APPLIED IMAGING CORP, DEF 14A, 2000-04-13

APPLIED IMAGING CORP
DEF 14A, 2000-04-13
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

Previous: NATIONAL FRUIT AND VEGETABLE TECHNOLOGY CORP, 10KSB, 2000-04-13

Next: CONMED CORP, DEF 14A, 2000-04-13

<PAGE>

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

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement

[_] Confidential, For Use Of The Commission Only (As Permitted By Rule 14a-
6(e)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

Applied Imaging Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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

(2) Form, Schedule or Registration Statement No.:

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

(3) Filing Party:

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

(4) Date Filed:

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

Notes:

<PAGE>

APPLIED IMAGING CORP.

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 2000

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

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Applied
Imaging Corp., a Delaware corporation (the "Company"), will be held on
Wednesday, May 10, 2000 at 11:00 a.m., local time, at the Santa Clara Marriott
Hotel, 2700 Mission College Blvd., Great America Parkway, Santa Clara,
California, 95052-8181, for the following purposes (as more fully described in
the Proxy Statement accompanying this Notice):

1. To elect two Class I directors of the Company to serve for terms of
three years expiring upon the 2003 Annual Meeting of Stockholders or
until their successors are elected.

2. To ratify the appointment of PricewaterhouseCoopers as independent
auditors of the Company for the year ending December 31, 2000.

3. To approve an amendment of the Company's 1998 Incentive Stock Plan (the
"1998 Option Plan") to increase the number of shares of Common Stock
available for issuance thereunder by 950,000 shares.

4. To transact such other business as may properly come before the meeting
or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

Only stockholders of record at the close of business on April 3, 2000, are
entitled to notice of and to vote at the meeting.

All stockholders are cordially invited to attend the meeting. However, to
assure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed Proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if he or she has returned a Proxy.

FOR THE BOARD OF DIRECTORS

Jack Goldstein
Chairman of the Board and Chief
Executive Officer

Santa Clara, California
April 3, 2000

IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, AND RETURN
IT IN THE ENCLOSED ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS YOU HAVE GIVEN IN THE PROXY. YOUR PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH RESPECT TO
THE SAME SHARES, BY FILING WITH THE SECRETARY OF THE COMPANY A WRITTEN
REVOCATION BEARING A LATER DATE OR BY ATTENDING AND VOTING IN PERSON AT THE
ANNUAL MEETING.
<PAGE>

APPLIED IMAGING CORP.

PROXY STATEMENT

INFORMATION CONCERNING SOLICITATION AND VOTING

General

The enclosed Proxy is solicited on behalf of the Board of Directors of
Applied Imaging Corp., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on Wednesday, May 10, 2000 at 11:00
a.m., local time, or at any adjournment thereof (the "Annual Meeting"). The
Annual Meeting will be held at the Santa Clara Marriott Hotel, 2700 Mission
College Blvd., Great America Parkway, Santa Clara, California 95052-8181. The
telephone number at that meeting location is (408) 988-1500.

. These proxy solicitation materials and the Annual Report to Stockholders
for the fiscal year ended December 31, 1999, including financial
statements were mailed on or about April 10, 2000, to all stockholders
entitled to vote at the meeting.

Record Date and Principal Share Ownership

Stockholders of record at the close of business on April 3, 2000 (the
"Record Date") are entitled to notice of and to vote at the meeting. The
Company has one series of shares outstanding, designated Common Stock, $0.001
par value per share. At the record date, 13,370,195 shares of the Company's
Common Stock were issued and outstanding and held of record by approximately
141 stockholders. No shares of the Company's Preferred Stock were outstanding.
The closing price of the Company's Common Stock on the Record Date, as reported
by The National Association of Securities Dealers, Inc. Automated Quotation
National Market, was $3.00 per share.

Revocability of Proxies

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.

Voting and Solicitation

Each stockholder is entitled to one vote for each share held as of the
record date. Stockholders will not be entitled to cumulate their votes in the
election of directors.

The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies may also be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation,
personally or by telephone or facsimile.

Quorum; Abstentions; Broker Non-Votes

Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") appointed for the meeting and will
determine whether or not a quorum is present.

The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the record date. Shares that are voted "FOR",
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.

1
<PAGE>

While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.

In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of
business, broker non-votes should not be counted for purposes of determining
the number of votes cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, the Company intends to treat
broker non-votes in this manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.

Any proxy which is returned using the form of proxy enclosed and which is
not marked as to a particular item will be voted for the election of the three
Class I directors, for the confirmation of the appointment of the designated
independent auditors, and as the proxy holders deem advisable on other matters
that may come before the meeting, as the case may be with respect to the items
not marked.

Deadline for Receipt of Stockholder Proposals

Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 2001 Annual Meeting of Stockholders must
be received by the Company no later than December 1, 2000 in order that they
may be considered for possible inclusion in the proxy statement and form of
proxy relating to that meeting.

2
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of April 3, 2000, by (i)
each person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director and nominee for
election, (iii) each executive officer named in the Summary Compensation Table
under the heading "Executive Officer Compensation" and (iv) all directors and
executive officers as a group. Except as otherwise noted, the stockholders
named in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
applicable community property laws.

<TABLE>
<CAPTION>
Shares Approximate
Beneficially Percent
Name and Address Owned Owned(1)
---------------- ------------ -----------
<S> <C> <C>
Individuals and Entities Affiliated with New
Enterprise Associates(2)............................ 2,579,504 19.3%
2490 Sand Hill Road,
Menlo Park, CA 94025

Individuals and Entities Affiliated with Special
Situation Fund III (3).............................. 1,628,666 12.2%
153 East 53rd St., Suite 51
New York, NY 10002
Attn: Austin W. Marxe

Ashford Capital Management(4)........................ 1,226,333 9.2%
10th Market Street
Wilmongton DE 19890

Individuals and Entities Affiliated with Tecnicas
Medicas............................................. 1,000,000 7.5%
Corsega 114
08029 Barcelona
Spain

