UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Mark One

For The Fiscal Year Ended December 31, 2003

OR

For the Transition Period from        to

Commission File Number 0-22677

CHROMAVISION MEDICAL SYSTEMS, INC.

(888) 443-3310

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
Rights to Purchase Series C Preferred Stock

     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 past 90 days. Yes x No o

     Indicate by check mark if the 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 the 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

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

     The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2003 was $22,251,666. For purposes of determining this amount, Registrant has defined affiliates to include (a) the executive officers and directors of Registrant on June 30, 2003 and (b) each stockholder that has informed Registrant by June 30, 2003 that it is the beneficial owner of 10% or more of the outstanding common stock of Registrant.

     The number of shares outstanding of the registrant’s Common stock, $.01 par value was 40,883,834 at February 17, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

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; 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.

PART I

Item 1. Business

     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 62.5% 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 Notes 6 and 12 of Notes to Consolidated Financial Statements.

Industry Overview

     The advent of proteomics – the study of specific proteins in cells – has brought to the forefront the need to advance the standards for laboratory processes to find and monitor certain diseases. The era of “yes/no” diagnostics, or just knowing whether or not a disease is present, has given way to the need to measure the specific proteins within the cells to assist the physician in identifying the patient that may benefit from new therapies. We expect new standardized, quantitative techniques to replace subjective judgment as clinicians move towards technologies that are more precise, reliable and consistent.

3

     While anatomic pathologists are specialists at diagnosing abnormal changes in tissue, most anatomic pathology laboratories are still operating using very traditional testing methods, with little or no automation, no routine proficiency testing and few inter-laboratory controls to ensure consistency. We believe that pathologists need to be armed with the best equipment to allow them to provide the most reliable and accurate information possible. Based on quality test data, the patient’s doctor can better evaluate the prognosis and the potential effectiveness of increasingly targeted and expensive therapies and advise patients on an appropriate, individualized course of treatment.

     With the ability to characterize certain protein behaviors in the cells, pharmaceutical companies are developing specific drugs to arrest or mitigate the adverse effects of these proteins in disease progression. Pharmaceutical companies are rapidly pursuing targeted drug delivery, aimed at creating better patient outcomes with fewer drug side effects. The Company believes that there are approximately over 1,300 promising cancer therapies in development between pre-clinical to stage three clinical trials, many of which will ultimately benefit from a unique diagnostic to accurately select the right patient for the right drug. Further, the company’s research also suggests that the annual growth in diagnostics selected for targeted therapeutics over the next four years be in excess of 75%. In the future, quantitative diagnostic testing for these therapies will be increasingly important, resulting in a significant need for a new industry standard in laboratory testing.

     We are actively pursuing collaboration with biopharmaceutical companies to provide expertise and technology to assist in clinical trials and drug discovery. This could potentially enable us to provide a diagnostic tool specifically paired with new therapeutics, adding to the number of tests which could be run on existing instruments placed with hospitals, pathology groups and in other clinical settings.

The ACIS Solution

     The ACIS is designed to complement the skills of pathologists by assisting them in generating more accurate, specific and reproducible results and reducing the subjectivity associated with current manual testing methods. Our system provides the following solution:

     Increased Sensitivity. In a validation study included in our FDA submission, the ACIS showed a 300% increase in detection sensitivity over traditional manual methods. In a separate internal study, the ACIS was able to reproducibly find one cytokeratin-positive cell among a sample containing over 100 million cells.

     Flexibility. The ACIS can be used to assist in the analysis of a wide range of diseases by identifying and quantifying a variety of stains and staining characteristics used to identify and evaluate diseased cells. In addition, the system’s color-recognition technology allows the ACIS to be configured to be compatible with most reagents and stains that have been developed in the industry.

     Reproducibility and Direct Visualization. The ACIS provides a very high degree of reproducibility. In clinical trials, the ACIS instruments reproduced results with 95% consistency, compared to the 72% reproducibility of manual microscopy. In addition, the ACIS system allows for the digital storage of high-resolution images of patient samples, which can be later accessed and revisited by pathologists or treating physicians. The system also has the ability to generate a patient report in both electronic and hard copies for transmittal and review by the physician, a feature unavailable with manual microscopy.

     Standardization. The reproducibility attained by the ACIS provides the opportunity for multiple laboratories or multiple pathologists to arrive at consistent results. Currently, standardization of results with manual microscope analysis is minimal.

     Automation. The ACIS provides a high degree of automation to the testing process. Up to 100 patient samples can be loaded and scanned unattended for review by a pathologist at a later time, enhancing the workflow of laboratory testing.

Corporate Strategy

     Our goal is to establish the ACIS system as the preferred imaging platform to assist in cell-based analysis in the healthcare industry. Using ACIS as an enabling platform, we intend to enhance standardization in laboratory testing by providing an integrated testing system optimized for imaging with the ACIS. In pursuit of that goal, we will:

	•		expand the market potential for fee-per-use revenue growth by increasing the number of placements with both independent users and select national accounts or regional reference laboratories;
	•		use the flexibility of the ACIS platform and our five FDA clearances to continue to collaborate with customers, leading pathology testing centers, opinion leaders and other third parties to assist in identifying, developing and validating new applications for the ACIS and thereby increase the revenue from each system in the field;

4

	•		continue to offer a modified ACIS workstation to lower volume hospitals and laboratories on a fee-per-use basis wherein slide preparation, staining and analysis are performed at a ChromaVision certified Access™ reference laboratory and customers then review the resulting images using a remote workstation;
	•		explore the appropriateness of providing additional, oncology focused laboratory services that complement ChromaVision’s image analysis and certified Access™ reference laboratory services. Such service extension will only take place if the Company is able to secure the additional financial resources of an amount sufficient to support such a service expansion strategy;
	•		continue our outreach to biopharmaceutical companies to collaborate in using ACIS for drug discovery and development;
	•		maintain and enhance our direct sales and marketing organization;
	•		expand our marketing and sales efforts to reach oncologists and other specialists, improving the understanding and perception of the ACIS with these groups in order to “pull through” demand from these critical participants in patient care decisions;
	•		develop expanded strategies for the strengthening and positioning of our intellectual property rights; and
	•		expand our spending for clinical trials to support FDA submissions for specific applications for the ACIS.

     There is considerable uncertainty as to whether these strategies can be implemented successfully, and ChromaVision cannot assure investors that it will be successful in doing so.

Business Segments

     Segment and geographic area information for the three years ended December 31, 2003 is incorporated by reference from Note 9 “Business Segments,” of the Notes to the Consolidated Financial Statements.

