SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Mark One

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2004

OR

	[   ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                     to                    

COMMISSION FILE NUMBER 000-22677

CHROMAVISION MEDICAL SYSTEMS, INC.

(949) 443-3355

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

     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, and (2) has been subject to such filing requirements for the past 90 days.

     Yes [X] No [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes [ ] No [X]

As of July 31, 2004 there were 51,413,722 shares outstanding of the Issuer’s Common Stock, $0.01 par value.

CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.

CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

See accompanying notes to condensed consolidated financial statements.

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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(1) Interim Financial Statements

     These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission.

     The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. All such adjustments are of a normal, recurring nature. Certain amounts have been reclassified to conform to the current period presentation. The results of operations for any interim period are not necessarily indicative of the results to be obtained for a full fiscal year.

Stock Options

     Pro forma information, which assumes the Company had accounted for stock options granted under the fair value method prescribed by SFAS No. 123, “Accounting for Stock-based Compensation,” is presented below. The per share weighted-average fair value of stock options granted was $1.97 for the six month period ended June 30, 2004, and $0.82 for the six month period ended June 30, 2003, respectively, as estimated using the Black-Scholes option-pricing model.

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s historical and pro forma net loss per share for the three and six month periods ended June 30, 2004 and 2003 are as follows (in thousands, except per share data):

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

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Restricted Stock

     On September 1, 2003, the Company issued 816,950 shares of restricted stock to employees. The restricted stock vests over a two year period. Unearned compensation under the restricted stock plan as reflected on the Balance Sheet was recorded based on the fair market value of the shares issued. Under APB No. 25, compensation expense is reflected over the period in which services are performed (See Note 8 of the Notes to the Consolidated Financial Statements).

(2) Net Loss Per Share

     Basic and diluted loss per common share is calculated by dividing net loss by the weighted average common shares outstanding during the period. In-the-money stock options and warrants to purchase an aggregate of 2,884,231 and 154,297 shares of common stock were outstanding at June 30, 2004 and 2003, respectively. These stock options and warrants outstanding were not included in the computation of diluted earnings per share because the Company incurred a net loss in all periods presented and hence, the impact would be anti-dilutive.

(3) Patents

     Patents with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s patents with definite useful lives recorded as of June 30, 2004 (in thousands):

The following table summarizes the future estimated annual pretax amortization expense for these assets (in thousands):

(4) Currency Translation

     The financial position and results of operations of our foreign subsidiaries are determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each quarter-end. Income statement accounts are translated at the average rate of exchange prevailing during the period. The effects of currency translations are included in comprehensive loss.

(5) Comprehensive Loss

     The total comprehensive loss is summarized as follows (in thousands):

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(6) Business Segments

     The Company currently operates primarily in one business segment engaged in the development, manufacture and marketing of an automated cellular imaging system which is designed to assist physicians in making critical medical decisions.

     The following table represents business segment information by geographic area (in thousands):

(7) Recent Accounting Developments

     In December 2003, the FASB issued FASB Interpretation No. 46 (as revised December 2003 “FIN 46R”), Consolidation of Variable Interest Entities (“VIEs”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company is required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities, and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities, and non-controlling interest of the VIE. Since the Company has no interest in any variable entity, the Company believes that the adoption of this interpretation will not have a material impact on its consolidated financial position or results of operations.

(8) Stock Transactions

     On February 26, 2003, the Company issued 4,646,408 shares of Common Stock for an aggregate cash purchase price of $5.0 million ($1.0761 per share) in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended to Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics, Inc. We refer to Safeguard Scientifics, Inc. and its wholly-owned subsidiaries as “Safeguard”. As a result of the transaction, Safeguard’s percentage of beneficial ownership increased to approximately 62%. ChromaVision and Safeguard also entered into an agreement giving Safeguard certain rights to have the purchased shares registered under the Securities Act of 1933, as amended.