Thomas C. McConnell(2)............................... 2,579,504 19.3%

Robert C. Miller(5).................................. 340,437 *

Jack Goldstein, Ph.D(6).............................. 274,581 *

John F. Blakemore, Jr.(7)............................ 97,803 *

Leslie G. Grant, Ph.D.(8)............................ 93,750 *

Gilbert J.R. McCabe(9)............................... 70,862 *

Carl W. Hull(10)..................................... 55,500 *

G. Kirk Raab(11)..................................... 51,040 *

Michal A. Zoccoli(12)................................ 41,457 *

Andre Marion(13)..................................... 28,243 *

All executive officers and directors as a group
(10 persons)(2)(5)(6)(7)(8)(9)(10)(11)(12)(13)...... 3,633,177 27.2%
</TABLE>
- --------
*Less than 1%.
(1) Applicable percentage ownership is based on 13,370,195 shares of Common
Stock outstanding as of April 3, 2000, together with applicable options or
warrants for such stockholder. Beneficial Ownership is determined in
accordance with the rules of the Securities and Exchange Commission.

3
<PAGE>

(2) Consists of 709,214 shares held by New Enterprise V, Limited Partnership
and 1,837,605 shares and warrants to purchase 169,550 shares held by New
Enterprise Associates VII, L.P., 11,765 shares held by The Silverado Fund
I, Limited Partnership, 15,920 shares and warrants to purchase 3,460
shares held by NEA President's Fund, and an option to purchase 5,000
shares within 60 days after April 3, 2000 held by Thomas C. McConnell. Mr.
McConnell, a director of the Company, is a general partner of New
Enterprise Associates V, Limited Partnership, New Enterprise Associates
VII, L.P. and NEA President's Fund, and disclaims beneficial ownership of
the shares held by such entities except to the extent of his proportionate
ownership interest therein. (Based on 13G filed February 11, 2000)
(3) Consists of 1,070,400 shares held by Special Situations Fund III, Limited
Partnership, 191,300 shares held by Special Situation Fund Private Equity
L.P. and 366,966 shares held by Special Situation Fund Cayman Fund L.P.
(Based on 13G filed March 2, 2000)
(4) Based on a 13G filed February 11, 2000, by Ashford Capital Management,
Inc.
(5) Consists of 198,678 shares and warrants to purchase 140,000 shares held by
Allen & Company Incorporated, Allen Value Partners, L. P., Allen Value
Limited and Allen Philton, L.P. Robert C. Miller, a director of the
Company and a holder of 1,759 shares, and an option to purchase 5,000
shares within 60 days after April 3, 2000, is an affiliate of Allen
Holding Inc. and the related entities, and disclaims beneficial ownership
of the shares held by such entities except to the extent of his
proportionate ownership interest therein.
(6) Includes an option to purchase 264,581 shares within 60 days after April
3, 2000.
(7) Includes an option to purchase 18,541 shares within 60 days after April 3,
2000.
(8) Includes an option to purchase 53,750 shares within 60 days after April 3,
2000.
(9) Consists of 10,000 shares, an option to purchase 7,291 shares within 60
days after April 3, 2000 and 53,571 shares held by SEFTA Trustees Ltd. for
family trusts. Mr. McCabe, a director of the Company, disclaims beneficial
ownership of the shares held by SEFTA Trustees Ltd. except to the extent
of his proportionate ownership interest therein.
(10) Includes an option to purchase 52,500 shares within 60 days after April
3, 2000.
(11) Consists of an option to purchase 51,040 shares within 60 days after April
3, 2000.
(12) Includes an option to purchase 38,957 shares within 60 days after April 3,
2000.
(13) Includes an option to purchase 23,541 shares within 60 days after April 3,
2000.

Compliance with Section 16(a) Filing Requirements

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and beneficial
owners of more than 10% of the Company's Common Stock to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Based solely on its review of the copies of such reports received
by it, or written representations from reporting persons, the Company believes
that during the fiscal year ended December 31, 1999, its officers, directors
and holders of more than 10% of the Company's Common Stock complied with all
Section 16(a) filing requirements.

4
<PAGE>

PROPOSAL NO. 1

ELECTION OF DIRECTORS

Directors and Nominees for Director

According to the Company's Restated Certificate of Incorporation, the
Company's Board of Directors currently consists of eight persons, divided into
three classes serving staggered terms of three years. Currently, there are
three directors in Class I, three directors in Class II, and two directors in
Class III. Two Class I directors are to be elected at the Annual Meeting. The
Class II and Class III directors will be elected at the Company's 2001 and 2002
Annual Meetings of Stockholders, respectively. Each of the two Class I
directors elected at the Annual Meeting will hold office until the 2003 Annual
Meeting of Stockholders, or until his successor has been duly elected and
qualified.

In the event that any nominee for director becomes unavailable or declines
to serve as a director at the time of the Annual Meeting, the proxy holders
will vote the proxies in their discretion for any nominee who is designated by
the current Board of Directors to fill the vacancy. It is not expected that any
of the nominees will be unavailable to serve.

The names of the two Class I nominees for election to the Board of Directors
at the Annual Meeting, their ages as of the Record Date, and certain
information about them are set forth below. The names of the current Class II
and Class III directors with unexpired terms, their ages as of the Record Date,
and certain information about them are also stated below.

<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
---- --- -------------------- --------
<S> <C> <C> <C>
Nominees for Class I
Directors
Jack Goldstein, Ph.D.... 52 Chairman and Chief Executive Officer 1997
Thomas C. McConnell
(2).................... 45 General Partner of New Enterprise Associates 1990

Continuing Class II
Directors
John F. Blakemore, Jr.
(1) (2)................ 60 Consultant 1987
Robert C. Miller (1).... 34 Vice President and Director of Allen & Company 1995
Incorporated
G. Kirk Raab............ 64 Chairman of the Board of Shaman Pharmaceuticals, 1996
Inc., Connetics, Inc., Oxford ClycoSciences (UK)
Ltd. And LXR Biotechnology Inc.

Continuing Class III
Directors
Andre F. Marion (1)..... 62 Director, Cygnus Corporation and Director, 1995
Molecular Devices Corp
Pablo Valenzuela, Ph.D.. 58 Senior Vice President Biological Research, Chiron 1999
Corporation
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

There are no family relationships among any directors or executive officers
of the Company.

