registered office in Delaware or at its principal place of business.

      7.2  INSPECTION BY DIRECTORS
           -----------------------

      Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.

      7.3  ANNUAL STATEMENT TO STOCKHOLDERS
           --------------------------------

      The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.

      7.4  REPRESENTATION OF SHARES OF OTHER CORPORATIONS
           ----------------------------------------------

      The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation.  The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.

      7.5  CERTIFICATION AND INSPECTION OF BYLAWS
           --------------------------------------

      The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.


                                  ARTICLE VIII

                                GENERAL MATTERS
                                ---------------

      8.1  RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
           -----------------------------------------------------

      For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to

                                     -18-

 
receive the dividend, distribution or allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date so fixed, except as otherwise
provided by law.

      If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.

      8.2  CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
           -----------------------------------------

      From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.

      8.3  CORPORATE CONTRACTS AND INSTRUMENTS:  HOW EXECUTED
           --------------------------------------------------

      The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances.  Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.

      8.4  STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
           ------------------------------------------------

      The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.

      Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,

                                     -19-

 
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.

      Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

      The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.

      8.5  SPECIAL DESIGNATION ON CERTIFICATES
           -----------------------------------

      If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.

      8.6  LOST CERTIFICATES
           -----------------

      Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.


                                     -20-

 
      8.7  TRANSFER AGENTS AND REGISTRARS
           ------------------------------

      The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.

      8.8  CONSTRUCTION; DEFINITIONS
           -------------------------

      Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws.  Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.


                                   ARTICLE IX

                                   AMENDMENTS
                                   ----------

      The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation.  The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.

      Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.

                                     -21-

 
                       CERTIFICATE OF ADOPTION OF BYLAWS

                                       OF

                             APPLIED IMAGING CORP.


                            ADOPTION BY INCORPORATOR
                            ------------------------


      The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Applied Imaging Corp. hereby adopts the foregoing
bylaws, comprising twenty-one (21) pages, as the Bylaws of the corporation.

   Effective as of August 30, 1996.



                                       /s/ Jason M. Brady
                                       ---------------------------------
                                       Jason M. Brady
                                       Incorporator



              Certificate by Secretary of Adoption by Incorporator
              ----------------------------------------------------


      The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Applied Imaging Corp. and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
effective as of August 30, 1996, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 30th day of August 1996.


                                       /s/ Neil E. Woodruff
                                       --------------------------------
                                       Neil E. Woodruff
                                       Secretary

                                     -22-

EX-10.21

 
                                                                      Exh. 10.21


                PATENT LICENSE AND MATERIAL TRANSFER AGREEMENT


This Agreement is made by and between Cambridge University Technical Services
Ltd at The Old Schools, Trinity Lane, Cambridge, Great Britain CB2 TS,
hereinafter referred to as "University", and Applied Imaging Corporation, a
Delaware corporation, having its office and principal place of business at 2380
Walsh Avenue, Building B, Santa Clara, California 95051 United States of
America, hereinafter referred to as "Licensee".

Witnesseth:

Whereas, University owns certain Patent Rights related to the Licensed Subject
Matter listed in Attachment A;

Whereas, University also owns Technology and Tangible Technical Materials
related to the Licensed Subject Matter, namely Assays to Detect and Analyze
Chromosomal Aberrations in various species using labeled DNA from a related
species as a set of probes, covered by British Patent Application No. 9704054.7.

Whereas, University wishes to have the technical information covered by the
Patent Rights and/or included in the Technology and Tangible Technical Materials
developed and used;

Whereas, Licensee wishes to obtain an exclusive license under such Patent
Rights, Technology, and Tangible Technical Materials to practice such invention;
and

Whereas, Licensee wishes University to produce and supply Tangible Technical
Materials to Licensee.



[ * ] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.

 
                                                                    Page 2 of 22

Now, therefore, in consideration of the mutual covenants and premises herein
contained, the parties hereto agree as follows:

1.   EFFECTIVE DATE

This Agreement shall be effective as of the date of execution (Effective Date).


2.   DEFINITIONS

As used in this Agreement, the following terms shall have the meanings
indicated.

     2.1    Licensed Subject Matter shall mean Licensed Patent Product, Patent
Rights, Technology, and Tangible Technical Materials in the field of in vitro
diagnostic assays, using labeled nucleic acid probes.

     2.2    Patent Rights shall mean those worldwide prospective or existing
patent applications and/or worldwide prospective or existing letters patents,
including any division, continuation, continuation-in-part, provisional,
reissue, or extension thereof, or substitute therefor of the current patent
applications listed in Attachment A, which are owned, assigned, or by right of
contact or law assignable to University. Attachment A shall be amended from time
to time to include any additional patents or patent applications not previously
listed.

     2.3   Technology shall mean, any existing or future invention, discovery,
know-how, process, procedure, method, protocol, formula, technique, software,
design, drawing, data or other valuable technical information of University's
relating to Patent Rights and Tangible Technical Materials in the field of in
vitro diagnostic assays, using labeled nucleic acid probes.

 
                                                                    Page 3 of 22

     2.4   Tangible Technical Materials shall mean University's existing or
future labeled DNA probes from one vertebrate species which are used to detect
chromosomal aberrations in another vertebrate species as described in the Patent
Rights.

