AUTOCYTE INC, 424B3, 1999-09-09

AUTOCYTE INC
424B3, 1999-09-09
LABORATORY ANALYTICAL INSTRUMENTS

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Filed pursuant to Rule 424(b)(3)
Registration Statement File No. 333-86555

[AUTOCYTE LOGO]
780 PLANTATION DRIVE
BURLINGTON, NORTH CAROLINA 27215

NASDAQ: ACYT

September 10, 1999

Dear Stockholder:

I am pleased to invite you to a special meeting of stockholders on
September 30, 1999, at 10:00 a.m. at the Courtyard by Marriott, 3141 Wilson
Drive, Burlington, North Carolina. At the meeting you will be asked to approve
amendments to AutoCyte's restated certificate of incorporation increasing the
number of authorized shares of our common stock and changing AutoCyte's name
from "AutoCyte, Inc." to "TriPath Imaging, Inc.," and the issuance of common
stock in a proposed merger between NeoPath, Inc. and a subsidiary of AutoCyte.
Please review the enclosed information regarding the proposal to increase the
authorized shares, change our name and the merger and complete your proxy today
to vote "FOR" the approval of the amendments to AutoCyte's restated certificate
of incorporation increasing the authorized common stock and changing our name
and the issuance of the shares in the merger.

The Board unanimously recommends that the stockholders vote to approve the
issuance of the AutoCyte shares in the merger. The approval is required in
accordance with the rules of the National Association of Securities Dealers,
Inc. which are applicable to AutoCyte because AutoCyte common stock is listed on
the Nasdaq National Market. The Board also unanimously recommends that the
stockholders vote to approve the amendment to the restated certificate of
incorporation to increase the authorized shares of common stock of AutoCyte. The
amendment to AutoCyte's restated certificate of incorporation increasing the
authorized shares is required to complete the merger with NeoPath. The Board
also unanimously recommends that the stockholders vote to approve the amendment
to the restated certificate of incorporation changing our name to "TriPath
Imaging, Inc." This amendment will not become effective if the merger is not
completed.

We need the affirmative vote of the holders of a majority of the
outstanding AutoCyte common stock to approve the amendments to the restated
certificate of incorporation. Under the rules of the National Association of
Securities Dealers, we need the affirmative vote of the holders of a majority of
the votes cast at the meeting to approve the issuance of AutoCyte common stock
in the merger. If the issuance of the AutoCyte shares and the amendment to
AutoCyte's restated certificate of incorporation increasing its authorized
common stock are approved by the AutoCyte stockholders and the merger is
approved by the NeoPath shareholders, the merger should be completed shortly
after the special meeting.

We believe that the proposed transaction with NeoPath will successfully
combine two of the most advanced technologies available for cervical cancer
screening, our liquid-based thin-layer specimen sample preparation system and
NeoPath's automated sample screening system. The business combination of
AutoCyte and NeoPath should accelerate our mission of pathology automation. The
combination should also provide the ability to leverage our collective product
platforms, funding, research and development expertise and intellectual property
to reach critical milestones and increase the potential of our business.

If the merger is completed, NeoPath shareholders will receive 0.7903 shares
of AutoCyte common stock for each share of NeoPath common stock. NeoPath
shareholders will own approximately 49% of the outstanding AutoCyte common stock
after the merger.

PLEASE READ THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS
FOR DETAILED INFORMATION ABOUT THE PROPOSED MERGER. WE ENCOURAGE
YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY. IN ADDITION, YOU MAY
OBTAIN OTHER INFORMATION ABOUT AUTOCYTE AND NEOPATH FROM
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 2

Whether or not you plan to attend the special meeting, we encourage you to
please take the time to vote by completing and mailing the enclosed proxy card
to us. If you sign, date and mail your proxy card without indicating how you
wish to vote, your proxy will be counted as a vote in favor of approving the
issuance of the AutoCyte shares in the merger and approving the amendment to the
restated certificate of incorporation. Your vote is very important.

We appreciate your support in this very important transaction. We are very
enthusiastic about the merger with NeoPath, and are confident that the combined
company will grow and prosper in a competitive marketplace. On behalf of the
board of directors of AutoCyte, I urge you to vote "FOR" the approval of the
proposals.

Sincerely,

/s/ Richard A. Charpie
-----------------------------
Richard A. Charpie
Chairman of the Board

- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

Joint proxy statement/prospectus dated September 8, 1999,
and first mailed to stockholders on or about September 10, 1999.

2
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[AUTOCYTE LOGO]

780 PLANTATION DRIVE
BURLINGTON, NORTH CAROLINA 27215

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 30, 1999

TO THE STOCKHOLDERS OF AUTOCYTE, INC.

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of AutoCyte
will be held at 10:00 a.m. on Thursday, September 30, 1999 at the Courtyard by
Marriott, 3141 Wilson Drive, Burlington, North Carolina for the following
purpose:

1. To consider and vote on a proposal to amend the AutoCyte restated
certificate of incorporation to increase the authorized shares of
common stock from 20,650,000 shares to 49,000,000 shares.

2. To consider and vote on a proposal to issue shares of AutoCyte
common stock in connection with the merger of a wholly-owned
subsidiary of AutoCyte with and into NeoPath, Inc. The merger
agreement provides for each outstanding share of common stock of
NeoPath to be converted into 0.7903 shares of AutoCyte common
stock. A copy of the merger agreement is attached as Annex A to the
accompanying joint proxy statement/prospectus. Completion of the
merger is dependent on approval of the proposal, set forth above,
to increase the authorized shares of AutoCyte.

3. To consider and vote on a proposal to amend AutoCyte's restated
certificate of incorporation to change AutoCyte's name from
"AutoCyte, Inc." to "TriPath Imaging, Inc." The change in our name
is dependent on approval of the proposal, set forth above, to issue
shares of our common stock in the merger with NeoPath.

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

Only holders of AutoCyte common stock on September 8, 1999 are entitled to
vote at the special meeting.

A quorum, consisting of the holders of at least a majority of the
outstanding shares of AutoCyte common stock, is required to act at the special
meeting.

If your shares are held through a bank or brokerage firm and you plan to
vote your shares in person at the special meeting, please request a letter or
some other evidence of ownership from your bank or brokerage firm as well as
proper authorization.

Information regarding the merger, the merger agreement, AutoCyte, NeoPath
and related matters is contained in the accompanying joint proxy
statement/prospectus and the annexes thereto, which are incorporated by
reference into this notice.

By Order of the Board of Directors,
Steven N. Farber
Secretary

September 10, 1999
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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[NEOPATH LOGO]

8271 154TH AVENUE NE
REDMOND, WASHINGTON 98052

NASDAQ: NPTH

September 10, 1999

Dear Stockholder:

I am pleased to invite you to a special meeting of shareholders on
September 30, 1999 at 10:00 a.m. at NeoPath's offices at 8271 154th Avenue NE,
Redmond, Washington. At the meeting, you will be asked to approve the merger of
NeoPath with a subsidiary of AutoCyte, Inc. Please review the enclosed
information regarding the merger and complete your proxy today to vote "FOR" the
approval of the merger.

We need the affirmative vote of a majority of the outstanding shares of
NeoPath common stock to approve the merger. If the NeoPath shareholders approve
the merger, and the AutoCyte stockholders approve an amendment to AutoCyte's
restated certificate of incorporation increasing its authorized common stock and
the issuance of the AutoCyte common stock in the merger, the merger should be
completed shortly after the special meeting.

We believe that the proposed transaction with AutoCyte will successfully
combine two of the most advanced technologies currently available for cervical
cancer screening, including Pap smears: AutoCyte's liquid-based thin-layer
specimen sample preparation and our automated sample screening system. We
believe that the combination of AutoCyte and NeoPath will enhance our ability to
pursue our mission of saving lives through visual intelligence. Our collective
funding, research expertise and intellectual property resources will help us to
reach critical milestones and potentially develop additional products.

In the merger, NeoPath shareholders will receive 0.7903 shares of AutoCyte
common stock for each share of NeoPath common stock. In addition, all options
and warrants of NeoPath outstanding after the merger will convert into options
and warrants to purchase AutoCyte common stock. After the merger, NeoPath
shareholders will own approximately 49 percent of the outstanding AutoCyte
common stock.

Whether or not you plan to attend the special meeting, please complete and
mail the enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you wish to vote, your proxy will be counted as a vote in favor
of approving the merger. Your vote is very important.

We appreciate your support in this very important transaction. We are very
enthusiastic about the merger with AutoCyte, and are confident that the combined
company will grow and prosper in a competitive marketplace. On behalf of the
board of directors of NeoPath, I urge you to vote "FOR" the approval of the
proposal.

Sincerely,

Ronald R. Bromfield
President and Chief Executive Officer
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Joint proxy statement/prospectus dated September 8, 1999,
and first mailed to shareholders on or about September 10, 1999.

2
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[NEOPATH LOGO]

8271 154(TH) AVENUE NE
REDMOND, WASHINGTON 98052

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 30, 1999

TO THE SHAREHOLDERS OF NEOPATH, INC:

WE HEREBY NOTIFY YOU that NeoPath will hold a special meeting of its
shareholders at 10:00 a.m. on September 30, 1999 at NeoPath's offices at 8271
154th Avenue NE, Redmond, Washington, for the following purposes:

1. To consider and vote on an agreement and plan of merger with AutoCyte
in which each outstanding share of NeoPath common stock will be
converted into 0.7903 shares of AutoCyte common stock. A copy of the
merger agreement is attached as Annex A to the accompanying joint
proxy statement/prospectus.

2. To transact any other business that properly comes before the special
meeting or any adjournment(s) of the meeting.

Only holders of shares of NeoPath common stock on September 8, 1999 may
vote at the special meeting.

To approve the merger, holders of a majority of the outstanding shares of
NeoPath common stock must vote in favor of the merger. A majority of the
outstanding shares of NeoPath common stock entitled to vote, represented in
person or by proxy, constitutes a quorum for consideration of the merger
agreement.

You will find information regarding the merger, the merger agreement,
NeoPath, and AutoCyte in the accompanying joint proxy statement/prospectus.

Shareholders of NeoPath who do not vote in favor of the merger agreement
and who comply with the requirements of Section 238.12.020 of the Washington
Business Corporation Act are entitled to appraisal rights based on the value of
NeoPath shares they hold immediately prior to the merger. The text of Section
238.12.020 is attached as Annex B to the accompanying joint proxy
statement/prospectus. THESE RIGHTS OF APPRAISAL ARE DESCRIBED IN THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS.

By order of the Board of Directors

Ronald R. Bromfield
President and Chief Executive Officer

September 10, 1999
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TABLE OF CONTENTS

PAGE
----

QUESTIONS & ANSWERS ABOUT THE MERGER...................................... 1
SUMMARY................................................................... 4
COMPARATIVE PER SHARE DATA................................................ 13
COMPARATIVE MARKET PRICES AND DIVIDENDS................................... 14
RISK FACTORS.............................................................. 16
FORWARD-LOOKING STATEMENTS................................................ 27
MEETINGS, VOTING AND PROXIES.............................................. 28
The AutoCyte Special Meeting.............................................. 28
The NeoPath Special Meeting............................................... 29
THE MERGER................................................................ 30
General Description of the Merger......................................... 30
Background of the Merger.................................................. 30
AutoCyte's Reasons for the Merger; Recommendations of the
AutoCyte Board.......................................................... 33
Opinion of Warburg Dillon Read LLC........................................ 34
NeoPath's Reasons for the Merger; Recommendation of the
NeoPath Board........................................................... 37
Opinion of Credit Suisse First Boston Corporation......................... 39
Accounting Treatment...................................................... 44
Material Federal Income Tax Consequences.................................. 44
NeoPath Shareholder Appraisal Rights...................................... 46
Nasdaq Listing of AutoCyte Common Stock................................... 47
Federal Securities Law Consequences....................................... 48
Regulatory Matters........................................................ 48
Potential Conflicts and Interests of Certain Persons in the
Merger.................................................................. 48
OVERVIEW OF THE CERVICAL CANCER SCREENING MARKET.......................... 50
BUSINESS OF AUTOCYTE...................................................... 52
BUSINESS OF NEOPATH....................................................... 70
RELATIONSHIPS BETWEEN AUTOCYTE AND NEOPATH................................ 80
AUTOCYTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 81
NEOPATH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 87
MANAGEMENT AFTER THE MERGER............................................... 96
Executive Directors....................................................... 96
Compensation of AutoCyte Executive Officers............................... 99
Director Compensation..................................................... 101
Compensation Committee Interlocks, Insider Participation and
Certain Transactions of AutoCyte........................................ 101
Compensation of NeoPath Executive Officers................................ 102
NeoPath Compensation Committee Interlocks and Insider
Participation........................................................... 104
THE MERGER AGREEMENT...................................................... 104
Structure of the Merger................................................... 104
Effective Time............................................................ 104
Merger Consideration...................................................... 104
No Fractional Shares...................................................... 104
Exchange of Share Certificates............................................ 104
Treatment of NeoPath common stock options and warrants.................... 105
Representations and Warranties............................................ 106
Certain Covenants......................................................... 107
Conditions to the Merger.................................................. 108
Amendments; Waivers....................................................... 109
No Solicitation........................................................... 109

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PAGE
----

Termination of the Merger Agreement....................................... 109
Termination Fees and Expenses............................................. 110
No Limitations on Recovering for Willful Breach........................... 111
Stockholder Voting Agreements............................................. 111
Affiliate Letter; Resales of Shares of AutoCyte Common Stock............... 111
PRINCIPAL STOCKHOLDERS.................................................... 113
AutoCyte Share Ownership.................................................. 113
NeoPath Share Ownership................................................... 115
DESCRIPTION OF AUTOCYTE CAPITAL STOCK..................................... 116
Common Stock.............................................................. 116
Preferred Stock........................................................... 116
Anti-Takeover Measures.................................................... 117
Transfer Agent............................................................ 117
COMPARATIVE RIGHTS OF HOLDERS OF NEOPATH AND AUTOCYTE COMMON
STOCK................................................................... 117
Authorized Capital Stock.................................................. 118
Boards of Directors....................................................... 118
Removal of Directors...................................................... 118
Special Meetings of Stockholders; Stockholder Action Without
Meeting................................................................. 119
Stockholder Proposals..................................................... 119
Quorum for Meeting of Stockholders........................................ 119
Stockholder's Voting Rights............................................... 119
Provisions Relating to Acquisitions and Business
Combinations............................................................ 119
Mergers, Acquisitions and Other Transactions.............................. 121
Dissenters' Rights........................................................ 121
Amendment of Governing Instruments........................................ 122
Dividends................................................................. 123
Terms of Conversion....................................................... 123
Liquidation Rights........................................................ 123
Stockholder Rights Plans.................................................. 123
Liability of Directors and Officers....................................... 123
Indemnification of Directors and Officers................................. 124
Stockholders' Suits....................................................... 125
AMENDMENT OF AUTOCYTE'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES
OF CAPITAL STOCK........................................................ 126
AMENDMENT OF AUTOCYTE'S RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE AUTOCYTE'S NAME FROM "AUTOCYTE,
INC." TO "TRI-PATH IMAGING, INC."....................................... 128
LEGAL MATTERS............................................................. 129
EXPERTS................................................................... 129
FUTURE AUTOCYTE STOCKHOLDER PROPOSALS..................................... 129
FUTURE NEOPATH SHAREHOLDER PROPOSALS...................................... 129
OTHER MATTERS............................................................. 129
WHERE YOU CAN FIND MORE INFORMATION....................................... 130
INDEX TO AUTOCYTE AND NEOPATH FINANCIAL STATEMENTS........................ F-1

Annex A Agreement and Plan of Merger among AutoCyte, Inc., Trilogy
Acquisition Corp. and NeoPath, Inc. ............................ A-1
Annex B Section 238.12.020 of the Washington Business Corporation
Act............................................................. B-1
Annex C Opinion of Warburg Dillon Read LLC.............................. C-1
Annex D Opinion of Credit Suisse First Boston Corporation............... D-1

ii
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QUESTIONS & ANSWERS ABOUT THE MERGER

1. HOW WILL THESE TWO COMPANIES MERGE?

AutoCyte and NeoPath will combine when a wholly-owned subsidiary of
AutoCyte merges with and into NeoPath. NeoPath will then be a wholly-owned
subsidiary of AutoCyte.

2. WHAT WILL NEOPATH SHAREHOLDERS RECEIVE?

Each share of outstanding NeoPath common stock will convert into the right
to receive 0.7903 shares of AutoCyte common stock, together with cash instead of
fractional shares.

Please read the more detailed description of conversion of shares on page
104.

On June 4, 1999, the last full trading day before the public announcement
of the merger, the closing price of AutoCyte common stock was $7.75 and on
September 7, 1999, the closing price of the AutoCyte common stock was $6.50.

3. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?

We intend that the merger qualify as tax-free so that neither NeoPath,
AutoCyte nor the AutoCyte wholly-owned subsidiary will recognize any gain or
loss solely by reason of the merger and no gain or loss will be recognized by
NeoPath shareholders on their receipt of AutoCyte common stock solely in
exchange for NeoPath common stock in the merger. NeoPath shareholders will,
however, recognize gain or loss on any cash they receive instead of fractional
shares. NeoPath shareholders should consult their tax advisors for a full
understanding of the tax consequences of the merger.

4. WHO MUST APPROVE THE MERGER?

NeoPath's board of directors and AutoCyte's board of directors have already
approved the merger. NeoPath's shareholders must also approve the merger.
AutoCyte's stockholders must approve the amendment to AutoCyte's restated
certificate of incorporation increasing AutoCyte's authorized common stock and
the issuance of AutoCyte common stock in the merger. Both stockholder approvals
are necessary for the merger to be completed.

5. WHY IS AUTOCYTE'S BOARD OF DIRECTORS RECOMMENDING APPROVAL OF THE
TRANSACTION?

AutoCyte's board of directors believes that the merger represents an
opportunity to acquire new technology, products and employees that would allow
AutoCyte to provide a more comprehensive product offering to the cervical cancer
screening market. AutoCyte's board of directors also believes that the terms of
the merger are fair to, and in the best interests of, AutoCyte and its
stockholders.

6. WHY IS NEOPATH'S BOARD OF DIRECTORS RECOMMENDING APPROVAL OF THE TRANSACTION?

NeoPath's board of directors believes that the merger will create a
combined company with the technology and personnel to make a strong impact in
the cervical cancer screening market. NeoPath's board also believes that the
terms of the merger are fair to, and in the best interests of, the NeoPath
shareholders.

7. WHEN IS THE AUTOCYTE SPECIAL MEETING?

The AutoCyte special meeting will take place on September 30, 1999.

8. WHAT PROPOSALS ARE AUTOCYTE STOCKHOLDERS VOTING ON?

AutoCyte stockholders are being asked to approve the issuance of 0.7903
shares of AutoCyte common stock in the merger for each outstanding share of
NeoPath common stock and to amend AutoCyte's restated certificate of
incorporation to increase the number of authorized common shares from 20,650,000

<PAGE> 11

shares to 49,000,000 shares and to change AutoCyte's name from "AutoCyte, Inc."
to "TriPath Imaging, Inc."

9. WHEN IS THE NEOPATH SPECIAL MEETING?

The NeoPath special meeting will take place on September 30, 1999.

10. WHAT PROPOSALS ARE NEOPATH SHAREHOLDERS VOTING ON?

NeoPath shareholders are being asked to approve the merger agreement.

11. WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER?

The holders of at least a majority of the outstanding shares of NeoPath
common stock must vote in favor of the merger agreement. Likewise, the holders
of at least a majority of the outstanding shares of AutoCyte common stock must
vote in favor of the amendment to AutoCyte's restated certificate of
incorporation increasing AutoCyte's authorized common stock. A majority of votes
cast at the AutoCyte special meeting must vote in favor of the AutoCyte stock
issuance. For both NeoPath and AutoCyte, a majority of the outstanding stock
entitled to vote constitutes a quorum for each meeting.

12. WHO IS ENTITLED TO VOTE?

Holders of record of NeoPath common stock on September 8, 1999 may vote at
the NeoPath shareholders meeting. As of September 8, 1999, approximately
17,448,802 shares of NeoPath common stock were outstanding.

Holders of record of AutoCyte common stock on September 8, 1999 may vote at
the AutoCyte stockholders meeting. As of September 8, 1999, approximately
14,292,942 shares of AutoCyte common stock were outstanding.

13. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?

We are working to complete all aspects of the merger transaction as quickly
as possible. We currently expect the merger to be completed shortly after
stockholder approvals are obtained at both the NeoPath and AutoCyte special
meetings.

14. WHAT DO I NEED TO DO NOW?

After you have carefully read this joint proxy statement/prospectus, just
complete, sign and mail your proxy card in the enclosed return envelope as soon
as possible. That way, your shares will be represented at the AutoCyte or
NeoPath special meeting.

In the case of the NeoPath shareholder meeting, failure to return a proxy
card will have the same effect as a vote against the merger agreement.

In the case of the AutoCyte stockholders meeting, failure to return a proxy
card will have the same effect as a vote against the proposal to increase the
authorized shares of AutoCyte. Approval of this proposal is a condition to
completing the merger.

15. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?

Your broker will vote your shares only if you provide instructions on how
to vote. You should instruct your broker to vote your shares, following the
directions provided by your broker.

16. CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?

Yes, you may change your vote at any time before the vote takes place. You
can attend the special meeting and vote in person to do so.

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If you are an AutoCyte stockholder, you also can complete a new proxy card
or send a written notice stating you would like to revoke your proxy. These
should be sent to: AutoCyte, Inc., 780 Plantation Drive, Burlington, North
Carolina 27215, Attention: President.

If you are a NeoPath shareholder, you also can complete a new proxy card or
send a written notice stating you would like to revoke your proxy. These should
be sent to: NeoPath, Inc., 8271 154th Avenue NE, Redmond, Washington 98052,
Attention: President.

17. SHOULD I SEND IN MY NEOPATH STOCK CERTIFICATES NOW?

No. For now you should continue to hold your certificates. If the merger is
completed, you will receive a set of materials with instructions on how to
exchange your shares of NeoPath common stock for AutoCyte common stock. You
should use these materials to submit your certificates.

18. WHERE WILL MY SHARES OF AUTOCYTE COMMON STOCK BE TRADED?

AutoCyte common stock is listed and traded on the Nasdaq National Market.

19. WILL THE NEOPATH STOCK OPTIONS AND WARRANTS BE EXCHANGED IN THE MERGER?

Yes. Each option and warrant to purchase NeoPath common stock outstanding
after the merger will be exchanged into a right to purchase shares of AutoCyte
common stock. As a holder of an option or eligible warrant to purchase shares of
NeoPath common stock, you will receive an option or warrant to purchase a number
of shares of AutoCyte common stock equal to the number of shares you would have
been eligible to purchase under your NeoPath option or warrant multiplied by
0.7903. The exercise price for the options and warrants to purchase shares of
AutoCyte common stock will be the exercise price under the NeoPath option or
warrant divided by 0.7903.

20. WHO SHOULD I CALL IF I HAVE ANY ADDITIONAL QUESTIONS?

AutoCyte stockholders may call AutoCyte's Investor Relations at (336)
222-9707.

NeoPath shareholders may call NeoPath's Investor Relations at (425)
556-4699.

21. ARE THERE ANY RISKS ASSOCIATED WITH THE MERGER?

The merger does involve some risks. For a discussion of certain risks
factors that you should consider in evaluating the merger, see "Risk Factors"
beginning on page 16.

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SUMMARY

This summary highlights information from this joint proxy
statement/prospectus. For a more complete description of the transaction, you
should read this entire document, including the materials attached as annexes,
and the other documents that we have referred you to. See "Where You Can Find
More Information" on page 130. We have included page references in parentheses
to direct you to a more complete description of the topics presented in this
summary.

THE COMPANIES

AUTOCYTE (SEE PAGE 52)

AutoCyte develops, manufactures and markets the only integrated automated
sample preparation and image analysis system to support professionals in
cervical cancer screening. AutoCyte's integrated system is comprised of two
separate products: the AutoCyte PREP System(TM) for sample preparation and the
AutoCyte SCREEN System(TM) for image analysis. On June 17, 1999, AutoCyte
received regulatory approval from the FDA to market PREP as a replacement for
the conventional Pap smear preparation. AutoCyte is currently seeking regulatory
approval of SCREEN for sale in the United States for cervical cancer screening.
AutoCyte began sales of PREP in the United States for non-gynecologic
applications in 1993 and with recent FDA approval, has begun selling PREP in the
United States for gynecologic applications, its principal application. In
addition, AutoCyte's Pathology Workstation product line works with some of
AutoCyte's other product offerings to provide tools for data storage and
transmission of cellular and tissue images, and tools for diagnosis of disease
from cytology and pathology specimens.

PREP is a proprietary automated liquid-based sample preparation system that
prepares slides with a homogeneous layer, or thin-layer, of cervical cells.
AutoCyte designed PREP to operate both as an independent sample preparation
system and with SCREEN as part of an integrated diagnostic system. AutoCyte
believes PREP will improve laboratory productivity and reduce interpretation
errors, as compared to conventional Pap smears, by producing cell samples that
are:

- clearer than conventional Pap smear samples;

- more uniform than conventional Pap smear samples and

- easier to interpret than conventional Pap smear samples.

SCREEN is an automated image analysis system that combines AutoCyte's own
imaging technology and classification software with off-the-shelf computer
hardware to screen and classify slides prepared using PREP. AutoCyte designed
SCREEN to be an interactive support tool for the laboratory professional in the
primary screening of cervical cells. SCREEN may also serve quality control and
adjunctive testing purposes. By designing PREP and SCREEN to function together,
AutoCyte has developed a system which AutoCyte believes will operate at a higher
production level and with greater diagnostic sensitivity than the conventional
Pap smear test and other cervical cancer screening systems.

On May 18, 1999 AutoCyte completed its acquisition of the intellectual
property estate of Neuromedical Systems, Inc. for $4.0 million in cash and the
issuance of 1.4 million shares of AutoCyte's common stock. Concurrently with the
execution of an asset purchase agreement on March 25, 1999, Neuromedical Systems
filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the
District of Delaware. AutoCyte's purchase of the intellectual property estate
was completed when the bankruptcy court subsequently approved the transaction.

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The principal offices of AutoCyte, a Delaware corporation, are located at
780 Plantation Drive, Burlington, North Carolina 27215 and its telephone number
at such offices is (336) 222-9707.

NEOPATH (SEE PAGE 70)

NeoPath develops and markets visual intelligence technology to increase
accuracy in medical testing. NeoPath's products include two automated screening
systems that integrate proprietary high-speed morphology computers, video
imaging technology and sophisticated image interpretation software to capture
and analyze thousands of microscopic images from a Pap smear slide for the early
detection of cervical cancer.

The FDA approved the AutoPap(R) 300 QC Automatic Pap Screener System in
1995. The AutoPap QC is a rescreening device used for quality control and
rescreening of previously screened Pap smear slides. Clinical studies have shown
that the AutoPap QC detects a significantly higher proportion of undetected
abnormal slides than procedures typically employed by clinical laboratories to
meet federal rescreening requirements. These studies were performed by
independent laboratories, and NeoPath funded the studies to support its FDA
approved applications.

The FDA approved the AutoPap(R) Primary Screening System in May 1998. The
AutoPap Primary Screener uses the same hardware components as the AutoPap QC,
but uses enhanced software to perform the initial screening of Pap smear slides
and to classify up to 25% of such slides as requiring no further review. NeoPath
also has funded clinical studies of the effectiveness of the AutoPap Screener by
independent laboratories. These clinical studies showed that the AutoPap Primary
Screener provides superior sensitivity and specificity when compared to existing
laboratory practice. Currently it is the only instrument approved by the FDA
that allows Pap smear slides to bypass human review. NeoPath believes that this
feature of the AutoPap Primary Screener gives customers an economic incentive to
adopt the technology. The AutoPap Screener provides customers with the
functionality of both the AutoPap QC as well as a primary screening system;
therefore, NeoPath is focusing its sales effort on the AutoPap Screener.

The principal offices of NeoPath, a Washington corporation, are located at
8271 154th Avenue NE, Redmond, Washington 98052 and its telephone number is
(425) 869-7284.

TRILOGY ACQUISITION CORPORATION

AutoCyte formed Trilogy Acquisition Corporation as a wholly-owned
subsidiary corporation under the laws of Delaware solely for the purpose of the
merger.

THE MERGER

SUMMARY OF THE TRANSACTION (SEE PAGE 104)

The merger agreement is attached at the back of this joint proxy
statement/prospectus as Annex A. We encourage you to read the merger agreement
because it is the legal document that governs the merger. In the proposed
merger, AutoCyte's subsidiary, Trilogy Acquisition Corporation, will be merged
into NeoPath and, as a result, NeoPath will become a subsidiary of AutoCyte.

The proposed merger will occur following: (i) approval of the merger
agreement by the NeoPath shareholders, (ii) approval by AutoCyte stockholders of
the increase in Autocyte's authorized common stock and the issuance of AutoCyte
common stock to NeoPath shareholders, and (iii) satisfaction or waiver of all
other conditions to the merger.

5
<PAGE> 15
- --------------------------------------------------------------------------------
WHAT THE HOLDERS OF NEOPATH COMMON STOCK RECEIVE IN THE MERGER (SEE PAGE 104)

In the proposed merger, the NeoPath shareholders will receive AutoCyte
common stock. At the time the merger is completed each issued and outstanding
share of NeoPath stock will convert into a right to receive 0.7903 shares of
AutoCyte common stock. AutoCyte will not issue any fractional shares of common
stock in the merger. Instead, NeoPath shareholders will receive cash for any
fractional share.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 44)

We intend that the merger qualify as a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended. Assuming the
merger does qualify as a reorganization, no gain or loss will be recognized by
NeoPath, AutoCyte or the merger subsidiary by reason of the merger, and NeoPath
shareholders will recognize no gain or loss solely on the exchange of their
shares of NeoPath common stock for shares of AutoCyte common stock, except in
connection with any cash they receive instead of fractional shares of AutoCyte
common stock.

BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING
UPON THE PARTICULAR CIRCUMSTANCES OF EACH NEOPATH SHAREHOLDER,
NEOPATH SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
ABOUT THE FEDERAL (AND ANY STATE, LOCAL OR FOREIGN) TAX
CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES.