Directors to be Elected at the Annual Meeting

Jack Goldstein, Ph.D. joined the Company in April 1997 as President and
Chief Executive Officer. Dr. Goldstein has over 26 years of senior management
experience in the diagnostic industry. From 1986 until 1997, Dr. Goldstein
served in various senior executive positions at Johnson & Johnson, including
President of Ortho Diagnostics Systems, Inc., a subsidiary of Johnson & Johnson
from 1993 to 1997. Dr. Goldstein holds an M.S. in Immunology and a Ph.D. in
Microbiology, both from St. John's University.

5
<PAGE>

Thomas C. McConnell has been a director of the Company since August 1990.
Mr. McConnell has been with New Enterprise Associates, a venture capital
investment firm since 1985 where he has been a General Partner since 1989. Mr.
McConnell serves on the Board of Directors of CardioThoracic Systems, Inc.,
Conceptus, Inc. and a number of private companies. He received an A.B. in
Engineering Science from Dartmouth College and an M.B.A. from the Stanford
University Graduate School of Business.

Directors Whose Terms Extend Beyond the Annual Meeting

John F. Blakemore, Jr. has been a director of the Company since December
1987. Since 1987 he has been an independent investor and consultant. Mr.
Blakemore was also a director, Vice President and CFO of Pro-Log Corp., an
industrial computer company. Mr. Blakemore holds a B.S. in Mechanical
Engineering and an M.B.A. from Stanford University.

Andre J. F. Marion has been a director of the Company since November 1995.
Mr. Marion was a founder of Applied Biosystems, Inc., a supplier of instruments
for biotechnology research, and served as its Chief Executive Officer from 1986
to 1993, and its Chairman of the Board from 1987 to February 1993, when it
merged with the Perkin Elmer Corporation, a manufacturer of analytical
instruments. Mr. Marion served as Vice President of Perkin Elmer and President
of its Applied Biosystems Division until his retirement in February 1995. Mr.
Marion holds a degree in engineering from the French Ecole Nationale
SupJrieures d'IngJnieurs Arts et MJtiers in both Mechanical and Electronic
Engineering. Mr. Marion is an independent consultant and also a director of
Cygnus Corporation and Molecular Devices Corp.

Robert C. Miller has been a director of the Company since November 1995. He
is a Vice President and Director of the investment banking firm of Allen &
Company Incorporated and has been associated with the firm since June 1986. Mr.
Miller is a director of Envirogen, Inc., Audits & Surveys Worldwide, Inc., and
a number of private companies. Mr. Miller received his B.A. from Williams
College and his M.B.A. from the Leonard N. Stern School of Business, New York
University.

G. Kirk Raab has been a director of the Company since 1996. Mr. Raab has 40
years of experience as a senior executive in health industries and was
President and Chief Executive Officer from February 1990 to July 1995 of
Genentech Inc., a pharmaceutical company. He is currently Chairman of the Board
of Shaman Pharmaceuticals, Inc., Connetics, Inc. Oxford GlycoSciences (UK) Ltd.
and LXR Biotechnology, Inc., and a director of a number of private companies.
He received his B.A. from Colgate University.

Pablo Valenzuela Ph.D. joined the Company's Board of Directors in April
1999. Dr. Valenzuela, has over 20 years of experience in the biotechnology
industry, and is currently Senior Vice President, Biological Research and
Development, and co-founder of Chiron Corporation, as well as President and
founder of Bios Chile Dr. Valenzuela holds a Ph.D. from Northwestern
University.

Vote Required

The two nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted for them shall be
elected as Class I directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but have no other legal effect under Delaware law.

Board Meetings, Committees and Director Compensation

The Board of Directors held four regular meetings and two telephonic
meetings during the calendar year ended December 31, 1999.

The Board of Directors has an Audit Committee and a Compensation Committee.
It does not have a nominating committee or a committee performing the functions
of a nominating committee. From time to time, the Board has created various ad
hoc committees for special purposes. No such committee is currently
functioning.

6
<PAGE>

The Audit Committee consists of directors Blakemore, Marion, and Miller. The
Audit Committee reviews the internal accounting procedures of the Company and
consults with and reviews the services provided by the Company's independent
auditors. The Audit Committee held two meetings in the last calendar year.

The Compensation Committee consists of directors Blakemore, McCabe,
McConnell, and Raab. The Compensation Committee reviews and recommends to the
Board the compensation and benefits of all executive officers of the Company
and establishes and reviews general policies relating to compensation and
benefits of employees of the Company. The Compensation Committee held two
meetings during the last calendar year.

Compensation of Directors

Messrs. McCabe, Raab, Blakemore, Marion and Valenzuela receive $800 per
regular meeting attended, and all directors receive reimbursement of travel
expenses from the Company for their service as members of the Board of
Directors. Prior to April 1999, each director who is not also an employee or
consultant of the Company (an "Outside Director") automatically received an
option to purchase 5,000 shares of Common Stock upon joining the Board of
Directors. Thereafter, each Outside Director who has served on the Board of
Directors for at least six months shall receive an option to acquire 5,000
shares of Common Stock on the date of each of the Company's annual meetings of
stockholders. Outside directors who were standing for re-election would only
receive the additional option for 5,000 shares if they were re-elected. These
options had been granted under the Company's 1994 Director Option Plan (the
"Director Plan").

Effective April 1999, the initial grant to an Outside Director joining the
Board of Directors will be an option for 25,000 shares and subsequent annual
grants will be for 10,000. Options are expected to be granted either
automatically under the Director Plan (up to the original 10,000 share limits)
and/or under the Company's 1998 Stock Option Plan (the "1998 Plan"). It is
expected that when the Director Plan shares are exhausted, that all grants will
then be made under the 1998 Plan. In addition, directors who are consultants to
the Company will continue to receive option grants as directors under the 1998
Plan. It is expected that, consistent with past grants to Outside Directors,
each option granted will become exercisable ratably over a four-year period.
The term of such options has been and is expected to be ten years from the date
of grant, provided that such options shall terminate three months following the
termination of the optionee's status as a director (or twelve months if the
termination is due to death or disability.) The exercise price of all options
granted has been and is expected to be equal to the fair market value of the
Company's Common Stock on the date of the grant, as determined in accordance
with the applicable option plan.