     2.5   Affiliate shall mean, with respect to either party, any corporation,
university, or other business or legal entity either directly or indirectly
controlling, controlled by, or under common control with such party.  Control
shall mean possession of the power to direct or cause the direction of the
management and policies of any entity, whether through ownership of voting
stock, by contract, or otherwise.  In the case of a corporation, control shall
mean the direct or indirect ownership of equal to or more than fifty percent
(50%) of the outstanding voting stock.

     2.6   Licensed Patent Product shall mean all current and future products
the manufacture, use, importation, offer to sell, or sale of which is covered by
one or more claims of the Patent Rights, so long as the related patent claims
have not been held invalid or unenforceable by a court or other body of
competent jurisdiction from which no appeal has been or may be taken.

     2.7   Net Sales shall mean the actual gross invoice price of Licensed
Patent Product sold by Licensee, its Affiliates and sublicensees to third party
customers less, to the extent included therein, the total of (i) ordinary and
customary trade discounts; (ii) sales and excise taxes, and other similar taxes,
such as Value Added Taxes (VAT), customs duty and compulsory payments to
governmental authorities actually paid or deducted and related to the sale; and
(iii) credits given to customers for rejects or returns of License Patent
Product.

     2.8   For Licensed Patent Products sold in combination with other products,
"Combination Product", Net Sales of the License Patent Product shall be
calculated by multiplying Net Sales of the Combination Product by the fraction
A/(B) wherein A is the sales price of the Licensed Patent Product when sold
separately and B is the total sales price of the Combination Product.  If the
Licensed Patent Product is not sold separately, then cost of 

 
                                                                    Page 4 of 22

production for each component shall be substituted for sales price in the above
formula.

     2.9   One "test" is sufficient to do one (1) in situ hybridization on a 
22 mm x 22 mm cover slip.


3.   GRANT

     3.1   University hereby grants to Licensee and its Affiliates a worldwide
exclusive license under its Patent Rights, Technology, and Tangible Technical
Materials to make, have made, import, use, offer to sell, or sell Licensed
Subject Matter during the Term of this Agreement.  University shall transfer
Technology and Tangible Technical Materials to Licensee upon the Effective Date
of this Agreement.

     3.2   Licensee shall have the right to grant sublicenses consistent with
this Agreement, provided that Licensee shall be responsible for the operations
of its sublicensees relevant to this Agreement as if such operations were
carried out by Licensee, including payment of royalties, whether or not paid to
Licensee by the sublicensee.

     3.3   Licensee shall have the Right to enter into crosslicense agreements
with third parties in which Licensee grants the third party a sublicense
consistent with this agreement.

     3.4   University and the University of Cambridge reserve the right to
practice and use Patent Rights, Technology, and/or other Tangible Technical
Materials for their own non-commercial research purposes, but for no other use.

 
                                                                    Page 5 of 22

4.   COMPENSATION

     4.1   Within thirty (30) days of the execution of this Agreement, Licensee
shall pay University [ * ] of which having already been paid by Licensee to
University.

     4.2   Licensee shall pay a royalty of [ * ] of Net Sales of Licensed
Patent Products sold in any country in which a patent has been issued or
granted within the Patent Rights, wherein a claim or claims of the issued
patent covers the manufacture, use, import, or sale of Licensed Patent
Products.

     4.3   Licensee shall pay a royalty of [ * ] of Net Sales of Licensed
Patent Products sold in any country in which a patent application is pending,
wherein a pending claim or claims of the application covers the manufacture,
use, import, or sale of Licensed Products.

     4.4   Licensee shall pay a minimum annual royalty of [ * ]. The minimum
annual royalty shall be paid in annual installments beginning on January 1,
1998, and payable thereafter on each anniversary thereof during the term of
this Agreement. This minimum annual royalty shall be non-refundable but shall
be creditable against earned royalties in any calendar year until the entire
credit is exhausted.

     4.5   Licensee shall pay a royalty of [ * ] of Net Sales of Licensed
Patent Products sold in any country wherein no patent has issued or is pending
until a competitive product is sold by a third party. Licensee shall notify
University of the sale of the third-party competitive product and all royalty
payments due in that country under this Section 4.5 shall immediately cease.

     4.6   No royalties shall be paid on the sale of a Licensed Patent Product
in a country after the Patent Rights covering such Licensed Patent Product have
expired.  Upon Licensee's 



[ * ] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.


 
                                                                    Page 6 of 22

final royalty payment due in a country, Licensee shall be deemed to have a full
paid-up irrevocable license.

     4.7   No royalties shall be due upon the sales of Licensed Patent Products
to and between Licensee and/or it Affiliates, or between Licensee, its
Affiliates, and/or sublicensees.

     4.8   If more than one royalty or royalty rate should be applicable to any
transaction, only a single royalty shall be due and that royalty shall be
computed at the highest applicable royalty rate.  Only a single royalty shall be
paid on sales of Licensed Patent Products no matter how many patent claims or
Patent Rights cover such Licensed Patent Products.

     4.9   Licensee shall pay to University the royalties set forth in this
Agreement within sixty (60) days after the end of each calendar quarter, along
with a report identifying the Licensed Patent Products, the Net Sales, and the
computation of the royalties payable to University.  If no royalties are due, it
shall be so reported.