THE AUTOCYTE SPECIAL MEETING

DATE AND PURPOSE (SEE PAGE 28)

The AutoCyte special meeting will be held at 10:00 a.m. on September 30,
1999 at the Courtyard by Marriott, 3141 Wilson Drive, Burlington, North
Carolina. At the AutoCyte special meeting, AutoCyte stockholders will be asked
to approve an amendment to AutoCyte's restated certificate of incorporation
increasing the number of authorized common shares of AutoCyte from 20,650,000 to
49,000,000 shares, to approve the issuance of the AutoCyte common stock in the
merger and to change AutoCyte's name from "AutoCyte, Inc." to "Tri-Path Imaging,
Inc."

AUTOCYTE RECORD DATE; VOTING RIGHTS (SEE PAGE 28)

If you owned shares of AutoCyte stock at the close of business on September
8, 1999, you may vote at the AutoCyte special meeting.

On that date, there were approximately 14,292,942 shares of AutoCyte common
stock outstanding. AutoCyte stockholders will have one vote at the AutoCyte
special meeting for each share of stock they own on the AutoCyte record date.

QUORUM; REQUIRED VOTE (SEE PAGE 28)

The holders of a majority of the outstanding shares of AutoCyte must be
present, in person or by proxy, at the AutoCyte special meeting for there to be
a quorum. The rules of the National Association of Securities Dealers, Inc.
require AutoCyte to obtain stockholder approval of the stock issuance due to the
number of shares of AutoCyte common stock expected to be issued in connection
with the merger. This approval is required when the total number of shares to be
issued will be equal to or greater than 20% of the total number of shares of
AutoCyte common stock issued and outstanding immediately prior to the merger.
Under the rules of the National Association of Securities Dealers, the
affirmative vote of a majority of the votes cast at the AutoCyte special meeting
must approve the issuance of AutoCyte common stock in the merger. Your failure
to vote or your abstention will not affect the outcome of this proposal.

In addition, due to the number of shares to be issued to NeoPath
shareholders, the AutoCyte stockholders must approve an amendment to AutoCyte's
restated certificate of incorporation to increase

- --------------------------------------------------------------------------------
6
<PAGE> 16
- --------------------------------------------------------------------------------
the authorized shares of common stock. The holders of a majority of the
outstanding shares of AutoCyte common stock must vote to approve the amendment.
Your failure to vote or your abstention will have the effect of a vote against
approval of the amendment which is a condition to completing the merger.

Brokers who hold shares of AutoCyte common stock as nominees will not have
authority to vote such shares unless you provide them with voting instructions.

RECOMMENDATION TO AUTOCYTE STOCKHOLDERS (SEE PAGE 33)

The AutoCyte board of directors believes that the merger is in the best
interest of AutoCyte stockholders and unanimously recommends that holders of
AutoCyte common stock vote "FOR" the increase in authorized common stock, the
issuance of the AutoCyte common stock in the merger and the change of AutoCyte's
name.

FAIRNESS OPINION OF WARBURG DILLON READ (SEE PAGE 34)

In deciding to approve the merger, the AutoCyte board of directors
considered an opinion from Warburg Dillon Read LLC to the effect that, as of the
date of the merger agreement, the exchange ratio is fair to AutoCyte, from a
financial point of view. The full text of the Warburg Dillon Read opinion,
including a description of the assumptions, limitations and qualifications of
the opinion, is annexed to this joint proxy statement/prospectus as Annex C.
Stockholders are urged to read the opinion in its entirety and to consider
carefully its contents. The opinion of Warburg Dillon Read is directed to the
board of directors of AutoCyte and does not constitute a recommendation to any
stockholder how to vote on the merger.

THE NEOPATH SPECIAL MEETING

DATE AND PURPOSE (SEE PAGE 29)

The NeoPath special meeting will be held at 10:00 a.m. on September 30,
1999 at NeoPath's offices at 8271 154th Avenue NE, Redmond, Washington. At the
NeoPath special meeting, NeoPath will ask its shareholders to approve the
merger.

NEOPATH RECORD DATE; VOTING RIGHTS (SEE PAGE 29)

If you owned shares of NeoPath stock as of the close of business on
September 8, 1999, the record date for the NeoPath special meeting, you may vote
on the approval of the merger agreement.

On that date, there were approximately 17,448,802 shares of NeoPath common
stock outstanding stock. NeoPath shareholders will have one vote at the NeoPath
special meeting for each share of stock they own on the record date.

QUORUM; REQUIRED VOTES (SEE PAGE 29)

The holders of a majority of the outstanding shares of NeoPath common stock
must be present, in person or by proxy, at the NeoPath special meeting for there
to be a quorum. The holders of a majority of the outstanding shares of NeoPath
common stock must approve the merger agreement. If you fail to vote or abstain
from voting, this has the effect of a vote against the merger. A broker who
holds NeoPath stock as your nominee will not have authority to vote your shares
unless you provide them with voting instructions.

RECOMMENDATION TO NEOPATH SHAREHOLDERS (SEE PAGE 37)

NeoPath's board of directors believes that the merger is in the best
interest of NeoPath shareholders and unanimously recommends that the
shareholders vote "FOR" approval of the merger.

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

7
<PAGE> 17
- --------------------------------------------------------------------------------
FAIRNESS OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION (SEE PAGE 39)

In deciding to approve the merger, the NeoPath board considered an opinion
from its financial advisor, Credit Suisse First Boston Corporation, that, as of
the date of the opinion and based on and subject to the matters set forth in the
opinion, the exchange ratio was fair, from a financial point of view, to the
NeoPath shareholders. The full text of this written opinion is attached as Annex
D to this joint proxy statement/prospectus. We encourage you to read this
opinion carefully in its entirety. The opinion of Credit Suisse First Boston
Corporation is directed to the NeoPath board and is not a recommendation to any
shareholder how to vote on the merger or the merger agreement.

SUMMARY OF OTHER SELECTED INFORMATION

POTENTIAL CONFLICTS OF INTEREST OF OFFICERS AND DIRECTORS IN THE MERGER (SEE
PAGE 48)

The officers and directors of NeoPath may have interests in the transaction
that are different from, or in addition to, those of NeoPath shareholders. The
NeoPath and AutoCyte boards were aware of these and other interests and
considered them in approving the merger agreement.

On the record date, directors and officers of NeoPath as a group owned
approximately 3.2% of the outstanding shares of NeoPath common stock. They have
each agreed to vote in favor of approval of the merger agreement.

On the record date, directors and officers of AutoCyte as a group owned
approximately 49% of the outstanding shares of AutoCyte common stock. They have
each agreed to vote in favor of the increase of authorized common stock and the
issuance of shares of AutoCyte common stock in the merger.

TREATMENT OF STOCK OPTIONS AND WARRANTS IN THE MERGER (SEE PAGE 105)

Each outstanding option to purchase shares of NeoPath common stock and
warrants to purchase shares of NeoPath common stock outstanding after the merger
will be assumed by AutoCyte and will become an option or warrant to acquire
AutoCyte common stock. We will adjust the number of shares and exercise price to
reflect the exchange ratio of shares of NeoPath stock for AutoCyte common stock
in the merger.

REGULATORY APPROVALS (SEE PAGE 48)

We are not aware of any governmental or regulatory approvals required for
consummation of the merger, other than compliance with applicable federal
securities laws and state "blue sky" laws.

CONDITIONS TO THE MERGER (SEE PAGE 108)

We must satisfy certain conditions before completing the merger, including
the following:

- Approval of the merger agreement by NeoPath shareholders.

- Approval by AutoCyte stockholders of the issuance of shares of AutoCyte
common stock in the merger and an increase in the number of authorized
shares of AutoCyte common stock.

- Effectiveness of the registration statement filed with the SEC, which
includes this joint proxy statement/prospectus.

- Receipt of all required third-party consents and approvals.

- Approval for quotation on the Nasdaq National Market of the shares of
AutoCyte common stock to be issued in the merger.

- Receipt of letters from Ernst & Young LLP regarding the appropriateness
of pooling-of-interests accounting for the merger under APB 16 if closed
and consummated in accordance with the merger agreement.

- --------------------------------------------------------------------------------
8
<PAGE> 18
- --------------------------------------------------------------------------------

- Receipt of legal opinions that the merger will qualify as a tax free
reorganization for federal tax purposes.

TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 109)

AutoCyte and NeoPath may mutually terminate the merger agreement without
completing the merger. Either of AutoCyte or NeoPath may terminate the agreement
if the merger is not completed by November 30, 1999 and in certain other
circumstances, including failure to obtain required stockholder approvals.

TERMINATION FEES AND EXPENSES (SEE PAGE 110)

If either party terminates the merger agreement under circumstances
involving an alternative acquisition proposal, it may be required to pay the
other a termination fee of $2,800,000 plus all costs and expenses related to the
merger.

If we do not complete the merger, each party generally will pay its own
expenses. If we complete the merger, the combined company will be liable for its
unpaid expenses.

COMPARATIVE STOCKHOLDER RIGHTS (SEE PAGE 117)

When we complete the merger, NeoPath shareholders will be stockholders of
AutoCyte, and their rights will be governed by the AutoCyte restated certificate
of incorporation, the AutoCyte amended and restated by-laws and Delaware law.

ACCOUNTING TREATMENT (SEE PAGE 44)

AutoCyte and NeoPath expect the merger to qualify as a pooling of
interests, which means that AutoCyte and NeoPath will be treated as if they had
always been combined for accounting and financial reporting purposes.

STATUTORY APPRAISAL RIGHTS (SEE PAGE 46)

If we complete the merger, NeoPath shareholders who comply with the
conditions of Section 238.13.026 of the Washington Business Corporation Act and
who do not vote in favor of the merger will be entitled to certain appraisal
rights. Failure to follow the required procedure under Section 238.13.026 on a
timely basis may nullify these rights. Section 238.13.026 of the WBCA is
attached as Annex B to this joint proxy statement/prospectus. We encourage
NeoPath's shareholders to read Annex B in full.

COMPARATIVE PER COMMON STOCK MARKET PRICE INFORMATION (SEE PAGE 14)

Both the AutoCyte common stock and NeoPath common stock are listed on the
Nasdaq National Market. On June 4, 1999, the last full trading day prior to the
public announcement of the proposed merger, AutoCyte common stock closed at
$7.75 and NeoPath common stock closed at $3.938. On September 7, 1999 AutoCyte
common stock closed at $6.50 and NeoPath common stock closed at $4.75.

LISTING OF AUTOCYTE COMMON STOCK (SEE PAGE 47)

AutoCyte will list the common stock to be issued in the merger on the
Nasdaq National Market.

- --------------------------------------------------------------------------------
9
<PAGE> 19

SELECTED HISTORICAL FINANCIAL INFORMATION OF AUTOCYTE

The annual financial information below has been derived from AutoCyte's (or
its predecessor's) audited consolidated financial statements. The data for the
six-month periods ended June 30, 1999 and 1998 have been derived from AutoCyte's
unaudited financial statements. You should read this information along with
AutoCyte's financial statements and notes contained in this joint proxy
statement/prospectus. The interim data reflect all adjustments that, in the
opinion of management of AutoCyte are necessary to present fairly the
information for the interim periods. You should not rely on the results of
operations for the six-month periods to predict the results expected for a full
year or any other interim period.

<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PREDECESSOR
AND
PREDECESSOR(1)
------------------- AUTOCYTE AUTOCYTE
YEARS ENDED AUTOCYTE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
------------------- DECEMBER 31, ------------------- -----------------
1994 1995 1996(2) 1997 1998 1998 1999
-------- -------- ------------ -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $ 3,396 $ 3,396 $ 1,876 $ 2,668 $ 4,770 $ 2,279 $ 2,349
Gross profit (loss)......... 796 982 (1,032) 715 1,787 798 538
Research and development.... 3,605 5,074 4,366 4,462 4,700 2,273 2,286
Selling, general and
administrative............ 8,479 7,895 12,491 6,532 7,458 3,842 3,628
Nonrecurring expenses(3).... -- -- -- -- -- -- 3,481
Operating loss.............. (11,288) (11,987) (17,889) (10,279) (10,370) (5,317) (8,857)
Net loss.................... $(11,288) $(11,987) $(17,846) $(10,985) $ (9,090) $(4,603) $(8,507)
======== ======== ======== ======== ======== ======= =======
Net loss per share (basic
and diluted)(4)........... $ (1.59) $ (0.72) $ (0.36) $ (0.65)
======== ======== ======= =======
Weighted-average shares
outstanding(4)............ 6,903 12,664 12,638 13,163
======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,817
Working capital............................................. 13,227
Total assets................................................ 32,387
Total stockholders' equity.................................. 28,257
</TABLE>

- ---------------
(1) Reflects the operations of the cytology and pathology automation business as
conducted by Roche Image Analysis Systems.

(2) Reflects the operations of the cytology and pathology automation business as
conducted by Roche Image Analysis Systems from January 1, 1996 through
November 21, 1996 and AutoCyte's operations from November 22, 1996 through
December 31, 1996.

(3) Nonrecurring expenses consists of in-process research and development
acquired from Neuromedical Systems, Inc. and expenses associated with the
NeoPath Merger.

(4) See Note 2 of Notes to AutoCyte's Financial Statements for information
concerning the computation of net loss per share and shares used in
computing net loss per share. Net loss per share is not disclosed for
periods prior to November 22, 1996 since Roche Image Analysis Systems
operated as a wholly owned subsidiary of Roche Holding Ltd. prior to the
formation of AutoCyte.

10
<PAGE> 20
- --------------------------------------------------------------------------------

SELECTED HISTORICAL FINANCIAL INFORMATION OF NEOPATH

The annual financial information below has been derived from NeoPath's
audited financial statements. The data for the six-month periods ended June 30,
1999 and 1998 have been derived from NeoPath's unaudited financial statements.
You should read this information along with NeoPath's financial statements and
notes contained in this joint proxy statement/prospectus. The interim data
reflect all adjustments that, in the opinion of management of NeoPath, are
necessary to present fairly the information for the interim periods. You should
not rely on the results of operations for the six-month periods to predict the
results expected for a full year or any other interim period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ -- $ -- $ 3,062 $ 10,824 $ 12,079 $ 7,871 $ 4,965
Gross margin................. -- -- 1,157 6,049 5,368 3,459 2,213
Research and development..... 9,183 9,384 11,202 14,249 11,269 5,957 4,780
Selling, general and
administrative............. 3,320 6,626 11,295 17,746 17,950 9,836 6,190
Write-off of intangible
assets(1).................. -- -- -- -- 3,084 -- --
Net loss..................... (12,324) (14,365) (17,655) (23,597) (26,181) (11,726) (8,618)
Basic and diluted net loss
per share(2)............... -- (1.59) (1.36) (1.66) (1.81) (0.81) (0.51)
Weighted average shares
outstanding(2)............. -- 9,008 13,029 14,197 14,468 14,442 16,804

JUNE 30,
1999
--------
BALANCE SHEET DATA:
Cash, cash equivalents, and securities available-for-sale.................................... $ 9,911
Working capital.............................................................................. 15,488
Total assets................................................................................. 40,696
Long-term obligations, less current portion.................................................. 31
Total shareholders' equity................................................................... 33,891

</TABLE>

- ---------------
The comparability of the above data is affected by NeoPath's initial public
offering completed in February 1995, its follow on public offering completed in
January 1996 and its privite equity transaction completed in February 1999. See
Note 7 of Notes to the Financial Statements of NeoPath.

(1) See Note 4 of Notes to the Financial Statements of NeoPath.

(2) The basis for determining the number of shares used in computing basic and
diluted net loss per share is described in Note 1 of Notes to the Financial
Statements of NeoPath. Basic and diluted net loss per share for 1994 is not
considered meaningful due to changes in NeoPath's capital structure.

- --------------------------------------------------------------------------------
11
<PAGE> 21
- --------------------------------------------------------------------------------
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA

The following selected unaudited pro forma combined condensed financial
data present the combined financial data of AutoCyte and NeoPath, including
their respective subsidiaries, after giving effect to the merger, assuming the
merger had been effective for the periods indicated. The selected unaudited pro
forma combined condensed financial data for the year ended December 31, 1998 and
as of June 30, 1999 and for the six months then ended were derived from, and
should be read in conjunction with, the unaudited pro forma combined balance
sheet and unaudited pro forma combined statements of operations, including the
notes, which are contained in this joint proxy statement/prospectus. You should
read the selected unaudited pro forma combined condensed financial data in
conjunction with the historical financial statements of both AutoCyte and
NeoPath, which are contained in this joint proxy statement/prospectus. We have
presented the selected unaudited pro forma combined condensed financial data for
illustration purposes only in accordance with the assumptions set forth below.
This data does not necessarily show what the operating results or financial
position would have been if the merger had been completed nor does it indicate
future operating results or financial position of the combined enterprise. The
selected unaudited pro forma combined condensed financial data do not include
any adjustments to reflect any adjustments to reflect any cost savings or other
synergies anticipated as a result of the merger.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>

Pro Forma Combined Condensed Statement of Operations Data:
Net sales................................................. $ 16,849 $ 7,315
Gross profit.............................................. 7,155 2,751
Research and development.................................. 15,970 7,066
Selling, general and administrative....................... 25,408 9,323
Nonrecurring expenses..................................... 3,084 3,977
Operating loss............................................ (37,307) (17,615)
Net loss.................................................. $(35,271) $(17,124)
======== ========
Net loss per share (basic & diluted)...................... $ (1.46) $ (0.65)
======== ========
Weighted average shares outstanding....................... 24,098 26,444
======== ========

JUNE 30, 1999
-------------
Pro Forma Combined Balance Sheet Data:
Cash, cash equivalents and securities
available-for-sale..................................... $ 21,728
Working capital........................................... 26,115
Total assets.............................................. 73,083
Total stockholders' equity................................ 59,548

</TABLE>

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12
<PAGE> 22

COMPARATIVE PER SHARE DATA

The following tables present certain unaudited historical per share data of
AutoCyte and NeoPath and the combined per share data on an unaudited pro forma
basis after giving effect to the merger. The table assumes that the merger is
accounted for on a pooling of interests and gives effect to the issuance of
0.7903 shares of AutoCyte common stock in the merger in exchange for each share
of NeoPath common stock. You should read this data in conjunction with the
selected financial data and the unaudited pro forma combined condensed financial
statements contained in this joint proxy statement/prospectus and the separate
historical financial statements of AutoCyte and NeoPath contained in this joint
proxy statement/ prospectus. The pro forma combined financial data does not
necessarily show what the operating results or financial position that would
have been if the merger had been completed as of the beginning of the periods
presented, nor does it indicate the future operating results or financial
position of AutoCyte or NeoPath.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
AUTOCYTE-HISTORICAL
Basic and diluted net loss per share...... $(0.72) $(0.65)
Book value per share at period end........ $ 2.11 $ 1.98
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
NEOPATH-HISTORICAL
Basic and diluted net loss per share...... ($1.81) $(0.51)
Book value per share at period end........ $ 1.95 $ 1.94
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
AUTOCYTE/NEOPATH PRO FORMA COMBINED
Basic and diluted net loss per share...... $(1.46) $(0.65)
Book value per share at period end........ $ 2.08 $ 2.12
</TABLE>

13
<PAGE> 23
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COMPARATIVE MARKET PRICES AND DIVIDENDS

AUTOCYTE

AutoCyte's common stock is quoted on the Nasdaq National Market under the
symbol "ACYT". AutoCyte has never paid cash dividends on its common stock and
does not anticipate paying such dividends in the foreseeable future. AutoCyte
currently intends to retain any future earnings for use in its business. As of
September 8, 1999, there were approximately 121 holders of record of AutoCyte
common stock.

The following table presents the range of high and low trade prices for
AutoCyte's common stock as reported by the Nasdaq National Market for the
periods indicated below since AutoCyte's initial public offering in September
1997.

<TABLE>
<CAPTION>
PRICE RANGE
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Third Quarter (from September 5, 1997)................. $10.125 $ 8.500
Fourth Quarter......................................... $13.125 $ 7.000

YEAR ENDED DECEMBER 31, 1998
First Quarter.......................................... $ 8.375 $ 4.000
Second Quarter......................................... $ 8.250 $ 4.500
Third Quarter.......................................... $ 6.375 $ 2.875
Fourth Quarter......................................... $ 4.438 $ 2.250

YEAR ENDED DECEMBER 31, 1999
First Quarter.......................................... $ 7.750 $ 3.375
Second Quarter......................................... $ 8.250 $ 5.188
Third Quarter (through September 7, 1999).............. $ 7.125 $ 3.500
</TABLE>

NEOPATH

NeoPath's common stock is quoted on the Nasdaq National Market under the
symbol "NPTH". NeoPath has never paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future. As of September 8, 1999, there
were approximately 269 holders of record of NeoPath's common stock.

The following presents the high and low trade prices reported by Nasdaq
National Market for the periods presented below.

<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter........................................... $19.750 $13.500
Second Quarter.......................................... $23.000 $11.500
Third Quarter........................................... $20.000 $15.000
Fourth Quarter.......................................... $20.375 $12.625

YEAR ENDED DECEMBER 31, 1998
First Quarter........................................... $18.188 $11.250
Second Quarter.......................................... $16.000 $ 5.625
Third Quarter........................................... $ 8.625 $ 3.875
Fourth Quarter.......................................... $ 8.750 $ 3.063

YEAR ENDED DECEMBER 31, 1999
First Quarter........................................... $ 7.625 $ 3.000
Second Quarter.......................................... $ 4.875 $ 3.000
Third Quarter (through September 7, 1999)............... $ 6.000 $ 3.000

</TABLE>

- --------------------------------------------------------------------------------
14
<PAGE> 24
- --------------------------------------------------------------------------------

The following table presents the market value of AutoCyte common stock (on
a historical basis) and the market value of NeoPath common stock (on a
historical and equivalent per share basis) as of June 4, 1999, the last business
day before we publicly announced the merger agreement.

<TABLE>
<CAPTION>
EQUIVALENT
PER SHARE
AUTOCYTE NEOPATH VALUE OF
------------------------ ------------------------- NEOPATH
DATE HIGH LOW CLOSING HIGH LOW CLOSING COMMON STOCK
- ---- ------ ----- ------- ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>

June 4, 1999....................... $8.250 $7.375 $7.750 $4.000 $3.875 $3.938 $6.12

</TABLE>

You are encouraged to obtain current market quotations for AutoCyte common
stock and NeoPath common stock.

- --------------------------------------------------------------------------------
15
<PAGE> 25

RISK FACTORS

In addition to the other information included in this joint proxy
statement/prospectus, you should consider the risk factors described below in
deciding how to vote on the merger proposals.

RISKS RELATING TO THE MERGER

IF AUTOCYTE'S STOCK PRICE DECLINES, THE VALUE OF THE MERGER CONSIDERATION TO
NEOPATH'S SHAREHOLDERS WILL DECLINE.

In the merger, NeoPath shareholders will receive 0.7903 shares of AutoCyte
common stock for each share of NeoPath common stock they hold. The exchange
ratio is fixed and will not be adjusted in the event of any increases or
decreases in AutoCyte's or NeoPath's stock prices. The number of shares of
AutoCyte common stock to be issued with the merger will only vary based upon the
number of NeoPath shares outstanding at the closing of the merger and the number
of NeoPath dissenting shareholders. If AutoCyte's stock price declines, the
value of the merger consideration to NeoPath's shareholders will decline.

The price of either AutoCyte common stock or NeoPath common stock at the
effective date of the merger may vary significantly from the price at the date
of this joint proxy statement/prospectus and at the dates of the special
meetings. These price variations may be the result of changes in the business,
operations or prospects of either company, market assessments of the likelihood
that the merger will be consummated, the timing of the merger, regulatory
considerations, general market and economic conditions, factors affecting the
medical device industry in general and other factors. We urge you to obtain
current market quotations for NeoPath common stock and AutoCyte common stock.

AUTOCYTE AND NEOPATH MAY NOT SUCCESSFULLY INTEGRATE OPERATIONS, AND THE
INTEGRATION OF OUR BUSINESSES MAY BE COSTLY.

Integration of our operations may temporarily distract management's
attention from the day-to-day business of the combined company. If we fail to
integrate the companies quickly and efficiently, the combined company's business
and results of operations could be impaired.

The integration of our operations will require us to, among other things:

- Educate the employees of each company about the technologies and programs
of the other company;

- Coordinate or combine research and development efforts;

- Manage relationships with suppliers and customers of each of the
companies; and

- Align the strategic plans of two previously independent management teams.

These integration efforts may be costly. For some period after the merger
is completed, we anticipate that there will be some duplication of functions. In
addition, we may need to pay to relocate people or equipment from one location
to another. If we have underestimated these initial costs of integration, then
our initial results as a combined company will be worse than anticipated.

AUTOCYTE FACES RISKS THAT ARE DIFFERENT FROM THOSE FACED BY NEOPATH, AND THESE
RISKS MAY CAUSE THE VALUE OF AUTOCYTE SHARES ISSUED TO NEOPATH SHAREHOLDERS TO
DECLINE.

Upon completion of the merger, NeoPath shareholders will become AutoCyte
stockholders. AutoCyte's business and strategy are somewhat different from that
of NeoPath, and AutoCyte's results of operations, as well as the price of
AutoCyte common stock, will be affected by various factors different from those
affecting NeoPath's results of operations and the price of NeoPath common stock.
Future events, that may not have affected the price of NeoPath stock, may cause
the price of AutoCyte's stock to fall. See "Forward-Looking Statements" for a
summary of many of the key factors that might affect

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AutoCyte and the price at which the AutoCyte common stock may trade from time to
time. See "Comparative Per Share Data" and "Comparative Dividends and Market
Prices."

RISKS RELATING TO THE COMBINED COMPANIES

AUTOCYTE IS A YOUNG COMPANY THAT HAS NOT YET GENERATED ANY SIGNIFICANT REVENUE
THROUGH THE SALE OF ITS PRODUCTS AND AUTOCYTE MAY NEVER GENERATE ANY
SIGNIFICANT REVENUE FROM THE SALE OF ITS PRODUCTS.

So far, AutoCyte has generated only limited revenues from the sale of its
products. Of AutoCyte's two principal products, only PREP has been approved by
the FDA for sale in the United States for gynecologic purposes. Since AutoCyte
started operations in November 1996, AutoCyte has financed its operations
through the following sources:

- the private placement and public sale of equity securities;

- borrowing; and

- limited sales of its products.

AutoCyte may not be able to successfully achieve all of the elements
necessary for it to become a profitable company. To become a profitable company
and sustain profitability, AutoCyte must:

- successfully market PREP in the United States;

- develop new products;

- manufacture its products profitably and at an acceptable level of
quality; and

- establish appropriate internal financial controls and other
infrastructure necessary to support large-scale business operations.

If AutoCyte fails or runs into difficulties in any of these aspects of its
business, it would harm AutoCyte's future ability to become a profitable
company.

BOTH NEOPATH AND AUTOCYTE HAVE INCURRED SUBSTANTIAL LOSSES SINCE EACH BEGAN
DOING BUSINESS, AND THE COMBINED COMPANY MAY NEVER BE PROFITABLE.

As of June 30, 1999, NeoPath's accumulated deficit was $122.4 million.
NeoPath first began recognizing product revenue in 1996. For 1996, 1997, 1998
and the first six months of 1999, NeoPath incurred cumulative losses of $76.1
million on revenues of $30.9 million. NeoPath's net losses have increased each
year since it began recognizing revenue. NeoPath expects continued losses from
NeoPath's business in 1999 as it continues to market the AutoPap Primary
Screener, continue product development initiatives and perform additional
clinical studies.

As of June 30, 1999, AutoCyte's accumulated deficit was $29.5 million and
AutoCyte expects continued losses from its business through 1999 and into 2000.

Since its inception, AutoCyte also has incurred substantial losses and has
an accumulated deficit. Operating expenses for both companies has been
concentrated in the following areas:

- research and development activities;

- clinical trials;

- preparation and submission of premarket approval applications to the FDA
for their respective products; and

- general administrative functions.

AutoCyte expects that marketing and sales expenses associated with
AutoCyte's products will increase significantly in the future as a result of
recently receiving approval to market PREP, which could contribute to financial
losses for the combined company.

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To become profitable, the combined company must:

- successfully market PREP and AutoPap in the United States and abroad;

- develop and obtain new regulatory approval for new products;

- manufacture its products profitably and at an acceptable level of
quality; and

- establish appropriate internal financial controls and other
infrastructure necessary to support large-scale business operations.

If the combined company fails or runs into difficulties in any of these
aspects of its business, it would harm its future ability to become a profitable
company. We cannot guarantee that the combined company will achieve or sustain
profitability.

THE COMBINED COMPANY'S ABILITY TO SUCCESSFULLY MARKET AND SELL ITS PRODUCTS
DEPENDS ON RECEIVING AND MAINTAINING FDA APPROVAL OF ITS PRODUCTS, AND AUTOCYTE
AND NEOPATH HAVE YET TO OBTAIN FDA APPROVAL FOR THE COMBINED USE OF PREP WITH
AUTOPAP.

The U.S. government extensively regulates the manufacture and sale of
medical diagnostic devices for commercial use. Government agencies in certain
other countries impose similar requirements. The combined company must obtain
FDA approval of its products before it can market and sell them for their
principal intended use in the United States.

Of AutoCyte's two principal products, so far, only PREP has received FDA
approval for its principal intended use. In addition, the FDA has not yet
approved the use of AutoPap to screen PREP slides. If the combined company fails
to obtain and maintain FDA approval for any of its future products, or if FDA
approval is delayed or the combined company receives FDA approval for its
products but labeling restrictions make the use of the products uneconomical to
customers, its future product sales will be far less than we anticipate and may
be insufficient to continue its operations.

In addition, AutoCyte cannot guarantee that it will complete the clinical
study relating to the use of AutoPap to screen PREP slides or that it will
submit any PMA supplement to the FDA. Additionally, if AutoCyte does submit a
PMA supplement to the FDA, the FDA may not accept it for substantive review. In
addition, if it is accepted, it may not be approved by the FDA in a timely
manner, or at all.

To obtain FDA approval for its products, the combined company must submit a
premarket approval application to the FDA. Several factors may limit the
combined company's ability to successfully obtain FDA approval for the sale of
its products, including the following:

- we have only limited experience with the FDA premarket approval
application process;

- the premarket approval application process can be expensive and
time-consuming, frequently lasting three to five years or more;

- both companies have and may continue to encounter unanticipated delays or
significant unanticipated costs in their efforts to secure FDA approval;

- ultimately, we have no assurance that the FDA will ever approve SCREEN or
our future products for their principal intended use; and

- even if we receive approval on the premarket approval applications for
our products, the FDA's approval may still not allow us to make some of
the specific claims for which we sought FDA approval.