The Director Plan provides for the automatic grant of non-statutory options
to Outside Directors on an annual basis in order to motivate them to continue
to serve as directors. A total of 120,0000 shares of the Company's Common Stock
has been reserved for issuance udring the current 10-year term of the Director
Plan, which expires in February 2004, of which 60,000 shares have been issued
and 60,000 shares remain available for future issuance.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
NOMINEES SET FORTH HEREIN.

7
<PAGE>

CERTAIN TRANSACTIONS

On June 3, 1998, the Company issued and sold 1,000,000 shares of its common
stock to certain partnerships affiliated with New Enterprise Associates, a
principal owner of the company at the purchase price of $3.00 per share. The
price exceeded the closing price of the Company's common stock as reported on
the NASDAQ National Market System.

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

On April 20, 1999, the Company's Board of Directors approved a consulting
agreement with Kirk Raab pursuant to which Mr. Raab will devote one day per
month to the Company to consult on matters identified by the Company's
Chairman of the Board and Chief Executive Officer. Mr. Raab will receive an
option under the 1998 Plan for 50,000 shares vesting monthly over two years
for his consulting services.

The Company has employment agreements with certain of its officers. See
"Employment Agreements."

8
<PAGE>

EXECUTIVE OFFICERS

The following table sets forth information as of December 31, 1999 regarding
executive officers of the Company.

<TABLE>
<C> <C> <S>
Jack Goldstein, Ph.D... 52 Chairman and Chief Executive Officer
Carl W. Hull........... 41 President and Chief Operating Officer
</TABLE>

Jack Goldstein, Ph.D., biographical information, infra, at Proposal No. 1.

Carl W. Hull joined the Company as Vice President of Worldwide Marketing in
August 1997. From March 1996 until June 1997, Mr. Hull served as Vice President
of Marketing & Business Development for Ventana Medical Systems. From 1982 to
1996, he served in various marketing and sales management positions at Abbott
Laboratories, including Vice President and General Manager of Abbott
Laboratories, Puerto Rico, Marketing Manager for Hematology Products, District
Sales Manager, and Product Manager for several diagnostic product lines. Mr.
Hull received his B.A. from The Johns Hopkins University and an M.B.A from the
University of Chicago.

Employment Agreements

Jack Goldstein, Ph.D. In April 1997, the Company entered into an agreement
with Dr. Goldstein, pursuant to which he would serve as the President and Chief
Executive Officer of the Company at an annual salary of $255,000. In the event
of the Company's termination of Dr. Goldstein's employment, he will continue to
serve as a consultant to the Company for one year, and be paid at the same rate
as his annual salary. Dr. Goldstein will also be eligible for a cash bonus
equal to up to 30% of his annual salary upon the achievement of objectives set
by the Board of Directors. The Company has granted Dr. Goldstein options under
the 1988 Plan to purchase 280,000 shares of Common Stock at an exercise price
equal to the fair market value of the shares on the date of the option grant,
which options will vest over four years. The Company has paid Dr. Goldstein's
relocation expenses totaling $218,708.

In the event of a change in control of the Company due to a merger or
acquisition of the Company, all of the shares subject to stock options granted
to Dr. Goldstein will become exercisable, but only if the acceleration of
exercisability will not preclude the structuring of a proposed merger or
acquisition as a pooling of interests, if the structure of the proposed merger
is approved by the Company's Board of Directors.

Carl W. Hull. In August 1997, the Company entered into an agreement with
Carl Hull pursuant to which Mr. Hull would serve as the Vice President of
Worldwide Marketing. Under the terms of this agreement, the Company has agreed
to provide Mr. Hull an annual salary and bonus, medical insurance, vacation
time, and an option to purchase 60,000 shares of the Company's Common Stock at
an exercise price of $5.50 per share. In addition, the Company has agreed to
(i) reimburse Mr. Hull for relocation expenses incurred in connection with his
move from Arizona to California, which totaled $35,650 (ii) a severance payment
equal to six times Mr. Hull's then existing monthly salary in the event his
employment is terminated by the Company and (iii) upon a change in control of
the Company, accelerated vesting of Mr. Hull's option.

9
<PAGE>

Executive Officer Compensation

Summary Compensation Table. The following table sets forth information for
the years ended December 31, 1997, 1998 and 1999 regarding the compensation of
the Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers whose total annual salary and bonus for
such fiscal years were in excess of $100,000 (the "Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
--------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Options Compensation($)
------------------ ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jack Goldstein, Ph.D.... 1997 170,000(3) 60,000(1) 69,298(4) 280,000 736(5)
Chairman and 1998 270,058 149,410(4) 480,000 1,188(5)
Chief Executive Officer 1999 290,000 85,000(2) 480,000 11,706(5)

Carl W. Hall............ 1997 56,250(10) 20,000(1) 29,906(4) 60,000 313(8)
President and 1998 144,720 21,254(2) 5,744(4) 100,000 5,913(8)
Chief Operating Officer 1999 160,000 40,000(2) 160,000 15,421(8)

Leslie G.Grant, Ph.D.... 1997 135,016 42,193(2) 46,903(6)
Executive Vice 1998 142,760 25,000 36,879(7)
President (left
effective 1999 144,399 35,596(2) 25,000 37,163(7)
December 31, 1999)