     4.10  Royalties due on Net Sales of Licensed Patent Products shall be in
US Dollars, and, unless otherwise agreed in writing, shall be made by wire
transfer to such United Kingdom bank as University shall designate in writing.
The payment shall be made without set-off, and free and clear of, and without
any deduction or withholding for, or on account of, any taxes, duties, levies,
imposts, fees or charges.  Royalties due on Net Sales of Licensed Patent
Products made in currency other than US Dollars shall first be calculated in the
foreign currency and then converted to US Dollars on the basis of the rate of
exchange in effect on the last business day of the quarterly period for which
royalties are due as published in The Wall Street Journal.  if no rate is
published therein, the conversion shall be based upon that prevailing at Chase
Manhattan Bank.  If restrictions on the transfer of currency exist in any
country such as to prevent Licensee from making payments in US Dollars, Licensee
shall make the royalty payment due upon Net Sales in such country in local
currency and shall deposit such payments in a local bank or other depository
designated by University in writing.

 
                                                                    Page 7 of 22

     4.11   During the Term of this Agreement and for three (3) years
thereafter, Licensee shall keep complete and accurate records of its and its
sublicensee's Net Sales of Licensed Patent Products under the license granted in
this Agreement in sufficient detail to enable the royalties to be determined.
Upon thirty (30)-days' written notice, Licensee shall permit University, or its
representatives, at University's expense, to examine Licensee's books, ledgers,
and records covering Net Sales of Licensed Patent Products during regular
business hours for the purpose of verifying, and to the extent necessary to
verify, any report required under this Agreement.  Such examination shall be
limited to a period of time no more than three (3) fiscal years immediately
preceding the request for examination.  Information received by the University
or its representatives shall be considered Licensee's Confidential Information
and subject to the Confidentiality Section below.

     4.12   If a third party obtains, by order, decree or grant from a
governmental authority in any country, a compulsory license authorizing such
third party to make, have made, use, import, or sell Licensed Subject Matter,
Licensee's obligations to pay royalties with respect to Net Sales of Licensed
Patent Products in that country shall be equal to and no more than the royalty
rate payable to Licensee or Licensor by said third party, during the effective
period of such compulsory license.


5.   CONFIDENTIALITY

     5.1    Except as is necessary in Licensee's discretion for the development
and/or commercialization of the Licensed Subject Matter, Licensee shall not
disclose information regarding the format of any Tangible Technical Materials
nor convey them nor disclose Technology to third parties without the express
written consent of University during the Term of this Agreement and for a period
of three (3) years thereafter, except to the extent that such Tangible Technical
Materials or Technology:

 
                                                                    Page 8 of 22

     (a)   is part of the public domain at the time of its disclosure to
           Licensee or later becomes part of the public domain through no fault
           of Licensee;

     (b)   was in the possession of Licensee prior to receipt from University;

     (c)   is received from a third party having no obligations of
           confidentiality to University; or

     (d)   is necessary to enforce, or resolve a dispute under, this Agreement;
           or is advisable or necessary to comply with any applicable local,
           state, federal, or international regulation or law.

     5.2   University shall not disclose information concerning Licensee's
business or products relating to the Licensed Subject Matter (Licensee's
Confidential Information) during the Term of this Agreement and for a period of
three (3) years thereafter, except to the extent that such Licensee's
Confidential Information:

     (a)   is part of the public domain at the time of its disclosure to
           University or later becomes part of the public domain through no
           fault of University;

     (b)   was in the possession of University prior to receipt from Licensee;

     (c)   is received from a third party having no obligations of
           confidentiality to Licensee; or

     (d)   is necessary to enforce, or resolve a dispute under, this Agreement;
           or is advisable or necessary to comply with any applicable local,
           state, federal, or international regulation or law.

     5.3   These confidentiality provisions shall survive termination or
expiration of this Agreement.

 
                                                                    Page 9 of 22

6.   PRODUCT DEVELOPMENT

     6.1   Licensee shall be free to establish any technical, pre-clinical,
and/or clinical program, at its expense, for the purposes of developing and/or
marketing Licensed Subject Matter.  Licensee shall own all resulting data and
all rights arising therefrom.

     6.2   University shall supply such assistance, consultation, documents or
information within its possession relating to the Licensed Subject Matter upon
written request of Licensee, and at no cost to Licensee.


7.   DILIGENCE

     7.1   Licensee agrees to use all reasonable efforts and diligence to
proceed with the development, manufacture, and/or sale of Licensed Patent
Products.


8.   PATENTS

     8.1   Licensee shall take all reasonable and necessary steps, and pay all
necessary expenses, to obtain and maintain worldwide patent protection for
Patent Rights. The filing, prosecution, and maintenance of Patent Rights shall
be the primary responsibility of Licensee; provided however, that University
shall have the right to review and comment on the prosecution patent counsel,
and strategy concerning Patent Rights, which review and comment Licensee shall
consider.  The parties shall discuss the country list for the filing of any
additional patent applications within Patent Rights.

     8.2   Licensee shall not finally abandon any Patent Rights without the
written consent of University, which consent shall not be unreasonably withheld.
University shall have the right, 

 
                                                                   Page 10 of 22

but not the obligation, to assume prosecution of any Patent Right which Licensee
intends to abandon or fail to maintain.

     8.3   University and Licensee agree, at Licensee's cost, to cooperate fully
with the other in the preparation and prosecution of Patent Rights.

     8.4   Licensee agrees to mark the Licensed Patent Products with the proper
legend concerning patent coverage, in accordance with the laws of each
respective country.