     On September 1, 2003, the Company issued 816,950 shares of restricted stock to employees with a value on the date of grant of $1,021,188 ($1.25 per share), which was recorded as deferred compensation. This restricted stock vests over a two-year period. Compensation expense is recognized on a straight-line basis over the vesting period and is reduced to the extent that a participant forfeits shares of restricted stock received prior to vesting. The deferred compensation charge is unaffected by future changes in the price of the common stock. Safeguard did not exercise its anti-dilution rights in conjunction with the restricted stock grant. As a result, Safeguard’s beneficial ownership decreased from approximately 62% to approximately 60%. These shares were issued following our delisting from the Nasdaq National Market without first being qualified under California state securities laws. As a result, the Company may have potential liability under California state securities laws to the individuals to whom the shares of restricted stock were issued. The Company may elect to conduct a rescission offer to such individuals to give them the election to rescind their 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.

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     On February 10, 2004, the Company completed a private placement exempt from registration under Section 4(2) of the Securities Act to issue 2,295,230 shares of common stock and a warrant to purchase shares of common stock to Safeguard for a purchase price of $5.0 million. The warrant issued to Safeguard is exercisable until March 1, 2008 and is currently exercisable to purchase 344,285 shares of common stock for an exercise price of $2.95 per share. As a result of this transaction, Safeguard’s percentage of beneficial ownership of our common stock increased from approximately 60% immediately preceding the transaction to approximately 63%. The Company also entered into a registration rights agreement giving Safeguard certain rights to have the purchased shares registered under the Securities Act of 1933, as amended.

     On March 25, 2004, the Company entered into a securities purchase agreement with a limited number of accredited investors pursuant to which we agreed to issue and the investors agreed to purchase 10,500,000 shares of common stock, together with warrants to purchase an additional 1,575,000 shares of common stock at an exercise price of $2.75 per share for an aggregate purchase price of $21.0 million (we refer to this financing as the “March 2004 financing”). The warrants issued in this transaction are exercisable for a period of four years after the date they were issued. This transaction was structured so that a portion of the common stock and warrants issued (4,200,000 shares of common stock and warrants to purchase 630,000 shares of common stock for aggregate gross proceeds of $8.4 million) were issued at an initial closing that occurred on March 31, 2004. The remaining shares and warrants to be issued in the transaction were issued at a subsequent closing which occurred on April 27, 2004. Safeguard was one of the purchasers in the March 2004 financing and acquired 3,750,000 shares (of which 1,500,000 shares were acquired at the initial closing) of common stock and warrants to purchase 562,500 shares of common stock (of which 225,000 were acquired at the initial closing) for an aggregate investment of $7.5 million. Following consummation of the subsequent closing of the financing Safeguard beneficially owned approximately 56.7% of our outstanding common stock.

     Each of the purchasers in the March 2004 financing was granted a preemptive right to purchase its pro-rata share of 49.9% of any new equity securities that may be issued on or prior to March 31, 2005. Safeguard had previously been granted preemptive rights, which it waived in connection with the March 2004 financing (except to the extent that it purchased securities in the March 2004 transaction). In connection with the March 2004 financing, the Company entered into a registration rights agreement with the purchasers in that financing, and the Company has registered the resale of shares issued in the March 2004 financing with the Securities and Exchange Commission

     Due to its beneficial ownership of approximately 56.7% of our outstanding common stock, Safeguard has the power to elect all of the directors of our Company. The Company has given Safeguard contractual rights enabling it to exercise significant control over the Company.

(9) Line of Credit

     In February 2003, we entered into a $3.0 million revolving credit agreement with Comerica Bank-California . This one year agreement was renewed for a second year to February 2005. 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 0.25% 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 are guaranteed by Safeguard in exchange for an annual 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 Company failed to satisfy certain financial covenants under the loan agreement as of the end of August 2003, and in October 2003 the lender waived these failures to satisfy the covenants and agreed to modify the covenants by amendment entered into on January 22, 2004. The amended agreement that began in February 2004 now has only one financial covenant related to tangible net worth, which must be greater than $1 through June 30, 2004 and greater than ($2,000,000) thereafter. As of June 30, 2004, the Company had no balance outstanding under the line of credit and was in compliance with the modified covenants. The Company believes it will remain in compliance with these modified covenants throughout the remaining term of the agreement.