Michael A. Zoccoli,
Ph.D................... 1997 20,633(11) 25,000 690(9)
Vice President (left 1998 127,118 85,000 8,192(9)
effective
December 31, 1999) 1999 140,000 15,000(2) 85,000 25,688(9)
</TABLE>
- --------
(1) Consists of bonuses earned and paid in the fiscal year.
(2) Consists of bonuses earned during each fiscal year and paid in the
following year.
(3) Jack Goldstein joined the Company in April 1997; his annualized salary for
1997 was $255,000.
(4) Represents reimbursements for moving and relocation expenses.
(5) Consists of $11,706, $ 1,188 and $736 in insurance premiums paid by the
Company in 1999, 1998 and 1997 respectively.
(6) Consists of $35,253 contributed to a private pension scheme in 1996 and
1997, $9,063 paid by the Company for operating expenses of a car leased by
the Company and used by Dr. Grant, and $2,587 in insurance premiums paid
by the Company.
(7) For 1998, consists of $18,298 contributed to a private pension scheme,
$15,919 paid by the Company for operating expenses of a car leased by the
Company and used by Dr. Grant, and $2,661 in insurance premiums paid by
the Company; for 1999 consists of $18,085 contributed to a private pension
scheme, $16,118 paid for by the Company for operating expenses of a car
leased by the Company and used by Dr. Grant, and $2,961 in insurance
premiums paid by the Company.
(8) For 1997, consists of $313 in insurance premiums paid by the Company; for
1998, consists of $4,941 contributed to the Company's retirement plan and
$972 in insurance premiums paid by the Company; for 1999, consists of
$4,800 contributed to the Company's retirement plan and $10,621 in
insurance premiums by the Company.
(9) For 1997, consists of $540 car allowance and $150 in insurance premiums
paid by the Company; for 1998 consists of $2,972 contributed to the
Company's retirement plan, $4,320 car allowance and $900 in insurance
premiums paid by the Company; for 1999, consists of $4,500 car allowance,
$3,387 of earned and unused vacation paid at termination, $4,149
contributed to the Company's retirement plan and $8,468 in insurance
premiums paid by the Company.
(10) Carl W. Hull joined the Company in August 1997; his annualized salary for
1997 was $135,000.
(11) Mike Zoccoli joined the Company in October 1997, his annualized salary for
1997 was $125,000

10
<PAGE>

Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1999 to each of
the Named Executive Officers:

Option Grants in Fiscal 1999

<TABLE>
<CAPTION>
Potential Realizable
Value at assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(4)
--------------------------------------------------- --------------------
Number of
Securities Percent of Total
Undelying Options Granted Exercise
Options during Fiscal Price Expiration
Name Granted(#)(1) 1999(2) ($/Sh)(3) Date 5%($) 10%($)
---- ------------- ---------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack Goldstein.......... -- -- -- -- -- --
Carl W. Hull............ 60,000 26% $1.19 12/16/09 $44,903 $185,193
</TABLE>
- --------
(1) Options were granted under the 1998 Plan and generally vest over four years
from the date of commencement of employment.
(2) Based on an aggregate of 232,500 options granted by the Company in the
year ended December 31, 1999 to employees of and consultants to the
Company, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the closing price
of the Common Stock at close of market on the working day before the date
of grant as determined by the Board of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that the
fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. The assumed rates of
appreciation are specified in SEC rules and do not represent the Company's
estimate or projection of future stock prices. Actual gains, if any,
resulting from stock option exercises and Common Stock holdings are
dependent on the future performance of the Common Stock and the option
holders' continued employment through the vesting period. There can be no
assurance that the amounts reflected in this table will be achieved.

Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. No
stock option exercises occurred during the year ended December 31, 1999 by the
Named Executive Officers.

11
<PAGE>

Stock Option Repricing Report of the Compensation Committee and Table

The following table sets forth certain information concerning the Exchange
Program, including (1) the name of each executive officer who participated in
the Exchange Program, (ii) the date of any such exchange, (iii) the number of
securities underlying exchanged options, (iv) the price per share of the
underlying security at the time of the exchange, (v) the original price or base
price of the canceled option at the time of exchange, (vi) the per share
exercise price of the option received in exchange for the existing option and
(vii) the original option term remaining at the date of the exchange.

Ten Year Option Repricings

<TABLE>
<CAPTION>
Number of
securities Length of original
underlying Market price of Exercise price option term
optioin/SARs stock at time at time of New remaining at date
repriced or of repricing or repricing or exercise of repricing or
Name Date amended(#) amendment($) amendment price($) amendment
---- ------ ------------ --------------- -------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Jack Goldstein.......... 2/2/98 280,000 $2.44 $5.63 $2.44 9.2 years
Carl Hull............... 2/2/98 60,000 $2.44 $5.50 $2.44 9.5 years
Mike Zoccoli............ 2/2/98 25,000 $2.44 $3.44 $2.44 9.79 years
</TABLE>

Stock options are intended to provide incentives to the Company's officers,
employees and consultants. The Compensation Committee believes that such equity
incentives are a significant factor in the Company's ability to attract, retain
and motivate service providers who are critical to the Company's long term
success. The disparity between the original exercise prices of the Company's
outstanding stock options and the market price for the Common Stock did not
provide, in the judgement of the Compensation Committee, a meaningful incentive
or retention device to those holding stock options and, therefore, the
Compensation Committee determined that offering the Exchange Program was in the
best interest of the Company and its stockholders.

Members of the Compensation
Committee

John F. Blakemore, Jr.
Gilbert J.R. McCabe
Thomas C. McConnell
G. Kirk Raab

12
<PAGE>

Board Compensation Committee Report on Executive Compensation

The following is provided to stockholders by the members of the Compensation
Committee of the Board of Directors:

The Compensation Committee of the Board of Directors (the "Committee"),
comprising four outside directors, is responsible for the administration of the
Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total compensation and include incentive and equity
ownership opportunities linked to the Company's performance and stockholder
return.

Compensation Philosophy: The Company's overall executive compensation
philosophy is based on a series of guiding principles derived from the
Company's values, business strategy, and management requirements. These
principles are summarized as follows:

. Provide competitive levels of total compensation which will enable the
Company to attract and retain the best possible executive talent;

. Motivate executives to achieve optimum performance for the Company;

. Align the financial interests of executives and stockholders through
equity-based plans;

. Provide a total compensation program that recognizes individual
contributions as well as overall business results.

Compensation Program: The Committee is responsible for reviewing and
recommending to the Board the compensation and benefits of all officers of the
Company and establishes and reviews general policies relating to compensation
and benefits of employees of the Company. The Committee is also responsible for
the administration of the Company's stock option plans. There are three major
components to the Company's executive compensation: base salary, incentive
(bonus) payments and long-term incentives in the form of stock options.