9.   SUPPLY OF TANGIBLE TECHNICAL MATERIALS

     9.1   University shall make best efforts to procure the supply to Licensee
[ * ] initial prototype tests containing Tangible Technical Materials for
Licensee's evaluation. Licensee shall pay University [ * ] for each prototype
test supplied and no additional royalty or payment shall be owed by Licensee
for these prototype tests. University shall make best efforts to ship these
prototype tests within thirty (30) days of the Effective Date of this
Agreement and Licensee shall have thirty (30) days in which to accept or
reject the prototype tests. If Licensee rejects any or all of the prototype
tests, University agrees to make best efforts to replace them within thirty
(30) days. For those prototype tests accepted by Licensee, Licensee shall pay
the designated amount per prototype test within thirty (30) days.

     9.2   The prototype tests shall be evaluated by Licensee at its sole
discretion and based upon acceptance criteria set solely by Licensee.



[ * ] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.

 
                                                                   Page 11 of 22

     9.3   Licensee shall bear full responsibility to obtain and pay for all
licenses and/or clearances related to the manufacture, use, export, and/or sale
of the prototype tests, including the Tangible Technical Materials and other
prototype test components.

     9.4   Full title to the prototype tests and risk of loss shall pass to
Licensee at the point of receipt (FOB receiving point).  Licensee shall have no
further obligation to University except as noted above.  University shall be
responsible for any loss, or damage to, the prototype tests which occurs in
transit.  Also, University shall pay all freight and handling charges, as well
as any other charges or non-VAT taxes relating to the supply and shipment of the
prototype tests.

     9.5   University shall make best efforts to fully and adequately inform
Licensee, in writing, prior to the shipment of any and all safety, health, and
environmental hazards associated with the manufacture, receipt, use, and/or
storage of the prototype tests.  University also shall make best efforts to
fully and adequately inform Licensee, in writing, of the prototype test's
contents as well as the proper storage, handling, and use procedures for the
prototype tests and shall render reasonable technical assistance as requested by
Licensee, at no cost to Licensee.

     9.6   For commercial tests subsequently supplied by the University to
Licensee, at Licensee's written request, Licensee shall pay [ * ] for each
commercial test supplied in addition to the royalty owed by Licensee for these
commercial tests. It is understood that Licensee shall not be obligated to
order any commercial tests. Licensee reserves the right to obtain probes from
another supplier; however, University shall be Licensee's exclusive source of
sorted chromosomes unless it is unable to supply the chromosomes [ * ] of when
Licensee places the order for such chromosomes. In the event University is
unable to supply the chromosomes [ * ], Licensee reserves the right to obtain
the chromosomes from another supplier. The price for the sorted chromosomes
shall be negotiated in good faith between the parties, but it is the intent of
the parties that such price be a commercially-competitive price.



[ * ] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.

 
                                                                   Page 12 of 22

     9.7   University shall make best efforts to ensure that the Tangible
Materials are produced in circumstances where that degree of skill, diligence,
prudence, documentation, and foresight, which would be reasonably expected from
a skilled or experienced person engaged in the same type of undertaking under
the same or similar circumstances, are exercised.  After providing reasonable
notice, Licensee shall have the right, but not the obligation to, inspect
University's quality control procedures and to coordinate with University in
setting such procedures.

10.   PATENT INFRINGEMENT

     10.1   If any patent infringement action is brought by a third party
against Licensee, its Affiliates, and/or its sublicensees because of actual or
anticipated manufacture, use, offer to sell, or sale of the Licensed Subject
Matter, Licensee shall promptly notify University and send University copies of
all relevant court documents.  Licensee, at its own expense, shall promptly
defend against such infringement unless the third party infringement action is
due to the actual or anticipated manufacture, use, import, or sale of Technology
and/ or Tangible Technical Materials by the University; in which case,
University, at its own expense, shall promptly defend against such infringement
action, once notified by Licensee.  Licensee shall cooperate with University in
the litigation, at University's expense.  University cannot settle the patent
infringement action without the express written consent of Licensee, which
consent shall not be unreasonably withheld.  Any recovery shall be received by
University, unless Licensee defends such infringement.  In all other cases,
Licensee shall have the right to settle and compromise the patent infringement
action, including the right to cross-license, and Licensee shall receive all
recoveries. However, Licensee cannot settle the patent infringement action
without the express written consent of University, which consent shall not be
unreasonably withheld.

     10.2   If University, when obligated to defend as stated above, fails to
defend such infringement action after being notified by Licensee within ninety
(90) days, Licensee shall have the right, but not the obligation, to defend the
infringement action in its name or in the name of 

 
                                                                   Page 13 of 22

University as it deems necessary or appropriate, at Licensee's expense.
Alternatively, if University fails to institute such infringement action,
Licensee may consider this failure a breach of a material obligation of this
Agreement and may terminate. If Licensee does undertake such a defense,
University shall cooperate with Licensee in the litigation, at Licensee's
expense. Any reasonable costs and expenses incurred by Licensee, including
settlement costs, damages assessed against Licensee and reasonable outside
attorney fees, shall be offset against royalty payments to University. Licensee
shall have the right to settle the infringement action, including the right to
enter into a cross license with the third party. Licensee shall notify
University of its intent to settle in advance and Licensee shall consider all
reasonable requests of the University related to the settlement. Licensee also
shall receive all recoveries. Licensee shall also have the right to suspend
royalty payments to University only in the country in which the litigation
occurs during the pendency of the infringement suit. In the event judgment is
rendered in favor of Licensee as to the non-infringement and/or invalidity of
the third party patent, Licensee shall pay royalties for the suspended period
within ninety (90) days of the judgment.