In addition to the premarket approval application process, we may face
further difficulties in connection with FDA approval of our products and product
enhancements for the following reasons:

- FDA regulations require submission and approval of a premarket approval
application supplement for certain changes to a product if the changes
affect the safety and effectiveness of the product;

- even if we obtain FDA approval of our premarket approval applications,
that approval may not confer the clinical indications we request;

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- Any FDA approval may include significant limitations on the indicated
uses for which we may market our products, such as warnings, precautions
or contraindications, requests for postmarket studies, or additional
regulatory requirements

- an approved product is still subject to continual review and regulation
by the FDA and other regulatory agencies, so long as the product is being
marketed. During this continual review process, any subsequent discovery
of previously unknown problems with the product or a failure of the
product to comply with any applicable regulatory requirements can result
in, among other things:

- fines;

- the refusal of the FDA to approve further premarket approval
applications;

- suspension or withdrawal of our FDA approvals;

- product recalls;

- operating restrictions, including total or partial suspension of
production, distribution, sales and marketing;

- injunctions;

- civil penalties; or

- product seizures and criminal prosecution of the combined company, its
officers or its employees.

The FDA may not approve future products or commercial enhancements to our
products on a timely basis, if at all. Our regulatory applications also may be
delayed or rejected based on changes in regulatory policies or regulations.

OUR LONG-TERM SUCCESS AS A COMBINED COMPANY DEPENDS IN PART ON MARKET
ACCEPTANCE OF OUR PRINCIPAL PRODUCTS IN PLACE OF BOTH CONVENTIONAL PAP SMEARS
AND COMPETITORS' PRODUCTS, AND WE CANNOT GUARANTEE THAT WE WILL ACHIEVE THIS
MARKET ACCEPTANCE.

The combined company's success and growth depends, in part, on market
acceptance by clinical laboratories, third party payors and health care
providers of our products for their primary intended use in cervical cancer
screening. The market may never widely accept our products. Market acceptance of
our products will depend on the combined company's ability to convince the
market that:

- there are limitations in the conventional Pap smear process of sample
collection, slide preparation and screening; and

- its products are better than the conventional Pap smear process because
they substantially overcome its shortcomings.

The combined company may not be able to convince the market that its
products are cost competitive compared to the conventional Pap smear collection
and screening process. In addition, clinical laboratories, third-party payors,
and health care providers may not accept the combined company's products as a
replacement for the conventional Pap smear collection and screening process.
Even if PREP, AutoPap and other products of the combined company do gain market
acceptance, their level of sales will still largely depend on the availability
and level of reimbursement from third-party payors, such as private insurance
plans, managed care organizations and Medicare and Medicaid.

THE CERVICAL CANCER DIAGNOSTIC MARKET HAS A NUMBER OF COMPANIES THAT POSSESS
SIGNIFICANT COMPETITIVE ADVANTAGES OVER THE COMBINED COMPANY.

The diagnostic market for cervical cancer currently consists of both the
conventional Pap smear procedure and new and developing technology. Some of
these newly-developed technologies have already received FDA approval with
product labeling that says they are significantly more effective than the

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conventional Pap smear for the detection of disease in certain patient
populations. The combined company may not be able to successfully compete
against companies marketing products based on competing technologies.

Many of the combined company's existing and potential competitors have
several competitive advantages over the combined company because they:

- possess greater financial, marketing, sales, distribution and
technological resources;

- have more experience in research and development, clinical trials,
regulatory matters, customer support, manufacturing and marketing; and

- have received third-party payor reimbursement for their products.

These competitors may manufacture, market and sell their products or
services more successfully than us, which could adversely affect our product
sales.

DIRECT COMPETITORS MAY DEVELOP AND MARKET TECHNOLOGIES THAT COMPETE WITH THE
COMBINED COMPANY'S PRODUCTS, AND THESE COMPETING PRODUCTS MAY REDUCE THE
ATTRACTIVENESS OF OUR PRODUCTS OR RENDER OUR PRODUCTS OBSOLETE.

Competition in the medical device industry is intense. Within the
diagnostic market for cervical cancer, the combined company will face direct
competition from companies that manufacture thin-layer slide preparation or
automated screening systems. The combined company's products could be rendered
obsolete or uneconomical because of:

- technological advances by current or future competitors;

- the introduction and market acceptance of competitors' products; or

- the introduction and market acceptance of new detection methods.

The combined company's products must remain competitive in accuracy and
effectiveness, cost, including both charges by us to the laboratory and the
laboratory's labor and overhead costs, convenience, perception among influential
cytopathologists and laboratories, and processing speed and reliability. To
effectively compete, we must keep pace with the rapid product development and
technological change in our industry. Our products must demonstrate accuracy and
cost effectiveness that equals or exceeds conventional preparation and review of
Pap smears and the technology that may be offered by our competitors. We cannot
guarantee that the our products will be competitive in any of these areas.

THE COMBINED COMPANY MAY NEED TO RAISE A LARGE AMOUNT OF CAPITAL IN THE FUTURE
TO SUSTAIN ITS OPERATIONS, AND THE FUNDING THAT IT MAY NEED MIGHT NOT BE
AVAILABLE.

Both NeoPath and AutoCyte have had negative cash flow from operations since
they began doing business, and we expect negative cash flow from both companies'
operations to continue at least through 1999. At June 30, 1999, NeoPath had
about $9.9 million in cash and cash equivalents and AutoCyte had about $11.8
million in cash and cash equivalents, and we estimate that our existing cash and
cash equivalents will meet our capital requirements at least through 1999.

We believe that the combined company will need additional funding to
sustain its operations and cover continuing losses until it is able to sustain
its operations from the sale of its products. We may be unable to obtain
adequate funds, whether obtained through financial markets or from collaborative
or other arrangements with corporate partners or other sources, when we need
them, or we may be unable to find adequate funding on favorable terms, if at
all. If the combined company were unable to fund its future capital
requirements, it would significantly harm its ability to become a profitable
company.

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The size of our future capital requirements depends on several factors,
including:

- the progress and scope of clinical trials;

- the timing and costs of filing future regulatory submissions;

- the timing and costs required to receive both United States and foreign
governmental approvals;

- the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;

- the extent to which our products gain market acceptance;

- the timing and costs of product introductions;

- the extent of our combined ongoing research and development programs;

- the costs of training laboratory personnel to become proficient with the
use of our products; and

- the costs of developing marketing and distribution capabilities and
manufacturing sufficient quantities of our products.

Many of these factors will be out of our control. We cannot guarantee that
the assumptions underlying our estimates about our need for future capital will
prove to be accurate.

THE COMBINED COMPANY'S FUTURE FINANCING ARRANGEMENTS MAY DILUTE THE INTERESTS
OF ITS STOCKHOLDERS OR MAY REQUIRE IT TO RELINQUISH IMPORTANT RIGHTS.

The combined company may choose to raise additional funding to meet its
future capital requirements through a variety of financing methods, including:

- lease arrangements;

- debt or equity financings; or

- strategic alliances.

If the combined company were to raise additional funding through the sale
of equity or securities convertible into equity, the value of the existing
stockholders' shares could be reduced. In addition, if it obtains additional
funds through arrangements with collaborative partners, it may have to
relinquish rights to certain of its technologies or potential products that it
would otherwise seek to develop or commercialize itself.

THE COMBINED COMPANY WILL RELY HEAVILY ON THE DEVELOPMENT AND PROTECTION OF
PROPRIETARY TECHNOLOGY, WHICH MAKES IT VULNERABLE TO THE INHERENT UNCERTAINTIES
INVOLVED IN THE PROCESS OF PATENT APPROVAL AND THE PROTECTION OF PROPRIETARY
TECHNOLOGY.

To protect its proprietary technology, rights and know-how, the combined
company will rely on a combination of:

- patents;

- trade secrets;

- copyrights; and

- confidentiality agreements.

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Together, the combined companies will hold 31 foreign patents, 77 U.S.
patents (issued or allowed), and have 25 additional U.S. patents pending. These
patents will expire in 2012-2018. The combined company's reliance on patents
poses the following risks:

- pending patent applications may not ultimately issue as patents;

- patents we obtain may not be broad enough to protect our proprietary
rights;

- the claims allowed in any of our existing or future patents may not
provide competitive advantages for our products;

- competitors may challenge or circumvent our patents or pending
applications; and

- in certain foreign countries, protection of our patent and other
intellectual property may be unavailable or very limited.

In addition, the large role that patents play in the combined company's
industry may pose the following risks:

- we cannot be sure that our products or technologies do not infringe
patents of competitors that may be granted in the future pursuant to
pending patent applications;

- we cannot be sure that our products do not infringe any existing patents
or proprietary rights of third parties; and

- we cannot be sure that a court would rule that our products do not
infringe any existing third-party patents or would invalidate any
existing patents in our favor.

If a court were to uphold any claims of infringement made by existing
patent holders, the combined company could then be:

- prevented from selling its products;

- required to obtain licenses from the owners of the patents; or

- required to redesign its products.

In the event that a court were to uphold a claim of patent infringement
against the combined company, it may not be able to obtain licenses from the
owners of the patents or be able to successfully redesign its products to avoid
patent infringement. If it were unable to obtain the necessary licenses or
successfully redesign our products, it could seriously harm the combined
company's ability to become profitable.

In addition, our confidentiality agreements with employees and other
parties may not protect the confidentiality of our trade secrets and proprietary
information or provide meaningful protection for our confidential information.
Moreover, our competitors could independently develop our trade secrets or
proprietary information.

THE SUCCESSFUL SALE OF THE COMBINED COMPANY'S PRODUCTS DEPENDS ON WHETHER
THIRD-PARTY PAYORS WILL ADEQUATELY REIMBURSE THEIR CUSTOMERS FOR THE USE OF
ITS PRODUCTS, AND THIRD-PARTY PAYORS MAY PROVIDE LITTLE IF ANY REIMBURSEMENT
FOR THE USE OF ITS PRODUCTS.

Our ability to successfully sell our products for cervical cancer screening
in the United States and other countries depends on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. Virtually all of our revenues will
be dependent on customers who rely on third party reimbursement. Third-party
healthcare payors in the United States are increasingly sensitive to containing
healthcare costs and heavily scrutinize new technology as a primary factor in
increased healthcare costs. Third-party payors may influence the pricing or
perceived attractiveness of our products and services by regulating the maximum
amount of reimbursement they provide or by not providing any reimbursement.
Medical community or third-party

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healthcare payors may deny or delay acceptance of our products or may provide
reimbursement at levels that are inadequate to support adoption of our
technologies.

If these payors do not reimburse for our preparation and screening
products, or provide reimbursement significantly below the amount laboratories
charge patients to perform screening with our products, our potential market and
revenues will be significantly limited. Use of our products may never become
widely reimbursed, and the level of reimbursement we obtain may never be
sufficient to permit us to generate substantial revenue.

Convincing third-party payors to provide reimbursement is a costly and time
consuming process for the following reasons:

- reimbursement approval is required from each payor individually; and

- obtaining this approval from the third-party payor will require us to
provide scientific and clinical data to support the use of our products
to each payor separately.

Ultimately, whether a third-party payor is willing to provide reimbursement
for the use of our products at a level that can allow us to succeed will depend
on several unpredictable factors, including:

- the level of demand for our products by physicians;

- the payor's determination that our products are an improvement over the
conventional Pap smear process; and

- the payor's determination that our products are safe and effective,
medically necessary, appropriate for specific patient populations, and
cost effective.

We will likely face particular difficulties convincing third-party payors
that our products are cost effective because the up-front, direct costs of using
our products will initially be greater than the cost of the conventional Pap
smear. As a result, we need to convince third-party payors that the use of our
products will result in a net overall cost savings to the health care system
because our products will allow earlier detection of cervical cancer and thus
reduce the number of biopsies and colposcopies that need to be performed. We may
not be able to successfully convince third-party payors that our products will
prove cost effective in the long run.

THE COMBINED COMPANY WILL NEED TO INCREASE ITS MARKETING AND SALES CAPABILITIES
AND IT MAY NOT BE ABLE TO DO THIS SUCCESSFULLY THUS LIMITING THE COMBINED
COMPANY'S REVENUES.

Both AutoCyte and NeoPath currently have a limited marketing and sales
force. To effectively market its products, the combined company may need to
substantially increase its direct sales force. Even if we increase the size of
our direct sales force, our present or future sales force may not be able to
successfully promote our products to clinical laboratories, health care
providers or third-party payors. In addition, we must educate health care
providers and third-party payors regarding the clinical benefits and
cost-effectiveness of our products because of the market's limited awareness of
our products. We may not be able to recruit and retain skilled marketing, sales,
service or support personnel to help us achieve these goals. Even if we were
able to recruit and retain skilled marketing, sales, service or support
personnel, they may not be successful.

Our marketing success in the United States and abroad will depend on
whether we can:

- obtain required regulatory approvals;

- successfully demonstrate the cost-effectiveness and
clinical-effectiveness of our combined products;

- further develop our direct sales capabilities; and

- continue to establish arrangements with contract sales organizations,
distributors and marketing partners.

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If we cannot successfully expand our marketing and sales capabilities in
the United States and in international markets, we may never become a profitable
company.

WE FACE RISKS INHERENT IN INTERNATIONAL TRANSACTIONS THAT COULD SERIOUSLY
UNDERMINE OUR INTERNATIONAL SALES.

Both AutoCyte and NeoPath currently sell their products in the global
market, and as a combined company, we intend to substantially expand our
international sales in the future. We may never be able to successfully expand
our international sales capabilities.

Even if we can establish significant international sales capabilities, we
may not succeed in obtaining reimbursement or regulatory approvals required in
foreign countries. In addition, our international sales and operations could be
limited or disrupted by any of the following:

- the imposition of government controls;

- export license requirements;

- political instability;

- trade restrictions;

- changes in tariffs;

- difficulties in staffing and managing international operations;

- changes in applicable laws;

- less favorable intellectual property laws;

- longer payment cycles;

- difficulties in collecting accounts receivable;

- fluctuations in currency exchange rates and potential adverse tax
consequences; and

- the inability to obtain any necessary foreign regulatory approvals for
its products in a timely manner.

Ultimately, we may never be able to successfully sell our present or future
products in any foreign market in volumes sufficient to justify our efforts.

THERE WILL BE A LIMITED NUMBER OF CUSTOMERS FOR THE COMBINED COMPANY'S
PRODUCTS.

A significant portion of our product sales will be concentrated among a
small number of large clinical laboratories. Moreover, due to consolidation in
the clinical laboratory industry, we expect that the number of potential
domestic customers for our products will decrease. These factors increase our
dependence on sales to the largest clinical laboratories and the bargaining
power of those potential customers. Our market research indicates that over 30%
of all U.S. Pap smears are processed by the two largest laboratories. Each of
these companies operates multiple laboratory facilities nationwide.

The combined company will have to make this small number of potential
customers aware of its products and then convince them to accept its products.
To gain acceptance of its products within this small customer base, the combined
company will have to successfully demonstrate the benefits of its products over
the conventional Pap smear process and other alternative methods of sample
collection, slide preparation and cervical cancer screening. In addition, to
generate demand for its products among these clinical laboratories, we believe
that the combined company must:

- educate doctors and health care providers on, and convince them of, the
clinical benefits and cost-effectiveness of its products; and

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<PAGE> 34

- demonstrate to doctors and health care providers that adequate levels of
third-party payor reimbursement will be available for its products.

Ultimately, the combined company may not be able to successfully sell its
products to large clinical laboratories. Even if the combined company does
successfully sell its products to large clinical laboratories, those sales may
not generate enough revenue to make it a profitable company.

THE COMBINED COMPANY PLANS TO MANUFACTURE AUTOCYTE'S PRODUCTS, BUT AUTOCYTE HAS
LIMITED MANUFACTURING EXPERIENCE AND CAPACITY.

The combined company intends to manufacture AutoCyte's products at its
Burlington facility. Currently AutoCyte has limited manufacturing experience and
capabilities.

We expect that the combined company may need to substantially increase its
manufacturing capabilities and acquire or rent additional manufacturing
facilities. We may not be able to recruit and retain skilled manufacturing
personnel to establish sufficient manufacturing capability and capacity. Even if
we do establish sufficient manufacturing capability and capacity, we still may
be unable to manufacture our products:

- in a timely manner;

- at a cost or in quantities necessary to make our products commercially
viable;

- in conformance with Quality System requirements; or

- in a manner which otherwise insures the quality of our products.

If we cannot successfully increase our manufacturing capability and
capacity, or successfully contract with third parties to manufacture our
products, the combined company may never be profitable.

THE COMBINED COMPANY MAY BE UNABLE TO ATTAIN OR MAINTAIN REQUIRED COMPLIANCE
WITH REGULATIONS GOVERNING MANUFACTURING OF MEDICAL DIAGNOSTIC DEVICES, AND OUR
FAILURE TO DO SO COULD PREVENT US FROM SELLING OUR PRODUCTS.

Manufacturers of medical diagnostic devices face strict federal regulations
regarding the quality of manufacturing. For example, the FDA periodically
inspects the manufacturing facilities of diagnostic device manufacturers to
determine compliance with regulations. Our current and future manufacturing and
design operations must comply with these and all other applicable regulations,
including regulations imposed by other governments. If we fail to comply with
quality systems regulations we could face civil or criminal penalties or
enforcement proceedings. These proceedings may require us to recall a product or
to stop placing our products in service or selling our products. Similar results
could occur if we violate equivalent foreign regulations. We may not be able to
attain or maintain compliance with quality systems requirements. Any failure to
comply with the applicable manufacturing regulations would have a material
adverse effect on our business.

BOTH AUTOCYTE AND NEOPATH DEPEND ON SINGLE AND LIMITED SOURCE SUPPLIERS FOR
CERTAIN COMPONENTS IN THEIR PRODUCTS.

AutoCyte currently obtains certain components of PREP and SCREEN on a
single source basis from certain suppliers. If AutoCyte were unable to
successfully obtain sufficient quantities of components on a cost-competitive
and timely basis from these single and limited source suppliers, AutoCyte would
not be able to manufacture its products in a cost effective or timely manner. If
AutoCyte cannot manufacture its products in a cost effective or timely manner,
it would harm the combined company's ability to become a profitable company.

If any of the components of PREP and SCREEN were no longer available in the
marketplace, the combined company could be forced to further develop its
technology to incorporate alternate components. The combined company also may
try to establish relationships with additional suppliers or vendors for

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components for its products, so long as it is not prohibited from doing so by
any existing contractual obligations. The combined company may not be able to
further develop its technology to incorporate new components or establish
relationships with additional suppliers or vendors for the necessary components
of PREP and SCREEN.

NeoPath purchases all components for the AutoPap System from outside
vendors. A major component of the AutoPap System, the slide tray motion system,
is supplied by a sole-source vendor, Applied Precision, Inc. In addition,
AutoPap System optics are purchased sole-source from Nikon Corporation, and
video cameras are purchased sole-source from Sony Electronics, Inc. Certain
other components are currently purchased from single-source vendors. Components
provided by additional or replacement suppliers would require some modification
to be used in the AutoPap System. The combined company would be unable to
quickly establish additional or replacement sources of supply for many AutoPap
System components. If one of NeoPath's vendors were to become unable to supply
acceptable components in a timely manner and in the quantity required it may
delay or halt our manufacturing process. Any delay or cessation of manufacturing
could adversely affect our combined business.

The use of any new components or replacement components from alternative
suppliers into either of our products may require us to submit premarket
approval application supplements to the FDA. We would then need FDA approval on
any premarket approval application supplements we have filed before we could
market its products with new or replacement components.

Ultimately, the combined company may not be able to successfully develop,
obtain, or incorporate replacement components into its products. Even if it were
able to successfully incorporate new components into its products, the FDA may
not approve these new components quickly, if at all.

FUTURE PRODUCT LIABILITY CLAIMS MAY STRAIN OUR FINANCIAL RESOURCES AND HARM OUR
BUSINESS REPUTATION.

The commercial screening of Pap smears has generated significant
malpractice litigation. As a result, the combined company faces product
liability, errors and omissions or other claims if our products are alleged to
have caused a false-negative diagnosis. Although we have product liability
insurance, it could become increasingly difficult for us to obtain and maintain
reasonable product liability coverage. Our product liability coverage could be
limited to amounts less than we desire. Substantial increases in insurance
premium costs often make coverage economically impractical. We may not be able
to obtain adequate product liability insurance at a reasonable cost. Thus,
product liability claims may strain our financial resources and harm our
business reputation.

INTENSE COMPETITION FOR THE SERVICES OF OUR KEY PERSONNEL COULD CAUSE THEM TO
LEAVE THE COMBINED COMPANY.

The combined company will depend heavily on the principal members of its
management and scientific staff. The loss of their services might impede
achievement of our strategic objectives or research and development. Our success
depends on our ability to retain key employees and to attract additional
qualified employees, which may be particularly difficult to do following the
merger. Competition for highly skilled scientific and management personnel is
intense, particularly in the geographic areas in which the companies currently
are located, and these resources are scarce relative to the needs of a growing
high technology business sector. The failure to recruit such personnel or the
loss of existing personnel could adversely affect our business.

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FORWARD-LOOKING STATEMENTS

This joint proxy statement/prospectus, and the documents which are
incorporated by reference (see "Where You Can Find More Information"), include
various forward-looking statements about AutoCyte, NeoPath and the combined
company that are subject to risks and uncertainties. Forward-looking statements
include the information concerning future financial performance, business
strategy, projected costs and plans and objectives of AutoCyte, NeoPath and the
combined company presented under "Questions and Answers About the Merger,"
"Summary," "Background of the Merger," "AutoCyte's Reasons for the Merger;
Recommendation of the AutoCyte Board," "Opinion of Warburg Dillon Read,"
"NeoPath's Reasons for the Merger; Recommendation of the NeoPath Board,"
"Opinion of Credit Suisse First Boston Corporation," and those preceded by,
followed by or that otherwise include the words "believes," "expects,"
"anticipates," "intends," "estimates" or similar expressions.

AutoCyte and NeoPath participate in an industry that is characterized by
rapidly evolving technology and intense competition. You should understand that
the following important factors, in addition to those discussed elsewhere in
this joint proxy statement/prospectus and the documents which are incorporated
by reference could affect the future results of AutoCyte, NeoPath and the
combined company and could cause actual results to differ materially from those
expressed in forward-looking statements contained or incorporated by reference
in this joint proxy statement/prospectus:

- The effect of the merger and AutoCyte's other strategic initiatives on
earnings and cash flow.

- The successful integration of the Companies' operations and research and
development programs.

- The uncertainty regarding pre-clinical and clinical trials of new
products.

- Uncertainties regarding new product development.

- Regulatory approval for commercial sale of products.

- Obtaining U.S. and foreign patent protection for products.

- Ability to secure adequate reimbursement from third party payors, such as
government health administration authorities, private health insurers and
other organizations.

- Risk of product liability claims.

- A significant delay in the expected completion of the merger.

Most of these factors are difficult to accurately predict and are generally
beyond the control of AutoCyte and NeoPath.

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MEETINGS, VOTING AND PROXIES

We are providing this joint proxy statement/prospectus to AutoCyte
stockholders in connection with the solicitation of proxies by the AutoCyte
board of directors for use at the special meeting of the AutoCyte stockholders.
We are also providing it to NeoPath's shareholders in connection with the
solicitation of proxies by the NeoPath board of directors for use at the special
meeting of the NeoPath shareholders. AutoCyte and NeoPath anticipate that
mailing of proxy materials to stockholders entitled to notice of and to vote at
the special meetings will begin on or about September 10, 1999.

THE AUTOCYTE SPECIAL MEETING

GENERAL. The purpose of the AutoCyte special meeting is to consider and
vote upon a proposal to approve the issuance of shares of AutoCyte common stock
pursuant to the Agreement and Plan of Merger dated June 4, 1999, providing for
the merger of a subsidiary of AutoCyte with and into NeoPath and amendments to
AutoCyte's restated certificate of incorporation to increase the authorized
shares of common stock from 20,650,000 shares to 49,000,000 shares and to change
AutoCyte's name from "AutoCyte, Inc." to "TriPath Imaging, Inc." Other matters
may be presented for consideration, but the AutoCyte board does not know, as of
the date of mailing of this joint proxy statement/prospectus, of any other
business to be brought before the AutoCyte special meeting. The enclosed proxy
card authorizes the proxy holders to vote shares represented by the proxy on all
other matters that may properly come before the AutoCyte special meeting, and
any adjournment or postponement of the special meeting. The proxy holders intend
to vote the shares in accordance with their best judgment.

The AutoCyte board, by a unanimous vote, has approved the stock issuance
and the amendments to the AutoCyte restated certificate of incorporation and
recommends that AutoCyte stockholders vote FOR the stock issuance and the
amendments to the restated certificate of incorporation.

DATE, PLACE AND TIME; RECORD DATE. The AutoCyte special meeting is
scheduled to be held on September 30, 1999 at 10:00 a.m. at the Courtyard by
Marriott, 3141 Wilson Drive, Burlington, North Carolina. AutoCycle stockholders
of record at the close of business on September 8, 1999 will receive notice of
and may vote at the AutoCyte special meeting.

VOTING RIGHTS. On September 8, 1999, approximately 14,292,942 shares of
AutoCyte common stock were issued and outstanding. Each share of AutoCyte common
stock outstanding has one vote for each matter properly submitted at the
AutoCyte special meeting. Under the rules of the National Association of
Securities Dealers, the affirmative vote of a majority of the votes cast at the
AutoCyte special meeting is required to approve the stock issuance. Under
Delaware law, the affirmative vote of the holders of a majority of the
outstanding stock of AutoCyte is required to approve the amendments to
AutoCyte's restated certificate of incorporation increasing the authorized
common stock of AutoCyte and changing the name of AutoCyte.

A majority of the outstanding AutoCyte shares entitled to vote must be
present, in person or by proxy, for there to be a quorum for the transaction of
business at the AutoCyte special meeting. Abstentions and broker non-votes will
be considered present for the purposes of establishing a quorum. Without
specific instructions from the beneficial owner, brokers and nominees do not
have the power to vote on behalf of the owner on the stock issuance or the
proposal to increase the authorized common stock and change AutoCyte's name. As
a result, abstentions and broker non-votes will not effect the outcome of voting
on the stock issuance matter but will have the effect of a vote against the
proposal to increase the authorized common stock. "Broker non-votes" are proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
as to a matter with respect to which brokers or nominees do not have
discretionary power to vote.

As of the AutoCyte record date, directors and executive officers of
AutoCyte and their affiliates beneficially owned a total of 7,053,248 shares of
AutoCyte common stock or 49% of the outstanding shares of AutoCyte common stock.
Directors and executive officers of AutoCyte that own or control approximately
45% of the outstanding shares of AutoCyte have agreed to vote their shares of
AutoCyte common stock in favor of the merger proposal and the proposal to
increase the authorized common stock.

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VOTING AND REVOCATION OF PROXIES. The proxy holders will vote the shares
of AutoCyte common stock represented by a proxy properly signed and received at
or before the AutoCyte special meeting, unless later revoked, in accordance with
the stockholder's instructions.

IF YOU SIGN AND RETURN A PROXY WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, YOUR SHARES OF AUTOCYTE COMMON STOCK WILL BE VOTED IN
FAVOR OF THE STOCK ISSUANCE AND THE RESTATED CERTIFICATE OF
INCORPORATION AMENDMENT.

AutoCyte proxy holders may in their discretion vote shares voted in favor
of the stock issuance and the proposal to increase the authorized common stock
to adjourn the AutoCyte special meeting to solicit additional proxies in favor
of these proposals. AutoCyte stockholders may revoke any proxy at any time
before the proxy is voted by the filing of an instrument revoking it or filing a
properly executed proxy bearing a later date with the Secretary of AutoCyte,
before or at the AutoCyte special meeting, or by voting in person at the
AutoCyte special meeting. All written notices of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: AutoCyte, Inc., 780 Plantation Drive, Burlington, North Carolina 27215,
Attention: President. Attendance at the AutoCyte special meeting will not by
itself constitute revocation of a proxy.

AutoCyte may adjourn the AutoCyte special meeting to another date and/or
place for any proper purpose, including, without limitation, for the purpose of
soliciting additional proxies.

SOLICITATION OF PROXIES. In addition to solicitation by mail, directors,
officers and employees of AutoCyte may solicit proxies from the AutoCyte
stockholders, personally or by telephone, telecopy or telegram or other forms of
communication. Officers, directors and employees of AutoCyte will not be
specifically compensated for these services. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners AutoCyte will reimburse them for their reasonable
expenses in doing so.

THE NEOPATH SPECIAL MEETING

GENERAL. NeoPath has called its special meeting so that its shareholders
may consider and vote on a proposal to approve the merger agreement, and any
other matters properly presented at the meeting. As of the date of mailing of
this joint proxy statement/prospectus, the NeoPath board was not aware of any
other business to be brought before the NeoPath special meeting. The enclosed
proxy card authorizes the proxy holder to vote shares represented by the proxy
on all other matters that may properly come before the NeoPath special meeting,
and any adjournment or postponement of the meeting. The proxy holders intend to
vote on these matters in their best judgment.

The NeoPath board, by a unanimous vote, has approved the merger agreement
and recommends that NeoPath shareholders vote FOR approval of the merger
agreement.

DATE, PLACE AND TIME; RECORD DATE. NeoPath will hold its special meeting
on September 30, 1999 at 10:00 a.m. at NeoPath's offices at 8271 154th Avenue
NE, Redmond, Washington. NeoPath shareholders of record at the close of business
on September 8, 1999 will receive notice of and may vote at the NeoPath special
meeting.

VOTING RIGHTS. On the record date NeoPath had approximately 17,448,802
shares of common stock issued and outstanding. Each share of NeoPath common
stock outstanding has one vote on each matter presented at the NeoPath special
meeting. A majority of the outstanding NeoPath shares must approve the merger at
the NeoPath special meeting.

A majority of the outstanding NeoPath shares must be present, in person or
by proxy, for there to be a quorum for the transaction of business. Abstentions
and broker non-votes will be considered present for the purpose of establishing
a quorum. Without specific instructions from the beneficial owner, however,
brokers and nominees do not have the power to vote the owner's shares on the
merger proposal. Abstentions and broker non-votes will have the effect of a vote
against the merger. "Broker non-votes" are proxies from brokers or nominees
indicating that they have not received instructions from the beneficial owners
or matters for which they do not have discretionary power to vote.

