The following assumptions were used by us to determine the fair value of stock options granted using the Black-Scholes option-pricing model:

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SUBSEQUENT EVENTS

     In August 2003, the Company entered into an agreement for an equipment financing line from the Life Science and Technology Finance group of the Commercial Equipment Financing Division of General Electric Capital Corporation (NYSE: GE). The equipment financing line provides for $3 million in immediate financing resources and an additional $2 million as ChromaVision achieves certain system placement objectives. The agreement has a 33 month term. The borrowings under the equipment financing agreement will be used for working capital purposes and will bear interest at 600 basis points over three year constant maturity treasuries. The agreement also provides for various restrictive covenants, maintenance of certain financial ratios and a collateral monitoring fee of $5,000 per year.

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     PART I – Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(000’s included)

     Statements in this report describing our plans, goals, strategies, intentions, expectations and anticipated events are forward-looking statements. Important factors which could cause actual results to differ materially from those described in such forward-looking statements include the following: commercialization of our products is dependent on acceptance by the medical community and receipt of satisfactory reimbursement from third-party payers; any future success depends upon our ability to expand and maintain a successful sales and marketing organization and to successfully manufacture products in commercial quantities; we may require additional financing for our business, and it is uncertain whether the financing will be available on favorable terms or at all; we may encounter unanticipated expenses, liabilities or other adverse events affecting cash flow; our ability to develop new applications depends on successful collaboration with third parties that we do not control; proper utilization of our system is dependent upon the quality of third party stains and reagents; we must successfully compete with other technologies and with emerging competitors in cell imaging; an inadequate supply of biological samples could delay completion of clinical trials for new applications for our Automated Cellular Imaging System (“ACIS”); the clinical trials could fail to demonstrate the efficacy of the ACIS for new applications; new applications may not be successfully developed; the ability to commercialize new applications may be dependent on obtaining appropriate U.S. Food and Drug Administration (the “FDA”) and foreign regulatory approvals and clearances, which may not be obtained when anticipated or at all; our competitive position is dependent upon our ability to protect our patents and proprietary rights; manufacture of the ACIS is subject to FDA regulation and our ability to implement our strategy of providing decentralized ACIS analysis capabilities over the internet is dependent upon successful development of the related imaging technology and obtaining any required regulatory approvals. Recent experience with respect to ACIS placements, new contracts for placements, revenues and results of operations may not be indicative of future results for the reasons set forth above.

Results of Operations

Overview

     Our mission is to improve the quality and reduce the cost of patient care, and speed drug discovery. We develop, manufacture and market a versatile automated digital microscope system with the ability to detect, count and classify cells based on color, size and shape to assist pathologists in making critical medical decisions that can affect patient treatment.

     The ACIS® (Automated Cellular Imaging System) combines an automated microscope with computer-based color imaging technology originally developed for the U.S. government’s “Star Wars” program. The FDA-cleared ACIS device is currently being used by pathologists and researchers to analyze specimens placed on slides and stained with color-producing, commercially available reagents. The system’s ability to overcome the limitations of the human eye (even when aided by a microscope) dramatically improves the observer’s ability to analyze cells and tissue. Peer-reviewed clinical data and publications have demonstrated that the ACIS digital microscope and proprietary software can considerably improve accuracy and consistency over other methods of laboratory testing. ChromaVision brings standardization, accuracy and reproducibility to anatomic pathology, an area of the laboratory focused on esoteric tests, which have traditionally been analyzed manually. In a multi-pathologist clinical study, observers improved their rates of correlation with an independent standard from a range of 42 to 92% scoring manually to 91 to 95% using ACIS. Even the most accurate pathologist scoring manually was able to achieve improved accuracy using ACIS.

     Safeguard Scientifics, Inc., a Pennsylvania corporation whose shares are listed on the New York Stock Exchange, owns beneficially approximately 62% of the outstanding shares of our Common Stock. We refer to Safeguard Scientifics, Inc. and its wholly-owned subsidiaries as “Safeguard”. As a result of this stock ownership, Safeguard has the ability to elect all of our directors and it also has significant contractual rights to control our business. See Note 8 of Notes to Condensed Consolidated Financial Statements.

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Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Therefore, on an ongoing basis, we evaluate our estimates, including those provisions for bad debts and reserves for ACIS in progress.