     10.3   If Licensee is required in a country by final court order from which
no appeal can be taken, to make changes in the Licensed Subject Matter or to
obtain and pay a royalty under a license to a third party under any patent in
order to make, have made, use or sell the Licensed Subject Matter in that
country, Licensee's obligations in the country to pay royalties to University
shall be reduced by the amount of the cost to Licensee for the changes and/or
additional royalties payable to the third party.  However, in no event will the
royalty due to University be reduced below [ * ].

     10.4   If, during the Term of this Agreement, either party becomes aware of
any third party infringement or threatened infringement of any Patent Rights,
the party having such knowledge shall promptly notify the other party.  Licensee
shall the obligation to bring suit in its name, or in the name of University, if
necessary, at Licensee's own expense, to restrain such infringement and to
recover profits and damages.  University agrees to being joined as a party
plaintiff and to cooperation in the litigation as is reasonably necessary, at
Licensee's expense. 



[ * ] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.

 
                                                                   Page 14 of 22

Licensee shall have the right to settle such action with University's prior
written consent, which shall not be unreasonably withheld. Licensee shall
receive all recoveries, unless University institutes the action as provided
below. However, Licensee shall have the right to suspend royalty payments to
University only in the country in which the litigation occurs during the
pendency of the infringement suit. In the event judgment is rendered in favor of
University and Licensee as to infringement and/or validity of Patent Rights,
Licensee shall pay royalties for the suspended period within ninety (90) days of
the judgment.

     10.5   If Licensee fails to institute such infringement action within
ninety (90) days of notification, University shall have the right, but not the
obligation, to take action in its own name or in the name of Licensee as it
deems necessary or appropriate, at University's expense. Licensee shall
cooperate with University as is reasonably necessary in any such action brought
by University.  If University brings legal action, University shall have the
right to settle such action with Licensee's prior written consent, which shall
not be unreasonably withheld, and University shall receive all recoveries.  In
the event a court of competent jurisdiction determines that one or more claims
of Patent Rights are invalid or unenforceable, no further royalty payments shall
be due University by Licensee for the affected Licensed Patent Products, unless
the affected Licensed Patent Products are still encompassed by a valid claim or
claims of Patent Rights.


11.   WARRANTIES

     11.1   University represents and warrants, subject to the statement below,
that it is the owner of the entire right, title and interest in and to Licensed
Subject Matter, all of which is and shall be unencumbered by any liens, security
interests, or other rights or claims of any third party, and no other person or
entity has or shall have any claim of ownership.  However, Licensee acknowledges
that the University has received a written assignment from the inventors of the
Patent Rights in which the inventors assigned their rights to the best of their
knowledge 

 
                                                                   Page 15 of 22

and Licensee acknowledges that the University has title through this assignment.
In the event the inventors have breached their assignment obligation, University
shall not be held in breach of this Section 11.1.

     11.2   University also represents and warrants that it has sole
responsibility to render appropriate payments to the inventors of the Patent
Rights and the inventors' sources of funding , and to resolve disputes between
it, the inventors of the Patent Rights and/or the inventors' sources of funding,
concerning the allocation of the payments made by Licensee to University under
this Agreement.

     11.3   University represents and warrants that has the right to grant
licenses under such Licensed Subject Matter, and that it has not granted
licenses thereunder to any other person or entity.

     11.4   University represents and warrants that to the best of its knowledge
making, having made, using, selling, offering for sale, or importing the
Licensed Subject Matter do not infringe any patent, trademark, or any other
rights of any third party.

     11.5   University represents and warrants that this Agreement has been duly
executed and delivered, and is a legal, valid, and binding obligation
enforceable against University in accordance with its terms.

     11.6   University represents and warrants that it knows of no fact which
does or could materially adversely affect the rights granted to Licensee under
this Agreement.

     11.7   University represents and warrants that the execution, delivery, and
performance of this Agreement do not conflict with, violate, or breach any
agreement to which University is a party, or University's charter or bylaws.

 
                                                                   Page 16 of 22

     11.8   Except as expressly set forth in this Agreement, UNIVERSITY MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTIBILITY, QUALITY, OR
FITNESS FOR A PARTICULAR PURPOSE.

     11.9   Licensee represents and warrants that it is a corporation duly
organized, existing, and in good standing under the laws of the State of
Delaware, United States of America, with full right, power, and authority to
enter into and perform this Agreement and to grant all of the rights, powers,
and authorities granted herein.

     11.10  Licensee represents and warrants that this Agreement has been duly
executed and delivered, and is a legal, valid, and binding obligation
enforceable against Licensee in accordance with its terms.

     11.11  Licensee represents and warrants that the execution, delivery, and
performance of this Agreement do not conflict with, violate, or breach any
agreement to which Licensee is a party, or Licensee's articles of incorporation
or bylaws.


12.  INDEMNIFICATION

     12.1  University shall be responsible for, and shall defend, indemnify and
hold Licensee, its managers, directors, officers, employees, and agents
(Licensee Indemnified Parties) harmless against any and all liability, loss,
damage, claim or expense, including attorney's fees (Licensee Indemnified
Losses) arising out of or in connection with this Agreement, including  Licensee
Indemnified Losses related to any third party infringement action due to the
actual or anticipated manufacture, use, import, or sale of Technology or
Tangible Technical Materials; including Licensee Indemnified Losses related to
the negligence or willful misconduct of University; or including Licensee
Indemnified Losses relating to any breach or default of an obligation,

 
                                                                   Page 17 of 22

representation, or warranty provided in this Agreement; provided, that Licensee
shall give University prompt notice of any such claim or lawsuit.  The
indemnification rights of Licensee contained herein are in addition to all other
rights Licensee may have at law, in equity, or otherwise.  Any claims brought
against University under this Section 12.1 shall be brought in an English court.