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As of the NeoPath record date, directors and executive officers of NeoPath
and their affiliates beneficially owned a total of 557,569 shares of NeoPath
common stock, or approximately 3.2% percent of NeoPath's outstanding shares.
They have agreed to vote in favor of approval of the merger.

VOTING AND REVOCATION OF PROXIES. The proxy holders will vote shares of
NeoPath common stock represented by a proxy properly signed and received at or
before the NeoPath special meeting, unless later revoked, in accordance with the
shareholder's instructions.

IF YOU SIGN AND RETURN A PROXY WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, YOUR SHARES OF NEOPATH COMMON STOCK WILL BE VOTED FOR
APPROVAL OF THE MERGER AGREEMENT.

NeoPath proxy holders may in their discretion vote to adjourn the NeoPath
special meeting to solicit additional proxies in favor of this proposal. Neopath
shareholders may revoke their proxy at any time before the vote by filing an
instrument revoking it or filing a later-dated proxy with the President of
NeoPath, or by voting in person at the NeoPath special meeting. You may direct
all written notices of revocation and other communications about revocation of
proxies to NeoPath, Inc., 8271 154th Avenue NE, Redmond, Washington 98052,
Attention: President. Attending the NeoPath special meeting will not by itself
constitute a revocation of a proxy.

The NeoPath special meeting may be adjourned to another date and/or place
for any proper purpose, including solicitation of additional proxies.

SOLICITATION OF PROXIES. In addition to solicitation by mail, directors,
officers and employees of NeoPath may solicit proxies from Neopath shareholders,
personally or by telephone, telecopy or telegram or other forms of
communication. They will not be specifically compensated for such services.
NeoPath will request brokerage houses, nominees, fiduciaries and other
custodians to forward soliciting materials to beneficial owners and will
reimburse them for their reasonable expenses in doing so.

THE MERGER

GENERAL DESCRIPTION OF THE MERGER

A wholly-owned subsidiary of AutoCyte will merge with and into NeoPath in
accordance with the laws of the States of Washington and Delaware. NeoPath will
then be a wholly-owned subsidiary of AutoCyte and will continue to be a
Washington corporation. At the time of the merger, NeoPath's Articles of
Incorporation and Bylaws, as in effect immediately before the merger, will
become the Articles of Incorporation and Bylaws of the surviving company.

BACKGROUND OF THE MERGER

On February 2, 1999 at a regularly scheduled board meeting, the AutoCyte
board of directors discussed the desirability of combining with either or both
of NeoPath and Neuromedical Systems, Inc. The decision was made to pursue a
combination with either or both of these companies.

During the first week in February 1999, Dr. Richard Charpie, a director of
AutoCyte, contacted William Scott, a director of NeoPath, to discuss the level
of interest in a possible combination of the two companies. Their discussion
expanded to consider the effect of including Neuromedical Systems, Inc. in a
three party combination. Following this conversation, Dr. Charpie called Dr.
Paul Sohmer of Neuromedical, who indicated an interest in further discussions.
During the week of February 8, 1999, executives of the companies continued to
discuss the business advantages of combining the companies.

On February 15, 1999, Dr. James B. Powell, Ernest A. Knesel, Dr. Robert
Curry and Eric W. Linsley, executives of AutoCyte, Dr. Alan C. Nelson and Robert
C. Bateman, executives of NeoPath, and Dr. Paul Sohmer and Mark Smith,
executives of Neuromedical, met in New York to further discuss the business
rationale for a possible combination of the three companies. On February 15,
1999, the three companies also executed a mutual confidentiality agreement.

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<PAGE> 40

On February 18, 1999, Mr. Scott, Dr. Charpie and Patrick Hurst, of Houlihan
Lokey Howard & Zuckin, Neuromedical's financial advisor, discussed in general
various structures and transaction terms of a possible business combination.

During the week of February 15, 1999, the NeoPath board of directors held
two meetings to discuss these matters and to authorize the management to retain
Credit Suisse First Boston Corporation as financial advisor. On February 19,
1999, NeoPath and Credit Suisse First Boston Corporation entered into a formal
engagement letter which was subsequently amended on June 4, 1999.

On March 1, 1999, executives of the three companies, together with their
legal and financial advisers, participated in a conference telephone call to
discuss possible terms of a business combination transaction, including methods
of determining the relative ownership positions in a combined company,
alternative structures, accounting and tax treatment, composition of management
and board of directors of the combined company and conditions that needed to be
satisfied prior to completion.

On March 5, 1999 Messrs. Nelson and Charpie continued discussing with Mr.
Hurst alternative structures related to Neuromedical. These discussions
continued during the following week, when NeoPath advised AutoCyte and
Neuromedical that it was no longer interested in continuing discussion of a
three party transaction.

AutoCyte continued discussions and negotiations exclusively with
Neuromedical. Based on these discussions, the AutoCyte management and board of
directors concluded that it was desirable to pursue an acquisition of the
Neuromedical intellectual property on a stand alone basis without the
involvement of NeoPath. AutoCyte's management and board of directors believed
that the acquisition of Neuromedical's intellectual property would allow the
company to offer a broader range of interactive methods for cytology screening,
including interactive methods for primary and adjunctive screening of both
conventional Pap smears and thin-layer preparations, as opposed to AutoCyte's
internal technology for screening only thin-layer preparations. Management and
the board also believed that the acquisition of Neuromedical's intellectual
property would reduce the risk of future patent infringement litigation costs.
On March 25, 1999, AutoCyte entered into an agreement with Neuromedical to
purchase all of its intellectual property, subject to certain conditions,
including the condition that Neuromedical file for federal bankruptcy protection
and that the transaction be approved by the applicable bankruptcy court. On
March 26, 1999, AutoCyte publicly announced the execution of the agreement.

On March 25, 1999, Dr. Charpie telephoned Messrs. Nelson and Scott to
advise them of the agreement with Neuromedical and proposed that discussions
between NeoPath and AutoCyte regarding a business combination of the two
companies resume. Specifically, Dr. Charpie also proposed NeoPath purchase an
undivided interest in Neuromedical intellectual property. On March 25 and 26,
1999, in a series of telephone conferences, Messrs. Nelson and Scott discussed
with Messrs. Charpie and Powell various terms of transactions regarding the
Neuromedical intellectual property and a possible business combination.

On March 29, 1999, the NeoPath board of directors, at a previously
scheduled meeting, discussed the principal elements of both proposed
transactions and authorized management and Mr. Scott to continue negotiations
and conferences with AutoCyte.

On April 6, 1999, Messrs. Nelson and Scott from NeoPath and Messrs. Charpie
and Powell from AutoCyte, together with certain legal and financial advisers,
met in Chicago to discuss the further development of the terms of a possible
business combination, including the basis on which the merger consideration
calculation would be based, the composition of the management and board of
directors of the combined company and the location of the corporate
headquarters. These individuals also considered a more definitive schedule for
the exchange of relevant business and financial information.

Executives of AutoCyte and NeoPath, together with their legal advisers,
continued to negotiate the terms of the transaction relating to the Neuromedical
intellectual property. On April 22, 1999, the NeoPath board of directors
approved the transaction. On April 24, 1999, AutoCyte and NeoPath entered into
an Intellectual Property Agreement setting forth the terms of NeoPath's
acquisition of an undivided
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interest in the Neuromedical intellectual property and termination of
outstanding litigation between NeoPath and Neuromedical. The agreement is
described under "Relationships Between AutoCyte and NeoPath."

On April 26 and 27, 1999, Dr. Nelson met with Dr. Charpie and Dr. Powell to
discuss various proposed terms of the transaction, including management issues
and the calculation of the merger consideration. Mr. Scott also participated in
telephone conference calls during this period. On April 28, 1999, the NeoPath
board of directors met by telephone conference to discuss the status of the
transaction. On April 26, 1999, AutoCyte's legal advisers delivered an initial
draft of the proposed merger agreement and related documents.

On April 28 and 29, 1999, Mr. Scott had several telephone conferences with
representatives of AutoCyte to discuss differences over various proposed terms
of the transaction, including selection of management, corporate governance,
location of headquarters, methods of determining an appropriate exchange ratio
and possible conditions to completion of the transaction. Messrs. Scott and
Charpie spoke by telephone on May 4, 1999 regarding these issues. Also on May 4,
1999, the NeoPath board of directors met to discuss the status of negotiation
and differences between the parties over various terms. After discussion, the
Board authorized Mr. Scott to continue negotiations in accordance with the
board's discussion. Mr. Scott and Mr. Charpie discussed outstanding issues later
on May 4, 1999 and reached agreement on the exchange ratio and determined to
proceed with scheduled due diligence.

On May 6 and 7, 1999, representatives of AutoCyte, together with their
financial and legal advisers, met near NeoPath's headquarters to conduct due
diligence concerning NeoPath's business, operations and financial affairs. On
May 11, 1999, the AutoCyte board of directors held a meeting attended by
AutoCyte's senior management and a representative of AutoCyte's legal counsel,
Palmer & Dodge LLP. The board discussed the proposed transaction and the board
authorized management to complete negotiations of remaining issues. On May 24
and 25, 1999, representatives of NeoPath, together with their financial and
legal advisers, met near the AutoCyte headquarters to conduct due diligence
concerning AutoCyte's business, operations and financial affairs. During this
period, representatives of each company and their legal, accounting and
financial advisers continued to negotiate the detailed terms of the merger
agreement and to analyze the tax and accounting issues involved.

On June 1, 1999, the NeoPath board of directors held a meeting in Chicago,
attended by members of NeoPath's senior management and representatives of Credit
Suisse First Boston Corporation and NeoPath's legal counsel, Perkins Coie.
Counsel described to the NeoPath board of directors the fiduciary duties
applicable to directors considering a strategic business combination and
summarized the terms of the proposed merger agreement and related documents and
the status of ongoing negotiations. Representatives of Credit Suisse First
Boston Corporation described, on a preliminary basis, its financial analysis
with respect to the possible business combination with AutoCyte. The board
discussed the proposed transaction and other alternatives available to NeoPath.
At the conclusion of the meeting, the board authorized management to complete
negotiations of any remaining issues on the basis of the board discussion.

On June 4, 1999, the NeoPath board of directors held a meeting by telephone
conference, attended by senior management and representatives of Credit Suisse
First Boston Corporation and Perkins Coie. Counsel summarized the results of
final negotiations and reviewed the final terms of the merger agreement and
related documents, including the final exchange ratio and the calculations on
which it was based. Representatives of Credit Suisse First Boston Corporation
reviewed its financial analysis and delivered its opinion to the effect that, as
of June 4, 1999 and based on and subject to the matters set forth in the
opinion, the exchange ratio was fair, from a financial point of view, to the
NeoPath shareholders. Following discussion, the NeoPath board of directors
concluded that the merger was fair to and in the best interest of NeoPath, and
the directors approved the merger agreement and the related documents.

On June 4, 1999, the AutoCyte board of directors held a meeting by
conference telephone, attended by senior management and a representative of
Palmer & Dodge. Dr. Powell summarized the background of the merger and the
reasons for the merger. Counsel summarized the final terms of the merger
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agreement and related documents, including the final exchange ratio and the
calculations on which it was based. Members of management also discussed Warburg
Dillon Read's preliminary fairness opinion and noted that, as of that date and
subject to certain assumptions, limitations and qualifications received by
management, Warburg Dillon Read expressed the opinion that the proposed exchange
ratio is fair to AutoCyte from a financial point of view. Following discussion,
the AutoCyte board of directors concluded that the merger was fair to and in the
best interests of AutoCyte and the directors approved the merger agreement and
the related documents, subject to receipt of a final fairness opinion from
Warburg Dillon Read. Later on June 4, Warburg Dillon Read reviewed its financial
analysis and delivered its oral opinion, later confirmed in writing and subject
to the limitations, qualifications and assumptions contained in the writing, to
the effect that, as of June 4, 1999, the exchange ratio was fair, from a
financial point of view, to AutoCyte.

NeoPath and AutoCyte executed the merger agreement as of Friday, June 4,
1999. On the morning of Monday, June 7, 1999, prior to the commencement of
trading, NeoPath and AutoCyte issued a joint press release announcing the
execution of the merger agreement.

AUTOCYTE'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE AUTOCYTE BOARD

In the course of reaching its decision to approve the merger agreement, the
AutoCyte board of directors consulted with AutoCyte's legal, accounting and
financial advisors as well as with AutoCyte management. In reaching its decision
to proceed with the merger, AutoCyte considered the following positive factors:

- the belief that the AutoCyte PREP System(TM) for liquid-based, thin-layer
Pap smear preparations and the NeoPath AutoPap(R) Primary Screening
System providing automated screening of Pap smears will provide the
combined company with a comprehensive, cost-effective and competitive
offering to clinical laboratories and others engaged in the large-scale
processing of Pap smears;

- the benefits of gaining immediate access to the AutoPap Primary Screening
System, an FDA-approved primary screening device for conventional Pap
smears;

- the belief that the combined companies should have greater critical mass
and enhanced prospects for success in this dynamic and competitive market
place, thereby increasing shareholder value;

- the belief that the combined company should offer greater liquidity to
investors;

- the belief that additional revenues should be generated from cross
selling opportunities;

- the benefits of cost reduction opportunities, primarily in research and
development, and general and administrative functions;

- the economic benefits of joint resource utilization in selling and
seeking reimbursement for our products;

- the benefits of a broad patent estate in automated image analysis;

- the terms and conditions of the proposed merger; and

- the opinion of Warburg Dillon Read, that as of the date thereof, and
based upon the assumptions made, matters considered and limits of review
set forth in such opinion, the exchange ratio was fair from a financial
point of view to AutoCyte.

AutoCyte management also considered a number of potentially negative
factors in its deliberations concerning the merger, including:

- the risk that the advantages of the merger listed above might not be
realized;

- the risk that AutoCyte and NeoPath might not be able to operate
successfully as a combined company due to potentially large difficulties
in integrating the two companies;

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- the fact that AutoCyte stockholder ownership would be diluted as a result
of the merger;

- the risk that the FDA might never approve a PMA supplement for using
AutoPap with PREP, and that even with approval, labeling restrictions
might make the use of the combined products uneconomical to customers;

- the risk that the merger could be challenged by the federal trade
commission;

- the risk that there might never be adequate reimbursement for automated
screening; and

- the risk that additional financing might not be available for the
combined company.

In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the merger, the AutoCyte board of
directors did not find it practicable to and did not quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the AutoCyte board of
directors may have given different weight to different factors.

After evaluating these factors and risks, the AutoCyte board of directors
unanimously concluded that the NeoPath merger should provide a significant
financial benefit to AutoCyte stockholders. The board of directors concluded
that the terms of the merger are fair to, and in the best interests of, AutoCyte
stockholders. Accordingly, the AutoCyte board of directors recommends that the
AutoCyte stockholders vote for the issuance of the shares of AutoCyte's common
stock pursuant to the merger agreement.

OPINION OF WARBURG DILLON READ LLC

The board of directors of AutoCyte retained Warburg Dillon Read to provide
an opinion as to the financial fairness from a financial point of view in
connection with the merger. Warburg Dillon Read has delivered its written
opinion, dated June 4, 1999, to the board of directors of AutoCyte, to the
effect that, and based upon and subject to the limitations, assumptions,
qualifications set forth therein, as of the date thereof, the exchange ratio is
fair to AutoCyte from a financial point of view. The full text of Warburg Dillon
Read's opinion dated June 4, 1999, which sets forth a description of the
assumptions made, general procedures followed, matters considered and
limitations on the review undertaken, is set out in Annex C and is incorporated
herein by reference. Holders of AutoCyte common stock are urged to read the
opinion carefully in its entirety, especially with regard to the assumptions
made and matters considered by Warburg Dillon Read. The summary of opinion set
forth herein is qualified in its entirety by reference to the full text of such
opinion.

In arriving at its opinion, Warburg Dillon Read, among other things: (i)
reviewed certain publicly available business and historical financial
information relating to AutoCyte and NeoPath, (ii) reviewed certain internal
financial information and other data relating to the business and financial
prospects of AutoCyte, including estimates and financial forecasts prepared by
management of AutoCyte, that were provided to Warburg Dillon Read by AutoCyte
and not publicly available, (iii) reviewed certain internal financial
information and other data relating to the business and financial prospects of
NeoPath, including estimates and financial forecasts prepared by management of
AutoCyte, that were provided to AutoCyte by the management of AutoCyte and
NeoPath and not publicly available, (iv) conducted discussions with members of
the senior managements of AutoCyte and NeoPath, (v) reviewed publicly available
financial and stock market data with respect to certain other companies in lines
of business Warburg Dillon Read believes to be generally comparable to those of
AutoCyte and NeoPath, (vi) compared the financial terms of the merger with the
publicly available financial terms of certain other transactions which it
believed to be generally relevant, (vii) considered certain pro forma effects of
the merger on AutoCyte's financial statements, (viii) reviewed drafts of the
merger agreement, and (ix) conducted such other financial studies, analyses, and
investigations, and considered such other information as it deemed necessary or
appropriate, but none of which was individually material. Warburg Dillon Read's
opinion was necessarily based upon economic, monetary, market and other
conditions as in effect on, and the information made available to Warburg Dillon
Read, as of the date thereof.

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In connection with its review, Warburg Dillon Read, with AutoCyte's
consent, did not assume any responsibility for independent verification of any
of the foregoing information and, with AutoCyte's consent, relied on such
information as being complete and accurate in all material respects. In
addition, with AutoCyte's consent, Warburg Dillon Read did not make or receive
any evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of AutoCyte or NeoPath nor was Warburg Dillon Read furnished with
such appraisal or evaluations. With respect to the financial forecasts,
estimates, pro forma effects and estimates of merger savings, Warburg Dillon
Read assumed, at AutoCyte's direction, that the AutoCyte and NeoPath financial
forecasts, estimates, pro forma information and estimates of merger savings or
synergies provided to or otherwise reviewed by or discussed by it had been
prepared reasonably on a basis reflecting the best currently available estimates
and judgments of the respective managements as to the future financial
performance of their respective companies and would be realized in the amounts
and at the times contemplated thereby. With respect to the business and
financial information relating to NeoPath pro forma for the merger, Warburg
Dillon Read did not, with AutoCyte's consent, hold any independent discussion
with NeoPath's management as to any specific aspect of the information provided
to Warburg Dillon Read.

Warburg Dillon Read's opinion does not address AutoCyte's underlying
business decision to effect the merger. In rendering its opinion, Warburg Dillon
Read did not render any opinion as to the value of NeoPath or make any
recommendation to the holders of NeoPath common stock with respect to the
advisability of disposing of or retaining AutoCyte common stock received in the
merger. In addition, Warburg Dillon Read did not make any recommendation
regarding whether or not it is advisable for holders of AutoCyte common stock to
vote in favor of the merger.

For the purposes of the opinion, with the consent of AutoCyte, Warburg
Dillon Read assumed that the representations and warranties of each party
contained in the merger agreement were true and accurate, that each party
thereto would perform all of the covenants and agreements required to be
performed by it under the merger agreement and that all conditions to the
consummation of the merger would be satisfied without waiver thereof. AutoCyte
did not place any limitations upon Warburg Dillon Read regarding the procedures
to be followed or the factors to be considered in rendering its opinion.

In arriving at its opinion, Warburg Dillon Read did not assign any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments based on its experience in rendering such opinions and on
then existing economic, monetary and market conditions as to the significance
and relevance of each analysis and factor. Accordingly, Warburg Dillon Read
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, Warburg
Dillon Read made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond AutoCyte's or NeoPath's control. Any estimates contained in Warburg
Dillon Read's analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of a business or securities do not purport to be appraisals or to reflect the
actual prices at which businesses or securities might be sold.

Warburg Dillon Read is an internationally recognized investment banking
firm which, as a part of its investment banking business, regularly is engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the past, Warburg Dillon
Read and its predecessors have provided investment banking services to AutoCyte
and have received customary compensation for the rendering of such services. In
the ordinary course of business, Warburg Dillon Read, its predecessors and
affiliates, may have traded the securities of AutoCyte and NeoPath for their own
accounts and, accordingly, may at any time hold a long or short position in such
securities.

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Pursuant to the engagement letter between AutoCyte and Warburg Dillon Read,
AutoCyte has paid to Warburg Dillon Read a fee of $400,000 for the rendering of
its opinion. AutoCyte has also reimbursed Warburg Dillon Read for the expenses
incurred by it in connection with its engagement (including reasonable counsel
fees) and has agreed to indemnify Warburg Dillon Read and its officers,
directors, employees, agents and controlling persons against certain expenses,
losses, claims, damages or liabilities in connection with its services,
including those arising under the federal securities laws.

ANALYSES RELATED TO AUTOCYTE

In connection with rendering its opinion, Warburg Dillon Read employed a
variety of evaluation methods. The material valuation methods are summarized
below.

ANALYSIS OF SELECTED COMPARATIVE COMPANIES. Using publicly available
information, Warburg Dillon Read analyzed, based upon market trading values,
selected financial criteria of companies which, in Warburg Dillon Read's
judgment, were generally comparable to AutoCyte and NeoPath for the purpose of
this analysis. The companies selected as comparative companies were as follows:
Cytyc Corporation, Digene Corporation, Selfcare, Inc., Abaxis, Inc., Optical
Sensors Incorporated and Diametrics Medical, Inc. The analysis considered, among
other things, (i) stock price as a multiple of estimated calendar 1999 and 2000
earnings per share ("EPS") based on industry sources; (ii) derived an
"enterprise value" (defined as equity market value plus the book value of debt
and preferred stock less cash and cash equivalents) and (iii) calculated
enterprise value as multiple of latest twelve months ("LTM") revenue, LTM gross
profit and LTM earnings before interest, taxes, depreciation and amortization
("EBITDA").

The median equity value as a multiple of each of the indicated statistics
for each of the AutoCyte Comparative Companies was as follows: estimated 1999
EPS and 2000 EPS of (5.8x) and 16.0x, respectively compared to equity value
multiples of (9.1x) and (18.8x) and (4.5x) and (11.0x) respectively, for
AutoCyte and NeoPath, respectively using stock prices of $7.00 for AutoCyte and
$3.94 for NeoPath. The median enterprise value as a multiple of each of the
indicated statistics for each AutoCyte comparative companies was as follows: LTM
revenue of 3.57x, LTM gross profit of 8.9x and LTM EBITDA of (10.3x), compared
to enterprise value multiples of 16.27x, 48.5x and (8.8x) for AutoCyte using a
stock price of $7.00 for AutoCyte and enterprise value multiples of 6.67x, 14.9x
and (4.1x) for NeoPath using a stock price of $3.94 for NeoPath.

No company, transaction or business used in the analysis described under
"Analysis of Selected Comparative Companies" is identical to AutoCyte.
Accordingly, an analysis of the results thereof necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors which could effect the transaction or the
public trading or other values of the company or companies to which they are
being compared. Mathematical analysis (such as determining the average or
median) is not in itself a meaningful method of using comparable acquisition or
comparable company data.

CONTRIBUTION ANALYSIS. Warburg Dillon Read analyzed the relative
contribution of revenues, EBITDA, earnings before interest and taxes ("EBIT")
and net income from AutoCyte and NeoPath for each company's estimated 1999
statistics, which resulted in AutoCyte's contribution of 51.3% of revenues. In
Warburg Dillon Read's judgment, the other contribution statistics were not
meaningful as both companies were projected to have EBITDA, EBIT and net income
losses in 1999. Based on the Exchange Ratio, the holders of AutoCyte common
stock will have pro forma equity ownership of 52.1%.

DISCOUNTED CASH FLOW ANALYSIS. Warburg Dillon Read performed discounted
cash flow analyses based a stand alone projection provided by AutoCyte's
management and a pro forma for the merger with NeoPath also provided by
AutoCyte's management. Utilizing these projections, Warburg Dillon Read
calculated the theoretical discounted present value of equity for AutoCyte by
adding together the present value of (i) the future stream of cash flow through
the year ended December 31, 2003, (ii) the future value of AutoCyte at the end
of the year ended December 31, 2004, and (iii) the projected net debt as of
December 31, 1999. The terminal value was calculated based on terminal EBITDA
multiples of 10.0x to 14.0x. The cash flow streams and terminal values were then
discounted to present values using a range of
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discount rates from 30% to 45%. These assumptions yielded per share equity
values of $6.22 to $7.83 under the AutoCyte stand-alone projections, and $7.83
to $9.87 under the pro forma merger projections.

HISTORICAL EXCHANGE RATIO ANALYSIS. Warburg Dillon Read prepared one day
and 30 day average exchange ratio analyses for AutoCyte and NeoPath for the time
period beginning June 2, 1998 and ending June 2, 1999. The maximum exchange
ratio was 2.79 and 1.99 for the daily and monthly exchange ratios, respectively.
The minimum exchange ratio was 0.47 and 0.56 for the daily and monthly exchange
ratios, respectively, and the median was 1.32 and 1.35 for the daily and monthly
exchange ratios, respectively.

PRO FORMA MERGER ANALYSIS. Warburg Dillon Read examined the impact of the
merger on AutoCyte's net income per share by preparing a pro forma analysis of
the impact of the Merger using the projections provided by the managements of
AutoCyte and NeoPath for the December 31, 1999, 2000, 2001, 2002, 2003 and 2004.
Assuming that the projections estimated by AutoCyte and NeoPath managements were
achieved, the impact on AutoCyte's pro forma earnings per share was mildly
dilutive in the year ending December 31, 1999 and accretive in the years ending
December 31, 2000, 2001, 2002, 2003 and 2004.

NEOPATH'S REASONS FOR THE MERGER; RECOMMENDATION OF THE NEOPATH BOARD

In reaching its decision to approve the merger agreement and the merger and
to recommend approval of the merger agreement by NeoPath shareholders, the
NeoPath board of directors consulted with its management team and advisors and
independently considered the proposed merger agreement and the transactions
contemplated by the merger agreement. The following discussion of the factors
considered by the NeoPath board of directors in making its decision is not
intended to be exhaustive but includes all material factors considered by the
NeoPath board of directors.

The NeoPath board of directors considered the following factors as reasons
that the merger will be beneficial to NeoPath and its shareholders:

- the belief that the AutoCyte PREP System(TM) for liquid based collection
and preparation of cervical specimens and the NeoPath AutoPap(R) Primary
Screening System for automated screening of cervical specimens are
compatible products and will provide the combined company with a
comprehensive, cost effective and competitive offering to clinical
laboratories and others engaged in the large scale processing of Pap
smears for cervical cancer detection;

- the possible cost reductions that can be obtained by the combined company
by synergistic administrative, marketing and sales, regulatory and
product development personnel and facilities presently supported by both
organizations;

- the belief that the combination of NeoPath's product and AutoCyte's
product, with additional research and product development, will provide
an even more cost effective solution for laboratories and others
processing large volumes of Pap smears;

- the belief that parties that provide financial resources for such testing
through cost reimbursement would be more receptive to offer increased
payments for the combined products;

- the belief that, through a tax-free reorganization, the opportunity to
own stock of the combined company would provide the shareholders with
greater future liquidity and a better possibility of return on
shareholder investment; and

- the belief that the combined intellectual property (including
Neuromedical's) creates a highly competitive foundation.

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In the course of its deliberations, the NeoPath board of directors reviewed
with NeoPath management a number of other factors relevant to the merger. In
particular, the NeoPath board of directors considered, among other things:

- information relating to the business, assets, management, competitive
position, operating performance, trading performance and prospects of
each of NeoPath and AutoCyte, including the prospects of NeoPath if it
were to continue as an independent company;

- the current and historical market prices of the NeoPath common stock and
the AutoCyte common stock (including the fact that the closing prices of
NeoPath common stock and AutoCyte common stock on June 4, 1999 were
$3.938 and $7.75, respectively);

- the financial presentation by Credit Suisse First Boston Corporation,
including its opinion described under "Opinion of Credit Suisse First
Boston Corporation" on page 39 to the effect that, as of the date of such
opinion and based on and subject to the matters set forth in the opinion,
the exchange ratio was fair, from a financial point of view, to the
shareholders of NeoPath;

- the possibility of strategic alternatives to the merger for enhancing
long-term shareholder value;

- the impact of the merger on NeoPath's and AutoCyte's customers, suppliers
and employees;

- the likelihood that the merger would be completed, the terms of the
merger agreement, including balanced representation and warranties,
conditions to closing and rights on termination and provisions permitting
the NeoPath board of directors to terminate the merger agreement in
response to a third party proposal which the NeoPath board of directors
determines in its good faith judgment to be more favorable to NeoPath
shareholders than the merger; and

- the expected qualification of the merger as a reorganization under
Section 368(a) of the Internal Revenue Code.

The NeoPath board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including:

- the risk that the operations of AutoCyte and NeoPath might not be
successfully integrated;

- a recognition that the AutoCyte and NeoPath common stock are thinly
traded and have not received significant recognition and support in the
public trading market and that combining the companies may not change
this market performance;

- the risk that, despite the efforts of AutoCyte and NeoPath after the
merger, key personnel might leave the combined company;

- the difficulty of managing operations in the different geographic
locations in which NeoPath and AutoCyte operate and will continue to
operate;

- the risk that the potential benefits of the merger might not be fully
realized;

- the risk that the merger could be challenged by the federal trade
commission; and

- the risk that the combined company may not have sufficient capital
resources to achieve profitability.

The NeoPath board of directors believed that certain of these risks were
unlikely to occur, that NeoPath could avoid or mitigate others, and that,
overall, these risks were outweighed by the potential benefits of the merger.

In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the merger, the NeoPath board of
directors did not find it practicable to and did not quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the NeoPath board of directors
may have given different weight to different factors.

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After careful consideration, the NeoPath board of directors has unanimously
determined that the terms of the merger agreement and the merger are fair to,
and in the best interests of, NeoPath and its shareholders and has unanimously
approved the merger agreement and the merger. The NeoPath board of directors
unanimously recommends that the shareholders of NeoPath vote "for" the approval
of the merger agreement.

OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION

NeoPath retained Credit Suisse First Boston Corporation to act as its
financial advisor in connection with the merger. CSFB was selected by NeoPath
based upon CSFB's experience, expertise and familiarity with NeoPath and its
businesses. On June 4, 1999 CSFB delivered to the board of directors of NeoPath
its written opinion that, based upon and subject to the factors and assumptions
set forth in the fairness opinion, as of the date of the opinion, the exchange
ratio of 0.790 was fair from a financial point of view to the holders of NeoPath
common stock (other than AutoCyte and its subsidiaries). NeoPath determined the
exchange ratio following arm's-length negotiations with AutoCyte and determined
that the exchange ratio was fair to and in the best interest of its
shareholders. These determinations were based on many factors, including those
discussed under the heading "NeoPath's Reasons for the Merger; Recommendation of
the NeoPath Board" and including the opinion of CSFB that the exchange ratio was
fair to the shareholders from a financial point of view.