     For estimated bad debts, we review on an individual account basis the age of the receivable, all circumstances surrounding the transaction that gave rise to the receivable and whether the customer continues to have the financial resources to pay the receivable as of the balance sheet date and prior to the issuance of the financial statements for the respective period. For ACIS in progress, the respective reserve is based upon the expected future use of the ACIS components based upon proposed design changes, high value components that may be discontinued in the near future and whether there are any lower of cost or market considerations. For other obligations, where judgment is required, we review the circumstances surrounding the obligation and evaluate the facts and circumstances to determine an appropriate level of accrual for each obligation.

     We place most of our instruments with users on a “fee-per-use” basis. We obtain the billing information via modem, which accesses the ACIS database. Revenue is recognized based on the greater of actual usage fees or the minimum monthly rental fee. Under this pricing model, we own most of the ACIS instruments that are engaged in service and, accordingly, all related depreciation and maintenance and service costs are expensed as incurred. For those instruments that are sold, we recognize and defer revenue using the residual method pursuant to the requirements of Statement of Position No. 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by Statement of Position No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Arrangements.” At the outset of the arrangement with the customer, we defer revenue for the fair value of its undelivered elements (e.g., maintenance) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (e.g., software license) when the basic criteria in SOP 97-2 have been met. Maintenance revenue is recognized ratably over the term of the maintenance contract, typically 12 months. Revenue on product sales is recognized upon acceptance by the customer subsequent to a testing and evaluation period.

     Some instruments are placed through distributors in Europe. The distributors’ commissions are paid based on a percentage of fees paid for use of the system as the fees accrue or as the sales take place. No sales through distributors took place during the first or second quarters of 2003 or the comparable periods in 2002.

Three and Six Months Ended June 30, 2003 Compared with Three and Six Months Ended June 30, 2002

Fee-per-use Revenue. Revenue for the three and six months ended June 30, 2003 increased approximately $660,000 or 30% and approximately $1,723,000 million or 43% over the comparable periods in 2002 due primarily to an increase in ACIS placements. The number of systems in the field generating fee-per-use charges increased from 165 to 246 from June 30, 2002 to 2003. The average monthly revenue for ACIS placements and remote viewing stations was approximately $4,837 and $2,404, respectively, as compared to $5,561 and $2,145 for the comparable periods in 2002. Our business plan focuses on placing the ACIS under a lease arrangement in which the customer is charged based on the number of tests performed, subject to a minimum monthly payment. The decline in the average monthly revenue is primarily due to pricing concessions offered to our largest customers and a decline in the monthly minimum. Also impacting fee-per-use revenue is an increase in the reserve for sales returns. The reserve for sales returns for the three and six months ended June 30, 2003 increased by $300,000 and $350,000, respectively over the comparable periods in 2002 due in part to the recent reduction in the amount of reimbursement paid by Medicare to our customers. (see discussion below under “Uncertainties to Future Operations”).

System Sales. Revenue for the three months ended June 30, 2003 from system sales increased approximately $174,000 or 378% over the comparable period in 2002 due to the price of a new versus used system. One new system was sold in Great Britain during the three months ended June 30, 2003 versus a used system in Germany for the comparable period in 2002. System sales contributed 8% of total revenue for 2003 as compared to 2% for the comparable period in 2002. Revenue from system sales can fluctuate significantly principally due to the infrequent and limited number of system sales. Occasional sales of the ACIS system are made to strategic research institutions.

Revenue for the six months ended June 30, 2003 from system sales increased approximately $285,000 or 239% over the comparable period in 2002 due to two new systems sold during the six months ended 2003 as compared to two used

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systems for the comparable period in 2002. System sales contributed 7% of total revenue for 2003 as compared to 3% for the comparable period in 2002.

Cost of revenue and gross margin percentage. Cost of revenue for the three and six months ended June 30, 2003 increased approximately $228,000 or 36% and $450,000 or 36% over comparable periods in 2002 due primarily to the increase in system placements. In 2003 we implemented a change in the accounting treatment of customer service costs which have been reclassified as a cost of sale rather than as a development cost, as in prior periods. This change was made in order to better match these costs with related sales activity. The effect of this reclassification is approximately $305,000 and $238,000 for the three months ended June 30, 2003 and 2002, respectively; and $617,000 and $483,000 for the six months ended June 30, 2003 and 2002, respectively. Using this approach for service costs, gross margin for the three and six months ended June 30, 2003 was 70% as compared to 71% and 68%, respectively, for the comparable periods in 2002. Cost of revenue primarily consists of cost for manufacturing the ACIS, which includes the cost for direct material, labor costs and manufacturing overhead. For fee-per-use revenue the cost of the ACIS is depreciated over a three-year time period and for a system sale the entire cost of the ACIS system is recognized at the time of sale. Contributing to the decline in the gross margin for the three months ended June 30 ,2003 was a decline in the average monthly revenue for our unit placements and an increase in the reserve for sales allowances as mentioned previously.