ChromaVision’s ACIS

     The ACIS combines color-based imaging technology with a fully automated, computer-controlled microscope system. The ACIS uses specifically developed software to analyze specimens placed on slides and stained with laboratory reagents that impart color to highlight diagnostic features of cells. The ACIS uses color as the primary means of detecting and characterizing cellular features. It achieves greater sensitivity than existing methods through its ability to discriminate among millions of colors and up to 256 levels of intensity of each color.

     The ACIS system uses color as a primary means of detection and characterizing cellular features. It achieves greater sensitivity than other existing test methods through its ability to discriminate among millions of colors and up to 256 levels of intensity of color. The ACIS system scans and processes the stained slides and creates a single image that reconstructs the entire tissue section. Using proprietary digital technology, the pathologist is then able to view the stored images at higher power for interpretation and quantitative information such as number of detected objects or intensity of color. ACIS, using additional color criteria and pattern recognition software, displays the relevant tissue or cell sections. The ACIS then generates a report, in the form specified by the pathologist, that can be printed or sent electronically over Intranet systems.

     We offer our customers an entire testing system, including an intelligent, automated microscope, specialized proprietary software, particular staining and slide preparation techniques that utilize readily available reagents, training and service. The ACIS is designed to enable a laboratory technician to operate the system using simple “point and click’’ commands to scan up to 100 patient samples with fully automated, walk-away operation. The reagents required to perform the tests are presently purchased by the customer from third parties. The hardware of the ACIS system includes a computer with a modem and monitor, a camera and an automated microscope. Ancillary equipment may include a cover slipper, auto-stainer, slide preparation equipment, hand held bar-code reader and color printer. The ACIS hardware configuration is modular, which means that we can replace most of the individual components without replacing the entire system. This allows us to take advantage of technological advances more easily and reduces the risk of obsolescence. As faster computer processors and increased disk storage become available, those enhancements will improve our product and in many cases lower its cost.

5

     In addition to the ACIS system, we market a modified ACIS pathology workstation primarily to community-based hospitals and pathology groups, enabling us to address a larger market (i.e. hospitals under 200 beds and smaller pathology groups where the volume of testing does not justify a full ACIS system). The ACIS remote pathology workstation is comprised of all of the hardware and software of the ACIS system with the exception of the microscope component. During 2003, two ChromaVision accredited laboratory “Centers of Excellence” performed standardized slide staining optimized for image analysis, ACIS slide scanning, and other support services to physicians and hospitals with the remote workstations. The resulting data and images are delivered to customers in the form of computer tapes or DVDs that can then be examined and analyzed by pathologists at the customers’ facilities using our pathology workstations. This program, which we market as ChromaVision’s “ACCESS program”, has been very successful, with 95 (36%) of our customers participating as Access clients at year end. For the years ended December 31, 2001, 2002 and 2003 revenues from the Access program accounted for approximately 5%, 17% and 24% of total revenues, respectively. In a step to broaden its commercial base, the Company has announced that beginning in April 2004, it intends to begin providing in-house laboratory services in support of its growing ACCESS remote pathology program.

ACIS Applications

     The ACIS has five significant capabilities: (1) tissue scoring and quantitative analysis, (2) rare event detection, (3) object detection and counting, (4) integrated optical density analysis and (5) tissue microarray technology. The applications being performed by ChromaVision customers use some or all of these features. Our technology, coupled with our existing FDA clearances gives us a significant competitive advantage with respect to our customers’ ability to identify and add any applications to the ACIS that they currently perform using manual microscopy. Because most laboratory tests require one or more of these unique features, we believe the menu of applications being run on ACIS will continue to expand. Currently, customers have the ability to validate new applications using existing capabilities of the ACIS technology requiring little or no modification to the system.

     Many assays currently performed by ChromaVision customers are standard-of-care tests in multiple cancer types and infectious disease. Revenues currently are derived primarily from breast cancer testing, although the ACIS platform technology is applicable to a virtually limitless number of tests. The market potential for tests currently available using ACIS is estimated to be $400-500 million, but grows to an excess of $1 billion for all of the applications we have identified for use with our system, including likely diagnostic tests for emerging cancer therapies.

     All test types referred to below are available for validation and use by our customers. Examples of tests currently being run by our customers include:

     HER2 Protein Expression. In performing this test, the pathologist must measure the quantity of the HER2 protein on the cell surface. An excess quantity of HER2 is associated with aggressive breast cancer, faster disease progression and shorter overall survival. Candidates for the cancer drug Herceptin, which was approved by the FDA and is marketed by Genentech, Inc., must be tested for excess quantities of HER2 to determine whether this therapy should be administered. Currently the test is performed manually, which can result in significant variation of results among individual laboratories and pathologists. A side effect of Herceptin, if it is prescribed under circumstances where it is not appropriate, is cardiac toxicity. In a clinical study, pathologists using the ACIS as a tool were able to reproducibly quantify the amount of protein on the cell surface in over 90% of cases. Pathologists assisted by the ACIS have the potential to substantially improve the accuracy and standardization of test results.

     In a published study, ten pathologists reviewed biopsy specimens obtained from 129 breast cancer patients with and without ACIS assistance. The data showed that every pathologist in the study improved his or her performance using the ACIS. As a group, the pathologists improved the reproducibility of their HER2 protein measurements from 75% without ACIS assistance to 95% when using the ACIS. In a different published study of 189 patient biopsies, pathologists using the ACIS found that 38 patients who had been classified as positive for HER2 protein overexpression by manual analysis alone (i.e., without ACIS assistance) were actually negative and should not therefore be exposed to the high cost and potential toxicity of Herceptin therapy.

     Estrogen Receptors (ER). The estrogen receptor assay is also ordered by physicians for virtually all new cases of breast cancer to assess patient prognosis and to guide clinical decision-making. Patients who are estrogen receptor positive may be candidates for anti-estrogen hormonal therapies such as Tamoxifen. Using manual microscopy, it is difficult to reproduce results between pathologists and laboratories because of the lack of standardized scoring techniques and the subjective nature of test evaluation. A pathologist using the assistance of ACIS is able to provide an objectively scored result, enabling the physician to better identify patients who would benefit from hormonal therapy. Recent studies have shown a high degree of inter-laboratory variability in manual detection sensitivity, especially in relation to the detection of breast cancers with low estrogen positivity. In one study, a false negative rate of between 30% to 60% was documented. False negatives could adversely affect the decisions to give adjuvant treatment in some patients, which means that accurate ER/PR assessment is critically important.