1. Base Salary. In setting compensation levels for executive officers, the
Committee reviews competitive information relating to compensation levels for
comparable positions at medical product, biotechnology, and high technology
companies. In addition, the Committee may, from time to time, hire compensation
and benefit consultants to assist in developing and reviewing overall salary
strategies. Individual executive officer base compensation may vary based on
time in position, assessment of individual performance, salary relative to
internal and external equity and critical nature of the position relative to
the success of the Company.

2. Incentive Bonuses. The incentive bonus program provides a variable
compensation opportunity for the executive officers. A pay out, if any, is
based on a combination of corporate financial performance and individual
officer performance relative to achievement of pre-established specified
strategic objectives (e.g., new product development milestones, marketing/sales
results, productivity enhancements and regulatory applications and approvals).

3. Long-Term Incentives. The long-term performance-based compensation of
executive officers takes the form of stock option awards under the Company's
stock option plans. The Committee believes that the equity-based compensation
ensures that the Company's executive officers have a continuing stake in the
long-term success of the Company. All options granted by the Company have been
granted with an exercise price equal to or in excess of the fair market value
of the Company's Common Stock on the date of grant. Options granted under the
Company's stock option plans grants prior to December 10, 1998 become
exercisable at the rate of 25% of the shares at the end of each year following
the date of vesting commencement such that, subject to the employee's or
independent contractor's continuous relationship with the Company, the option
is fully exercisable four years from such date. Options granted after December
10, 1998 become exercisable at the rate

13
<PAGE>

of 1/48 per month. Options granted as a bonuses generally vest over two years,
50% after the first year monthy the following year. Options granted are subject
to the employee's or independent contractor's continuous relationship with the
Company, the option is fully exercisable four years from such date. The Company
has not issued any stock appreciation rights (SARs), stock purchase rights,
long-term performance awards in stock to any Named Executive Officer or any
other person under the Company's stock option plans.

1999 Compensation for the Chief Executive Officer

In determining the salary of Dr. Goldstein for 1999, the Committee
considered competitive compensation data for the presidents and chief executive
officers of similar companies within the medical device and biotechnology
industry, taking into consideration Dr. Goldstein's experience and knowledge.
Based on the Company's plan for specified goals, the Committee determined that
it was appropriate to offer Dr. Goldstein a salary of $290,000.

Section 162(m) of the Internal Revenue Code Limitations on Executive
Compensation

In 1993, Section 162(m) was added to the United Stated Internal Revenue Code
of 1986, as amended (the "Code"). Section 162(m) may limit the Company's
ability to deduct for United States federal income tax purposes compensation in
excess of $1,000,000 paid to the Company's Chief Executive Officer and its four
other highest paid executive officers in any one fiscal year. No executive
officer of the Company received compensation in excess of this limit during
fiscal 1997. Grants under the 1998 Option Plan will not be subject to the
deduction limitation if the stockholders approve the 1998 Option Plan,
including the option grant limitations described below.

Section 162(m) of the Code places limits on the deductibility for United
States federal income tax purposes of compensation paid to certain executive
officers of the Company. In order to preserve the Company's ability to deduct
the compensation income associated with options and stock purchase rights
granted to such persons, the 1998 Option Plan provides that no employee may be
granted, in any fiscal year of the Company, options and stock purchase rights
to purchase more than 500,000 shares of Common Stock.

The foregoing Committee Report shall not be deemed to be "soliciting
material" or to be "filed" with the SEC, nor shall such information be
incorporated by reference into any future filing under this Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent the Company specifically incorporates it by reference into such
filing.

Respectfully submitted,

John F. Blakemore, Jr.
Gilbert J. R. McCabe
Thomas C. McConnell
G. Kirk Raab

14
<PAGE>

Stock Performance Graph

The following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return of the Nasdaq National
Market, U.S. Index ('Nasdaq U.S. Index") and the Hambrecht & Quist Healthcare,
Excluding Biotechnology Index ("H&Q Healthcare Index") for the period beginning
on November 8, 1996, the Company's first day of trading after its initial
public offering, and ending on December 31, 1999.

COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG APPLIED IMAGING CORP.
NASDAQ NATIONAL MARKET, U.S. INDEX AND
THE HAMBRECHT & QUIST HEALTHCARE, EXCLUDING
BIOTECHNOLOGY INDEX
(PERIOD ENDED DECEMBER 31, 1999)

<TABLE>
<CAPTION>
Applied Imaging Corp. Nasdaq U.S. Index H&Q Healthcare Index
--------------------- ----------------- --------------------
<S> <C> <C> <C>
11/8/96 100 100 100
12/31/96 129 103 103
3/31/97 79 97 97
6/30/97 89 115 116
9/30/97 64 135 122
12/31/97 29 126 122
3/31/98 45 148 138
6/30/98 35 152 141
9/30/98 37 137 124
12/31/98 30 177 147
3/31/99 13 199 145
6/30/99 21 218 149
9/30/99 13 223 129
12/31/99 18 329 133
</TABLE>

* The graph assumes that $100 was invested on November 8, 1996 in the
Company's Common Stock, the Nasdaq National Market, U.S. Index and the
Hambrecht & Quist Healthcare, Excluding Biotechnology Index, and that all
dividends were reinvested. No dividends have been declared or paid on the
Company's Common Stock. Stock performance shown in the above chart for the
Common Stock is historical and should not be considered indicative of future
price performance.

15
<PAGE>

PROPOSAL NO. 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has selected PricewaterhouseCoopers LLP ("PWC"),
independent certified public accountants, to audit the consolidated financial
statements of the Company for the fiscal year ending December 31, 2000, and
recommends that stockholders vote "FOR" ratification of such appointment. In
the event of a negative vote on such ratification, the Board of Directors will
reconsider its selection.

Representatives of PWC are expected to be present at the meeting with the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000.

16
<PAGE>

PROPOSAL NO. 3

APPROVAL OF AN AMENDMENT OF THE COMPANY'S 1998 INCENTIVE STOCK
PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
AVAILABLE FOR ISSUANCE THEREUNDER BY 950,000.