Selling, general and administrative expenses. Expenses for the three and six months ended June 30, 2003 decreased approximately $14,000 or 1% and increased approximately $429,000 or 8%, respectively, over the comparable periods in 2002. The increase for the six month period is primarily due to the accrual of senior management recruiting and relocation costs, an increase in cost for sales commission related to our revenue growth and an increase in costs for tradeshow and advertising expenditures.

Research and development expenses. Expenses for the three and six months ended June 30, 2003 increased approximately $43,000 or 3% and decreased approximately $104,000 or 4% over the comparable periods in 2002. The increase for the three month period is due primarily to $100,000 of expense incurred related to the funding of a clinical trial outcomes study. The decline for the six month period is primarily due to a reduction in personnel and other development costs as we sought to achieve an appropriate level of personnel to support the development of new system capabilities and the continuation of technological advances to the ACIS.

Other income. Other income for the three and six months ended June 30, 2003 decreased marginally from the comparable period in 2002 due primarily to a decrease in the interest rate earned on our cash balance for 2003. We anticipate increases in interest expense due to a decline in our cash balance in order to fund operations and anticipated draws on the $3 million dollar line of credit.

Preferred stock accretion and dividends. Our net loss attributable to Common Stock for the three and six months ended June 30, 2002 included a charge of approximately $843,000 and $1,369,000, which consisted of a charge for the accretion of and dividends on the Series D Preferred Stock. No such charge was incurred for the comparable periods in 2003 due to the conversion of all of the outstanding shares of Series D Preferred Stock in August 2002 which eliminated charges for accretion of, and dividends, on the Series D Preferred Stock in subsequent periods. See Note 8 of the Notes to the Condensed Consolidated Financial Statements.

Uncertainties as to Future Operations

     The year 2000 was our first full year of commercial activity during which we focused primarily on marketing and sales of the ACIS system as our menu of capabilities performed with the ACIS expanded and gained commercial acceptance. Although we have experienced consistent and ongoing revenue growth, we still face significant uncertainties, including those discussed below under “Liquidity and Capital Resources,” which include our ability to achieve market acceptance of the ACIS, to manufacture the system in commercial quantities and to ensure satisfactory valuation by Medicare and other third party insurance carriers of new billing codes which have been established for image analysis based testing and which will become effective on January 1, 2004.

     Laboratory services provided for patients with the assistance of ACIS technology are eligible for third party reimbursement using medical billing codes which apply to image analysis-based testing. These billing codes are known as Common Procedural Terminology, or CPT, codes and are the means by which Medicare and private insurers identify medical services that are provided to patients in the United States. CPT codes are established by the American Medical Association (AMA). The reimbursement dollar amounts associated with the CPT codes are established jointly by the Centers for Medicare and Medicaid (CMS), private insurers, and representatives from the AMA, with advice from professional societies representing the various medical specialties.

     On April 1, 2003, the CMS instituted a new National Correct Coding Initiative (NCCI) edit. The NCCI edit significantly reduces from this date to December 31, 2003 the amount of reimbursement previously paid by Medicare for

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services involving automated image analysis. The CMS edit applies only to Medicare patients. ChromaVision estimates that 25 to 35 percent of ACIS-based services are performed for Medicare beneficiaries. We believe that, before the edit, the majority of our customers were being reimbursed approximately $200 per test. Under the new interim edit (effective until December 31, 2003) customers are being reimbursed about $85 per test for Medicare patients. Over time, the edit may influence the reimbursement policies of other payers.

     A new CPT code has been established specifically for image analysis. The new image analysis CPT code goes into effect on January 1, 2004 and will effectively supersede the current NCCI edit. It will be important to all manufacturers and providers of image analysis services that the new CPT code is valued appropriately. It is expected that valuation of the new CPT code by CMS will be published in early November, 2003.