The summary of the CSFB opinion described in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the CSFB opinion. The opinion explains the procedures followed, assumptions
and qualifications made, matters considered and limitations on the review
undertaken by CSFB. The full text of the CSFB opinion, which has been used in
this joint proxy statement/prospectus with the consent of CSFB, is attached as
Annex D to this joint proxy statement/prospectus and is incorporated in this
summary by reference. Shareholders of NeoPath are urged to read the CSFB opinion
carefully in its entirety. The CSFB opinion was provided to the NeoPath board of
directors for its information in connection with its consideration of the merger
and is not a recommendation to any shareholder on how to vote on the proposed
merger.

In preparing the CSFB opinion, CSFB performed a variety of financial and
comparative analyses, including those described below. The following summary of
CSFB's analyses is not a complete description of the analyses underlying the
CSFB opinion or the presentation made by CSFB to the NeoPath board of directors.
The preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and therefore, it is inherently difficult to summarily describe
the fairness opinion. As a result, CSFB believes that its analyses must be
considered as a whole and that selecting portions of its analyses without
considering all analyses would create an incomplete view of the process
underlying its analyses and its opinion.

In performing its analyses, CSFB made numerous assumptions with respect to
NeoPath and AutoCyte, industry performance, regulatory, general business,
economic, market, and financial conditions and other matters, many of which are
beyond the control of NeoPath or AutoCyte. No company, transaction or business
used in those analyses as a comparison is identical to NeoPath, AutoCyte or the
proposed merger, nor is an evaluation of the results of the analyses entirely
mathematical; rather, the evaluation of the results of the analyses involve
complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. Any estimates contained in the analyses performed by CSFB do not
necessarily indicate actual values or future results, which may be significantly
more or less favorable than suggested by the analyses. Additionally, estimates
of the value of businesses or securities are not appraisals and do not reflect
the prices at which those businesses or securities might actually be sold.
Accordingly, the analyses and estimates described above are inherently subject
to substantial uncertainly. In addition, the CSFB opinion and CSFB's
presentation to the NeoPath board were among several factors taken into
consideration by the NeoPath board in making its determination to approve the
merger. Consequently, the CSFB analyses described below should not be
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viewed as, and were not, determinative of the opinion of the NeoPath board or
NeoPath management with respect to the exchange ratio or the proposed merger.

In arriving at its opinion, CSFB reviewed certain publicly available
business and financial information relating to NeoPath and AutoCyte, as well as
the merger agreement. CSFB also reviewed certain other information relating to
NeoPath and AutoCyte, including financial forecasts, provided to CSFB by NeoPath
and AutoCyte, and met with NeoPath's and AutoCyte's managements to discuss the
business and prospects of NeoPath and AutoCyte.

CSFB also considered certain financial and stock market data of NeoPath and
AutoCyte, and compared that data with similar data for other publicly held
companies in businesses similar to NeoPath and AutoCyte and considered the
financial terms of certain other business combinations and other transactions
which have recently been effected. CSFB also had discussions with managements of
NeoPath and AutoCyte concerning the business, operational and strategic benefits
and implications of the merger, and the synergistic values and operating cost
savings expected to be achieved through the combination of the operations of
NeoPath and AutoCyte. CSFB also considered other information, financial studies,
analyses and investigations and financial, economic and market criteria which it
deemed relevant.

In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information described above and relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, CSFB assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of NeoPath's and
AutoCyte's managements as to the future financial performance of NeoPath and
AutoCyte. In addition, CSFB was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of NeoPath or AutoCyte, nor was it furnished with any evaluations or
appraisals. The CSFB opinion is necessarily based on financial, economic, market
and other conditions as they existed and could be evaluated on the date the
opinion was given. CSFB did not express any opinion as to the actual value of
the AutoCyte common stock when issued to NeoPath shareholders pursuant to the
merger or the prices at which the AutoCyte common stock will trade subsequent to
the merger. CSFB was not requested to, and did not, solicit third-party
indications of interest in acquiring all or any part of NeoPath. CSFB assumed
that the merger will be treated as a pooling of interests in accordance with
generally accepted accounting principles and as a tax-free "plan of
reorganization" pursuant to Section 368 of the Internal Revenue Code of 1986, as
amended.

The following is a summary of the analyses performed by CSFB in connection
with the preparation of the CSFB opinion. The summary of the analyses includes
information presented in tabular format. In order to fully understand the
analyses, the tables should be read together with the text of each summary.
Consideration of the tables alone without the full narrative description of the
analyses, including the underlying assumptions, would create a misleading or
incomplete view of the process underlying, and conclusions presented by, the
CSFB opinion.

In preparing its valuation of each of NeoPath and AutoCyte, CSFB conducted
several financial analyses for each company. Given the inherent difficulties in
assigning multiples for a company that is not yet profitable and whose peers are
often not profitable (and may not be profitable in the near future) but which
expects significant revenue growth over the next few years from increased market
penetration or new product introductions, CSFB placed greater emphasis on the
discounted cash flow analyses and less emphasis on the other valuation analyses.
While certain of the valuation analyses are described in greater detail below,
in arriving at its opinion, CSFB assigned greater significance to those analyses
and factors which in its judgment were more relevant and appropriate for
companies and transactions of this type.

NEOPATH DISCOUNTED CASH FLOW ANALYSES. CSFB performed discounted cash flow
analyses for fiscal years 1999 to 2008 to estimate the present value of the
stand-alone unlevered free cash flows that NeoPath is expected to generate if
NeoPath performs in accordance with scenarios based on financial forecasts
discussed below. For purposes of these analyses, unlevered free cash flows were
defined as unlevered net income plus deprecation plus amortization less capital
expenditures less investment in working capital.

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CSFB performed analyses based on three scenarios:

- a NeoPath management base case provided to CSFB by NeoPath management,
reflecting baseline assumptions primarily related to revenue growth,
pricing trends and gross margins;

- a NeoPath management upside case provided to CSFB by NeoPath management,
reflecting more aggressive assumptions primarily related to accelerated
revenue growth, more favorable pricing trends and higher gross margins;
and

- a CSFB downside case, a more conservative version of the NeoPath
management base case, reflecting less aggressive assumptions primarily
related to slower revenue growth, less favorable pricing trends and lower
gross margins.

Ranges of estimated terminal values were calculated using terminal value
multiples of unlevered net income of 14.0x to 16.0x and earnings before
interest, taxes, depreciation and amortization ("EBITDA") of 7.0x to 8.0x. This
range is based on prospective growth in outer years and on the performance of
similar companies determined through a comparable company analysis.

For all of the cases, the unlevered free cash flow streams were then
discounted using a discount rate of 24% to 26%. The discount rates applied in
this case reflect commercial risk premium and small size premium. The following
presents the implied equity values per diluted share for NeoPath based on the
NeoPath discounted cash flow analyses.

Implied NeoPath Equity Value Range Per Diluted
Share.............................................. $3.24-$9.82

AUTOCYTE DISCOUNTED CASH FLOW ANALYSES. CSFB performed discounted cash
flow analyses for fiscal years 1999 to 2008 to estimate the present value of the
stand-alone unlevered free cash flows that AutoCyte is expected to generate if
AutoCyte performs in accordance with scenarios based on financial forecasts
discussed below. CSFB performed a valuation of AutoCyte because holders of
NeoPath common stock will be receiving AutoCyte common stock in the merger. For
purposes of this analysis, unlevered free cash flows were defined as unlevered
net income plus depreciation plus amortization less capital expenditures less
investment in working capital.

CSFB performed its analyses based on projections and CSFB's due diligence
review with AutoCyte management for three separate business scenarios:

- an AutoCyte management case based on projections provided to CSFB by
AutoCyte management, reflecting aggressive assumptions primarily relating
to increased product placements and test volume, favorable pricing
trends, increased gross margins, and FDA approval of PREP in the second
quarter of 1999 and of SCREEN by the second quarter of 2001;

- a CSFB base case, a more conservative scenario than the AutoCyte
management case, reflecting baseline assumptions made by CSFB primarily
relating to product placements, test volume, pricing trends, gross
margins, and FDA approval of PREP in the second quarter of 1999 and of
SCREEN by the first quarter of 2002; and

- a CSFB downside case, a more conservative version of the CSFB base case,
reflecting assumptions made by CSFB primarily relating to relatively
slower increases in product placements and test volume, less favorable
pricing trends, lower gross margins and FDA approval of PREP in the
second quarter of 1999 and of SCREEN by the second quarter of 2001.

For all three scenarios, the unlevered free cash flow streams were then
discounted using a discount rate of 24% to 26%. As with the discount rate used
in the NeoPath analysis, the discount rates applied in this case reflect
commercial risk premium and small size premium. As with the NeoPath analysis,
terminal value multiples of unlevered net income and EBITDA of 14.0x to 16.0x
and 7.0x to 8.0x, respectively, were assumed. The following presents the implied
equity values per diluted share for AutoCyte based on the AutoCyte discounted
cash flow analyses.

Implied AutoCyte Equity Value Per Diluted Share... $3.81-$12.06

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NEOPATH COMPARABLE COMPANIES ANALYSIS. Using publicly available
information, CSFB compared selected financial, operating and stock market data
for NeoPath to corresponding data of seven comparable diagnostic and pathology
laboratory automation companies, including:

- ChromaVision Medical Systems Inc.

- Digene Corp.

- Ventana Medical Systems, Inc.

- AutoCyte, Inc.

- Cytyc Corp.

- I-Stat Corp.

- Biosite Diagnostics Inc.

CSFB noted that its discounted cash flow analysis was a more appropriate
valuation technique for NeoPath than the comparable companies analysis given the
inherent difficulty in assigning multiples to NeoPath and its peer group since
many of those companies are not yet profitable. Given that NeoPath does not have
very meaningful historical multiples and because NeoPath is projected to reach
profitability in 2000, CSFB believed that the best parameters from which to
value NeoPath versus comparable companies were projected revenue and net income
multiples for the year 2000. The following presents the valuation range for
NeoPath common stock based on the NeoPath comparable companies analysis.

Valuation Range Per Share of NeoPath Common
Stock.............................................. $3.81-$5.53

AUTOCYTE COMPARABLE COMPANIES ANALYSIS. Using publicly available
information, CSFB compared selected financial, operating and stock market data
for AutoCyte to corresponding data of the same comparable companies as were used
in the NeoPath analysis. Due to AutoCyte's lack of projected profitability prior
to 2001, CSFB believed that the best parameter from which to value AutoCyte
versus comparable companies is a projected revenue multiple for the year 2000.
The following presents the valuation range for AutoCyte common stock based on
the AutoCyte comparable companies analysis.

Valuation Range Per Shares of AutoCyte Common
Stock.............................................. $5.13-$7.77

COMPARABLE ACQUISITIONS ANALYSIS. CSFB reviewed twelve transactions in the
diagnostics sector from May 1994 through January 1999 to determine the relative
prices paid in comparable transactions. CSFB compared purchase prices in the
selected transactions as multiples of revenue and earnings before interest and
taxes ("EBIT") for the 12 month periods preceding each of these transactions.
CSFB then applied a range of multiples for the selected transactions to (1)
financial data of NeoPath, utilizing the NeoPath management base case estimates
of revenue and EBIT in 2000, and (2) financial data of AutoCyte, utilizing the
CSFB base case estimate of revenue in 2000. These amounts were then discounted
back 1.75 years in order to derive an approximation of their present values.
This comparable acquisitions analysis provided a valuation range per share of
NeoPath common stock of $3.53 to $4.96 and a valuation range per share of
AutoCyte common stock of $2.82 to $3.81. However, CSFB did not rely on the
comparable acquisitions analysis in arriving at valuations of NeoPath and
AutoCyte because neither company currently has meaningful historical multiples
upon which to base such a comparison. In addition, CSFB believed that the
historical operating statistics of each of NeoPath and AutoCyte do not provide
an accurate reflection of each company's potential over the next few years.
Furthermore, many of the selected transactions in the diagnostics sector have
been of significantly larger companies with much more mature businesses and
therefore CSFB did not believe the transactions to be truly "comparable" to the
merger.

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MERGER CONSEQUENCES ANALYSIS. CSFB analyzed the merger consequences based
on the following key assumptions:

- pooling-of-interests accounting treatment for the merger;

- an exchange ratio of 0.790x based on AutoCyte's 20-day trailing average
closing bid price as of June 3, 1999;

- use of the NeoPath management base case projections for NeoPath and the
CSFB base case projections for AutoCyte with the base synergies case; and

- limitations on the use of NeoPath's NOLs to the extent the combined
company generates earnings in future periods but no limitations on the
use of AutoCyte's NOLs.

CSFB determined that, based on the above assumptions, the proposed merger
would be

- accretive to AutoCyte's stand-alone earnings per share for each of the
years 2000, 2001, and 2002; and

- dilutive to NeoPath's stand-alone earnings per share for the year 2000,
slightly accretive for the year 2001, and dilutive for the year 2002;

The actual results achieved by the combined company may vary from projected
results and the variations may be material.

NEOPATH/AUTOCYTE SYNERGIES VALUATION. CSFB also separately valued the
potential synergies resulting from the merger. Projections were made based in
part on discussions with managements of NeoPath and AutoCyte for three separate
scenarios reflecting varying assumptions relating to the synergistic effects of
the merger on revenues, pricing and operating expenses.

The synergy cash flow streams were then discounted using a discount rate of
approximately 10% and assumed a perpetuity growth of 2%. The following presents
the implied equity values of the synergies per diluted share of NeoPath common
stock based on the discounted cash flow analyses of potential synergies
resulting from the merger.

Implied Equity Value of Synergies Per Diluted NeoPath
Share.............................................. $0.76-$3.31

EXCHANGE RATIO ANALYSIS. CSFB also conducted the following relative
analyses and compared the exchange ratio in the merger, based on AutoCyte's
20-day trailing average closing bid price as of June 3, 1999, of 0.790x with the
exchange ratios implied by an historical stock trading exchange ratio analysis
and a relative contribution exchange ratio analysis.

- Historical Stock Trading Exchange Ratio Analysis: CSFB performed an
exchange ratio analysis comparing the average daily closing prices for
NeoPath and AutoCyte during one-month, three-month, six-month and
one-year periods preceding June 3, 1999. This analysis indicated exchange
ratios ranging from 0.580x to 1.227x.

- Relative Contribution Exchange Ratio Analysis: Based on the AutoCyte
management case and the CSFB base case projections for AutoCyte, CSFB
performed an exchange ratio analysis comparing the relative contributions
of NeoPath (using each of the NeoPath management base case, NeoPath
management upside case, and the CSFB downside case for NeoPath) and
AutoCyte to the estimated revenue and earnings before interest and tax
("EBIT") of the combined company in the years ending 2000 and 2003. This
analysis yielded implied exchange ratios ranging from 0.254x to 1.249x.

In an engagement letter dated February 19, 1999, as amended as of June 4,
1999, between CSFB and NeoPath, NeoPath agreed to pay CSFB, upon the
consummation of the merger, a transaction fee equal to $1.5 million, plus 2.25%
of the amount of total consideration between $100 million and $200 million, plus
3.0% of the amount of total consideration in excess of $200 million. In
addition, NeoPath agreed to pay a financial advisory fee of $50,000 payable on
or before May 1, 1999, with such amount fully credited

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against the transaction fee discussed above. For delivery of its fairness
opinion on June 4, 1999, CSFB is entitled to receive a fee of $350,000, which
became payable upon delivery of its opinion, with such amount fully credited
against any transaction fee discussed above. It is currently estimated that the
aggregate financial advisory fee payable to CSFB in connection with the merger
will be approximately $1.5 million. NeoPath also has agreed to reimburse CSFB
for out-of-pocket expenses incurred by CSFB in performing its services,
including fees and expenses of legal counsel and any other advisor retained by
CSFB, and to indemnify CSFB and certain related persons and entities against
certain liabilities, including certain liabilities under the federal securities
laws, arising out of CSFB's engagement. The fees associated with CSFB's
engagement were determined through arm's-length negotiations between NeoPath and
CSFB. In the past, CSFB has performed investment banking services for NeoPath
and has received customary fees for such past services.

In the ordinary course of its business, CSFB and its affiliates may
actively trade the equity securities of both NeoPath and AutoCyte for its and
its affiliates' own accounts and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.

ACCOUNTING TREATMENT

The merger will be accounted for by AutoCyte using the pooling of interests
method of accounting for a business combination. Under this method of accounting
the historical recorded assets and liabilities of AutoCyte and NeoPath will be
carried forward to the combined company at their recorded amounts, the operating
results of the combined company will include the operating results of AutoCyte
and NeoPath for the entire fiscal year in which the combination occurs and the
historical reported operating results of the separate companies for prior
periods will be combined and restated as the operating results of the combined
company.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

The income tax discussion below is based on the opinions of Perkins Coie
LLP, counsel to NeoPath, and of Palmer & Dodge, counsel to AutoCyte, and
summarizes the material United States federal income tax consequences of the
merger for a NeoPath shareholder. The opinions of counsel are included as
exhibits 8.1 and 8.2 to the registration statement of which this joint proxy
statement/prospectus forms a part. This discussion is not a comprehensive
description of all of the tax consequences that may be relevant to any given
shareholder. For example, we have not described tax consequences that arise from
rules that apply generally to all taxpayers or to some classes of taxpayers. We
have also not described tax consequences that are generally assumed to be known
by investors.

This discussion, and counsels' opinions, are based upon the Internal
Revenue Code, the regulations of the United States Treasury Department, and
court and administrative rulings and decisions in effect on the date of this
joint proxy statement/prospectus. These authorities may change, possibly
retroactively, and any change could affect the continuing validity of counsels'
opinions and of this discussion. This discussion, and counsels' opinions, are
also based upon (1) representations made by NeoPath and AutoCyte contained in
the tax representation letters, signed by officers of NeoPath and AutoCyte,
attached to the opinions included as exhibits to AutoCyte's registration
statement and (2) the assumptions that the merger will be effected pursuant to
applicable state law and otherwise completed according to the terms of the
merger agreement and as described in this joint proxy statement/prospectus. The
validity of counsels' opinions and of this discussion depends upon the
continuing validity of these representations and assumptions.

This discussion, and counsels' opinions, assume that NeoPath's shareholders
hold their shares of NeoPath common stock as capital assets and do not address
the tax consequences that may be relevant to a particular shareholder receiving
special treatment under some United States federal income tax laws. Shareholders
receiving this special treatment include:

- banks

- insurance companies

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- pension funds

- tax-exempt organizations

- dealers in securities or foreign currencies

- Shareholders who are not U.S. persons

- Shareholders who have a "functional currency" other than the U.S. dollar

- Shareholders who do not hold their NeoPath common stock as capital assets
within the meaning of Section 1221 of the Code

- Shareholders who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions.

- Shareholders who hold shares of NeoPath common stock as part of a hedge,
straddle or conversion transaction.

In addition, the following discussion does not address the tax consequences
of the merger under foreign, state, or local tax laws or the tax consequences of
transactions completed prior or subsequent to or concurrently with the merger,
whether or not such transactions are in connection with the merger. ACCORDINGLY,
NEOPATH SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR
PARTICULAR CIRCUMSTANCES.

The tax opinions NeoPath received from its tax counsel, Perkins Coie LLP,
and that AutoCyte received from its tax counsel, Palmer & Dodge, state that,
subject to the foregoing and the limitations referred to below and in the
opinions, the merger will constitute a "reorganization" within the meaning of
Section 368 of the Code. The opinions referred to above also conclude that,
subject to the foregoing and the limitations referred to below and in the
opinions, the merger will result in the following federal income tax
consequences:

(i) each of AutoCyte, NeoPath and Trilogy Acquisition Corporation, the
subsidiary of AutoCyte that will merge with and into NeoPath, will be a
party to the reorganization within the meaning of Section 368(b) of the
Internal Revenue Code of 1986, as amended;

(ii) No gain or loss will be recognized by holders of NeoPath common
stock solely upon their receipt of AutoCyte common stock in exchange for
NeoPath common stock in the merger, except to the extent of cash received
in lieu of fractional shares of AutoCyte common stock.

(iii) The aggregate tax basis of AutoCyte common stock received by
NeoPath shareholders in the merger will be the same as the aggregate tax
basis of NeoPath common stock surrendered in the merger reduced by any
amount allocable to fractional share interests for which cash is received.

(iv) The holding period of the AutoCyte common stock received in the
merger will include the period during which the NeoPath common stock
surrendered in exchange therefor was held, provided that the NeoPath common
stock is held as a capital asset at the time of the merger.

(v) Cash payments received by holders of NeoPath common stock in lieu
of fractional shares will be treated as if fractional shares of AutoCyte
common stock had been issued in the merger and then redeemed by AutoCyte. A
shareholder of NeoPath receiving such cash will generally recognize gain or
loss upon such payment, equal to the difference, if any, between such
shareholder's allocable basis in the fractional shares and the amount of
cash received. This gain or loss will be a capital gain or loss if the
NeoPath common stock is held by such shareholder as a capital asset at the
effective time of the merger.

(vi) NeoPath, AutoCyte and Trilogy Acquisition Corporation will
recognize no gain or loss solely as a result of the merger.

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It is a condition to the merger that each of AutoCyte and NeoPath receives
another tax opinion from its counsel, prior to completing the merger, that the
merger will be treated for United States federal income tax purposes as a
reorganization. The opinions will be based on customary assumptions and factual
representations to be provided by NeoPath and AutoCyte at the closing and will
assume that the merger will be effected pursuant to applicable state law and
otherwise completed according to the terms of the merger agreement and as
described in this joint proxy statement/prospectus. Opinions of counsel are not
binding upon the Internal Revenue Service or the courts. Neither AutoCyte nor
NeoPath has requested or will request an advance ruling from the Internal
Revenue Service as to the tax consequences of the merger.

Neopath Shareholders will be required to attach a statement to their tax
returns for the year of the merger that contains certain information required by
Treasury Regulations under Section 368 of the Code. Such statement must include
the shareholder's tax basis in the shareholder's NeoPath common stock and a
description of the AutoCyte common stock received.

FAILURE OF THE MERGER TO QUALIFY AS A REORGANIZATION. A successful IRS
challenge to the reorganization status of the merger would result in a NeoPath
shareholder recognizing gain or loss with respect to each share of NeoPath
common stock surrendered equal to the difference between the shareholder's basis
in that share and the fair market value, as of the effective time of the merger,
of the AutoCyte common stock received in exchange for that share. In that case,
a shareholder's aggregate basis in the AutoCyte common stock so received would
equal such fair market value and his or her holding period for that AutoCyte
common stock would begin the day after the merger.

NEOPATH SHAREHOLDER APPRAISAL RIGHTS

Holders of shares of NeoPath common stock are entitled to dissenters'
rights under Chapter 23B.13 of the Washington Business Corporation Act with
respect to the merger.

THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE WASHINGTON BUSINESS CORPORATION ACT AND IS
QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF CHAPTER 23B.13 OF THE WASHINGTON
BUSINESS CORPORATION ACT, WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX B TO THIS
PROXY STATEMENT/PROSPECTUS.

Holders of shares of NeoPath common stock will have the right to dissent
with respect to the merger and, subject to certain conditions, will be entitled
to receive a payment of the fair value for those shares under the Washington
Business Corporation Act. Each beneficial owner asserting dissenters' rights
must assert those rights with respect to all shares of which he or she is the
beneficial owner or has power to direct the vote, and must submit to NeoPath,
with or prior to his or her assertion of dissenters' rights, the record
shareholder's written consent to the dissent. A record shareholder may assert
dissenters' rights as to fewer than all the shares registered in his or her name
only if the shareholder dissents with respect to all shares beneficially owned
by any one person and notifies NeoPath in writing of the name and address of
each person on whose behalf that shareholder asserts dissenters' rights.

A NeoPath dissenting holder (1) must deliver to NeoPath, before the vote on
the merger is taken, written notice of his or her intent to demand payment for
his or her shares if the merger is effectuated and (2) must not vote his or her
shares in favor of the merger. The notice should be delivered to NeoPath at its
principal executive offices, 8271 154th Avenue NE, Redmond Washington 98052,
Attention: Secretary. A shareholder who does not satisfy both of these
requirements will not be entitled to dissenters' rights.

If the merger is approved by the NeoPath shareholders, NeoPath will send
written notice not later than ten days after the effective time of the merger
agreement to each NeoPath dissenting shareholder who satisfied the two
requirements in the preceding paragraph:

- stating where the shareholder must send his or her written payment
demand;

- stating where and when certificates representing NeoPath common stock
must be deposited;

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- containing a form for demanding payment which requires that the dissenter
certify whether or not he or she acquired beneficial ownership before the
first public announcement of the merger on June 7, 1999; and

- setting a date by which the written payment demand must be received.

The notice by NeoPath will be accompanied by a copy of Chapter 23B.13 of
the Washington Business Corporation Act. A NeoPath shareholder who does not
demand payment, does not certify that he or she acquired the shares before June
7, 1999, and does not deposit his or her shares within the time provided by this
notice will not be entitled to dissenters' rights.

NeoPath will pay to each NeoPath dissenting shareholder who complies with
the procedures described in the previous paragraphs, within 30 days after the
later of the effective time of the merger agreement and receipt of the demand,
the amount that NeoPath estimates to be the fair value of the dissenters'
shares, plus accrued interest. NeoPath will provide, along with this payment,

- certain financial information, including NeoPath's balance sheet, income
statement and statement of changes in shareholders' equity for its last
fiscal year and NeoPath's latest available interim financial statements,
if any,

- an explanation of how NeoPath estimated the fair value of the shares, and

- an explanation of how the accrued interest was calculated and certain
other information;

but NeoPath may elect to withhold this payment until completion of the merger
from any dissenter who was not the beneficial owner of the shares of NeoPath
common stock as to which dissenters' rights are asserted before the date of
first public announcement of the merger, June 7, 1999.

Any dissenting shareholder who is dissatisfied with the payment or the
offer may, within 30 days of the payment or offer for payment, notify NeoPath in
writing of the shareholder's estimate of the fair value of his or her shares and
the amount of interest due, and demand payment. If any NeoPath dissenting
shareholder's demand for payment is not settled within 60 days after receipt by
NeoPath of the shareholder's payment demand, the Washington Business Corporation
Act requires that NeoPath commence a proceeding, and petition the court to
determine the fair value of the shares and accrued interest, naming all NeoPath
dissenting shareholders whose demands remain unsettled as parties to the
proceeding. The court may appoint one or more persons as appraisers to receive
evidence and recommend the fair value of the shares. The dissenters will be
entitled to the same discovery rights as parties in other civil actions. Each
dissenter made a party to the proceeding will be entitled to judgment for the
amount, if any, by which the court finds the fair value of his or her shares,
plus accrued interest, exceeds the amount paid by NeoPath. Court costs and
approval fees would be assessed against NeoPath, except that the court may
assess costs against some or all of the dissenters to the extent that the court
finds the dissenters acted arbitrarily, vexatiously or not in good faith in
demanding payment. The court may also assess the fees and expenses of counsel
and experts of the respective parties in amounts that the court finds equitable
(1) against NeoPath, if the court finds that it did not substantially comply
with certain provisions of the Washington Business Corporation Act concerning
dissenters' rights and (2) against either the dissenter or NeoPath, if the court
finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith. If the court finds that services
of counsel for any dissenter were of substantial benefit to other dissenters
similarly situated, and that the fees should not be assessed against NeoPath,
the court may award to that counsel reasonable fees to be paid out of the
amounts awarded to dissenters who benefited from the proceedings.

NASDAQ LISTING OF AUTOCYTE COMMON STOCK

It is a condition to completion of the merger that the AutoCyte common
stock issuable to NeoPath shareholders in the merger be listed on the Nasdaq
National Market. So long as AutoCyte continues to meet the requirements of the
Nasdaq National Market, AutoCyte intends to continue to list its common stock on
the Nasdaq National Market.

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FEDERAL SECURITIES LAW CONSEQUENCES

All shares of AutoCyte common stock received by NeoPath shareholders in the
merger will be freely transferable, except that shares of AutoCyte common stock
received by individuals and entities who are deemed to be affiliates of NeoPath
before the merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act (or Rule 144 under the
Securities Act, in the case of individuals and entities who become affiliates of
AutoCyte) or in other transactions permitted under the Securities Act. Persons
who may be deemed to be affiliates of NeoPath or AutoCyte generally include
individuals or entities that control, are controlled by, or are under common
control with, NeoPath or AutoCyte and may include some officers and directors of
NeoPath or AutoCyte as well as principal stockholders of NeoPath or AutoCyte.
The merger agreement also requires NeoPath to use all reasonable efforts to
cause each of its affiliates to execute and deliver to AutoCyte a written
agreement to the effect that the affiliate will not offer or sell or otherwise
dispose of AutoCyte common stock issued to the affiliate in the merger in
violation of the Securities Act or the rules and regulations adopted by the
Securities Exchange Commission. The delivery of such agreements is also a
condition to AutoCyte's obligation to complete the merger.

This joint proxy statement/prospectus does not cover resales of AutoCyte
common stock received by any person who may be deemed to be an affiliate of
NeoPath and/or AutoCyte.

REGULATORY MATTERS

AutoCyte and NeoPath are not aware of any material governmental or
regulatory requirements that must be complied with in connection with the
merger, other than applicable federal securities laws and securities and "blue
sky" laws of the various states and the filing of the certificate of merger,
setting forth the principal terms of the merger agreement, with the Secretary of
State of the State of Washington and the Secretary of the State of Delaware.

POTENTIAL CONFLICTS AND INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the NeoPath board of directors in
favor of the merger, shareholders of NeoPath should be aware that certain
directors and executive officers of NeoPath have interests in the merger that
are different from, or in addition to, the interests of shareholders of NeoPath.
These interests relate to or arise from, among other things:

- the continued indemnification of current directors and officers of
NeoPath pursuant to the merger agreement;

- the retention of certain current officers of NeoPath as employees; and

- directors and employees with stock options to acquire NeoPath common
stock will have these options converted to stock options to acquire
AutoCyte common stock pursuant to the merger agreement and options held
by executive officers and all other employees will become fully vested.