The Company's Board of Directors and stockholders have previously adopted
and approved the 1998 Incentive Stock Plan (the "1998 Option Plan"). A total of
950,000 shares of Common Stock have been reserved for issuance under the 1998
Option Plan and no more shares are available for future grant as of the Record
Date. In April 2000, the Board of Directors authorized an amendment to the 1998
Option Plan, subject to stockholder approval, to increase the shares reserved
for issuance thereunder by 950,000 shares, bringing the total number of shares
issuable under the 1998 Option Plan to 1,900,000.

At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment of the 1998 Option Plan, in the form of Appendix
A hereto, to increase the number of shares of Common Stock reserved for
issuance thereunder.

The Board of Directors believe that the amendment is necessary to enable the
Company to, among other things, continue its policy of employee stock ownership
as a means to motivate high levels of performance and to recognize key employee
accomplishments.

Summary of the 1998 Option Plan

General. The 1998 Option Plan was adopted by the Board of Directors in
February 1998 subject to stockholders approval at the Annual Meeting of
Stockholders in May 1998. The 1998 Option Plan authorizes the Board of
Directors (the "Board"), or one or more committees which the Board may appoint
from among its members, to grant options to purchase Common Stock. Options
granted under the 1998 Option Plan may be either "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonstatutory stock options, as determined by the Board or a Board
Committee.

Purpose. The general purpose of the 1998 Option Plan is to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees and consultants
and to promote the success of the Company's business.

Administration. The 1998 Option Plan may be administered by the Board or a
Board Committee (together, the "Administrator"). Subject to the other
provisions of the 1998 Option Plan, the Administrator has the authority: (I) to
determine the fair market value of the Company's Common Stock; (ii) to select
the consultants and employees to whom Options and stock purchase rights may be
granted under the 1998 Option Plan; (iii) to determine the number of shares of
Common Stock to be covered by each option and stock purchase right granted
under the 1998 Option Plan; (iv) to approve forms of agreement for use under
the Option Plan; (v) to determine the terms and conditions, not inconsistent
with the terms of the 1998 Option Plan, of any option or stock purchase right
granted under the 1998 Option Plan, including the exercise price, the time or
times when options or stock purchase rights may be exercised (which may be
based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any option
or stock purchase right or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator, in its sole discretion,
shall determine; (vi) to reduce the exercise price of any option or stock
purchase right to the then current fair market value if the fair market value
of the Common Stock covered by such option or stock purchase right shall have
declined since the date the option or stock purchase right was granted; (vii)
to institute an option exchange program; (viii) to construe and interpret the
terms of the Option Plan and awards granted pursuant to the 1998 Option Plan;
(ix) to prescribe, amend and rescind rules and regulations relating to the 1998
Option Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws; (x) to modify or amend each Option or stock purchase right (subject to
Section 15(c) of the 1998 Option Plan); (xi) to

17
<PAGE>

authorize any person to execute on behalf of the Company any instrument
required to effect the grant of an Option or stock purchase right previously
granted by the Administrator; (xii) to institute an option exchange program;
and (xiii) to make all other determinations deemed necessary or advisable for
administering the Option Plan.

Eligibility. The 1998 Option Plan provides that options and rights may be
granted to the Company's employees and independent contractors. Incentive stock
options may be granted only to employees. Any optionee who owns more than 10%
of the combined voting power of all classes of outstanding stock of the Company
(a "10% Stockholder") is not eligible for the grant of an incentive stock
option unless the exercise price of the option is at least 110% of the fair
market value of the Common Stock on the date of grant.

Terms and Conditions of Options. Each option granted under the 1998 Option
Plan is evidenced by a written stock option agreement between the optionee and
the Company and is subject to the following terms and conditions:

(a) Exercise Price. The Administrator determines the exercise price of
options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the
exercise price under an incentive stock option must not be less than 100%
of the fair market value of the Common Stock on the date the option is
granted. If the Common Stock is listed on any established stock exchange or
a national market system, the fair market value shall be the closing sale
price for such stock (or the closing bid if no sales were reported) on the
last market trading day prior to the date the option is granted. If the
Common Stock is traded on the over-the-counter market, the fair market
value shall be the mean of the high bid and high ask prices on the last
market trading day prior to the date the option is granted.

(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally
may be made by cash, check, promissory note, other shares of Common Stock
of the Company owned by the optionee, consideration received by the Company
under a formal cashless exercise program adopted by the Company, a
reduction in the amount of any Company liability to the Optionee, or by a
combination thereof.c)Exercise of the Option. Each stock option agreement
will specify the term of the option and the date when the option is to
become exercisable. However, in no event shall an option granted under the
Option Plan be exercised more than 10 years after the date of grant.
Moreover, in the case of an incentive stock option granted to a 10%
Stockholder, the term of the option shall be for no more than five years
from the date of grant. Generally, all options granted under the 1998
Option Plan vest 25% annually, starting one year from the date of grant.

(c) Exercise of the Option. Each stock option agreement will specify the
term of the option and the date when the option is to become exercisable.
However, in no event shall an option granted under the Option Plan be
exercised more than 10 years after the date of grant. Moreover, in the case
of an incentive stock option granted to a 10% Stockholder, the term of the
option shall be for no more than five years from the date of grant.
Generally, all options granted under the 1998 Option Plan vest 25%
annually, starting one year from the date of grant.

(d) Termination of Employment. If an optionee's employment or consulting
relationship terminates for any reason (other than death or permanent
disability), then all options held by such optionee under the 1998 Option
Plan expire upon the earlier of (i) such period of time as is set forth in
his or her option agreement (but not to exceed ninety days after the
termination of his or her employment in the event of an incentive stock
option) or (ii) the expiration date of the option. The optionee may
exercise all or part of his or her option at any time before such
expiration to the extent that such option was exercisable at the time of
termination of employment or consulting relationship.

(e) Permanent Disability. If an optionee is unable to continue his or
her employment or consulting relationship with the Company as a result of
permanent and total disability (as defined in the Code), then all options
held by such optionee under the 1998 Option Plan shall expire upon the
earlier of (i) 12 months

18
<PAGE>

after the date of termination of the optionee's employment or (ii) the
expiration date of the option. The optionee may exercise all or part of his
or her option at any time before such expiration to the extent that such
option was exercisable at the time of termination of employment.