(10) Equipment and Lab Expansion Financing

     In August 2003, the Company entered into a $3.0 million equipment financing agreement with GE Capital. The loan principal amortizes ratably over a 33-month term. The borrowings under the equipment financing agreement are being used for working capital purposes and bear interest at 600 basis points over the three year treasury constant maturities rates (2.16% at 9/19/03 or time of borrowing). The agreement also provides for an incremental $2.0 million of financing availability upon reaching certain system placement objectives, various restrictive covenants, maintenance of certain financial ratios and a collateral monitoring fee of $5,000 per year. In September 2003, the entire $3.0 million available under the financing agreement was borrowed with an interest rate of 8.16%. As of June 30, 2004, $2.3 million of debt remains outstanding with approximately $1.1 million of the debt classified as current and $1.2 million as long-term.

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     In June 2004, the Company entered into a lease with GE Capital for the financing of up to $4.6 million in laboratory services related equipment. The lease financing has a term of 36 months for each financing executed under the line and provides for an early purchase option after 30 months at a predicted fair market value of the equipment. Any borrowings under the equipment lease financing agreement will bear interest based on a spread over the three year treasury constant maturities rate (3.24% at time of agreement). As of June 30, 2004, there were no funds that had been advanced under this lease financing agreement.

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

     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: our ability to successfully implement our plans to begin offering cancer diagnostic laboratory services, biopharma services and in-sourcing of our Access remote pathology program, the performance and acceptance of our system and service offerings in the marketplace; changes in rates of third-party payer reimbursement for tests performed using our system; uncertainty of success in developing any new software applications; the outcome of any currently pending and any future litigation that involves us; 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 tests and to distribute our systems and tests performed on the system 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 many of which may have greater resources, market share, and brand recognition than us; 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. In addition, there is risk and uncertainty as to our expectation that our revenues may increase from the addition of new system placements, expanded sales of systems to research accounts and the roll-out of the Access remote pathology program in our laboratory facilities. 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, to speed drug discovery, and to become a leading provider of advanced cancer diagnostic services. 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.

     Recently, we have begun to implement plans to broaden our service offering to include the direct provision of Access technical services to our Access remote pathology customers as well as to provide an array of complementary advanced cancer diagnostic services. We are beginning to provide Access technical services in ChromaVision’s own laboratory facility that is currently being renovated for these purposes. Over the next several quarters, we will also be introducing an array of broader diagnostic services in our new facility. We believe that we are qualified to provide this combination of services because of the recent addition of many new staff members with direct experience in the reference laboratory industry, our proprietary image analysis technology and our ability to develop companion diagnostic tests with biopharma companies in their introduction of new cancer therapeutics. In the future, we expect that contributions from these laboratory services will comprise a greater component of revenue.

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     Safeguard Scientifics, Inc., a Pennsylvania corporation whose shares are listed on the New York Stock Exchange, owns beneficially approximately 56.7% 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.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. 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, which is recorded in property plant and equipment, 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 will 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.

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

     Revenue — Fee per use. Our focus has been on placing the ACIS under a lease arrangement in which the customer is charged monthly based on the number of tests performed, subject to a minimum monthly payment. In addition, we are now offering technical laboratory services in our facilities which will provide a new stream of complementary revenue. In this new arrangement, we will submit for reimbursement for technical services directly with Medicare and other third party payors. Revenue for the three months ended June 30, 2004 decreased approximately $1.0 million or 38.2% over the comparable period in 2003 due primarily to a decrease in the average monthly revenue for ACIS placements and the remote viewing stations. The average monthly revenue for ACIS placements and remote viewing stations was approximately $3,200 and $335, respectively in the second quarter of 2004 as compared to $4,837 and $2,404, respectively for the comparable period in 2003. The decline in the average monthly revenue is primarily due to pricing concessions offered to our customers in response to lower reimbursement levels from 2003 to 2004 (See discussion following under “Uncertainties to Future Operations). The decline in revenue per unit per month for Access customers, or those with remote viewing stations, declined more than that for ACIS customers because Access accounts only receive the professional component of reimbursement, which fell much more substantially than the decline in overall reimbursement. We anticipate that the average monthly ACIS system revenue will remain at approximately the levels experienced in the first half of 2004 and that most, if not all, of the negative impact from reimbursement has been reflected in the current revenue amounts. Access system revenue per unit is expected to continue to decline because of competitive pricing pressures. In response, we plan to offer an internet based service solution during the next quarter that will ultimately eliminate the need to place physical assets in the field with these customers, substantially reducing our costs of service. In February 2004, we gave notice of termination to our largest customer, US Labs, so that we could provide technical services to our Access customers. Our existing contractual relationship with US Labs ended in July 2004. We have transitioned many of these customers to the new laboratory operation and expect to see new revenue from these services increasing over the next several quarters. At the end of the second quarter, approximately 75% of our Access customers converted to our Access technical services operation. We will continue to work with the remaining group of customers to convert them to our services while also working aggressively to add new customers to this service offering.