These interests are described below, to the extent material, and except as
described below those persons have, to the knowledge of AutoCyte and NeoPath, no
material interest in the merger apart from those of shareholders generally. The
NeoPath board of directors was aware of, and considered the interests of, their
directors and executive officers in approving the merger agreement and the
merger.

INDEMNIFICATION AND INSURANCE. The merger agreement provides that all
rights of indemnification and exculpation from liabilities existing in favor of
the current and former directors or officers of NeoPath and its subsidiaries as
provided in their respective articles of incorporation and by-laws will be
assumed by the surviving corporation in the merger, and will continue in full
force and effect in accordance with their terms after the merger. AutoCyte will
maintain for six years after the merger directors' and officers' liability
insurance for acts or omissions which occur prior to the merger for those
directors and officers who were, as of the date of the merger agreement, covered
by NeoPath's directors' and officers' liability insurance policy, on terms no
less favorable than those in effect on the date of the merger agreement.

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AutoCyte's obligation to provide this insurance coverage is subject to a cap
based on the current annual premium paid by NeoPath for its existing insurance
coverage. If AutoCyte cannot maintain the existing or equivalent insurance
coverage without exceeding the cap, AutoCyte is required to maintain only that
amount of insurance coverage which can be obtained by paying an annual premium
equal to the cap.

NEOPATH EXECUTIVE OFFICERS. If the merger is completed, Shih-Jong James
Lee, Mary K. Norton and David H. Robison, who currently serve as the Vice
President and Chief Technical Officer, Vice President, Regulatory/Government
Affairs and Quality Assurance and Vice President, Operations of NeoPath, will
become the Vice President of Corporate Partner Advisory Development, Vice
President, Regulatory Affairs and Quality Assurance and Vice President,
Operations of AutoCyte.

STOCK OPTIONS. Under the merger agreement, at the effective time of the
merger, AutoCyte will assume each stock option plan of NeoPath and all stock
options granted under those plans to acquire shares of NeoPath common stock.
Each stock option under those plans will be converted into a stock option to
acquire AutoCyte common stock on the same terms and conditions. The number of
shares of AutoCyte common stock to be subject to any option will be equal to the
number of shares of NeoPath common stock subject to that NeoPath option
multiplied by the 0.7903 exchange ratio and rounded down to the nearest whole
share. The exercise price per share of AutoCyte common stock under any option
will be equal to the exercise price per share of NeoPath common stock subject to
that NeoPath option divided by the 0.7903 exchange ratio. As soon as practicable
following the effective time of the merger, AutoCyte will prepare and file with
the Securities and Exchange Commission an appropriate registration statement
registering the shares of AutoCyte common stock subject to the assumed NeoPath
stock options. That registration statement will be kept effective (and the
current status of the prospectus or prospectuses required by the SEC shall be
maintained) for so long as any assumed NeoPath options remain outstanding. See
"The Merger Agreement -- Treatment of NeoPath common stock options and
warrants". Also, stock options held by executive officers and all other
employees of NeoPath will become fully vested AutoCyte options as a result of
the merger.

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BUSINESS OF AUTOCYTE AND NEOPATH

OVERVIEW OF THE CERVICAL CANCER
SCREENING MARKET

CERVICAL CANCER

Cancer of the uterine cervix, or cervical cancer, is the second most common
form of cancer among women worldwide, with approximately 500,000 new cases
reported each year. In 1996, approximately 247,000 deaths worldwide were
attributable to cervical cancer. In the United States alone, the American Cancer
Society projected that in 1998 doctors would diagnose approximately 13,700 new
cases of invasive cervical cancer and approximately 4,900 women would die of
cervical cancer. In addition, recent studies have indicated that cervical cancer
is linked to the presence of certain strains of Human Papillomavirus.

Almost all deaths due to cervical cancer can be prevented through
early-stage detection and treatment. Early detection and cure is possible
because cervical cancer is preceded by a precancerous, curable stage that
generally progresses without symptoms over a period of years until it reaches an
invasive stage. If detected early, treatment of abnormalities that may progress
to cervical cancer is relatively inexpensive and almost always successful.
Treating cervical cancer after it is has reached the invasive stage, however,
becomes more difficult and expensive, and does not always succeed.

THE CONVENTIONAL PAP SMEAR TEST PROCESS

The conventional Pap smear test was developed by Dr. George N. Papanicolaou
in the 1940s. The Pap smear test serves as a screening procedure for the early
detection of precancerous and cancerous conditions of the uterine cervix by
identifying abnormalities that may progress to cervical cancer. This test is
currently the most widely used screening test for cervical cancer. It is
estimated that clinical laboratories in the United States perform over 50
million conventional Pap smear tests annually. Of these 50 million Pap smear
tests, industry sources estimate that about 2.5 million, or 5%, are diagnosed
with precancerous conditions or cancer.

The conventional Pap smear process begins with the collection of cervical
cells during a gynecologic examination. To obtain a Pap smear, a gynecologist,
general practitioner, or a clinician uses a sampling device to scrape the
surface of a woman's uterine cervix to collect a sample of cervical cells. This
sample is then manually smeared onto a microscope slide and preserved with a
fixative agent such as alcohol, creating what is conventionally known as a Pap
smear.

After the Pap smear sample has been taken, the sample and patient
information are sent to a clinical laboratory for further preparation, screening
and diagnosis. At the clinical laboratory, a technician stains the Pap smear
sample to highlight important cellular features and then seals it with a
protective coverslip. The slide containing the Pap smear sample is then given to
a cytotechnologist, the analyst responsible for reviewing samples at a
laboratory, who generally spends about five to ten minutes screening each Pap
smear slide and completing related paper work.

The cytotechnologist reviews the Pap smear slide with a microscope to
determine whether the sample is adequate for evaluation and to assess the
presence of abnormal cells. After determining whether the sample is adequate for
evaluation, the cytotechnologist manually screens the slide with a microscope to
differentiate diseased or abnormal cells from normal cells based on size, shape
and structural details of the cells and their nuclei. In the United States, each
conventional Pap smear slide is then typically classified according to the
Bethesda System for Reporting Cervical/Vaginal Cytological Diagnoses, a five
point classification system that assigns a rating for cervical cytology slides
ranging from negative to carcinoma. Typically, about 90% to 95% of all Pap
smears are classified as normal. In the remaining cases where the
cytotechnologist detects a suspicious condition, a senior cytotechnologist then
reviews the slide. Ultimately, slides confirmed to have signs of precancerous
conditions or cancer are referred to a cytopathologist who carefully reviews the
Pap smear and makes a final diagnosis.

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Any slide classified as other than normal under the Bethesda System for
Reporting Cervical/Vaginal Cytologic Diagnoses is considered abnormal and may be
precancerous or cancerous. Abnormalities may indicate various conditions ranging
from atypical squamous cells of undetermined significance and atypical glandular
cells of undetermined significance, both commonly referred to as "atypia," and
low-grade squamous intraepithelial lesions to high-grade squamous
intraepithelial lesions and cancer. A woman whose Pap smear indicates the
presence of high-grade lesions or cancer will typically receive a colposcopic
examination, and if necessary, a biopsy. Treatment of early-stage noninvasive
cervical cancer, which is relatively curable, often consists of epithelial
treatment in which the cancerous tissue is removed, for example, by
electrocautery. Once the cancer reaches an invasive stage, the patient's chances
for recovery decline. These cases typically require treatment such as radiation
therapy, surgery or chemotherapy.

LIMITATIONS OF THE CONVENTIONAL PAP SMEAR TEST PROCESS

Each Pap smear slide sample typically contains 50,000 to 300,000 cervical
cells, and the process of manually screening and interpreting a conventional Pap
smear requires intense visual examination of the slide sample through a
microscope. Errors often occur during the review process because it is difficult
to properly evaluate and categorize subtle changes in the size and/or shape of
cells and their nuclei.

Pap smears have a highly variable false-negative rate, which is the
percentage of abnormal smears that are misclassified as normal. In certain
laboratories, more than one out of four abnormal Pap smears are misclassified as
normal. Errors made by clinicians while collecting samples and preparing slides
cause many inaccurate test results, including false negative and false positive
diagnoses. Studies suggest that approximately 60% of all false negative
diagnoses are the result of inadequacies in sample collection and slide
preparation; approximately 40% are attributable to detection and interpretation
errors.

A recent study published in the American Journal of Clinical Pathology
reported that, with a conventional Pap smear, as much as 80% of the sample taken
from a patient is not transferred to the slide and remains on the discarded
collection device. In addition to the problem of cell transfer, the conventional
Pap smear slide preparation process produces inconsistent and non-uniform slides
with extreme variability in quality, often making examination difficult.
Furthermore, the batch staining done by the laboratory technicians may result in
cross-contamination among slide samples. AutoCyte estimates that annual costs to
the United States health care system of repeat testing due to unsatisfactory
slides and slides that are satisfactory but cannot be fully evaluated due to
certain characteristics of the sample are $50 million and $750 million,
respectively.

When using the conventional Pap smear process, a physician cannot perform
additional testing using the original patient sample. If additional testing is
required, the patient must return to the physician's office to provide a second
sample. AutoCyte believes that the ability to access the remaining cellular
material from the original patient sample would lower the costs associated with
inconclusive Pap smear tests.

Physical and mental stress escalates with the number of Pap smear slides
that a cytotechnologist examines, which increases the risk of false-negatives.
For this reason, federal regulations promulgated under the Clinical Laboratory
Improvement Amendments of 1988 require cytology laboratories to:

- rescreen 10% of the slides that are initially classified as negative;

- limit the number of slides screened by a cytotechnologist per day to 100;
and

- perform proficiency testing and quality control by testing
cytotechnologists in order to assure a minimum level of competence and
expertise.

In addition to these federal regulations, certain states have also adopted
regulations further limiting the number of slides that may be manually examined
per day by a cytotechnologist.

It has become significantly more expensive for laboratories to perform
conventional Pap smear screening due to these regulations.

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BUSINESS OF AUTOCYTE

The discussion included in this section as well as elsewhere in this joint
proxy statement/prospectus may contain forward-looking statements based on
current expectations of AutoCyte's management. Such statements are subject to
risks and uncertainties that could cause actual results to differ from those
projected. See "Risk Factors" beginning on page 16 of this joint proxy
statement/prospectus. Readers are cautioned not to place undue reliance on the
forward looking statements, which speak only as the date of this joint proxy
statement/prospectus. AutoCyte has no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.

OVERVIEW

AutoCyte develops, manufactures and markets the only integrated automated
sample preparation and image analysis system to support professionals in
cervical cancer screening. AutoCyte's integrated system is comprised of two
separate products: the AutoCyte PREP System(TM) for sample preparation and the
AutoCyte SCREEN System(TM) for image analysis. On June 17, 1999, AutoCyte
received regulatory approval from the FDA to market PREP as a replacement for
the conventional Pap smear preparation. AutoCyte is currently seeking regulatory
approval of SCREEN for sale in the United States for cervical cancer screening.
AutoCyte began sales of PREP in the United States for non-gynecologic
applications in 1993 and with the recent FDA approval, has begun selling PREP in
the United States for gynecologic applications, its principal application. In
addition, AutoCyte's Pathology Workstation product line works with some of
AutoCyte's other product offerings to provide tools for data storage and
transmission of cellular and tissue images, and tools for diagnosis of disease
from cytology and pathology specimens.

PREP is a proprietary automated liquid-based sample preparation system that
prepares slides with a thin-layer of cervical cells. AutoCyte designed PREP to
operate both as an independent sample preparation system and with SCREEN as part
of an integrated diagnostic system. AutoCyte believes PREP will improve
laboratory productivity and reduce interpretation errors, as compared to
conventional Pap smears, by producing cell samples that are:

- clearer than conventional Pap smear samples;

- more uniform than conventional Pap smear samples; and

- easier to interpret than conventional Pap smear samples.

SCREEN is an automated image analysis system that combines AutoCyte's own
imaging technology and classification software with off-the-shelf computer
hardware to screen and classify slides prepared using PREP. AutoCyte designed
SCREEN to be an interactive support tool for the laboratory professional in the
primary screening of cervical cells. SCREEN may also serve quality control and
adjunctive testing purposes. By designing PREP and SCREEN to function together,
AutoCyte has developed a system which it believes will operate at a higher
production and level and with greater diagnostic sensitivity than the
conventional Pap smear test and other cervical cancer screening systems.

THE AUTOCYTE SOLUTION

AutoCyte is the first company to develop a system for preparing and
screening cervical cell samples for cancer that addresses the limitations of the
conventional Pap smear process.

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THE AUTOCYTE PREP SYSTEM(TM)

PREP consists of AutoCyte's own line of preservative fluid and reagents,
plastic disposables and automated equipment for preparing a thin-layer of
cervical cells on the microscope slide. A cervical cell sample is prepared using
PREP as follows:

- STEP 1: A clinician takes a patient's cervical sample using a
conventional collection device.

- STEP 2: The clinician then places the collection device in a vial
containing AutoCyte's own CytoRich preservative fluid, thereby retaining
virtually all of the cells from the collection device.

- STEP 3: The laboratory thoroughly mixes the sample, generating a
randomized cell suspension, which is then layered onto AutoCyte's own
liquid density reagent in a plastic centrifuge tube using AutoCyte's
patented disaggregation syringe device. AutoCyte is developing PREPMATE
(described below), a more automated device for performing this process.

- STEP 4: A lab technician then conducts batch centrifugation on the cell
suspension to remove excess blood, inflammatory cells and other debris
from the sample.

- STEP 5: The lab technician places the tube containing the separated
diagnostic cells onto the automated PREP pipetting station.

- STEP 6: PREP then distributes the cells in a thin-layer on a microscope
slide and discretely stains the slide for subsequent analysis.

A PREP slide typically contains between approximately 50,000 and 160,000
diagnostic cells which are distributed uniformly over a 13-mm diameter circle.
PREP is currently capable of preparing and discretely staining 48 thin-layer
slides in approximately one hour.

AutoCyte also is currently developing a new automated front-end processor
called PREPMATE that will reduce the number of manual preparation steps required
for the PREP system. PREPMATE reduces the time and labor required to prepare
samples for processing on the PREP instrument.

AutoCyte believes that PREP will offer the following advantages over the
conventional Pap smear process:

- Because the entire patient sample is contained in the preservative fluid,
the subsample on the thin-layer preparation is more representative of the
entire patient specimen. Using the conventional Pap smear process, as
much as 80% of the cervical sample can be inadvertently discarded after
smearing the sample onto the slide.

- PREP virtually eliminates air-drying, generates a more complete fixation
and provides a more standardized preparation process in a controlled,
laboratory environment by eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process.

- Unlike conventional Pap smear slides that are often manually stained in a
batch process using common reservoirs of staining reagents, PREP staining
reagents are directly applied to individual slides by a
computer-controlled robotic pipetting station, which AutoCyte believes
should reduce the risk of cross-contamination among cell samples.

- Because AutoCyte's proprietary CytoRich preservative system enables the
patient sample to be preserved for several months, it permits, if
necessary, preparation of several slides from a single sample.

AutoCyte believes these advantages should result in, among other things,
improved diagnostic sensitivity and reduction in unsatisfactory and inadequate
samples.

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AutoCyte believes that PREP will offer the following advantages over other
liquid-based sample preparation systems:

- AutoCyte believes that its cell enrichment process more effectively
controls the incidence of mucus, inflammatory cells and other debris that
may reduce the performance of membrane filtration systems.

- PREP has the capacity to produce 48 thin-layer slide preparations in
approximately one hour, providing a higher throughput than other
available automated slide preparation systems.

- AutoCyte believes that the smaller cell circle on a PREP slide, which has
approximately an equal number of diagnostic cells as slides prepared
using other thin-layer sample preparation systems, coupled with a lower
incidence of infectious agents and inflammatory cells and other debris,
should result in faster, more efficient screening by cytology
professionals.

- The PREP centrifugation and robotic liquid handling techniques are
similar to procedures already in use in clinical laboratories.

- Unlike other thin-layer sample preparation systems that rely on batch
staining using common reservoirs of staining reagents PREP staining
reagents are applied directly to individual slides. Discrete staining
offers several benefits, including a reduced risk of cross-contamination
among cell samples, less degradation of the staining solution, less
staining time and lower costs.

THE AUTOCYTE SCREEN SYSTEM(TM)

SCREEN is an automated image analysis system which combines AutoCyte's own
imaging technology and classification software with off-the-shelf computer
hardware to screen thin-layer slides prepared using the PREP system.

SCREEN is designed to:

- function as an interactive support tool for the cytology professional in
the primary screening of cervical cells;

- serve quality control and adjunctive testing purposes;

- use a series of proprietary algorithms to independently classify cells
and present the cytotechnologist with 120 images of the most diagnostic
cells on the sample slide;

- evaluate all areas of the PREP thin-layer slide and

- present high-resolution, color images of diagnostic cells in the sample.

When using SCREEN, a cytotechnologist is able to undertake an independent
analysis of these selected cells to interpret each slide. Once the
cytotechnologist inputs his or her determination into the computer, SCREEN
displays its interpretation for comparison. Unless SCREEN and the
cytotechnologist agree that the slide is normal, the slide is referred to a
senior cytotechnologist or pathologist for reevaluation. Combining expert human
review with unbiased computer interpretation is a fundamental component of
AutoCyte's patented SCREEN process.

AutoCyte believes that its integrated system combining PREP and SCREEN will
offer the following advantages over the conventional Pap smear process:

- SCREEN reduces the need for traditional manual screening, bringing
human-assisted automated detection of abnormality to cytology practice
and thereby reducing cytotechnologist fatigue.

- SCREEN is designed to allow the cytotechnologist to review the thin-layer
slide in less than one-half the time now required for manual screenings
of conventional Pap smear slides.

- SCREEN allows cytotechnologists to control and display high resolution
cell images and to enlarge and enhance images of cells and abnormalities
for easier examination. This process enables

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cytotechnologists to concentrate on the most significant cells and
clusters, thereby reducing the complexity and tedious nature of manual
review which AutoCyte believes will enable cytotechnologists to reach
accurate cell classification decisions more quickly and efficiently.

- The Clinical Laboratory Improvement Act of 1988 allows thin-layer slides
which result in cell dispersion on one-half or less of the total
available slide area to be screened at levels higher than the current 100
slide-per-day limit applicable to conventional Pap smear slides.

AutoCyte believes that, by designing PREP and SCREEN to work together, it
has created a system which will operate with higher throughput and with greater
diagnostic sensitivity than other available systems or combinations of
approaches thus giving it an advantage over other screening systems recently
developed to enhance or replace conventional Pap smear testing.

AUTOCYTE PRODUCT SYSTEMS

AUTOCYTE PREP SYSTEM(TM)

PREP consists of the CytoRich line of proprietary preservatives and
reagents, a variety of proprietary plastic disposable components, and the
customized PREP instrument. The CytoRich reagents include the preservative
fluid, density reagent and multiple stains. The plastic disposables include the
preservative vial, a patented disaggregating syringe (not needed when using
PREPMATE), a slide settling column and pipette tip. The PREP instrument is
AutoCyte's own, computer-controlled robotic pipetting station that has been
specifically engineered for preparing and discretely staining PREP thin-layer
slides. The user can program the instrument to apply a variety of different
stains. AutoCyte also provides a centrifuge as part of the system. AutoCyte
holds a number of patents covering certain components of PREP and the PREP
thin-layer slide preparation process.

PREPMATE is a system to provide laboratories with additional automation
supporting PREP. PREPMATE is designed to function as a robotic mixer of the cell
suspension in the preservative vial and to transfer the cell suspension to
centrifuge tubes. By eliminating manual steps, PREPMATE is designed to enhance
the throughput of PREP.

AUTOCYTE SCREEN SYSTEM(TM)

The SCREEN system currently consists of a fully automated microscope; a
high capacity slide handler; an ultra high resolution digital color camera; a
high performance UNIX-based multi-processor and high resolution monitor.

The SCREEN system uses AutoCyte's own cell population histogram analysis
software. Up to 400 PREP slides may be placed onto the fully automated SCREEN
instrument for unattended slide handling, identification and screening, and a
built-in mechanical counter allows AutoCyte to monitor the number of slides
screened.

SCREEN currently has the capacity to process, in unattended operation, 160
slides per 24-hour period.

AUTOCYTE PATHOLOGY WORKSTATION

The Pathology Workstation is a flexible computerized microscope which
supports PC-based applications, such as:

- image telecommunications;

- archiving;

- image and patient data management; and

- other supplemental testing designed to complement and support the SCREEN
system.

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Pathology Workstation applications currently available from AutoCyte
include:

- the AutoCyte Image Management System, an intelligent user interface which
organizes images and data using electronic folders;

- AutoCyte QUIC (DNA & Immuno), cellular and histological measurement
systems;

- AutoCyte LINK which provides the ability to interactively capture and
transfer diagnostic quality images during an online telepathology
consultation; and

- AutoCyte ImageTiter(R) which enables the quantitative assessment of
anti-nuclear antibodies in a patient's blood specimen.

- SlideWizard(TM) is being developed as a support system for manual
microscopic review. Cytology professionals can use this system to
electronically mark cells of interest and communicate these images and
data to colleagues. SlideWizard will assist with cell relocation during
manual or automated screening, and is designed to be networked with
SCREEN and other AutoCyte products.

NON-GYNECOLOGIC PRODUCT APPLICATIONS

AutoCyte's predecessor, Roche Image Analysis Systems, began limited sales
of PREP for non-gynecologic cytology applications in 1993. Non-gynecologic
applications relate to cytology preparation from a wide variety of specimen
types, including:

- urine;

- sputum;

- plural fluid;

- spinal fluid;

- peritoneal fluid; and

- other body cavity fluids.

Cell preparations from bronchial, gastrointestinal and endometrial
brushings and washings as well as fine needle aspiration of specific organs are
also addressed among these applications. These non-gynecologic applications of
the PREP system do not require FDA clearance. AutoCyte has developed its own
preservatives that are created specifically for these non-gynecologic cytology
preparations.

REGULATORY STATUS

PREP

On June 17, 1999, AutoCyte received regulatory approval from the FDA to
market PREP as a replacement for the conventional Pap smear.

STATUS OF SCREEN PMA

In October 1996, AutoCyte began blinded clinical trials for SCREEN and
submitted a PMA for SCREEN to the FDA on July 6, 1998. The SCREEN PMA was
accepted for substantive review by the FDA on August 31, 1998. On November 24,
1998, the FDA notified AutoCyte that the SCREEN PMA would not be considered
further until the PREP PMA was approved. The FDA also raised other issues. On
February 18, 1999, AutoCyte's representatives met with the FDA to address
specific questions regarding SCREEN performance and the SCREEN clinical trial.
On May 7, 1999 AutoCyte filed a formal amendment to the SCREEN PMA documenting
its responses to FDA questions. FDA regulations provide that the FDA will review
a PMA or a PMA amendment within 180 days from the date of submission. While the
FDA review of the SCREEN PMA amendment may be shorter than 180 days,

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AutoCyte cannot guarantee that the FDA will complete its review in 180 days or
less or that the FDA will approve the SCREEN PMA within that period or at all.

In December 1998, AutoCyte's Burlington, North Carolina manufacturing
facility was inspected by the FDA for compliance with the FDA's Quality System
requirements relating to the SCREEN product. In April 1999 AutoCyte was notified
in writing that the facility had no outstanding deficiencies and that it had
passed the inspection.

SUPPLEMENTAL STUDY WITH NEOPATH

In March 1999, AutoCyte announced an agreement with NeoPath to pursue a
clinical study to obtain supplemental approval from the FDA to use NeoPath's
AutoPap(R) Primary Screening System to screen slides prepared using PREP.

PATHOLOGY WORKSTATION

AutoCyte has received FDA clearance of a premarket notification covering
ImageTiter, an application for the Pathology Workstation which AutoCyte is
currently selling. AutoCyte believes that it may need to obtain premarket
notification clearance to market in the United States certain additional
Pathology Workstation applications currently being developed.

MARKETING AND SALES

AutoCyte's predecessor, Roche Image Analysis Systems, began limited
commercial sales of PREP for non-gynecologic cytology uses in 1993. The first
commercial use of both PREP and SCREEN for cervical cancer screening began in
laboratories in Australia, Hong Kong and Japan. Sales were expanded to Europe,
with a concentration in Switzerland and France. The FDA approved PREP for
cervical cancer screening in the U.S. on June 17, 1999 and AutoCyte is now
selling and marketing PREP in the U.S. AutoCyte generates PREP revenue from both
system sales and rentals, as well as from the sale of reagents and consumables

For SCREEN customers in the United States, AutoCyte intends to place
instruments without charge at customer locations and to charge customers on a
per test, or fee-per-use, basis. In foreign markets, AutoCyte plans to either
sell or license SCREEN. As an important element of AutoCyte's business strategy,
it has obtained third-party financing to support rentals of PREP, and will seek
third-party financing to support fee-per-use placements of SCREEN. AutoCyte may
never be able to obtain SCREEN financing and, if it does, it may not be on
favorable terms.

AutoCyte sells Pathology Workstation products through distributors and
original equipment manufacturer vendors who integrate certain of the workstation
software into their own products. AutoCyte has entered into an international
distribution agreement with Carl Zeiss Jena Gmbh, to distribute the Pathology
Workstation in the US and Europe. AutoCyte has also entered into an agreement
with Dynamic HealthCare, Inc. to supply the AutoCyte Image Management System as
a component of its CoPath(R) client/server solution for anatomic pathology
laboratories. AutoCyte has also entered into an exclusive distribution agreement
with Medical and Biological Laboratories Co. to distribute ImageTiter in support
of their autoimmune diagnostic reagent offering to laboratories worldwide.
Medical and Biological Laboratories Co. will also distribute Pathology
Workstation products in Japan, Korea and Taiwan.

MARKETING STRATEGY

AutoCyte has recently commenced marketing PREP in the United States for
cervical cancer screening, and AutoCyte expects to commence marketing SCREEN in
the United States for cervical cancer screening when and if FDA approval for
cervical cancer screening is obtained. AutoCyte designed

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PREP to be sold as either a stand-alone system or as an integrated system with
SCREEN. AutoCyte intends to achieve market acceptance of PREP alone and then to
target PREP customers for use of SCREEN with the goal of achieving market
acceptance for the integrated PREP and SCREEN system for cervical cancer
screening. AutoCyte will address the needs of the constituencies in the cervical
cancer screening market in the manner described below.

LARGE CLINICAL LABORATORIES. Conventional Pap smear testing has become a
concentrated market in the United States. AutoCyte believes that two major
clinical laboratories account for approximately 40% of the conventional Pap
smear Market. Other large testing laboratories account for another 20% of the
market, concentrating approximately 60% of cervical cancer test volume among a
relatively small number of large laboratories. AutoCyte believes that it can
market PREP successfully to this concentrated market segment. AutoCyte also
believes that pressures associated with rising health care costs, rising
litigation costs and the limited supply of qualified cytotechnologists will make
it easier for AutoCyte to market PREP and SCREEN to large laboratories. Because
such a high volume of testing is performed by a small number of large
laboratories, AutoCyte believes that a relatively small number of employees will
be able to effectively market AutoCyte's systems to these customers.

MEDIUM AND SMALL CLINICAL LABORATORIES. AutoCyte also intends to devote a
substantial portion of its marketing resources to targeting medium and small
clinical laboratories. Hospital consolidation, and particularly the
consolidation of laboratories of the larger hospitals, is creating a new medium
sized customer for AutoCyte's products.

THIRD-PARTY PAYORS. Customers will not accept AutoCyte's products unless
it ensures that the use of its products is supported by third-party payors.
AutoCyte will promote the clinical and economic benefits of its PREP and SCREEN
systems to national managed care providers, major private insurers and other
third-party payors. When compared to a conventional Pap smear test, AutoCyte's
cervical cancer screening system will initially cost more per test. Because the
up-front, direct costs of using AutoCyte's products will be greater than the
cost of the conventional Pap smear, AutoCyte will need to convince third-party
payors that the overall cost savings to the health care system will more than
offset the cost of AutoCyte's products. At least two of AutoCyte's competitors
have received third-party reimbursement for products that are similar to PREP
and SCREEN. See "Third-Party Reimbursement."

HEALTH CARE PROVIDERS. AutoCyte intends to promote the clinical and
economic benefits of PREP and SCREEN directly to gynecologists and primary care
physicians by marketing with reference laboratory sales organizations. As part
of AutoCyte's sales and marketing program, AutoCyte will educate the medical
community on the advantages of its integrated cervical cancer screening system.

MARKETING AND SALES ORGANIZATION

AutoCyte currently has 24 employees worldwide to market, sell and provide
after-sale support of its products. AutoCyte anticipates that its worldwide base
of employees to market, sell and provide after-sale support of its products will
grow to 30 to 35 persons by the end of 1999.

In the United States, AutoCyte plans to do the following:

- Market AutoCyte's cervical cancer screening system through a direct sales
force.

- Hire a small highly-specialized sales organization which will market to
managed care and other third-party payor organizations to achieve
appropriate reimbursement levels and to create demand for the products.

- Emphasize co-marketing agreements with sales organizations of major
reference laboratories to market AutoCyte's products directly to health
care providers.

- Support the needs of third-party payors, laboratories and individual
physicians through development of reimbursement hotlines and
cost-effectiveness software models.

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In international markets AutoCyte markets and sells its products primarily
through distributors. To support these efforts, AutoCyte employs three people,
consisting of sales professionals, supporting product managers and after-sales
support personnel located in Europe and Australia. AutoCyte anticipates that
these distributor organizations will ultimately assume responsibility for all
sales and after sales support activities as well as a portion of AutoCyte's
marketing activities.

AutoCyte will offer the following after-sale support services directly to
customers in the United States:

- customer training;

- product installation;

- telephone technical support; and

- repair service.

Personnel providing these services will be located both at AutoCyte's
headquarters and in select major metropolitan areas. Internationally, AutoCyte
plans to provide these services through distributor organizations.

MANUFACTURING

QUALITY SYSTEMS

AutoCyte is in the process of certifying its quality systems according to
ISO 9001 standards. On June 24, 1999 AutoCyte completed a favorable registration
audit and expects full certification within the next four months.

AUTOCYTE PREP SYSTEM

AutoCyte currently assembles, tests and packages components of the PREP
system at its manufacturing facility in Burlington, North Carolina. AutoCyte
also manufactures its CytoRich line of reagents and stains for PREP at the
Burlington facility. AutoCyte believes that its existing manufacturing and
assembly processes are adequate to meet the near-term, full-scale production
requirements for PREP for cervical cancer screening.