6

     Progesterone Receptors (PR). The progesterone receptor assay is similar to the estrogen receptor assay in that it predicts response to hormonal therapies in certain cases of cancer. Most studies show that when patients’ tumors are positive for estrogen and/or progesterone receptors, patients are more likely to respond to systemic hormonal treatments. Because the two assays are highly complementary, physicians routinely order both tests for their newly diagnosed breast cancer patients. The benefits afforded by the PR test using the assistance of ACIS are similar to those discussed above for the ER test, enabling physicians to better identify patients who would benefit from hormonal therapy.

     Cell-proliferation (Ki-67). Ki-67 is an antibody recognizing a protein which serves as an indicator of tumor proliferation and, by extension, of tumor growth and aggressiveness. Ki-67 testing is performed upon relatively small biopsy specimens, such as those which are obtained by fine needle aspiration of mammographically detected breast and other lesions. Ki-67 testing is also performed currently for other diseases such as ovarian, prostate, lung, and colorectal cancers and non-Hodgkin’s lymphoma. Manual microscopy is difficult for this test because of the necessity for precise quantification of cells expressing this protein. The ability of the ACIS to assist the pathologist in providing a precise measurement will enable the treating physician to avoid unnecessary chemotherapy regimens and guide alternative treatment options.

     Protein expression (p53). p53 is the most commonly altered (or mutated) gene in cancer. Over-expression of the p53 protein indicates whether mutation has occurred in the gene. Further, over-expression of p53 is recognized as an indicator of aggressive cancer even in the absence of gene mutation. This information can be used in cancer staging to assess risk of recurrence and potentially to evaluate cancer risk. p53 can be applied to multiple cancer types. Pathologists using the assistance of ACIS to perform p53 testing will assist in guiding treatment and avoiding unnecessary chemotherapy.

     Micrometastases in Bone Marrow. This test involves finding minute quantities of cancer cells in bone marrow, which have been shown to be an early indication of cancer that has metastasized. Testing for small quantities of cancer cells also can be used to monitor the progress of the disease and to provide required information in connection with stem cell and bone marrow transplants. Using manual microscopy, the search for rare events is difficult and often not reproducible. By using the assistance of ACIS, physicians can more accurately monitor cancer progression, make better decisions regarding the best course of therapy and evaluate a patient’s response to therapy.

     Micrometastases in Tissue. This test is now being used to evaluate lymph nodes in breast cancer patients. This test is recommended for nearly all breast cancer patients and is expected to have broad applicability to multiple cancer types including skin, thyroid, head and neck, gastrointestinal and gynecologic cancers. The ACIS can provide significantly greater sensitivity, accuracy and reproducibility to a test that is potentially inaccurate and tedious when performed manually. Test data demonstrated that utilizing the assistance of the ACIS makes it practical to examine a greater number of tissue sections than the manual method, increasing the likelihood of detecting metastases if they are present.

     Tissue Microarray. Tissue microarray technology enables the analysis of hundreds of samples on a slide simultaneously in a single display and has emerged as a valuable new technique used by biopharmaceutical companies to facilitate new drug discovery. This technique realistically enables a full clinical trial to be performed on one single slide and enables data compilation never before possible. Using the assistance of the ACIS, analysis that would take many hours or days to perform manually can be performed in only minutes, saving time for clinicians and advancing the availability of completed study data.

     DNA Ploidy. This test quantifies DNA in cell nuclei and is an important component of the primary panel of tests performed to characterize tumors and determine the aggressiveness of those tumors. The ACIS DNA Ploidy test minimizes the subjectivity in analysis and assists pathologists and oncologists in being more certain of their treatment decisions. The ACIS is able to collect more information at a rate five times faster than older-generation image analysis systems used for DNA Ploidy testing.

     Human Papillomavirus (HPV). When performing this test, the pathologist is seeking to detect even one HPV infected cell in a liquid-based cytology sample obtained as part of a PAP testing regimen or in a tissue specimen obtained by cervical biopsy. The presence and persistence of HPV infection has been shown to be the most important risk factor for cervical cancer. HPV testing assisted by ACIS is performed using the rare cell detection function and chromogenic in situ hybridization. The ACIS’ sensitivity enables the accurate identification of positive cases and reduces false negative cases that may be missed by manual microscopic analysis. Additionally, the pathologist’s ACIS report shows full-color images of the cells detected as visual confirmation of positivity. ACIS automation allows unattended scanning of hundreds of slides and presents the suspicious cells in a montage for review by the pathologist, replacing the tedious, time-consuming and potentially inaccurate manual evaluation of HPV slides.

Collaborations

7

     We have entered into an agreement with Abbott Laboratories to support the clinical development of Abbott’s cancer compounds targeting tumor angiogenesis. The ACIS system and ChromaVision-labeled antibodies and reagents will be employed in the research and assessment of the efficacy of Abbott’s developmental anti-angiogenic compounds. Abbott will provide samples from clinical trial patients with multiple cancer types at various stages of progression to understand and evaluate the scope of patient response. Data gathered through the collaboration will be used by Abbott to support clinical development. We have a similar agreement with pharmaceutical developer NewBiotics Inc. to use the ACIS in evaluation of NewBiotics’ anti-cancer drug candidate for treatment of colon cancer patients.

     During the past several years, we have been involved in a marketing relationship, pursuant to a reference agreement and certain leases, with US LABS. Inc., a full service, national reference laboratory with a sales force of over 50 individuals across the country. During this time, US LABS has been an accredited ACCESS reference laboratory that services ChromaVision remote pathology ACIS users by performing the technical and professional component of analysis. US LABS has provided laboratory staining services and ACIS image scanning to hospital-based pathologists who then use their own ACIS remote viewing systems to assist them in interpreting the digital images. The ACCESS program has been highly successful leading to a similar relationship with Esoterix, Inc., a national laboratory based in Brentwood, Tennessee. In February 2004, however, ChromaVision gave notices to both of these national reference laboratories that ChromaVision would end its relationship with them and begin to provide in April 2004 in-house laboratory services to its customers in support of its growing ACCESS remote pathology program.

     For the year ended December 31, 2003 US LABS was our largest customer and accounted for approximately 7% of our revenues. ChromaVision’s decision to in-source the provision of laboratory staining and ACIS image scanning services and attract new customers later this year could have a negative impact on revenue depending on the extent to which ChromaVision is successful in retaining its existing customers and attracting new customers to ChromaVision’s laboratory service offering. The Company’s contract with US Labs, which is being terminated, contains a provision whereby ChromaVision is precluded from soliciting US Labs’ customers for a period of six months following the effective date of the termination of the contract. ChromaVision maintains that customers using our ACIS scanning services (whether in- or out-sourced) are ChromaVision’s customers and are not subject to this restriction on solicitation. US Labs has indicated that it disagrees with ChromaVision’s interpretation of the contract with respect to which customers are customers of ChromaVision or US Labs for purposes of the non-solicitation provision. While we believe our interpretation of the contract is correct, if US Labs is successful in arguing its position in a court of law, such an outcome would have a significant negative impact to revenue from the ACCESS remote pathology program with respect to customers previously outsourced to US Labs.