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     Revenue - System sales. Revenue for the three months ended June 30, 2004 increased approximately $0.5 million or 247% over the comparable period in 2003 due primarily to an increase in the number of units sold. Five systems were sold during the second quarter of 2004 as compared to two during the comparable period in 2003. System sales contributed 32% of total revenue for the first quarter of 2004 as compared to 8% for the comparable period in 2003. Revenue from system sales can fluctuate significantly principally due to the infrequent and limited number of system sales. We have placed a greater emphasis on selling ACIS systems to research and biopharma accounts and anticipate that system sale revenue will become a larger component of total revenue in the future. These efforts will be facilitated by an increase in sales staff for these purposes and greater development of ACIS system features most attractive to this customer segment.

     Cost of revenue. Cost of revenue for the three months ended June 30, 2004 increased approximately $0.3 million, or 32% over the comparable period in 2003, due primarily to the combination of the lab direct costs and greater system sales placements. Cost of revenue consists of cost for manufacturing the ACIS, which includes the cost for direct material, labor costs and manufacturing overhead, the cost of systems sold, direct costs of laboratory services, and field customer service costs. 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. The gross margin, as a percentage of total revenue for the three months ended June 30, 2004 was 52.7% as compared to 69.9% for the comparable period in 2003. The gross margin decrease is primarily due to the lower revenue per unit for ACIS and Access, remote viewing systems, offset by lower system sales costs due to the sale of refurbished units versus new units.

     Selling, general and administrative expenses. Expenses for the three months ended June 30, 2004 increased approximately $1.2 million, or 42% over the comparable period in 2003 primarily due to non-cash compensation charges related to stock options and restricted stock of $0.3 million, Safeguard charges for interim CEO management of $0.1 million, various legal costs of $0.5 million, CEO & other recruiting of $0.3 million and outside consultants of $0.5 million, offset by savings due to the third quarter 2003 reduction in force and lower depreciation and travel costs.

     General and administrative costs related to lab services. During the first half of 2004, we began incurring costs directly related to the start-up and administration of the new laboratory services department, which became operational during the second quarter of 2004. The start-up and administrative costs associated with this department are included in the caption “General and administrative costs related to lab services.” This is the first quarter where we are reporting these expenses separately.” Costs for the three months ended June 30, 2004 were approximately $1.1 million. The lab service costs, which support the development of our in-house Access technical services capability, will continue to be an increasing component of total costs in future periods. The direct costs of providing laboratory services are included in “Cost of revenue.”

     Research and development expenses. Expenses for the three months ended June 30, 2004 was comparable to the same period in 2003. We believe that sufficient resources exist currently to support the development of new features for the clinical and research markets. These new development activities, which are intended to produce features that could expand the volume of clinical tests supported by ACIS and increase the attractiveness of the ACIS as a tool for researchers, are important to increasing clinical system test volume, expanding the count of clinical system placements, and increasing research system sales.

     Other income(expense). Other expense for the three months ended June 30, 2004 totaled $17,000, compared to $3,000 of other expense for the comparable period of 2003, and consisted of approximately $67,000 of interest expense offset by approximately $50,000 of interest income. The interest expense is due to the borrowings under our $3.0 million equipment financing agreement, which began in September 2003. No borrowings under the equipment financing agreement, or any other credit facility, existed duri