AutoCyte purchases certain of the PREP instrument components from a single
original equipment manufacturer supplier in Europe. AutoCyte purchases the
consumable items used with PREP, including glass slides, centrifuge tubes,
pipette tips, settling chambers and other disposable components, from a variety
of third-party vendors, some of which are sole-source suppliers.

In 1998, AutoCyte agreed to new multi-year exclusive contracts with two
suppliers of manufactured plastic components incorporated into its products. The
first contract covers a specially engineered component that is required for the
PREPMATE system. The contract started in March 1998 and will end in March 2001.
Pricing is fixed, but may be adjusted if raw material costs change. In addition,
AutoCyte has the ability to renegotiate pricing, or obtain the product
elsewhere, if it can identify another third-party supplier that is willing to
supply the product on more competitive terms.

The second contract covers three plastic components used with PREP. The
contract started in June 1998 and will end in June 2002. Pricing is fixed, but
may be adjusted if raw material costs change. AutoCyte is only obligated to use
this supplier exclusively for the components if this supplier's prices are
competitive with prices offered by other suppliers on similar terms, and if this
supplier meets AutoCyte's quality and production requirements.

In June 1999 AutoCyte signed an exclusive supply agreement with the
manufacturer of the automated pipetting and staining component of PREP. This
agreement ends December 31, 1999, but contains renewal provisions. AutoCyte
expects to renew the contract.

AutoCyte believes that each of these suppliers has sufficient capacity to
meet its present and future supply requirements.

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AutoCyte may seek to establish other relationships with additional
suppliers or vendors for components of its products. AutoCyte cannot guarantee,
however, that it will be successful in doing so. Additionally, if AutoCyte adds
new components to its products or use components supplied by an alternative
supplier, the FDA may require us to submit PMA supplements and obtain further
regulatory approvals before marketing the products with the new or replacement
components.

AUTOCYTE SCREEN SYSTEM

AutoCyte also intends to assemble, test, and package SCREEN at its
Burlington facility. The SCREEN system is composed of:

- a sophisticated automated microscope;

- a robotic slide handler;

- a digital color camera;

- a computer; and

- other related components.

AutoCyte is also developing a next generation SCREEN system called SCREEN
II that utilizes fewer custom parts than the current system.

AutoCyte relies upon certain sole-source vendors for a variety of SCREEN
components. AutoCyte intends to minimize this reliance in the future by
establishing relationships with additional suppliers. The FDA may require
AutoCyte to submit PMA supplements to the FDA if AutoCyte incorporates
alternative components from new suppliers into SCREEN. AutoCyte cannot guarantee
that the FDA will approve these supplements.

AutoCyte is taking steps to ensure it will have adequate manufacturing
capacity in place for SCREEN by the time the FDA approves SCREEN for marketing,
if it approves it at all. AutoCyte cannot, however, guarantee that it will ever
have adequate manufacturing capacity to produce SCREEN.

PATHOLOGY WORKSTATION PRODUCTS

AutoCyte currently integrates and assembles the Pathology Workstation
products at its Burlington facility and believes it has sufficient capacity to
meet anticipated customer demand for this product. AutoCyte's Pathology
Workstation products consist primarily of off-the-shelf components and
AutoCyte's own software. The components are supplied by a variety of vendors,
some of which are sole-source suppliers. AutoCyte has been integrating and
selling Workstation products since 1993.

MANUFACTURING STANDARDS

AutoCyte's manufacturing process is subject to extensive regulation by the
FDA, including the FDA's Quality System Regulations, also known as Good
Manufacturing Practice. AutoCyte's Burlington, North Carolina manufacturing
facility was inspected by the FDA in October 1997 for compliance with Quality
System Regulations requirements relating to PREP. AutoCyte was notified by the
FDA in December 1997 that the facility had no outstanding deficiencies and that
it had passed the inspection. The facility was inspected again by the FDA in
December 1998 for compliance with Quality System Regulations requirements
relating to SCREEN. In April 1999, AutoCyte was notified in writing by the FDA
that the facility had no outstanding deficiencies and that it had passed the
inspection. If at any point AutoCyte fails to meet the FDA's Quality System
Regulations requirements, it is unlikely that AutoCyte could achieve or maintain
the levels of production necessary for commercial sales of its products,
resulting in potential loss of customers and sales.

In addition to Quality System Regulations manufacturing requirements,
AutoCyte may be required to meet certain requirements relating to ISO 9001
certification and other European regulatory requirements. AutoCyte must obtain a
European CE certification to successfully sell PREP and SCREEN in Europe.
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The original equipment manufacturer of the PREP instrument components has ISO
9001 certification and has obtained CE certification for the main PREP
component. AutoCyte expects to achieve CE compliance for the entire PREP system
by the end of 1999. AutoCyte designed the SCREEN system to meet the requirements
of CE certification. All SCREEN units shipped to Europe after January 1, 1999
comply with CE requirements and are appropriately labeled. AutoCyte is in the
process of certifying its quality systems according to ISO 9001 standards. On
June 24, 1999 AutoCyte completed a favorable registration audit and expect full
certification within the next four months.

AutoCyte's failure to either attain or maintain compliance with the
applicable manufacturing requirements of regulatory agencies would have a
material adverse effect on its business, financial condition and results of
operations.

RESEARCH AND DEVELOPMENT

AutoCyte's research and development programs are currently focused on:

- continued enhancement of the PREP instrument, related reagents and
disposables;

- PREPMATE for further automation of the PREP slide preparation and
handling process;

- continued development of SCREEN II; and

- development of additional Pathology Workstation applications to address
the needs of the broader pathology automation market.

AutoCyte designed PREPMATE, an automated front-end processor for PREP, to
reduce the number of manual pre-preparation steps required for the PREP system
and to further enhance the throughput of the PREP system.

AutoCyte designed SCREEN II to replace SCREEN, to increase throughput,
incorporate more off-the-shelf components and facilitate slide handling. SCREEN
II will rely on an enhanced classification technology and will be designed to
have increased information management and storage capabilities. AutoCyte is
developing SCREEN II to include networking and sophisticated database
capabilities.

AutoCyte is continuing to develop additional applications to run on its
Pathology Workstation platform. These applications include quantitative image
analysis, tumor grading and slide management.

AutoCyte cannot guarantee that any product enhancement or development
project it undertakes will be successfully completed, receive regulatory
approvals or be successfully commercialized. AutoCyte's failure to complete,
receive approval for or commercialize any such enhancement or project could
prevent AutoCyte from successfully competing in its targeted markets and could
have a material adverse effect on AutoCyte's business, financial condition and
results of operations.

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AutoCyte currently has 33 employees engaged in research and development.
The following table shows the approximate amounts AutoCyte has spent on research
and development for the previous four years:

<TABLE>
<CAPTION>
APPROXIMATE
EXPENDITURE ON
RESEARCH &
DEVELOPMENT
--------------
<S> <C>
FOR THE YEAR ENDED DECEMBER 31
1994 (predecessor).......................................... $3.6 million
1995 (predecessor).......................................... $5.1 million
1996 (proforma-combined).................................... $4.4 million
1997 (AutoCyte)............................................. $4.5 million
1998 (AutoCyte)............................................. $4.7 million
FOR THE SIX MONTHS ENDED JUNE 30
1998........................................................ $2.3 million
1999........................................................ $2.3 million
</TABLE>

THIRD-PARTY REIMBURSEMENT

In order to successfully commercialize PREP and SCREEN for cervical cancer
screening in the United States and other countries, reimbursement from
third-party payors such as private insurers and managed care organizations must
be available. AutoCyte intends to focus on obtaining coverage and reimbursement
from major national and regional managed care organizations and insurance
carriers throughout the United States. AutoCyte expects to emphasize the
improved disease detection and cost savings benefits (from both early disease
detection and less repeat testing) in seeking to obtain reimbursement for PREP
and SCREEN for cervical cancer screening.

Current Procedural Terminology codes, which are used in the submission of
claims to insurers for reimbursement for medical service, are assigned,
maintained and revised by the CPT Editorial board administered by the American
Medical Association. In January 1998 the CPT Editorial board established two
separate Current Procedural Terminology codes (88142 and 88143) for liquid-based
cervical cytology interpretations by a cytotechnologist and, if necessary, a
pathologist, respectively. The United States Health Care Financing
Administration has targeted September 1999 as a deadline for establishing a
national limit on the amount of reimbursement for these procedures. AutoCyte
cannot guarantee that the national limit for monetary reimbursement will be high
enough to support use of PREP on a routine basis. If the national limit is
insufficient to support the routine use of PREP, AutoCyte's business, financial
condition and results of operations could be materially adversely effected.

AutoCyte has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices and
in many instances are exerting significant pressure on medical suppliers to
lower their prices. Lack of, or inadequate, reimbursement by government and
other third-party payors for its products would have a material adverse effect
on AutoCyte's business, financial condition and results of operations. Further,
outside of the United States, health care reimbursement systems vary from
country to country, and AutoCyte cannot guarantee that third-party reimbursement
will be made available at an adequate level, if at all, for PREP or SCREEN under
any other reimbursement system.

In February 1998, the Medical Advisory Panel of the Blue Cross and Blue
Shield Association's Technology Evaluation Center completed a cost-effectiveness
study pertaining to some of AutoCyte's competitors. The Medical Advisory Panel
concluded that systems being marketed by AutoCyte's competitors offer only
modest improvements in diagnostic accuracy at a high cost. While AutoCyte's
products were not included in the study, AutoCyte cannot guarantee that the
report will not have an adverse effect on market acceptance of AutoCyte's
products. Further, in July 1998, the American College of Obstetricians and
Gynecologists released a report stating that, while the new technologies improve

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sensitivity of the Pap test, their routine use cannot be recommended based on
costs and a lack of sufficient data demonstrating a reduction in incidence of
late-stage disease or an improvement in cervical cancer survival rate. Again,
AutoCyte was not one of the companies whose products were evaluated in this
report. However, AutoCyte cannot guarantee that this information will not
negatively affect acceptance of PREP and SCREEN in the marketplace. AutoCyte
cannot guarantee that third-party payors will provide coverage, that
reimbursement levels will be adequate or that health care providers or clinical
laboratories will use PREP and SCREEN for cervical cancer screening in lieu of
the conventional Pap smear.

Recent health care cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may effect AutoCyte
negatively. However, emphasis on preventive measures to reduce the overall costs
to the health care system could lead to more frequent testing for cervical
cancer and use of PREP and SCREEN if approved by the FDA. AutoCyte is unable to
predict the outcome or the effect on its business of the current health care
reform debate.

PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS

AutoCyte relies on a combination of patents, trade secrets, copyrights and
confidentiality agreements to protect its proprietary technology, rights and
know-how. AutoCyte currently holds numerous issued United States patents as well
as corresponding foreign patents and patent applications, and have additional
United States patent applications that have been allowed but not issued,
relating to various aspects of AutoCyte's slide preparation and computerized
image analysis technologies. These patents cover system components, such as the
disaggregation syringe, as well as the PREP process and the interactivity of the
cytotechnologist with the SCREEN system. AutoCyte has also filed one patent
application which is pending in the United States and numerous patent
applications which are pending abroad.

AutoCyte cannot guarantee that the claims allowed in any of its existing or
future patents will not be successfully challenged or circumvented by
competitors. Under current law, patent applications in the United States are
maintained in secrecy until patents are issued and patent applications in
foreign countries are maintained in secrecy for a period after filing. The right
to a patent in the United States belongs to the first to invent, not the first
to file a patent application. AutoCyte cannot be sure that its products or
technologies do not infringe patents that may be granted in the future pursuant
to pending patent applications or that AutoCyte's products do not infringe any
patents or proprietary rights of third parties. AutoCyte is aware that several
of its competitors hold several patents relating to automated slide preparation
and screening. AutoCyte cannot guarantee that a court would rule that its
products do not infringe such third-party patents or would invalidate such
third-party patents.

AutoCyte could incur substantial legal fees in defending against a patent
infringement claim or in asserting claims of invalidity against third parties.
In the event that any claims of third-party patents are upheld as valid and
enforceable, the owners of such patents could prevent AutoCyte from selling its
products or could require AutoCyte to obtain licenses from them. Alternatively,
AutoCyte would have to redesign its products to avoid infringement. AutoCyte
cannot guarantee that such licenses would be available or, if available, would
be on terms acceptable to it or that AutoCyte would be successful in any attempt
to redesign its products or processes to avoid infringement. AutoCyte's failure
to obtain these licenses or to redesign its products would have a material
adverse effect on its business, financial condition and results of operations.

AutoCyte has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors. AutoCyte
cannot guarantee that the obligations of its employees and employees of other
companies with whom AutoCyte has entered into confidentiality agreements to
maintain the confidentiality of trade secrets and proprietary information will
effectively prevent disclosure of AutoCyte's confidential information. AutoCyte
also cannot guarantee that these agreements will provide meaningful protection
for its confidential information if there is unauthorized use or disclosure, or
that AutoCyte's trade secrets or proprietary information will not be
independently developed by its competitors. AutoCyte also hold unregistered
rights to copyrights on documentation and operating software it developed for
PREP and SCREEN. AutoCyte cannot guarantee that any copyrights it owns will not
be challenged or

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circumvented by its competitors. Litigation may be necessary to defend against
claims of infringement, to enforce AutoCyte's patents and copyrights, or to
protect trade secrets. Litigation of this nature could result in substantial
cost to, and diversion of effort by, AutoCyte. Furthermore, AutoCyte cannot
guarantee that it would prevail in any infringement litigation. In addition, the
laws of some foreign countries do not protect AutoCyte's proprietary rights to
the same extent as do the laws of the United States.

COMPETITION

The cervical cancer screening market is comprised of the conventional Pap
smear and certain technologies which have been introduced in recent years or are
currently under development to provide improvements over the conventional Pap
smear process. AutoCyte's competitors in the development and commercialization
of alternative cervical cancer screening technologies include both publicly
traded and privately held companies. The alternative technologies of which
AutoCyte is aware have focused on:

- improvements in slide sample preparation;

- the development of automated, computerized screening systems; and

- adjunctive testing technologies.

To date, AutoCyte knows of no competitor which has developed an integrated
sample preparation and image analysis system, such as PREP and SCREEN.
Nevertheless, some competitors' products have already received FDA approval and
are being marketed in the United States. In addition, some of AutoCyte's
competitors have substantially greater financial, marketing, sales, distribution
and technical resources than AutoCyte does. Certain competitors also have more
experience in research and development, clinical trials, regulatory matters,
customer support, manufacturing and marketing. In addition, some of these
companies have received third-party reimbursement for their products. AutoCyte
believes that its products will compete on the basis of a number of factors,
including:

- slide specimen adequacy;

- screening sensitivity;

- ease of use;

- efficiency;

- cost to customers; and

- performance claims.

While AutoCyte believes that its products will have competitive advantages
based on some of these factors, AutoCyte cannot guarantee that various
competitors' products will not have competitive advantages based on other
factors that, when coupled with the earlier market entry of some products, will
adversely effect the market acceptance of PREP and SCREEN. Moreover, AutoCyte
cannot guarantee that it will be able to compete successfully against current or
future competitors or that competition, including the development and
commercialization of new products and technologies, will not have a material
adverse effect on AutoCyte's business, financial condition and results of
operations. AutoCyte's products could be rendered obsolete or uneconomical by
technological advances of its current or potential competitors, the introduction
and market acceptance of competing products or by other approaches.

AutoCyte's primary competitor in thin-layer slide preparation is Cytyc
Corporation. Cytyc's system, the ThinPrep(R) 2000 Processor(TM), is based on a
membrane-filtration separation system rather than the centrifugation approach
used in the AutoCyte PREP process. It is also used for non-gynecologic
applications. The FDA has allowed Cytyc to conclude in the discussion section of
the package insert for ThinPrep 2000 that the sample preparation is
". . . significantly more effective than the conventional Pap smear for the
detection of Low Grade Squamous Intraepithelial and more severe lesions in a
variety of patient populations." The FDA has also allowed Cytyc to conclude in
the package insert that specimen

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quality ". . . is significantly improved over that of conventional Pap smear
preparation in a variety of patient populations."

In June 1997, Cytyc entered into a multi-year agreement with Quest, at the
time, one of the three large national chain laboratories. AutoCyte believes that
this agreement is scheduled to expire at the end of 1999. In February 1999,
Quest announced that it was acquiring the clinical laboratory operations of
SmithKline Beecham, another of the large national chain laboratories. The
acquisition is subject to review by various regulatory authorities and is
targeted for completion in the third quarter of 1999. In addition, in October of
1996, Cytyc announced a non-exclusive co-marketing agreement with Digene
Corporation, which has developed a product that detects the presence or absence
of human papillomavirus in precancerous cervical lesions. In September 1997, the
FDA approved PMA supplements submitted by Cytyc and Digene enabling testing for
human papillomavirus directly from Cytyc's ThinPrep process cell suspension.
AutoCyte is currently working with Digene on a PMA supplement for use of PREP's
cell suspension with Digene's human papillomavirus test in the United States. In
Europe, PREP cell suspension is already in routine use with Digene's human
papillomavirus test. Cytyc has also announced that it is developing a higher
throughput version of its ThinPrep 2000 system (the ThinPrep 3000) that is
expected to complete clinical trials by the end of 1999. In January 1999, Cytyc
announced that it was expanding its direct sales force by 75 people to sell
directly to hospitals, laboratories and doctors. Finally, in July 1999, Cytyc
announced that it was collaborating with Battelle's Medical Products Group to
accelerate development of a computer imaging system to aid in cervical cancer
screening. Cytyc's success with implementation of any of the foregoing
arrangements or marketing initiatives may make it more difficult for AutoCyte to
promote PREP in markets in which it competes with Cytyc.

In automated screening AutoCyte faces direct competition primarily from one
company, NeoPath, which markets imaging systems for both primary screening of
conventional Pap smears, and to reexamine or rescreen conventional Pap smears
previously diagnosed as negative. NeoPath's primary AutoPap Screening System was
approved for primary screening in May 1998. The NeoPath primary screening system
protocol excludes high-risk patient samples, and of the remaining samples,
approximately 25% are designated, based on system analysis, for no further
review. The remaining 75% of non-high-risk patients' samples undergo full
cytotechnologist review.

NeoPath's system could not be used with PREP without FDA approval, and,
therefore, if this system is installed at or used by hospitals and reference
laboratories, those hospitals and laboratories may not purchase AutoCyte's
products, which would result in a material adverse effect on AutoCyte's
business, financial condition and results of operations.

In March 1999, AutoCyte announced an agreement with NeoPath to pursue a
clinical study to obtain supplemental approval from the FDA to use NeoPath's
AutoPap Primary Screening System to screen slides prepared using PREP. See
"Supplemental Study with NeoPath", above, for a further discussion of this
agreement.

Morphometrix is also developing an automated, computerized system for
screening thin-layer slides.

GOVERNMENT REGULATION

The manufacture and sale of medical diagnostic devices are subject to
extensive governmental regulation in the United States and in other countries.
PREP and SCREEN are regulated for cervical cytology applications in the United
States as medical devices by the FDA under the Federal Food, Drug, and Cosmetic
Act and require premarket approval by the FDA prior to commercial distribution.
In addition, certain modifications to medical devices, their manufacture or
their labeling also are subject to FDA review and approval before marketing.
Pursuant to the or their labeling also are subject to FDA review and approval
before marketing. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA
regulates the following with regard to medical devices in the United States:

- preclinical and clinical testing;

- manufacturing;
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- labeling;

- distribution;

- sales;

- marketing;

- advertising; and

- promotion.

Failure to comply with applicable requirements, including good clinical
practice requirements, can result in:

- the refusal of the government to grant premarket approval for devices;

- suspension or withdrawal of clearances or approvals;

- total or partial suspension of production, distribution, sales and
marketing;

- fines;

- injunctions;

- civil penalties;

- recall or seizure of products; and

- criminal prosecution of a company and its officers and employees.

Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling and adherence to FDA-mandated quality system
(including Quality System) requirements and, in some cases, premarket
notification). Class II devices are subject to general controls including, in
most cases, premarket notification, and to special controls (e.g., performance
standards, patient registries and FDA guidelines). Generally, Class III devices
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices) and also include most "new medical devices," devices that were not on
the market before May 28, 1976, and for which the FDA has not made a finding of
"substantial equivalence" based on a premarket notification. Class III devices
usually require clinical testing and FDA approval prior to marketing and
distribution. AutoCyte's PREP and SCREEN products, when intended for gynecologic
use, are regulated as Class III medical devices.

If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or
distributor of the device) is required to file an investigational new device
application prior to commencing human clinical trials. The investigational new
device application must be supported by data, typically including the results of
animal and laboratory testing. If the investigational new device application is
approved by the FDA (or the FDA does not notify the sponsor 30 days after
receipt of the application that the trials may not begin) and one or more
appropriate institutional review boards approves the study protocol, clinical
trials may begin at a specified number of investigational sites with a specific
number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, such as AutoCyte's PREP and SCREEN
products when intended for gynecologic use in a "split-sample" study, or is an
investigational new exempt in-vitro diagnostic device, a sponsor may begin the
clinical trial after obtaining approval for the study from one or more
appropriate institutional review boards. Sponsors of clinical trials are
permitted to sell devices distributed in the course of the study provided the
price charged does not exceed recovery of the cost of manufacture, research,
development and handling. Generally, for an investigational new device study, a
supplement must be submitted to, and approved by, the FDA (or the FDA does not
notify the sponsor 30 days after receipt of the supplement that the change may
not be implemented) before a sponsor or an investigator may make a change to the
investigational plan that may affect its scientific soundness or the
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rights, safety or welfare of human subjects. The FDA has the authority to
re-evaluate, alter, suspend or terminate clinical testing based on its
assessment of data collected throughout the trials or for non-compliance with
regulatory requirements.

Generally, before a new Class II medical device can be introduced into the
market, the manufacturer must obtain FDA clearance of a premarket notification
or approval of a premarket approval application, unless the device is exempt
from the requirement of such clearance. A premarket notification clearance will
be granted if the submitted information establishes that the device is
"substantially equivalent" to a legally marketed predicate device (Class I or II
medical device (for a Class I or II device that is not exempt from the
requirement of premarket notification clearance) or to a legally marketed Class
III device that does not itself require an approved PMA prior to marketing). A
premarket notification must contain information to support a claim of
substantial equivalence, which may include laboratory test results or the
results of clinical studies of the device in humans. Such studies can take years
to complete, analyze, and prepare for submission to the FDA. Commercial domestic
distribution of a device for which a premarket notification is required may
begin only after the FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. An FDA review of a premarket notification is
generally expected to take from three to six months from the date the premarket
notification is accepted for review by the agency, but it may take far longer,
and premarket notification clearance may never be obtained.

An FDA order may declare that the device is "substantially equivalent" to
another legally marketed device and allow the proposed device to be marketed in
the United States. The FDA, however, may determine that the proposed device is
not "substantially equivalent" or require further information, including
clinical data, to make a determination of substantial equivalence. Such
determinations or requests for additional information could prevent or delay
market introduction of the product that is the subject of the premarket
notification premarket notification.

Generally, a PMA for a new Class III device must be filed with and approved
by the FDA before marketing of the device may begin. A PMA must be supported by
valid scientific evidence that typically includes extensive data, including data
from preclinical testing and human clinical trials to demonstrate the safety and
effectiveness of the device. The FDA ordinarily requires the performance of
independent, statistically significant human clinical trials that demonstrate
the safety and effectiveness of the device in order to obtain FDA approval of
the PMA. The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling.

Upon receipt of the PMA, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA so determines, the FDA will accept the PMA for filing and begin an
in-depth review of it. An FDA review of a PMA typically is expected to take
approximately one year from the date the PMA application is accepted for filing,
but may take significantly longer if the FDA requests additional information and
any major amendments to the PMA are filed. The review time is often
significantly extended by requests from the FDA for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, including clinicians, may be convened to
review and evaluate the application and provide recommendations to the FDA as to
whether the PMA should be approved. The FDA is not bound by the recommendation
of the advisory committee. The FDA will usually inspect the applicant's
manufacturing facility to ensure compliance with Quality System requirements
prior to approval of a PMA. The FDA also may conduct bioresearch monitoring
inspections of the clinical trial sites and the PMA applicant to ensure data
integrity, and that the studies were conducted in compliance with the applicable
FDA regulations.

If the FDA's evaluations of the clinical study sites' compliance with the
agency's Good Clinical Practice requirements and the Quality System compliance
of the manufacturing facilities are acceptable, the FDA will issue either an
approval letter (order) or an "approvable letter" containing a number of
conditions that must be met in order to secure approval of a PMA. If the FDA's
evaluation of the PMA,

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the clinical study sites or the manufacturing facilities are not favorable, the
FDA will deny approval of the PMA or issue a "not approvable letter." The FDA
may also determine that additional preclinical testing or human clinical trials
are necessary, in which case approval of the PMA could be delayed for several
years while additional testing or trials are conducted and submitted in an
amendment to the PMA. The IDE/ PMA process is expensive, uncertain and lengthy
(typically taking five to seven years or more to complete), and a number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing. There can be no assurance that AutoCyte will be
able to obtain necessary regulatory approvals for any proposed future products
in a timely manner or at all. Delays in receipt of approvals, failure to receive
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements, would have a material adverse effect
on AutoCyte's business, financial condition and results of operations.

The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; certain labeling
changes; certain types of manufacturing changes; and changes in performance or
design specifications. Any such change will require FDA approval of a PMA
supplement before implementing the change.

PREP and SCREEN and any other products manufactured or distributed by
AutoCyte pursuant to an approved PMA application and supplements (or to
premarket notification clearances) will be subject to pervasive and continuing
regulation by the FDA, including record-keeping requirements and reporting of
adverse experience with the use of the device. Device manufacturers are required
to register their establishments and list their devices with the FDA. The FDC
Act requires that medical devices be manufactured in accordance with the FDA's
Quality System regulation. Product labeling and promotional activities are also
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. Products may only be promoted by AutoCyte and any of its
distributors for their approved indications. No assurance can be given that
modifications to the labeling which may be required by the FDA in the future
will not adversely affect AutoCyte's ability to market or sell PREP, SCREEN or
other of AutoCyte's products.

AutoCyte also is subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that AutoCyte will
not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon AutoCyte's business, financial condition and
results of operations.

Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. AutoCyte has been advised by various parties,
including consultants it engaged and foreign distributors, that no regulatory
approvals for a device analogous to FDA approval of a PMA are currently required
by any country where AutoCyte currently sells PREP or SCREEN. Such approval
requirements may be imposed in the future. Export sales of investigational
devices that are subject to PMA or IDE application requirements and have not
received FDA marketing approval generally may be subject to FDA export permit
requirements depending upon, among other things, the purpose of the export
(investigational or commercial), the country to which the device is intended for
export, and on whether the device has valid marketing authorization in a country
listed in the FDA Export Reform and Enhancement Act of 1996, e.g., any member
country of the European Union and certain other countries including but not
limited to Australia, Canada, Israel, Japan, New Zealand, and South Africa. In
order to obtain such a permit, when one is required, AutoCyte must provide the
FDA with documentation from the medical device regulatory authority of the
country in which the purchaser is located, stating that the device may be
marketed in the country. In addition, the FDA must find the exportation of the
device is not contrary to the public health and safety of the country in order
for AutoCyte to obtain the permit. AutoCyte received an FDA permit
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to export PREP and SCREEN to all foreign countries in which it is currently
selling these products and where such a permit was required. There can be no
assurance that AutoCyte will meet the FDA's export requirements or receive
additional FDA export approval when such approval is necessary, or that
countries to which the devices are to be exported will approve the devices for
import. AutoCyte's failure to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import, could
have a material adverse effect on AutoCyte's business, financial condition and
results of operations.

The laboratories that would purchase AutoCyte's PREP and SCREEN products
are subject to extensive regulation under CLIA, which requires laboratories to
meet specified standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. AutoCyte believes that its
PREP and SCREEN products operate in a manner that will allow laboratories using
the products to comply with the requirements of the Clinical Laboratory
Improvement Amendments. However, AutoCyte cannot guarantee that interpretations
of current Clinical Laboratory Improvement Amendments regulations or future
changes in Clinical Laboratory Improvement Amendments regulations would not make
compliance by the laboratory difficult or impossible and therefore have an
adverse effect on sales of AutoCyte's products.

PRODUCT LIABILITY

Commercial use of any of AutoCyte's products may expose AutoCyte to product
liability claims. AutoCyte currently carries $12,000,000, limited to $11,000,000
per occurrence, in general liability (including product liability) insurance
coverage. AutoCyte believes that this amount is adequate to meet its present
needs. The medical device industry has experienced increasing difficulty in
obtaining and maintaining reasonable product liability coverage, and substantial
increases in insurance premium costs in many cases have rendered coverage
economically impractical. To date, AutoCyte has not experienced difficulty
obtaining an amount of insurance coverage commensurate with its level of sales.
As AutoCyte's sales expand, however, there can be no assurance that its existing
product liability insurance will be adequate or that additional product
liability insurance will be available to AutoCyte at a reasonable cost, or that
any product liability claim would not have a material adverse effect on
AutoCyte's business, financial condition and results of operations.

EMPLOYEES

As of September 7, 1999 AutoCyte employed 83 persons on a full-time basis.
AutoCyte believes that its relations with its employees are good. None of
AutoCyte's employees are a party to a collective bargaining agreement.

FACILITIES

AutoCyte currently leases a total of 43,000 square feet of space devoted to
manufacturing, warehousing, administrative, research and development and
engineering functions, at 780 Plantation Drive, Burlington, North Carolina under
a seven-year lease expiring in July 2005. The lease is renewable for five
additional one-year terms.

AutoCyte also currently leases a 5,000 square foot education facility at
1111 Huffman Mill Road in Burlington, North Carolina under a three-year lease
expiring in June 2001. The education facility lease is renewable for one
additional three-year term, and also contains an option to expand the leased
space by 4,500 square feet.

LEGAL PROCEEDINGS

AutoCyte is not a party to any legal proceedings.

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BUSINESS OF NEOPATH

The AutoPap System refers to the AutoPap Primary Screener and the AutoPap
QC together.

MARKET

NeoPath believes that clinical analysis of Pap smears is the largest
nonautomated clinical laboratory procedure. U.S. clinical laboratories process
over 50 million Pap smears annually, and laboratories outside the United States
process more than 60 million Pap smears annually.

The AutoPap Screener is the only instrument approved by the FDA to process
Pap smears without human review. In addition, in recent years the medical
community has increasingly focused on improving the quality of women's
healthcare. NeoPath believes that the AutoPap System will allow laboratories to
better detect precancerous cervical conditions and cervical cancer, thereby
improving the standard of care for their female patients. Earlier detection and
treatment should lower risks of morbidity and mortality.