     We have entered into and will continue to use scientific collaborations to assist in identifying and validating applications of our technology and enhancing our marketing and distribution capabilities. We collaborate with customers as well as researchers at prestigious hospitals and major laboratories to assist with clinical studies and publishing peer reviewed scientific papers.

     Additionally, we will be seeking to collaborate with companies who can create greater awareness and/or distribution capabilities to accelerate our business plan.

Sales & Marketing

     Our goal is to make ACIS and the ACIS remote pathology workstation technologies available to the entire clinical laboratory market. To accomplish this, the ACIS and the remote pathology workstation are marketed under various revenue models.

Fee-Per-Use Model

     The ACIS and the remote pathology workstation are offered under lease arrangements in which the customer is charged based on the number of tests performed, subject to a minimum monthly payment. Rather than selling the systems, our fee-per-use strategy removes any capital equipment investment barrier to new system placements, shortens our placement cycle, yields very attractive margins and gives us a recurring source of revenues. The fee-per-use is determined by the specific test that is run along with the volume of tests run. On a monthly basis, we poll each customer’s instrument by modem to retrieve usage information. The list prices of our tests range from $40 to $150. This model best fits larger volume customers that might perform more than 100 tests per month.

Hybrid Sale

     ACIS customers that have smaller monthly tests volumes in the range of 50 to 100 are good candidates for a new pricing model intended for 2004 which is referred to as a Hybrid Sale. Under this program, clinical customers can purchase the ACIS system for a small capital investment but will continue to be charged a small fee per test. This approach allows lower volume accounts to enjoy the benefits of ChromaVision image analysis technology while still being able to stay within the economic requirements of their

8

business model. The Hybrid Sale approach was deemed appropriate for 2004 due to changes in reimbursement rates and the need to allow all potential users of ACIS to find a way to utilize our technology.

Direct Sales

     We strategically sell the ACIS to research market customers, and will either sell or lease the system on a fixed rent basis in the European Community where the fee-per-use strategy is not accepted in the international healthcare structure. In order to further the use of ACIS in the research markets, which includes biopharmaceutical companies, biotechnology companies, and academic medical centers, the Company intends to place an increasing focus on sales to these customers by expanding its sales resources and improving system features most attractive to this market.

Customers

     Our target customers fall broadly into six principal market segments. We direct our marketing efforts to the following groups of customers that perform laboratory testing:

     Reference laboratories. These laboratories have a national presence or specialized focus. Examples include Quest Diagnostics Incorporated, Laboratory Corporation of America Holdings, IMPATH, and Specialty Laboratories Inc. The Company’s decision to directly provide certain laboratory services in April 2004 may limit the opportunities with these organizations, who may view ChromaVision to be a future competitor. Opportunities may still exist, however, for the provision of select image analysis capabilities or specific use features, such as for HPV. In addition, the Company has relationships with close to a dozen regional reference laboratories with whom it does not compete and to which it offers its ACCESS remote pathology program in the markets served by the regional reference laboratories.

     Pathology practice groups. These groups network individual pathology practices nationally or regionally. The majority of practicing pathologists are members of one of these groups.

     Hospitals. This market is comprised of community or regional hospitals and regional cancer centers. The majority of slide-based testing is currently done in hospitals, and the second largest category for testing is reference laboratories. ChromaVision believes that it is able to address the continuum of needs from the largest to the smallest of these organizations through its ACIS, ACCESS and laboratory services offerings.

     Pharmaceutical companies. These companies benefit by using the ACIS in the drug development process. In addition, the ACIS may assist in directing the treatment protocol for patients with new therapeutics, such as Herceptin and anti-angiogenesis agents.

     University medical centers. These medical centers include transplant, oncology and research centers as well as women’s hospitals.

     Research institutions. These institutions include governmental sanctioned groups such as The National Cancer Institute, The National Institutes for Health and the Center for Disease Control as well as cancer cooperative groups such as the ECOG, NSABP and SWOG.

     ACIS systems have been placed in each of these markets in the United States. We estimate that in the U.S. there are up to 64,000 potential customers in these groups.

     As of December 31, 2003, the sales and marketing organization consisted of 27 people, including 14 direct sales people and nine technical service specialists in the United States and two direct sales people and two technical service specialists in Europe. We expect that the majority of our sales will result from direct, face-to-face selling efforts by our sales force augmented by strategic collaborations. As a result, we intend to devote significant resources to our sales and marketing organization to support the acceleration of the commercialization of our products, principally investing in more aggressive marketing initiatives.

     We have entered into selected agreements with independent distributors to market the ACIS throughout Europe. Negotiations with additional distribution partners are currently underway. We are using our European team members to support these distributor partners.

9

Reimbursement Strategy

     Laboratory services provided for patients with the assistance of ACIS technology are eligible for third party reimbursement under well-established medical billing codes. These billing codes are known as Common Procedural Terminology, (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 for the CPT codes are established by the Centers for Medicare and Medicaid Services (CMS), with advice from AMA and professional societies representing the various medical specialties.

     Effective April 1, 2003, the CMS instituted a National Correct Coding Initiative (NCCI) edit. The NCCI edit significantly reduced from, April 1, 2003 to December 31, 2003, the amount of reimbursement previously paid by Medicare for services involving automated image analysis by limiting the codes that would be accepted for reimbursement for ACIS-based services. The CMS edit applied directly only to Medicare patients. We estimate 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 NCCI interim edit (effective until December 31, 2003) customers were reimbursed about $85 per test for Medicare patients. During this time, the edit was adopted to a limited degree by other payers.

     The new CPT code to be used for image analysis went into effect on January 1, 2004. Under the new code, the total Medicare reimbursement for ACIS-based procedures performed in physician offices or independent laboratories will be approximately $140 per test, reflecting a technical component of approximately $85 and a professional component of approximately $55. The technical component involves preparation of the patient sample and running the test on the ACIS, while the professional component involves the physician’s reading and evaluation of the test results. The actual amount will also vary based upon a geographic factor index for each state and may be higher or lower than the amounts indicated above in particular cases based on one’s geographic location.