     12.2   Licensee shall be responsible for, and shall defend, indemnify and
hold University, its managers, directors, officers, employees, and agents
(University Indemnified Parties) harmless against any and all liability, loss,
damage, claim or expense, including attorney's fees (University Indemnified
Losses) arising out of or in connection with this Agreement, including
University Indemnified Losses related to the negligence or willful misconduct of
Licensee; or including University Indemnified Losses relating to a breach or
default by Licensee or sublicensee of an obligation, representation, or warranty
provided in this Agreement; provided, however, that University shall give
Licensee prompt notice of any such claim or lawsuit.  The indemnification rights
of University contained herein are in addition to all other rights which
University may have at law, in equity, or otherwise.

     12.3   The indemnification rights of Licensee and University shall survive
termination or expiration of this Agreement.


13.  TERM AND TERMINATION

     13.1   This Agreement shall be effective as of the date of execution and
its Term shall continue in full force and effect until the expiration of the
last to expire Patent Rights, or ten (10) years, whichever is later.  The
provisions of Sections 5, 10, 11, 12, and 13 hereof shall survive the expiration
or termination of this Agreement, except as otherwise provided herein.

     13.2   If either party breaches or defaults in the performance or
observance of any of the 

 
                                                                   Page 18 of 22

material provisions of this Agreement, and such breach or default is not cured
within ninety (90) days after the giving of notice by the other party specifying
the breach or default, the non-defaulting party shall have the right to
terminate this Agreement, effective upon the expiration of the ninety (90)-days,
without further notice to the breaching or defaulting party. If termination is
by Licensee because of University's breach or default, the rights and licenses
granted by University to Licensee shall be deemed to be fully paid-up,
exclusive, worldwide, and irrevocable.

     13.3   Licensee may terminate this Agreement, in its entirety, at any time
upon ninety (90)-days' written notice to University.  Licensee may terminate
this Agreement, in part, as to any specific Licensed Patent Product or any
specific Patent Right, with immediate effect, upon written notice to University.

     13.4   Except as otherwise provided in this Agreement, upon termination of
this Agreement, all rights and licenses shall terminate and revert to University
and Licensee shall not thereafter make, use, or sell any Licensed Subject
Matter.

     13.5   Termination of this Agreement in whole or in part for any reason
shall not relieve University or Licensee of their respective continuing
obligations under this Agreement. Termination of this Agreement for any reason
shall be without prejudice to and shall not affect the right of either party to
recover any and all damages to which it may be entitled, or exercise any other
remedies which it may otherwise have.

     13.6   Licensee may, after the effective date of any termination, sell all
Licensed Patent Products in its inventory at the date of termination, provided
that Licensee pays earned royalties thereon.


14.  MISCELLANEOUS

 
                                                                   Page 19 of 22

     14.1   This Agreement sets forth the entire agreement and understanding
between the parties and supersedes all previous agreements, promises,
representations, understandings, and negotiations, whether written or oral,
between the parties with respect to the subject matter herein.  None of the
terms of this Agreement shall be amended or modified except in writing.

     14.2   Neither party shall assign any right or obligation hereunder without
the written consent of the other party, except if such assignment arises under a
transaction in which the assigning party is selling its entire business or a
line of business to which this Agreement relates, or the assigning party is
being acquired or merged with a third party.  This Agreement shall be binding
upon, and inure to the benefit of, the parties' respective successors and
assigns.

     14.3   Either party may terminate this Agreement if, at any time, the other
party shall file in any court or agency pursuant to any statute or any
individual state or country, a petition in bankruptcy, insolvency, or for
reorganization or for any agreement among creditors or for the appointment of a
receiver or trustee of the party or of its assets, or if the other party
proposes a written agreement of composition or extension of its debts, or if the
other party is served with an involuntary petition against it filed in any
insolvency proceeding, and such petition is not dismissed within ninety (90)
days after the filing thereof, or if the other party shall propose or be a party
to any dissolution or liquidation or if the other party makes an assignment for
the benefit of creditors.

     14.4   In the event any one or more of the provisions of this Agreement
should for any reason be held by any court or authority having jurisdiction over
this Agreement, or any of the parties hereto, to be invalid, illegal, or
unenforceable, such provision or provisions shall be validly reformed to as
nearly approximate the intent of the parties as possible and if unreformable,
the provision or provisions will be excised from this Agreement.  The other
provisions of this Agreement shall remain in full force and effect.

     14.5   Each party agrees to execute, acknowledge and deliver such further
instruments 

 
                                                                   Page 20 of 22

and to do all such other acts as may be necessary or appropriate to effect the
purpose and intent of this Agreement.

     14.6   A waiver by either party of any term or condition of this Agreement
shall not be deemed or construed to be a waiver of such term or condition for
any similar future instance or of any subsequent breach.

     14.7   Each party shall comply with all applicable laws, rules, ordinances,
guidelines, consent decrees, and regulations of any pertinent national, state,
or other governmental authority.