     The adoption of a new CPT code specific to image analysis reflects the expanding role of image analysis in pathology and the need for a unique identifier to clearly delineate the new ways in which the technology is being used by healthcare providers to benefit patients. Potentially, the new CPT code could help to streamline reimbursement for ACIS users by allowing third party payers to correctly identify image analysis-based services. The key to achieving the potential benefits of a new CPT code is to ensure that the new code is valued correctly so that the amount paid by Medicare for image analysis based services accurately reflects the technology costs, the benefit that image analysis brings to patients, and its positive impact on healthcare economics. ChromaVision is working with medical societies, patient groups, healthcare providers, and healthcare payers to ensure that patients and providers of image analysis based services are reimbursed appropriately by Medicare and other payers. However, there remains significant uncertainty as to the reimbursement that will be allocated to the new CPT code specific to image analysis. The new CPT code may remain at the current effective reimbursement amount or may actually be lower. The reduction of reimbursement for ACIS-based procedures will not only reduce revenue for current ACIS customers, for which we have booked an allowance, but also may result in returns or cancellations by current customers and may also negatively impact future placements of ACIS.

     We also face uncertainties with respect to our ability to complete development of additional tests for the ACIS. In order to mitigate the risk that any one test will not be successfully developed, we maintain a pipeline of tests in a prioritized queue so that if any one test is not successfully developed, or market feedback suggests that a test should be given a lower priority, we can align development efforts according to priority. In addition, the ACIS system is dependent upon the laboratory producing a quality stained slide for image analysis. Reagent and or stain quality issues by stain manufacturers may impact the rate at which the ACIS technology is adopted or new applications are added to existing placements. Other uncertainties affecting our business include our ability to maintain and develop our relationship with additional remote imaging laboratories and thereby reduce our concentration of risk with our primary imaging provider, to collaborate successfully with other companies, universities and research centers to develop, initiate and complete clinical trials of new applications for the ACIS and obtain governmental approvals for the applications. Lack of success in any of these efforts could have a material adverse effect on the future results of our operation and our ability to generate sufficient cash flow to fund operations.

     At June 30, 2003 we have approximately $8.8 million in stockholders’ equity. In order for our Common Stock to continue to trade on the NASDAQ National Market, we would have to achieve and maintain a stockholders’ equity of at least $10 million. Therefore, in July 2003 we applied for listing on the NASDAQ SmallCap Market and expect to make the transition from the National Market listing soon after approval from NASDAQ. Our Common Stock is expected to continue to trade under its current symbol of CVSN.

Liquidity and Capital Resources

     At June 30, 2003 we have approximately $2.4 million of cash and cash equivalents, working capital of approximately $2.1 million and no long-term debt. Cash used in operating activities was $3.3 million in 2003 due primarily to our net loss of $4.3 million. Cash used in investing activities of $2.1 million consisted of capital expenditures related primarily to the manufacture of the ACIS systems placed with customers. Capital expenditures for the remainder of 2003 are uncertain as they vary with the volume of our business. However, our current commitments total approximately $500,000 and will be primarily related to the manufacture of the ACIS for placement with customers. Our business plan anticipates placing these instruments with users and charging a “fee-per-use” for each time the instrument is used to perform a test. The manufacture of these instruments will require a significant outlay of cash for which revenues will be recognized over the lease term. We intend to fund these expenditures with our current cash resources, the $3.0 million revolving line of credit and with the $3 million equipment financing.

     Cash provided from financing activities of $5.0 million was due to the completion of the sale of $5 million of our Common Stock to Safeguard in February 2003. In the transaction we issued 4,646,408 shares of our Common Stock for an aggregate cash purchase price of $5 million ($1.0761 per share) in a private placement to Safeguard. As a result of the

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transaction, Safeguard’s percentage of beneficial ownership increased from 56% to 62%.

     In February 2003 we entered into a $3 million revolving credit agreement with the Technology and Life Sciences Division of Comerica Bank-California (NYSE:CMA). The borrowings under the line of credit will be used for working capital purposes and will bear interest at Comerica’s prime rate plus one-half percent. The agreement also includes a one-time facility fee of $15,000, a fee of .25% on the unused balance of the line of credit, various restrictive covenants and requirements to maintain certain financial ratios. Borrowings under the line of credit will be guaranteed by Safeguard in exchange for a one-time fee of $15,000 and an amount equal to 4.5% per annum of the daily-weighted average principal balance outstanding under the line of credit. The agreement expires February 2004. No amounts were drawn on the revolving credit agreement during the first and second quarters of 2003.

     In August 2003 we entered into a $3 million equipment financing agreement with GE Capital. The agreement has a 33 month term. The borrowings under the equipment financing agreement will be used for working capital purposes and will bear interest at 600 basis points over a three year constant Treasury maturity. The agreement also provides for an incremental $2,000,000 available upon reaching certain system placement objectives, various restrictive covenants, maintenance of certain financial ratios and a collateral monitoring fee of $5,000 per year.