     The adoption of a new CPT code appropriate for image analysis reflects the expanding role of image analysis in pathology and the need for appropriate reimbursement to enable use of this technology by healthcare providers to benefit patients. Potentially, the new CPT code could help to streamline reimbursement for ACIS users by allowing them to code more specifically for image analysis-based services in claims billed to third party payers. The 2004 valuations of the new code are considered interim valuations and are open for comment to influence further adjustments in 2005. ChromaVision will continue working with relevant medical societies and other appropriate constituents to obtain appropriate reimbursement amounts by all payers for providers of image analysis- based services. The goal is to have the amount paid by Medicare and other payers for image analysis-based services accurately reflect the technology costs, the benefit that image analysis brings to patients, and its positive impact on healthcare economics.

     The reduction of reimbursement resulting from the NCCI edit and the 2004 interim valuations for ACIS-based procedures will not only reduce revenue for current ACIS customers, but also may result in system returns or cancellations by current customers in 2004 and may also negatively impact future placements of ACIS. ChromaVision is in the process of determining the ultimate impact of this code on our customers and our business. In addition, because of the increase in the technical component to reimbursement, ChromaVision will be required to enter into new contracts with the hospitals that often prepare the slides for analysis. Hospitals have longer buying cycles and a more extensive contract evaluation process which may delay the implementation of these contracts. At the same time, ChromaVision’s current pathologist customers, for whom professional service reimbursement has been reduced, will require more significant rate reductions in their contract terms with the Company. The creation of these “split billing” agreements, where ChromaVision will seek fees from both a hospital and pathology practitioner, have the potential to be difficult to implement and could cause delays in coming to agreement on contract rate terms.

     Due to the change in reimbursement effective January 1, 2004, the Company’s sales representatives have focused a majority of their efforts, during the fourth quarter of 2003, on renegotiating many of the Company’s fee-per-use contracts. As a result, we anticipate a reduction in system placements and fee-per-use revenue in the near term. Approximately two-thirds of our contracts have been renegotiated as of January 1, 2004 representing the majority of those that the Company believes will require amendment. New sales efforts will now be substantially focused on system placement expansion and continued defense of our existing base of installations.

Patents and Proprietary Technology

     We file patent applications to protect technology, innovations and improvements that we consider important to the development of our business. Currently, we have fourteen patent applications pending with the U.S. Patent and Trademark Office and twenty-five foreign patent applications pending. We have thirteen issued patents in the United States and eleven filed patents, all

10

related to the system and method for cellular specimen grading performed by the ACIS. The patents for which we have received a final issuance have remaining lives which vary from 11 to 13 years.

     In all our patent applications, we have endeavored to file claims, which cover the underlying concepts of the unique features of the ACIS, its associated processes and methodologies as well as our specific implementation of those processes and methodologies. As a further protection against efforts to erode our proprietary position, we have systematically explored other designs, which could achieve results similar to the ACIS and prepared patent applications on those alternate designs.

     We also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our employees and consultants. As a condition of employment, we require that all full-time and part-time employees enter into an inventor assignment and non-disclosure agreement.

     We intend to broaden the scope of our intellectual property portfolio, which we consider critical to our future product development. If we are unable to protect our patents and proprietary rights, our reputation and competitiveness in the marketplace could be materially damaged. Litigation may therefore be necessary in order to enforce any patents that we now hold or that are issued to us. In February 2004, ChromaVision filed suit against Applied Imaging Corporation (Nasdaq: AICX). The lawsuit, filed in the United States District Court for the Southern District of California, asserts the Applied Imaging’s ARIOL SL-50 system infringes upon three ChromaVision patents. ChromaVision has asked the court for damages and an injunction barring Applied Imaging from making, using, importing, selling, or offering for sale any device that infringes ChromaVision patented technology. In its complaint, ChromaVision has asserted Applied Imaging’s product infringes upon three ChromaVision patents relating to image analysis and automated microscopy. Those three patents are: United States Patent No. B1 6,215,892, entitled “Method and Apparatus for Automated Image Analysis of Biological Specimens;” United States Patent No. B1 6,404,916, entitled “Method and Apparatus for Applying Color Thresholds in Light Microscopy;” and United States Patent No. B1 6,418,236, entitled “Histological Reconstruction and Automated Image Analysis.” We may also be forced to protect our trade secrets or the know-how we own or to determine the enforceability, scope and validity of the proprietary rights of others. It is also possible that others will assert claims against us. The outcome of such intellectual property litigation is inherently unpredictable, such litigation is expensive and the cost and resolution of these matters could materially affect our results and business operations. Moreover, there can be no assurance that the steps we take to protect our proprietary rights will be adequate or that third parties will not infringe, design around, or improve upon our proprietary technology or rights.

Competition

     In the late 1980’s and early 1990’s, the cellular image analysis market was dominated by the CAS system. The CAS system, developed by Jim Bacus, Ph.D. in 1988 and later sold to Becton Dickinson, was the first attempt to automate Immunohistochemistry (IHC) analysis. The system was moderately successful, offering limited quantitation and standardization benefits, but it required a significant increase in pathologist time over manual microscopy. Although over 400 CAS systems were placed worldwide in the 1990’s, Becton Dickinson ultimately abandoned the CAS platform and the IHC market. However, even today there are approximately 90 CAS systems still in use worldwide, primarily for DNA Ploidy analysis.

     ACIS was first released in 1997 for use in research as an imaging system for the detection of rare cellular events. The primary application was for the detection of cytokeratin positive cells in bone marrow. At that time, the most significant competition to the ACIS for this application was manual microscopy and cell-based techniques such as PCR and flow cytometry. ACIS quickly showed that imaging was clearly superior to these two technologies in terms of ease-of-use and sensitivity in detecting rare cellular events.

     It became apparent that a natural expansion for ChromaVision and the ACIS was to penetrate the manually intensive IHC tissue market with initial focus on the breast cancer market. Although numerous imaging systems have preceded ACIS, they were not designed for quantitative IHC and for the most part they were targeted at the research, high volume routine PAP screens or the urinalysis markets. This meant that initially the only serious competition to the ACIS in the IHC market was the manual microscope. Traditionally, the IHC market remains one of the few areas of laboratory medicine that is not quantitative, automated or standardized with only 60% of the US laboratories, 25% of the European laboratories and 5% of the Japanese laboratories currently using automated IHC staining systems. The need for quantitative, automated and standardized IHC results became increasingly important with the recent emergence of protein-targeted therapies such as Herceptin and Iressa.

     For this reason, all of the major IHC reagent manufacturers are looking at quantitative IHC and image analysis as a critical requirement for their future growth and expansion into new markets. Companies with a strong foothold in the IHC market such as DAKO, Ventana and BioGenex could be serious competitors to ChromaVision as they have IHC market share, pathologist relationships and two of the critical system components needed to drive standardization—reagents and staining automation. Other imaging companies that have traditionally served the cytology (Pap Smears) and cytogenetics market, such as TriPath and Applied

11

Imaging, have followed the success of the ACIS in the anatomic pathology market and are currently expanding into this market. Advancements in the field of proteomics and the advent of new protein-based therapies, will bring increased competition to this market segment.