     14.8   No party shall be liable for failure to perform or delay in
performing obligations set forth in this Agreement, and no party shall be deemed
in breach or default of its obligations, if, to the extent and for so long as,
such failure, delay, breach or default is due to natural disasters, strikes,
riots, incendiaries, war, interference by civil or military authorities,
compliance with governmental laws, rules, regulations, or uncontrollable delays
in transit or delivery.  Any party desiring to invoke the protection of this
paragraph shall promptly notify the other party.

     14.9   This Agreement shall be governed by, and interpreted in accordance
with, English Law and the Parties submit to the non-exclusive jurisdiction of
the English Courts.

     14.10  In the event that the Parties cannot amicably resolve any dispute
that arises under this Agreement, the matter shall be referred to a single
arbitrator, to be agreed to by the parties, but in the default of such
agreement, nominated by the then President of the Law Society of England.  The
arbitrator's decisions shall be final and binding upon the Parties.

     14.11  Any notice, consent or approval permitted or required under this
Agreement shall be in writing sent by overnight courier or by facsimile
(confirmed by mail) and addressed as follows:

     University:

 
                                                                   Page 21 of 22

     Cambridge University Technical Services Ltd.
     20 Trumpington Street, Cambridge, Great Britain CB2 1QA
     Attention: Director

     Licensee:
     2380 Walsh Avenue, Building B
     Santa Clara, California 95051, United States of America
     Attention: Chief Executive Officer


All notices shall be deemed to be effective on the date of deposit with the
courier service or on the date of the facsimile.  If a party changes its
address, prompt written notice of such change shall be given to the other party.

     14.12  The relationship hereby established between University and Licensee
is solely that of independent contractors.  This Agreement shall not create any
agency, partnership, joint venture, or employer/employee relationship, and
nothing herein shall be construed to authorize either party to act for,
represent, or bind the other party, except as expressed provided.

     14.13  Nothing contained within this Agreement shall be construed to allow
either party to utilize the name of the other, except with the prior written
consent of the pertinent party, which consent shall not be unreasonably
withheld.  Licensee shall have the right, however, to use the name of University
in materials associated with investors or potential investors, or associated
with stock offerings and stock sales, and the like, without the written consent
of University.

     14.14  The captions or headings of this Agreement are for convenience only
and are to be of no force or effect in construing and interpreting the
provisions of this Agreement.

 
                                                                   Page 22 of 22

In witness thereof, the parties have caused this Agreement to be executed by
their duly authorized representatives.


FOR UNIVERSITY:

Signature:     /s/ R. C. Jennings
               _________________________________________

Typed Name:    Dr. R. C. Jennings
               _________________________________________

Title:         Director
               _________________________________________

Date:          14.10.97
               _________________________________________

FOR LICENSEE:

Signature:     /s/ L.G. Grant
               _________________________________________

Typed Name:    Dr. L.G. Grant
               _________________________________________

Title:         President, Cytogenetics
               _________________________________________

Date:          24th Oct. 97.
               _________________________________________



ATTACHMENT A: CURRENT PATENT RIGHTS

UK Patent Application Number 9704054.7 entitled "Chromosome-specific Paint
Probes" (Priority Date: 27 February 1997).

EX-10.22

 
                         [APPLIED IMAGING LETTERHEAD]
                                                                   EXHIBIT 10.22


July 21, 1997



Mr. Carl Hull
P.O. Box 64086
Tucson, AZ  85728

Dear Carl,

I am pleased to offer you the position of Vice President of World Wide
Marketing, reporting to me.

Your annual salary will be $135,000. In addition, you will be recommended for
participation in the Company's Incentive Stock Option Plan at a level of 60,000
shares (subject to board approval). In line with our ISO program, the price of
the shares will be the closing market price on the last trading day preceding
your date of hire. You will vest 25% of your total holdings at the anniversary
of your grant date. Accordingly, it will take four years to become fully vested.
Should Applied Imaging be sold within the first eighteen months of your
employment, one-half (or 30,000 shares) of your initial option award of 60,000
shares will become immediately vested. Should Applied Imaging be sold after that
eighteen month period, but prior to the end of your fourth year of employment,
all of the then-unvested portion of your initial option award of 60,000 shares
will become immediately vested.

In addition to your salary, you will be eligible to receive a cash bonus of up
to 30% of your annual salary, based on your achievement of mutually agreed
objectives.

As a Company employee, you are also eligible to receive certain employee
benefits, which presently include 10 days per year vacation time and 10 days per
year sick leave. Applied Imaging will provide medical, dental, and life
insurance for you at a minimal cost.  Medical and dental insurance is also
available for your dependents.  Coverage beings 30 days after your date of hire.
Applied Imaging also offers a 401(k) plan, matching the first 3% of the employee
contribution and an employee stock purchase plan. Please be advised that
employment at Applied Imaging is at-will and may be terminated with our without
cause and with or without notice at any time by the employee or the Company.  It
is mutually understood and agreed that, should your employment be terminated by
Applied Imaging, other than for "cause", you shall be entitled to receive a
severance payment equal to six times your monthly base salary then in effect.
It is Corporate policy that a pre-employment drug screen is required.

To assist you in your permanent relocation, Applied Imaging will reimburse any
reasonable expenses associated with the movement of your personal property to

 
California, up to three house hunting trips, lease breaking expense incurred
with your current rental property and up to three months temporary living
expenses.  In addition, the Company will provide you with a low interest loan
for up to $50,000 (to be utilized as a down payment for a permanent residence in
California), to be paid back over a five year period or sooner in the event of
termination, under the terms and conditions set forth in Appendix 1, attached.