(f) Death. If an optionee dies while employed by the Company, his or her
option shall expire upon the earlier of (i) 12 months after the optionee's
death or (ii) the expiration date of the option. The executors or other
legal representative of the optionee may exercise all or part of the
optionee's option at any time before such expiration to the extent that
such option was exercisable at the time of death.

(g) Termination of Options. Each stock option agreement will specify the
term of the option and the date when all or any installment of the option
is to become exercisable. Notwithstanding the foregoing, however, the term
of any incentive stock option shall not exceed 10 years from the date of
grant. No options may be exercised by any person after the expiration of
its term.

(h) Nontransferability of Options. Unless determined otherwise by the
Administrator, during an optionee's lifetime, his or her option(s) shall be
exercisable only by the optionee and shall not be transferable other than
by will or laws of descent and distribution.

(i) Value Limitation. If the aggregate fair market value of all shares
of Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000,
the excess options shall be treated as nonstatutory options.

(j) Other Provisions. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the 1998 Option Plan as may
be determined by the Board or Committee.

Adjustment Upon Changes in Capitalization, Corporate Transactions. In the
event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of the Company, appropriate proportional adjustments shall be
made in the number and class of shares of stock subject to the 1998 Option
Plan, the number and class of shares of stock subject to any option or right
outstanding under the 1998 Option Plan, and the exercise price of any such
outstanding option or right. Any such adjustment shall be made upon approval of
the Board and, if required, the stockholders of the Company, whose
determination shall be conclusive. Notwithstanding the above, in connection
with any merger, consolidation, acquisition of assets or like occurrence
involving the Company, each outstanding option and right shall be assumed or an
equivalent option or right substituted by a successor corporation. If the
successor corporation does not assume the options or substitute substantially
equivalent options, then the exercisability of all outstanding options and
rights shall be automatically accelerated.

Amendment, Suspensions and Termination of the 1998 Option Plan. The Board
may amend, suspend or terminate the Option Plan at any time; provided, however,
that stockholder approval is required for any amendment to the extent necessary
to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934
or Section 422 of the Code, or any similar rule or statute. In any event, the
Option Plan will terminate automatically in the year 2008.

Federal Tax Information. Options granted under the 1998 Option Plan may be
either incentive stock options, as defined in Section 422 of the Code, or
nonstatutory options.

An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director, or 10% stockholder of the Company. The Company will be
entitled to a deduction in the same amount as the ordinary income

19
<PAGE>

recognized by the optionee. Any gain or loss recognized on such a premature
disposition of the shares in excess of the amount treated as ordinary income
will be characterized as long-term or short-term capital gain or loss,
depending on the holding period.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he or she is granted a nonstatutory option. However, upon
its exercise, the optionee will recognize taxable income generally measured as
the excess of the then fair market value of the shares purchased over the
purchase price. Any taxable income recognized in connection with an option
exercise by an optionee who is also an employee of the Company will be subject
to tax withholding by the Company. Upon resale of such shares by the optionee,
any difference between the sale price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.

Stock purchase rights are taxed in substantially the same manner as
nonstatutory options.

The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the 1998 Option Plan, does not purport to be complete, and does
not discuss the tax consequences of the optionee's death or the income tax laws
of any municipality, state or foreign country in which an optionee may reside.

Vote Required

The approval of the amendment of the 1998 Option Plan requires the
affirmative vote of a majority of the shares of the Company's Common Stock
present and voting at the Annual Meeting.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
APPROVAL OF THE AMENDMENT OF THE 1998 OPTION PLAN.

OTHER MATTERS

The Company knows of no other matters to be submitted at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent
as the Board of Directors may recommend.

THE BOARD OF DIRECTORS

Santa Clara, California
April 3, 2000

20
<PAGE>

APPLIED IMAGING CORP.

ANNUAL MEETING OF STOCKHOLDERS

Wednesday, May 10, 2000
11:00 a.m. local time

SANTA CLARA MARRIOTT HOTEL
2700 Mission College Blvd.
Great America Parkway
Santa Clara, CA 95052-8161

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

Applied Imaging Corp.
2380 Walsh Ave., Santa Clara, CA 95051 proxy
- --------------------------------------------------------------------------------

This proxy is solicited by the Board of Directors for use at the Annual Meeting
on May 10, 2000.

The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify on the reverse side.

If no choice is specified, the proxy will be voted "FOR" Items 1, 2 and 3

By signing the proxy, you revoke all prior proxies and appoint Jack Goldstein,
and Carl Hull, and each of them, with full power of substitution, to vote your
shares on the matters shown on the reverse side and any other matters which may
come before the Annual Meeting and all adjournments.

<PAGE>

Please detach here

<TABLE>

The Board of Directors Recommends a Vote FOR Items 1, 2 and 3.
<S> <C> <C> <C> <C>
1. Election of Class 01 Jack Goldstein, Ph.D. 02 Thomas C. McConnell [_] Vote FOR [_] Vote WITHHELD
directors: all nominees from all nominees
(except as marked)
______________________________________________
(Instructions: To withhold authority to vote for any indicated nominee,
write the number(s) of the nominee(s) in the box provided to the right.) ______________________________________________

2. To ratify the appointment of PricewaterhouseCoopers as independent auditors
of the company for the year ending December 31, 2000. [_] For [_] Against [_] Abstain

3. To approve an amendment of the Company's 1998 Incentive Stock Plan (the
"1998 Option Plan") to increase the number of shares of Common Stock
available for issuance thereunder by 950,000 shares. [_] For [_] Against [_] Abstain

4. To transact such other business as may properly come before the meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
- ---
Address Change? Mark Box [_] Indicate changes below: Date:________________________________________

______________________________________________

Signature(s) in Box
Please sign exactly as your name(s) appear on
Proxy. If held in joint tenancy, all persons
must sign. Trustees, administrators, etc.,
should include title and authority. Corporations
should provide full name of corporation and
title of authorized officer signing the proxy.

</TABLE>