     Over the past three years ChromaVision has gained significant visibility in the anatomic pathology marketplace. To ensure that we capitalize on the momentum we have created and to stay ahead of our potential competitors, we are developing new applications for the ACIS. We are in the process of releasing the next generation ACIS, which we believe will improve our competitive position and provide an additional market within the research and biopharmaceutical communities.

Service

     We offer service and maintenance to ACIS customers as part of the “fee-per-use” pricing structure. We have developed a support, field service and parts distribution plan designed to support the installed base of ACIS systems. This plan will offer the following services as part of the “fee-per-use” structure: (i) installation; (ii) customer training and stain validation; (iii) a 24-hour per day, seven-day per week customer help desk available via a toll free number; (iv) the ability to remotely service ACIS units and load new software via dial-up modems, and (v) on-site field service and parts replacement utilizing regionally based field engineers who are supported by our headquarters’ development and engineering staff. We are currently solving approximately 92% of customer issues remotely in less than an hour and at initial customer contact. ACIS modules have an uptime rate in excess of 99%, and the mean time between failures is approximately 250 days.

Research & Development

     To date, our core competency has been in the area of advanced imaging as applied to the detection and quantification of reagent-stained cellular material. At December 31, 2003 we had 17 employees dedicated to engineering and research and development, including several scientists who hold Ph.D. degrees in various disciplines. Our research and development staff is experienced in the rapid prototyping and development of advanced software-based, electro-optical-mechanical systems. We intend to continue to invest in the recruitment of experienced scientists and engineers with an emphasis on achieving a balance between research and development, innovation and support of focused, market driven requirements. Research and development spending was approximately $5,939,000, $4,782,000 and $4,754,000 in 2001, 2002 and 2003, respectively.

Manufacturing

     The ACIS is currently manufactured at our facility in San Juan Capistrano, California. Our employees assemble the components, optically align the microscope, load the software and quality test the system. Components of the system are manufactured internally, purchased off-the-shelf, or manufactured by subcontractors to our specifications. The system uses an off-the-shelf charged couple device (CCD) camera and an Intel/Microsoft-based personal computer. The system can be adapted for use with most popular microscopes and related optical accessories. The ACIS has been designed to be fully modular to take advantage of improvements in microscopy and computer hardware.

Governmental Regulatory Status

     As a medical device, our ACIS product is subject to governmental regulation in the United States and in other countries. In the United States, the Federal Food, Drug, and Cosmetic Act (FDC Act), along with the regulations promulgated by the United States Food and Drug Administration (FDA) as well as various other federal and state statutes and regulations, govern the testing, manufacture, labeling, storage, record keeping, distribution, sale, marketing, advertising and promotion and importing and exporting of medical devices.

     Before a company can place a medical device into interstate commerce for sale in the United States, FDA must review and approve or clear the device unless it is exempt under FDA’s regulations. Approvals and clearances are generally for specific intended uses. This regulatory process can be lengthy, expensive and uncertain. Extensive clinical data and other information can be required by FDA in order for the agency to approve or clear a medical device.

     Under the FDC Act and its regulations, medical devices are placed into one of three classes on the basis of FDA’s view of their risk and the controls necessary for assuring their safety and effectiveness. These three categories are referred to as Class I, Class II and Class III. ACIS was cleared as a Class II product.

     Class I devices are those in the lowest risk category. As such, many Class I medical devices are exempt from certain pre-market and other regulatory requirements. To sell a non-exempt Class I device or a Class II device, a manufacturer must submit and obtain an order from FDA stating that the product is cleared for marketing in the United States. This FDA clearance is achieved

12

through the filing of a Pre-market Notification (510(k)) based on the device being “substantially equivalent” to a legally marketed product, i.e., a Class I or Class II medical device or a Class III device for which FDA has not yet required a Premarket Approval Application (PMA).

     Class III devices are those in the highest risk category. As such, a manufacturer must submit and obtain FDA approval of a PMA before the device can be introduced to the United States market. The PMA process is significantly more complex and time-consuming than the 510(k) process. The PMA process almost always requires the submission of well-controlled clinical investigations in order to obtain FDA approval. On average, FDA reviews and clears a 510(k) submission within six months. PMA approval by the agency generally takes at least one year and can even take a number of years. In the case of a PMA and/or a 510(k), there is no assurance that the agency will agree with the submission and/or clear or approve the product. FDA may reject a 510(k) submission and require that a company file a PMA instead. Determination by FDA that any of our devices or certain applications of ours are subject to the PMA process could have a material adverse effect on our business, results of operations and financial condition. Nonetheless, a business benefit can accrue where FDA approves a PMA because holding a PMA may, in some instances, provide a competitive advantage. A change or modification of a medical device that has already received FDA clearance or approval can result in the need to submit further filings to the agency. A change or modification of a product cleared through the 510(k) process can result in the need for a new 510(k) submission where the change or modification could significantly adversely affect the safety or effectiveness of the device. A change in a device that is the subject of an approved PMA could require a PMA supplement.

     We obtained our first 510(k) clearance in May 1997 from the FDA to market the ACIS with a test to screen blood for malignancy. In July 1999 we received our second 510(k) clearance from the FDA which granted use of the ACIS to assist the pathologist to detect, count and classify cells of clinical interest based on recognition of cellular objects of particular color, size and shape. In 2002 we received a 510(k) clearance from the FDA which granted the ability to use ACIS to conduct an Estrogen Receptor and Progesterone Receptor (ER/PR) test, which aid in the management, prognosis and prediction of therapeutic response for cancer. In December 2003, we received our most recent 510(k) clearance from the FDA which recognizes the ability of ACIS to detect, count, and classify the presence of the HER2 protein, allowing physicians a more precise and quantitative understanding of the specific traits of individual cancer tumors. Specifically, this FDA clearance allows ACIS to be used as a complement to the DakoCytomation HercepTest™ in the detection and measurement of Her2/neu (c-erbB-2)

     As a Class II medical device manufacturer, we are also subject to FDA’s Quality System Regulation (QSR) which includes FDA’s regulatory requirements for Good Manufacturing Practices (GMPs). In addition, we are subject to FDA’s regulations regarding labeling, medical device reporting and reports of corrections and removals. The medical device reporting regulations require us to provide certain information to FDA in the event of a death or serious injury allegedly associated with the use of ACIS or any product malfunction which would likely cause or contribute to a death or serious injury if the malfunction were to recur. Class II devices may also be required to adhere to certain “special controls” including but not limited to performance standards, post-market surveillance and/or patient registries where applicable. In addition, we must comply with applicable regulatory requirements for the export of our products.