We look forward to you joining Applied Imaging on August 4, 1997. To confirm
your acceptance of this offer, please sign below and return one copy of this
letter to me by July 25, 1997.

Sincerely,


/s/ Jack Goldstein
Jack Goldstein
President and CEO

JG/dx
attachment



/s/ Carl Hull                               7-22-97
- -------------                               --------
Carl Hull                                   Date

EX-10.23

 
                         [APPLIED IMAGING LETTERHEAD]
                                                                   EXHIBIT 10.23

April 2, 1997


Jack Goldstein, Ph.D.
2 Glennon Farm Lane
Lebanon, NJ 08833

Dear Jack,

On behalf of the board of Applied Imaging, I am pleased to offer you the
position of Chief Executive Officer of Applied Imaging, reporting to the Board
of Directors.

We have all enjoyed getting to know you, and are unanimous in our enthusiastic
support of your candidacy.  We are convinced that you are well qualified to lead
Applied Imaging in its growth, and to make a crucial contribution to the success
of the Company.

Your annual salary will be $255,000. In addition you will be awarded 280,000
shares of common stock under the Company's Incentive Stock Option plan. The
Company has approximately seven million outstanding shares. In line with our ISO
program, the price of the shares will be determined by the market value of the
shares at your starting date. You will vest 25% of your total holdings at the
anniversary of your grant date. Accordingly, it will take four years to become
fully vested.

In addition to your salary, you will be eligible to receive a cash bonus of up
to 30% of your annual salary, based on your achievement of mutually agreed
objectives set by the Board of Directors.  An additional 20,000 shares will be
issued to you under the ISO program at the completion of one year of employment,
if the board deems your performance outstanding.

Our health insurance plan provides for dependent coverage until the dependent's
twenty  third birthday.  The plan is largely company-sponsored, and depending on
which HMO/PPO you select, the employee premium contribution can vary from zero
to $50 per month.  We also have a dental plan that is company-sponsored.  You
will be eligible for term life insurance coverage for two times your annual
salary at no cost to you; our Long Term Disability program is a standard plan;
however, we offer an LTD supplement for Corporate officers which mitigates 'loss
of income' under the basic plan.

In addition, Applied Imaging offers a 401 (k) retirement program wherein the
Company matches your voluntary contribution up to 3% of your salary, 1997's
maximum allowable voluntary contribution (as established by the federal
government) is $9,500.

To assist you in your permanent relocation, including the sale of your current
residence and the purchase of a new home in California, Applied Imaging will
reimburse your 

 
reasonable documented expenses, related to these transactions. In addition the
company will reimburse you for reasonable documented expenses associated with
the movement of your personal property to California and house hunting trips.
Applied Imaging will also reimburse you for up to six month of temporary housing
costs. Finally, the company will gross up tax liabilities which are incurred by
you as a result of these relocation expenses.

We look forward to you joining Applied Imaging full time during the next 45
days.  To confirm your acceptance of this offer, please sign below and return
one copy of this letter to me by Friday, April 11, 1997.

Jack, on a personal basis, I am looking forward to working with you.  I firmly
believe that this is an exciting and challenging opportunity in which you can
make a significant contribution.  We all look forward to welcoming you aboard.

Regards,


/s/ Abe Coriat
Abe Coriat
Chairman of the Board

AC/dx



/s/ Jack Goldstein                              4/5/97
- ------------------                              ------
Jack Goldstein, Ph.D.                           Date

 
                         [Applied Imaging Letterhead]
                                        

April 4, 1997


Jack Goldstein, Ph.D.
2 Glennon Farm Lane
Lebanon, NJ 08833

Dear Jack,

Per my discussions with John Archer, the following is an addendum to my offer
letter dated April 2nd.

1.  In the event of the company terminating your employment for a reason other
than cause, the company will continue paying your salary for a period of 12
months after your termination date.

2.  I understand that it is your intention to start looking for a house to
purchase, and to sell your current house, as soon as you begin your employment
with Applied Imaging. In addition to the six months mentioned in the offer
letter, the company will grant you up to two three-months extensions to cover
reasonable temporary housing cost on an as needed basis, should it be required.

3.  In the event of change in control due to a merger or acquisition of the
company, the vesting of your shares will be accelerated, but only if the
acceleration provision will not preclude the structuring of the proposed merger
or acquisition as a pooling of interests, if this is the structure approved by
the Board of Directors.

4.  The price of your shares will be determined by the market value of the
shares at your starting date. We will announce your ernployment with Applied
Imaging after your starting date.

5.  I understand that you intend to take vacations with your wife between July
2nd and July 11th. July 4th is independence day, as part of your vacations you
could also celebrate your independence from J&J!!

May I say again how much we all welcome you to Applied Imaging -- and we look
forward to you joining us soon.

Regards,


/s/ Abe Coriat                                          /s/ Jack Goldstein, PhD
Abe Coriat                                              4/5/97
Chariman of the Board

EX-23.1

 
                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Applied Imaging Corp.:

We consent to incorporation by reference in the registration statement (No. 
333-26127) on Form S-8 of Applied Imaging Corp. of our report dated February 
6, 1998, relating to the consolidated balance sheets of Applied Imaging 
Corp. as of December 31, 1997 and 1996, and the related consolidated 
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, and the related 
financial statement schedule, which report appears in the December 31, 1997, 
annual report on Form 10-K of Applied Imaging Corp.

                                             KPMG Peat Marwick LLP

Mountain View, California
March 27, 1998

EX-27.1

 



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