     Existing cash resources, the $3 million revolving line of credit, and the $3 million equipment financing completed in August 2003 may be sufficient to satisfy our cash needs during 2003. Our losses from operations, increases in working capital and capital expenditure requirements will continue during 2003, but we expect our operating losses in 2003 to decrease due to revenue generated from additional system placements. It is entirely possible, however, that our cash resources will not be sufficient. To support any such future cash needs, we intend to consider additional debt or equity financing. If we are unable to obtain sufficient additional funds, we will have to delay, scale back or eliminate some or all of our development activities, clinical studies and/or regulatory activities.

     We currently lease our facility under an operating lease arrangement. The lease expired in February 2003 and we exercised our option to extend the lease one year. Our purchase obligations represent commitments primarily for the purchase of materials for the manufacture of our ACIS. The following table summarizes our contractual obligations and commercial commitments at June 30, 2003:

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements that provide financing, liquidity or market or credit risk support or involve leasing, hedging, research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements, except for facilities and automobile operating leases.

     At June 30, 2003, we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standards Not Yet Adopted

     Several new accounting standards have been issued that will be adopted by the Company beginning with the third quarter of 2003. None of these standards are expected to have a material impact on the Company’s financial position, results of operations, or liquidity. See Note 7 of Notes to the Condensed Consolidated Financial Statements.

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Item 3 Quantitative and Qualitative Disclosures About Market Risk

     Historically, we have invested excess cash in short-term debt securities that are intended to be held to maturity. These short-term investments typically have various maturity dates which do not exceed one year. We had no short-term investments as of June 30, 2003.

     Two of the main risks associated with these investments are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of debt securities. Fluctuations in interest rates would not have a material effect on our financial statements because of the short-term nature of the securities in which we invest and our intention to hold the securities to maturity. Credit risk refers to the possibility that the issuer of the debt securities will not be able to make principal and interest payments. We have limited the investments to investment grade or comparable securities and have not experienced any losses on our investments to date due to credit risk.

     Changes in foreign exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect our consolidated sales and gross margins as expressed in U.S. dollars. To date, we have not entered into any foreign exchange contracts to hedge our exposure to foreign exchange rate fluctuations. However, as our international operations grow, we may enter into such arrangements in the future. Effective January 1, 2002, our foreign sales were denominated in Euros. Foreign currency-denominated sales have not been significant.

Item 4 Controls and Procedures

     The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) as of a date within 90 days of filing date of the quarterly report have concluded that the Company’s disclosure controls and procedures were effective, as of the end of the quarter ended June 30, 2003, to provide reasonable assurance that material information relating to our Company (including our consolidated subsidiaries) required to be disclosed in the periodic reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time specified in the rules and forms of the Securities and Exchange Commission, including the reporting of such information to our Chief Executive Officer, Chief Financial Officer and other members of our management as appropriate to allow timely decisions regarding required disclosure.

     There were no changes in the Company’s internal controls over financial reporting (as that term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

Item 4 Submission of Matters to a Vote of Security Holders

     We held our Annual Meeting of Stockholders on June 11, 2003. At the meeting, the stockholders voted in favor of electing as directors the eight nominees named in the Proxy Statement dated April 30, 2003, and in favor of approving the amended and restated 1996 Equity Compensation Plan.

     The number of votes were as follows:

I.

Election of directors

II.          Proposal to approve an amendment to our Restated 1996 Equity Compensation Plan to increase the number of shares subject thereto by 2,000,000 shares.

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Item 6- Exhibits and Reports on Form 8-K

			(a)Exhibits
	3.1		Certificate of Incorporation of the Company (as amended)(a)
	3.4		By-laws of the Company, as amended (a)
	31		Certifications of the CEO and CFO pursuant to Exchange Act Rule 13-14(a) or Rule 15d-14(a). (b)
	32		Certifications of the CEO and CFO required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. (b)
			(b)Reports or Form 8-K
			None.

(a)		Filed on April 30, 1997 as an exhibit to the Company’s Registration Statement on Form S-1 (No. 333-26129) and incorporated by reference.
(b)		Filed herewith.

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SIGNATURES

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

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EXHIBIT INDEX

	3.1		Certificate of Incorporation of the Company (as amended)(a)
	3.4		By-laws of the Company, as amended (a)
	31		Certifications of the CEO and CFO pursuant to Exchange Act Rule 13-14(a) or Rule 15d-14(a). (b)
	32		Certifications of the CEO and CFO required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. (b)

(a)		Filed on April 30, 1997 as an exhibit to the Company’s Registration Statement on Form S-1 (No. 333-26129) and incorporated by reference.
(b)		Filed herewith.