     FDA’s QSR requires, among other things, that we have (i) a written quality assurance policy and procedures for controlling and documenting all aspects of our manufacturing processes, (ii) the ability to produce devices which meet the applicable design controls and specifications which have been validated by extensive and detailed review of each of the manufacturing processes, and (iii) the ability to conduct, and written procedures for conducting, corrective and preventative actions. FDA conducts periodic inspections to determine compliance with all of the regulatory requirements imposed by the FDC Act and its regulations. If deficiencies are noted during the inspection, the FDA investigator may issue FDA Form 483 that lists the observed deficiencies.

     The State of California Department of Health Services (DHS) enforces that state’s requirement that our facility have a Medical Device Manufacturing License. The requirements for that license include adherence to FDA’s QSR. Our facility has been inspected by DHS, and we have been issued a license to manufacture devices in California. This license must be renewed every year. The State of California could prohibit our manufacturing of medical devices if we failed to maintain this license.

     Laws and regulations regarding the manufacture, distribution, marketing, sale and use of medical devices are subject to change and depend heavily on administrative interpretations by federal and state government agencies, including FDA. There can be no assurance that these regulations or their interpretations will not change in the future or that such changes will not be applied retroactively.

     We may be subject to a number of other laws and regulations in those states and countries where our products are now or will in the future be marketed. These laws and regulations may restrict or hinder our ability to market our products in those states or countries. Use of our products may be subject to periodic inspection, quality control checks, quality assurance checks, proficiency testing, documentation and safety reporting standards pursuant to the Joint Commission on Accreditation of Healthcare Organizations, a self-regulated consortium of health care organizations. Depending on circumstances, including but not limited to our strategies and

13

discussions with potential distribution partners, we may develop a distribution strategy that initiates marketing in international markets prior to marketing in the United States.

     In anticipation of marketing our products in the European Union (EU) and accordance with the newly released In-Vitro Diagnostic Directive (IVDD) we applied for and received certification to EN13485:2003. The ACIS product was CE marked in 1998. The CE Mark was applied after we demonstrated compliance with applicable regulatory requirements, including, but not limited to, compliance with pertinent ISO and EN requirements and certification by a recognized notified body.

Employees

     As of December 31, 2003, we employed 71 persons of which 17 persons were in product development and engineering, 20 persons were in manufacturing, quality assurance and field services, 7 persons were in finance, executive and administrative capacities and 27 persons were in sales and marketing. We are not subject to any collective bargaining agreements, and we believe that our relationship with our employees is good.

     In addition to full-time employees, we utilize the services of various independent contractors, primarily for certain product development and foreign sales, marketing and administrative activity.

Reports

     We make available free of charge through our website, www.chromavision.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or to be furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Item 2. Properties

     Our executive office, development and manufacturing facilities are located in San Juan Capistrano, California, in approximately 21,000 square feet. We lease the space at an annual rent of approximately $202,000. The existing lease agreement has been extended to February 2005 and we are evaluating alternatives to exercising our option to extend the lease beyond February 28, 2005. We are currently exploring leasing other facilities as we anticipate that additional space will be required as our business expands. We believe that we will be able to obtain suitable space as needed.

Item 3. Legal Proceedings

     In February 2004, ChromaVision filed suit against Applied Imaging Corporation (Nasdaq: AICX). The lawsuit, filed in the United States District Court for the Southern District of California, asserts the Applied Imaging’s ARIOL SL-50 system infringes upon three ChromaVision patents. ChromaVision has asked the court for damages and an injunction barring Applied Imaging from making, using, importing, selling, or offering for sale any device that infringes ChromaVision patented technology. In its complaint, ChromaVision has asserted Applied Imaging’s product infringes upon three ChromaVision patents relating to image analysis and automated microscopy. Those three patents are: United States Patent No. B1 6,215,892, entitled “Method and Apparatus for Automated Image Analysis of Biological Specimens;” United States Patent No. B1 6,404,916, entitled “Method and Apparatus for Applying Color Thresholds in Light Microscopy;” and United States Patent No. B1 6,418,236, entitled “Histological Reconstruction and Automated Image Analysis.”

     The Company is not otherwise a party to any other legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on the business, financial condition or results of operations of the business.

14

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to us by a vote of the security holders during the fourth quarter ended December 31, 2003.

Executive Officers

     The following persons were executive officers of the Company at March 1, 2004:

     Michael F. Cola, 43, Chairman of the Company since June 2003 and Interim Chief Executive Officer since February 2004. Currently Mr. Cola is employed with Safeguard and joined Safeguard as Vice President of Operations and Management Services in February 2000 and became Managing Director, Corporate Operations in January 2002. Prior to joining Safeguard, Mr. Cola spent eight years as Vice President, Global Clinical Operations, at AstraZeneca, where he was responsible for global clinical and U.S. product development operations and technology solutions integration. Prior to joining AstraZeneca, Mr. Cola was responsible for re-engineering processes and systems in manufacturing and product development at Campbell Soup Company.

     Stephen T. D. Dixon, 43, Executive Vice President and Chief Financial Officer since December 2002, Mr. Dixon brings over two decades of executive level experience in financial management, corporate finance and strategic business plan development and implementation to ChromaVision. From November 2000 to November 2002, Dixon served as Senior Vice President and Chief Financial Officer with The Scully Companies, a privately held provider of regional transportation services located in Fontana, California. Mr. Dixon also spent two years in various senior management positions, most recently Vice President and Chief Financial Officer, U.S. and Canada for the largest division of Bax Global, Inc., a $2 billion publicly traded provider of global transportation and supply chain services located in Irvine, California. Prior to his corporate management positions, Dixon began his career with Coopers & Lybrand, Certified Public Accountants in Philadelphia. He is a Certified Public Accountant, licensed in the State of Philadelphia, and a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants. Mr. Dixon graduated with honors receiving a Master’s Degree in Business Administration from the Wharton Graduate School of the University of Pennsylvania and graduated cum laude with a Bachelor’s Degree in Accounting and Economics from Bucknell University

      Kenneth D. Bauer, Ph.D., 52, has been Vice President and Chief Science Officer since August 1997. From 1992 to 1997, Dr. Bauer was Senior Scientist in the Immunology Division and head of Cytometry for Genentech, Inc. a publicly traded biotechnology company. Prior to Genentech, Dr. Bauer held academic positions at Northwestern University (Associate Professor of Pathology) and the University of Rochester, in New York (Assistant Professor of Oncology). Dr. Bauer has authored over 90 peer-reviewed scientific publications, edited two books, and was Associate Editor of Cytometry (Journal of the Society of Analytical Cytology) for ten years. Dr. Bauer has been a member of the scientific advisory boards for several public companies and served on scientific review sections for the National Institutes of Health, Department of Energy, and National Aeronautics and Space Administration. He is currently a Clinical Professor of Pathology at the Keck School of Medicine, University of Southern California, an Adjunct Professor of Pathology and Laboratory Medicine at the University of Pennsylvania School of Medicine and a subcommittee member of the National Committee for Clinical Laboratory Standards. Dr. Bauer received a Bachelor of Arts degree in Zoology from the University of California at Los Angeles and a Doctorate of Philosophy in Anatomy and Radiology from the University of Utah.

     Heather Creran, 36, has been Executive Vice President and Chief Operating Officer Oncology Services since January 2004. Prior to joining ChromaVision, she worked for IMPATH Inc. for 14 years. IMPATH specialized in cancer pathology using sophisticated technologies to provide patient-specific cancer diagnostic and prognostic information. Having joined IMPATH at its inception, she served in various positions and for the last five years held the position of Vice President of Operations with responsibility for the operations at IMPATH’s three laboratory locations in New York, Los Angeles and Phoenix. Ms. Creran holds a Bachelor’s Degree in Economics and Political Science from Duke University.

     Jose de la Torre-Bueno, Ph.D., 54, has been Chief Technology Officer since April 2001 and has been Vice President since February 1999. Dr. Torre-Bueno was also Senior Applications Engineer for the Company from July 1998 to February 1999. Prior to joining ChromaVision, Dr. Torre-Bueno was engaged as a consultant to Tower Technologies in Encinitas, California. In 1982, he

15

founded American Innovision; an image analysis company that configured complete application systems and designed and built software and hardware. He served as President and Vice President of Research and Development for American Innovision, a company in which he had a substantial ownership interest, until its sale to Oncor Instrument Systems in 1992. He remained with Oncor for three years after the sale as Senior Scientist and Research and Development Manager. Dr. Torre-Bueno has been an inventor on 4 issued patents and 8 pending patents all assigned to ChromaVision. Dr. Torre-Bueno is currently an Adjunct Professor in the Department of Mathematical Sciences at San Diego State University and a Clinical Professor of Pathology at the Keck School of Medicine, University of Southern California. Dr. Torre-Bueno earned a Bachelor of Science degree in Biology and Psychology from the State University of New York at Stony Brook and a Doctorate of Philosophy in Physiology, Behavior and Genetics from Rockefeller University.

     Karen K. Garza, 46, is Vice President of Marketing and Strategic Initiatives, having joined ChromaVision as Vice President of National Accounts and Strategic Initiatives in May 2003. Garza has more than 20 years experience in healthcare sales and marketing, most recently with Valley Forge, PA-based AmerisourceBergen (formerly Anaheim, CA-based Bergen Brunswig Drug Company). In her two years at AmerisourceBergen, she held the titles of Vice President, Corporate Sales and Vice President, Strategic Accounts. In these roles, she was responsible for managing relationships with acute-care based national organizations, representing more than $4 billion in revenues. Prior to AmerisourceBergen, Garza held senior marketing positions at Louisville, CO-based RxMarketplace, Inc., where she was Vice President, Sales and Marketing for the internet-based pharmacy solutions company. Prior to that, Garza was with San Francisco-based McKessonHBOC, Inc., where she served for five years as both Vice President, West, Corporate Solutions Group and Corporate Vice President, Integrated Healthcare Systems. Garza also spent nine years in increasingly responsible marketing management roles at Deerfield, IL-based Baxter Healthcare Corporation, culminating in the position of Director, Corporate Sales and Marketing where she was responsible for marketing resources and services to the executive suite of major healthcare institutions. Garza graduated with a Bachelor of Science, Medical Technology degree, from the College of Pharmacy & Allied Health Professions at Wayne State University, Detroit, MI.

16

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

     Our common stock trades on the NASDAQ Small Cap Market under the symbol “CVSN”. The table below sets forth the high and low sales prices of the common stock:

     As of March 3, 2004 we had outstanding 40,884,834 shares of common stock held by approximately 10,000 stockholders including beneficial owners of the common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

     We have not paid cash dividends and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of dividends is prohibited in accordance with covenants related to our $3 million revolving credit agreement acquired in February 2003 and renewed in January 2004. The restriction on dividends will remain during the term of the revolving credit agreement. We expect to utilize any future earnings to finance our operations. The actual amount of any dividends that may be paid in the future will be subject to the discretion of the Board of Directors of the Company and will depend on our operations, financial and business requirements and other factors.

     See Note 6 and Note 12 of the Notes to the Consolidated Financial Statements for information concerning the sale of Common Stock and warrant to Safeguard., Those securities transactions were entered into in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”) afforded by Section 4(2) of that Act and Rule 506 adopted by the Securities and Exchange Commission under the Securities Act.

     Effective August 15, 2003, a Nasdaq Qualifications Panel terminated our Nasdaq National Market Listing and transferred our securities to the Nasdaq SmallCap Market.

     With our securities listed on the Nasdaq SmallCap Market, we face a variety of legal and other consequences that may negatively affect our business including, without limitation, the following:

•the state securities law exemptions available to us are more limited, and, as a result, future issuances of our securities may require time-consuming and costly registration statements and qualifications;

•the coverage of ChromaVision by securities analysts may decrease or cease entirely; and

•we may lose current or potential investors.

     In addition, we are required to satisfy various listing maintenance standards for our common stock to be quoted on the Nasdaq SmallCap Market. If we fail to meet such standards, our common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter bulletin board, commonly referred to as the “pink sheets.” This alternative is generally considered to be a less efficient market and would seriously impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could materially harm our business.

17

Following our delisting from the Nasdaq National Market the Company issued stock options and shares of restricted stock to certain employees in California without first qualifying such securities under California state securities laws, and such issuance may have been in violation of state securities laws. As a result, the Company may have potential liability under California state securities laws to the individuals to whom the options and shares of restricted stock were granted. The Company may elect to conduct a rescission offer to such individuals to give them the election to rescind their option or restricted stock grant. Management is currently analyzing this matter and cannot, at this time, ascertain the extent of our potential liability, if any, although we do not believe that it would be material to the Company’s financial statements.

18

Item 6. Selected Financial Data

     The following table presents selected financial data for the last five years of the operation of our business. The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.