Laboratories that fail to accurately identify abnormal Pap smears may face
malpractice suits. Because federal law requires all laboratories to retain Pap
smears for five years, they face significant exposure to liability. NeoPath
believes that use of the AutoPap System will substantially improve the current
quality of practice, and will reduce exposure to liability for laboratories that
use the AutoPap System.

PRODUCTS

The AutoPap QC and AutoPap Screener use identical hardware components. The
AutoPap Screener, however, contains enhanced software, including additional
cell-classification algorithms, for use in the initial screening of Pap smears.

The AutoPap System works with a wide range of staining procedures used on
conventionally prepared Pap smear slides. The AutoPap System analyzes a Pap
smear in about the same time as a cytotechnologist. It holds 288 Pap smear
slides at a time, is easy to load and unload, and can operate continuously, with
minimal intervention, for up to 24 hours per day. NeoPath provides each clinical

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laboratory with on-site training, system documentation, a comprehensive quality
assurance program, and ongoing customer and technical support.

NeoPath believes that its automated visual intelligence technology can be
used for other diagnostic tests that involve microscopic analysis of biological
specimens on glass slides, such as sputum, blood, or urine samples. In addition,
NeoPath has identified several other potential uses for its technology,
including automated tissue analysis, breast and skin cancers. To develop its
systems for other applications, NeoPath must adapt software algorithms developed
for the analysis of Pap smears to the analysis of other tissue specimens.
NeoPath continues to evaluate other applications for future development efforts,
including non-medical applications. In July 1999, NeoPath announced a
collaborative research agreement with Bayer Diagnostics to develop an automated
screening system for the detection of early lung cancer.

AUTOPAP 300 QC AUTOMATIC PAP SCREENER SYSTEM

The AutoPap QC rescreens Pap smears that have already been screened and
classified as normal by a cytotechnologist. Laboratories use the AutoPap QC to
improve the detection of false-negatives and to improve diagnostic accuracy. The
AutoPap QC classifies slides based on their likelihood of being abnormal; it
classifies 10% or more of slides showing the highest potential for abnormality
as requiring additional review by a cytotechnologist qualified to perform
quality control. Laboratories can use the AutoPap QC as either a quality-control
or an adjunctive rescreening device for manually screened Pap smears. This
allows laboratories to implement the AutoPap QC into their quality-control
procedures or to offer rescreening as an additional service for women who
request additional review of their Pap smears.

Preclinical and clinical trials demonstrated that the AutoPap QC, operating
in a quality-control mode, detected up to five times more low-grade and worse
false negative slides than a 10% random selection method. The AutoPap QC
achieved up to an eight-fold improvement in the detection of biopsy-confirmed
high-grade and cancer slides. NeoPath believes that use of the AutoPap QC
provides consistent earlier detection of precancerous conditions and cancer,
earlier treatment and reduced risk of morbidity and mortality.

AUTOPAP PRIMARY SCREENER SYSTEM

The FDA approved the AutoPap Screener in May 1998. The AutoPap Screener
uses new diagnostic algorithms to improve accuracy in the primary screening of
Pap smear slides. As approved by the FDA, the AutoPap Screener identifies up to
about 25% of slides as "within normal limits" and requiring no further review.
Cytotechnologists then manually screen the remaining approximately 75% of slides
with the assistance of the AutoPap ranked review report. This ranked review
report shows the relative scores of the processed slides. At least 15% of the
highest-ranking slides that are classified normal by manual review then undergo
quality control rescreening.

The AutoPap Screener has been approved in certain foreign countries to
identify up to 50% of slides "within normal limits." Clinical studies have shown
that the AutoPap Screener-assisted practice identifies significantly more
abnormal slides compared to current practice. This difference is statistically
significant in favor of the AutoPap Screener-assisted practice. In addition, the
AutoPap Screener-assisted practice is better able to correctly identify normal
slides than current practice.

The AutoPap Screener is NeoPath's principal product for the Pap smear
screening market. By reducing the number of Pap smears requiring
cytotechnologist review, the AutoPap Screener increases the number of Pap smears
a laboratory can process. This reduces the per-slide processing cost while
improving overall laboratory accuracy. Because the AutoPap Screener is an
upgrade, designed to incorporate the features of the AutoPap QC, the laboratory
can continue to perform its AutoPap QC-assisted quality control rescreening
without having to process Pap smear slides twice through the AutoPap System.

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MARKETING AND SALES

The AutoPap System is the only fully automated Pap smear screening device
to receive regulatory clearance for marketing in the United States. NeoPath
believes that use of the AutoPap System will distinguish its customers'
laboratories as providing a higher standard of care for Pap smear screening.

NeoPath recognizes revenue on either a product sale or fee-per-use basis.
Under its fee-per-use program, NeoPath retains ownership of AutoPap Systems
placed at customer sites and assesses customers a charge for each Pap smear
slide they process.

NeoPath markets the AutoPap System to domestic and foreign clinical
laboratories through direct sales activities in the U.S. and primarily through
distributors in international markets. Approximately 19% of NeoPath's revenues
in 1998 were from customers outside of the United States, compared to 51% in
1997 and 45% in 1996. NeoPath believes that over 35% of all U.S. Pap smears are
screened by the three largest laboratories, including SmithKline Beecham
Clinical Laboratories, Quest Diagnostics Incorporated, and Laboratory
Corporation of America. Each of these companies operates multiple laboratory
facilities nationwide.

NeoPath distributes AutoPap Systems in Japan through an agreement with
Nikon Corporation. Under this agreement, Nikon markets NeoPath products to
customers and handles maintenance and service, and NeoPath provides training for
Nikon sales personnel and service engineers, who in turn train Japanese
customers. The Japanese market, which conducts about 12 million Pap smear tests
annually, is second only to the United States in current screening volume.

In 1997, NeoPath established NeoPath Europe, located in Belgium, as its
first international branch.

NeoPath's largest customers have accounted for a significant percentage of
total revenues, as noted below.

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------
JUNE 30, 1999 1998 1997 1996
------------- ----- ----- -----
<S> <C> <C> <C> <C>
Smith Kline Beecham Clinical Laboratories............... 44% 18% 15% 22%
Nikon Corporation (Japan)............................... * * 38% 33%
Chang's Instrument Company Limited (Taiwan)............. * 10% * *
Immuno Bio Systems (Australia).......................... * * * 12%
Cascade Pathology Services Corporation.................. * * * 19%
Unilab Corporation...................................... 17% * * *
</TABLE>

- ---------------
* Less than 10%

NeoPath installs the AutoPap System at customer laboratories. By providing
this on-site service, NeoPath believes that clinical laboratories will be better
able to integrate use of the AutoPap System into their normal workflow. By
installing the AutoPap System on site, clinical laboratories can maintain
control over patient specimens data, minimize slide handling and avoid delays in
reporting their test results.

As its product development efforts improve the performance of the AutoPap
System, NeoPath intends, subject to obtaining applicable regulatory approvals,
to offer upgraded products to its customers. NeoPath has not yet determined how
it will charge for its upgrade packages, but anticipates that upgrades will
increase its fee-per-use and sale pricing.

MANUFACTURING

NeoPath's manufacturing operations are located at its headquarters in
Redmond, Washington, where it conducts final assembly, integration and testing
of the electronic, mechanical and optical components and modules of the AutoPap
System. In its manufacturing process, NeoPath must meet and adhere to all
applicable requirements of U.S. and international regulatory agencies, including
Quality Systems Regulations issued by the FDA. As part of the FDA regulatory
process, NeoPath faces periodic FDA
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inspections and other periodic inspections by U.S. and foreign regulatory
agencies. See "Governmental Regulation." NeoPath's manufacturing operations have
produced sufficient AutoPap Systems to meet customer demand since it began
commercial operations in 1996.

NeoPath purchases all components for the AutoPap System from outside
vendors. A major component of the AutoPap System, the slide tray motion system,
is supplied by a sole-source vendor, Applied Precision, Inc. In addition,
NeoPath purchases all of its AutoPap System optics from Nikon Corporation, and
all of its video cameras from Sony Electronics, Inc. Certain other components
are currently purchased from single-source vendors. NeoPath would need to modify
any components provided by additional or replacement suppliers for use in the
AutoPap System. NeoPath would be unable to quickly establish additional or
replacement sources of supply for many AutoPap System components. In addition,
NeoPath may need to obtain regulatory approval to substitute certain components.
NeoPath cannot be sure of obtaining the necessary approvals. If one of its
vendors becomes unable to supply acceptable components in a timely manner and in
the quantity required NeoPath may need to delay or halt its manufacturing
process. Any delay or cessation of manufacturing could adversely affect its
business.

CORE AUTOPAP SYSTEM TECHNOLOGY

NeoPath's core AutoPap System technology consists of:

- an integrated high-speed video microscope that can capture high-quality
images,

- comprehensive image interpretation software that accurately analyzes
images and classifies cells and slides, and

- high-speed custom field-of-view computers that run the software at high
speed.

This technology can automatically analyze and extract important features of
cellular material and can classify a specimen based on those features according
to likelihood of abnormality.

HIGH-SPEED VIDEO MICROSCOPE

To capture high-quality images, NeoPath has designed a high-speed video
microscope with an integrated mechanical/optical system, a custom microscope and
video cameras that focus, capture and digitize images from a Pap smear. The
microscope and three video cameras remain stationary while the platform holding
the Pap smear is moved. This allows the camera system to scan the Pap smear in a
continuous, systematic motion. High-intensity, narrow band light from a strobe
illuminates the Pap Smear, which enhances cell contrast and freezes each image
without interrupting the motion of the platform holding the Pap smear.

A custom-designed image capture and focus module controls the
mechanical/optical system. This module uses specialized integrated circuits and
software. This module calibrates the image acquisition system, automatically
focuses the system to obtain diagnostically relevant images and adjusts for the
non-uniform background and cell distributions of a conventional Pap smear. The
image capture and focus module also digitizes images, evaluates image and focus
quality, decides whether to accept or reject the image for analysis and
identifies the location of a rejected image for a repeat scan.

The mechanical/optical system scans the slide in three separate operations.
First, it performs a setup in which it locates the slide, identifies the
coverslip area and maps three-dimensional surface irregularities of the Pap
smear. The system then captures and analyzes low-magnification images from the
slide in a systematic scan of the slide coverslip area. Finally, using
information from the low-magnification scan, the system captures
high-magnification images from those areas of the slide having the greatest
diagnostic interest.

IMAGE-INTERPRETATION SOFTWARE

NeoPath's image-interpretation software uses a series of
image-interpretation algorithms to examine slide images and select and analyze
those that best indicate normality and abnormality. An image-
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interpretation algorithm consists of multiple-step mathematical and algorithmic
processes that detect and classify an object or collection of objects based on
shape, structure, optical density, contextual features and other measurable
characteristics. The process consists of five steps:

- selecting images from a slide,

- segmenting the images into objects,

- measuring object features,

- classifying objects, and

- classifying the slide.

SELECTION OF IMAGES. By analyzing images from a low-magnification scan of
the slide coverslip area, algorithms first identify the areas most likely to
contain cellular material of diagnostic significance. This information then
guides the high-speed video microscope to analyze the locations of greatest
diagnostic interest in a separate high-magnification scan. The AutoPap System
also accumulates and stores information gathered in this first step for later
use in the slide classification process.

SEGMENTATION INTO OBJECTS. In the high-magnification scan, the AutoPap
System locates and separates the well-defined cells or group of cells in each
image from poorly defined objects and obvious artifacts such as blood, mucus,
dust particles and similar matter.

MEASUREMENT OF OBJECT FEATURES. Once the system separates objects or
groups of objects from other elements of the image, algorithms measure more than
100 features from each object. These features independently or in combination
distinguish normal cells, artifacts and abnormal cells. The algorithms
discriminate on the basis of such categories as density, texture, size, shape
and context. Density features are measures of the optical density of various
portions of the cell, such as the cytoplasm and nucleus, and the ratios of these
densities to each other. Texture is a localized measure of optical density
variation. Size features refer to the physical areas of the segmented objects
and their ratios to each other. Shape features measure the boundary complexity
of the segmented objects, can differentiate cell types, and are used to
discriminate among isolated and overlapping objects. Context compares an object
to its surroundings and the proximity of objects to each other.

CLASSIFICATION OF OBJECTS. Using the measured object features, a series of
algorithms then classifies the objects contained in the images. Each
classification algorithm proceeds from easily identifiable objects to
increasingly difficult objects, adding more features at each level of
classification. Three complementary algorithms analyze the cells and cell
groupings that could indicate normality and abnormality: the single-cell
algorithm, the group algorithm and the thick-group algorithm. The algorithm
computes an "anomaly likelihood" value at various steps of the classification
process and generates "alarms," that identify objects that are more likely to be
abnormal cells. The results of the three algorithms are combined to achieve a
high level of accuracy.

CLASSIFICATION OF THE SLIDE. The system compiles all the gathered and
analyzed information from objects in a series of scores that the system uses to
classify the slide. Other algorithms evaluate the suitability of the slide for
machine processing based on the quality of staining, adequacy of cell
collection, presentation of material on the slide and image quality. Others
determine the probable presence of certain important cellular material such as
endocervical and squamous cells.

The AutoPap Screener uses new diagnostic algorithms that provide an
additional evaluation score, in addition to the original evaluation score, for
superior detection of glandular abnormalities. The screener uses new algorithms
that classify clusters of cells. The additional evaluation score provides a
second opinion to the decision of the original evaluation score. The combined
scores better detect abnormalities in all categories.

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FIELD-OF-VIEW COMPUTER

The AutoPap System requires a high-speed computing system, with significant
computing power to run its image-interpretation algorithms. To address this
requirement, NeoPath developed specialized field-of-view computers, which are
powerful image processors that contain application-specific integrated circuits
and other processing components. These special purpose computers accelerate the
execution speed of NeoPath's image-interpretation software. NeoPath estimates
that one field-of-view computer can perform over 1.6 billion elemental pixel
operations per second and at proportionately higher rates when several
field-of-view computers are linked to run in parallel. The current AutoPap
System contains 15 field-of-view computers. The field-of-view computer can be
programmed to execute algorithms for other applications.

PATENTS AND PROPRIETARY RIGHTS

Because of the substantial length of time and expense required to bring new
products through development and regulatory approval to the marketplace, the
medical device industry relies heavily on patent protection and protecting trade
secrets for new technologies, products and processes. NeoPath files patent
applications to protect technologies that it believes are significant to the
development of its business. NeoPath holds 58 U.S. patents (issued or allowed)
and has 22 additional U.S. patent applications pending. The patents and patent
applications relate to various aspects of its high-speed image-interpretation
technology. NeoPath holds 7 foreign patents and has applied for patent
protection for certain aspects of its technology in various foreign countries.
NeoPath intends to continue to pursue patent protection where it is available
and cost-effective, both in the United States as well as in other countries.

Companies in the medical device industry have engaged in extensive
litigation regarding patents and other intellectual property rights. NeoPath may
face such litigation to enforce its patents, protect its trade secrets or
know-how, challenge the validity of proprietary rights of others or defend
against alleged infringement of proprietary rights of others.

NeoPath relies on a combination of patents, trade secrets and
confidentiality agreements to protect its proprietary technology, rights and
know-how. NeoPath requires each of its employees and consultants to enter into a
confidentiality agreement that prohibits them from disclosing confidential
information to anyone outside NeoPath. These agreements also require employees
and consultants to disclose to NeoPath ideas, developments, discoveries or
inventions they conceive during employment or consultation. They also must
assign their proprietary rights in such matters if the matters relate to NeoPath
business and technology.

NeoPath has registered trademarks in the United States, Australia, Japan,
Canada, France, the Benelux countries, Germany, the United Kingdom, Italy and
Spain for "NeoPath" and "AutoPap." NeoPath also has registered trademarks for
"Pathfinder" and "PapMap" in the United States. NeoPath has applied for
registration of its trademarks in several other foreign countries.

THIRD-PARTY REIMBURSEMENT

Some private third-party medical insurance providers and governmental
agencies offer reimbursement for laboratory testing associated with routine
medical examinations, including Pap smears. In the United States, the level of
reimbursement by those third-party payors varies considerably, and the patient
often pays for Pap smears. Third-party healthcare payors in the United States
are increasingly sensitive to containing healthcare costs and heavily scrutinize
new technology. Third-party payors may influence the pricing or perceived
attractiveness of NeoPath's products and services by regulating the maximum
amount of reimbursement they provide or by not providing any reimbursement.

Restrictions on reimbursement may limit the price NeoPath can charge for
AutoPap System screening or reduce the demand for AutoPap System screening. If
these payors do not reimburse for the AutoPap System screening, or provide
reimbursement significantly below the amount laboratories charge patients to
perform AutoPap System screening, NeoPath's potential market will shrink.
NeoPath intends to

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focus on obtaining coverage and reimbursement from major national and regional
third-party payors in the United States.

NeoPath believes that increased third-party reimbursement of Pap smears in
general, and increased reimbursement for screening utilizing the AutoPap System
in particular, would increase market acceptance of its products. Virtually all
of NeoPath's revenues are dependent on customers who rely on third-party
reimbursement. In early 1998, NeoPath established a reimbursement team to work
with third-party insurers and managed care organizations to establish and
improve third-party reimbursement rates for the AutoPap System. These
reimbursement specialists work closely with NeoPath's field sales personnel
throughout the United States. On January 1, 1999, revised Physicians' Current
Procedural Terminology codes established by the American Medical Association
became effective for the AutoPap Screener. These codes are a standardized system
used by physicians and clinical laboratories to identify specific procedures
when billing insurers for their services. New codes that address utilization of
the AutoPap QC were established on January 1, 1998.

GOVERNMENTAL REGULATION

UNITED STATES

Medical devices like the AutoPap QC and the AutoPap Screener are heavily
regulated in the United States by the FDA and by other federal, state and local
authorities. The FDA regulates the research, development, clinical studies,
manufacturing, packaging, labeling, distribution, promotion and postmarket
surveillance of medical devices in the United States. FAA regulations govern all
preclinical and clinical trials of medical devices. In addition, state and local
authorities may require permits under regulations relating to clinical
activities.

Under the Federal Food, Drug, and Cosmetic Act, the AutoPap System is a
Class III medical device, subject to stringent FDA review to ensure that the
device is safe and effective before it is marketed, sold and distributed in the
United States. Once a PreMarket Approval application receives FDA approval and
the company begins marketing a product, it must register with the FDA and to
submit device listing information for products in commercial distribution. In
addition, the FDA may impose certain post-approval requirements in a pre-market
approval order at the time of approval. In conjunction with FDA approval of the
pre-market application and supplements with respect to the AutoPap System,
NeoPath's manufacturing operations are subject to FDA inspection. NeoPath will
continue to be inspected on a routine basis by the FDA for compliance with
regulations with respect to manufacturing, testing, distribution, storage and
control activities. The FDA also regulates labeling and promotional activities.
NeoPath must establish and maintain a system for tracking AutoPap Systems
through the chain of distribution and conduct postmarket surveillance, and must
provide periodic reports containing safety and effectiveness information.

In addition, the FDA's Medical Device Reporting regulations require medical
device companies such as NeoPath to provide information to the FDA whenever
evidence reasonably suggests that a device may have caused or contributed to a
death or serious injury. These regulations also apply if the device malfunctions
and the device or a similar device sold by the company would be likely to cause
or contribute to a death or serious injury if the malfunction were to recur.

If the FDA believes that NeoPath has not complied with the law, it can take
one or more of the following actions:

- refuse to review or clear applications to market its products in the
United States

- refuse to allow NeoPath to enter into government supply contracts;

- withdraw approvals already granted;

- require that NeoPath notify users regarding newly found risks;

- request repair, refund or replacement of faulty devices;

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- request corrective advertisements, recalls or temporary marketing
suspension; or

- initiate legal proceedings to detain or seize products, enjoin future
violations or assess criminal penalties against NeoPath or its officers
or employees.

The FDA also may assess civil penalties for Food, Drug, and Cosmetic Act
violations. These actions could disrupt NeoPath's operations for an indefinite
period of time. Various states in which NeoPath products are sold also may
impose additional regulatory requirements.

INTERNATIONAL MARKETS

Under FDA rules, companies can export a Class III medical device that has
not been approved for marketing in the United States only after meeting certain
criteria. The FDA must determine that exportation does not threaten public
health and safety and that the company has received approval of the country to
which the device will be exported. Companies usually must obtain approval by a
comparable regulatory authority of a non-U.S. country before applying to the FDA
for clearance to export and begin marketing in that country. Foreign regulatory
requirements for sales of medical devices vary widely from country to country.

In addition to regulatory approvals in the United States, the AutoPap
System is approved for primary screening and quality control rescreening in
Japan, Canada, Australia, New Zealand, The Netherlands, Italy, Hong Kong, Korea,
and Taiwan. NeoPath intends to pursue additional product registrations in other
foreign countries.

NeoPath's products are subject to a variety of regulations in Europe,
including the European Union. In vitro medical devices, including the AutoPap
System, must now comply with the EU's In-Vitro Diagnostic Medical Devices
Directive. The Directive was published in the Official Journal of European
Communities in December, 1998. The EU member states will likely implement the
Directive into national law by December 1999. A transition period, which begins
from the date of publication of the Directive and ends December, 2003, applies
to all devices placed on the market in the EU. During this transition period,
both Directive "CE" marked and non CE-marked devices may be placed on the
market. In other words, companies may choose to follow either the CE mark or the
national legislation, if any. If no such national legislation exists, the
devices can be freely placed on the market. By the conclusion of this transition
period, NeoPath's products must comply with the requirements of the Directive
and member state local language requirements.

Other European countries may enact national laws that would conform to the
Directive. Member states of the EU and the European Economic Area may enact
requirements in addition to those imposed by the Directive. Some European
countries have established national regulations relating to in vitro diagnostic
medical devices. EU directives and national laws impose requirements for
electrical safety and electromagnetic compatibility that apply to the AutoPap
System. NeoPath has performed the requisite testing procedures and related
documentation to apply the European CE mark to the AutoPap System. NeoPath
cannot guarantee that the AutoPap System or any other product it may develop
will obtain any required regulatory clearance or approval on a timely basis, if
at all.

REGULATION OF CERVICAL PAP SMEAR ANALYSIS

Congress has directed the Department of Health and Human Services to issue
regulations designed to improve the quality of biomedical analytic services,
particularly the examination of Pap smears. These regulations require clinical
laboratories to rescreen at least 10% of the Pap smears classified on initial
manual screen as normal. This 10% must include normal cases selected from the
laboratory's total caseload, and from patients or groups of patients that are
have a high probability of developing cervical cancer based on available patient
information. The AutoPap System is not intended to replace a laboratory's
current practices regarding screening or rescreening Pap smears of "high-risk"
patients.

In addition, laboratories often must comply with state regulations,
inspection, and licensing. In recent years, a few states, including New York and
California, have adopted regulations that limit the number of
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slides that may be manually examined by a cytotechnologist within a given period
of time. NeoPath cannot guarantee that states will not directly regulate the
AutoPap System in the future. NeoPath cannot predict the effect, if any,
regulation may have on its business or operations.

COMPETITION

Competition in the medical device industry is intense. To effectively
compete, NeoPath must keep pace with the rapid product development and
technological change in the industry. The AutoPap System competes with existing
manual methods of screening Pap smears and with semi-automated systems. To
compete effectively, the AutoPap System must demonstrate accuracy and cost
effectiveness that equals or exceeds manual review of Pap smears. The AutoPap
System must remain competitive in accuracy and effectiveness, cost, convenience,
perception among influential cytopathologists and laboratories, and processing
speed and reliability.

NeoPath is aware of two potential direct competitors:

- AutoCyte, which is developing a semi-automated system to analyze
liquid-based Pap smears, a potential alternative to conventional Pap
smears; and

- Morphometrix Technologies Inc., which is developing an automated system
to analyze liquid-based Pap smears

Neuromedical Systems, Inc., had obtained regulatory approval for a
semi-automated system that rescreens conventional Pap smears and was developing
a semi-automated primary screener. On March 26, 1999, Neuromedical announced
that it had filed a voluntary Chapter 11 petition for bankruptcy. On March 26,
1999, AutoCyte announced an agreement to purchase certain Neuromedical
technology, including patent rights, for $4.0 million in cash and 1.4 million
shares of AutoCyte common stock. On April 26, 1999, NeoPath and AutoCyte
announced an agreement in which NeoPath may acquire an undivided interest in the
intellectual property estate of Neuromedical that AutoCyte had agreed to
acquire. If the Merger of AutoCyte and NeoPath does not occur, NeoPath will pay
AutoCyte $2.2 million in cash and issue AutoCyte 1.2 million shares of NeoPath
common stock. On May 18, 1999, AutoCyte announced that it had completed its
acquisition of the Neuromedical technology.

NeoPath also faces indirect competition from companies such as AutoCyte
that manufacture liquid-based or monolayer slide preparation systems and devices
that automate various aspects of cytology. Cytyc Corporation also is approved to
market its ThinPrep System that prepares slides for cervical cancer screening
using a liquid-based sampling and preparation technique as a replacement for the
conventional Pap smear method.

EMPLOYEES

At June 30, 1999, NeoPath employed 100 full-time equivalent personnel,
including 41 in research and development and regulatory; 35 in administration,
customer service and support, and sales and marketing; and 24 in manufacturing
and operations. None of its employees is represented by a union or other
bargaining group. NeoPath believes its relationship with its employees is good.

PROPERTIES

NeoPath leases approximately 72,000 square feet of office and manufacturing
space in Redmond, Washington under operating leases expiring through January
2000, with various renewal options. NeoPath believes that the Redmond facility
and other available office space are adequate for its current needs and that
additional space is available in the area, should it be needed. NeoPath also
leases office space in Brussels, Belgium under an operating lease expiring in
August 2007.

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LEGAL PROCEEDINGS

On July 15, 1996, Neuromedical filed a lawsuit against NeoPath in the
United States District Court for the Southern District of New York. The
complaint alleged patent infringement, unfair competition, false advertising,
and related claims and requested monetary damages and injunctive relief. On
September 5, 1996, NeoPath filed its answer and counter claims. In May 1998, a
judge in the United States District Court for the Southern District of New York
denied Neuromedical's motion for a preliminary injunction against NeoPath. The
parties agreed to dismiss their claims and counterclaims on all but the patent
issues, and Neuromedical accordingly served an amended complaint on July 27,
1998 asserting only patent infringement claims. Virtually all of NeoPath's
domestic revenues, which represented 81% of its total revenues in 1998, are
derived from products that incorporate technology covered by this patent.
NeoPath believes it has a strong position in this action and will defend against
these claims vigorously. On March 26, 1999, Neuromedical announced that it had
filed a voluntary chapter 11 petition for bankruptcy. On April 6, 1999, the
court removed the case from its active docket pending further developments in
Neuromedical's bankruptcy proceedings.

On March 31, 1997, NeoPath filed a patent infringement lawsuit against
Neuromedical in the United States District Court for the Western District of
Washington. The complaint alleges patent infringement and seeks permanent
injunctions against Neuromedical. In March and April 1998 this lawsuit was
amended, and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment, which the court
denied in April 1998. In October 1998, Neuromedical filed another motion for
summary judgment that the court denied. By court order on March 30, 1999,
proceedings were stayed pending resolution of Neuromedical's bankruptcy
proceedings. The court ordered that these cases be removed from the court's
active caseload.

The intellectual property acquisition agreement between NeoPath and
AutoCyte provides that the patent infringement litigation between NeoPath and
Neuromedical will be terminated.

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RELATIONSHIPS BETWEEN AUTOCYTE AND NEOPATH

In March 1999, AutoCyte and NeoPath announced an agreement to pursue a
supplemental study to allow NeoPath to obtain approval from the FDA to use the
AutoPap Primary Screening System to screen PREP slides. This supplement is
expected to be submitted to the FDA in the second half of 1999.

In connection with the acquisition by AutoCyte of the entire intellectual
property estate of Neuromedical Systems, Inc., which was completed on May 17,
1999, AutoCyte has succeeded Neuromedical as the plaintiff in certain patent
infringement litigation filed by Neuromedical against NeoPath. The action is
currently stayed pending completion of the bankruptcy proceedings in which
Neuromedical is subject.

On April 24, 1999, AutoCyte entered into a purchase and sale agreement with
NeoPath, Inc. The agreement between AutoCyte and NeoPath provides that, subject
to certain conditions, NeoPath will acquire an undivided interest in the
intellectual property acquired by AutoCyte from Neuromedical Systems. The
agreement further provides for termination of pending patent infringement
litigation between NeoPath and Neuromedical Systems over the patents included in
the intellectual property acquired by AutoCyte from Neuromedical Systems. The
agreement requires NeoPath to pay AutoCyte $2.2 million in cash and issue
AutoCyte 1,230,000 shares of NeoPath common stock. The agreement further
provides that the pending patent infringement litigation between NeoPath and
AutoCyte (as successor to the claim filed by Neuromedical Systems) will be
terminated. AutoCyte does not anticipate that this transaction will ever be
concluded if the merger with NeoPath is completed. AutoCyte and NeoPath have
agreed to extend the scheduled closing date for this transaction to November 1,
1999. If the scheduled closing date for this transaction occurs at a time that
the NeoPath merger is still pending, AutoCyte expects to further extend the
closing date with NeoPath's consent.

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AUTOCYTE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion of the financial condition and results of
operations of AutoCyte should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this joint proxy
statement/prospectus. The financial results for the years ended December 31,
1994 and 1995 and for the period from January 1, 1996 through November 21, 1996
are for AutoCyte's business as conducted by its predecessor, the cytology and
pathology automation business of Roche Image Analysis Systems. For purposes of
this discussion, information for the year ended December 31, 1996 combines
financial results of AutoCyte's predecessor and AutoCyte.

BACKGROUND

AutoCyte was formed in October 1996 to acquire the cytology and pathology
automation business then owned by Roche Image Analysis Systems, a wholly-owned
subsidiary of Roche Holding Ltd. Roche had previously operated such business as
part of Roche Biomedical Reference Laboratories, Inc., a predecessor company to
Laboratory Corporation of America, Inc., one of the largest clinical laboratory
chains in the United States and formerly a wholly-owned subsidiary of Roche.

On June 17, 1999 AutoCyte received FDA approval to market PREP for cervical
cancer screening. AutoCyte cannot market SCREEN in the United States for use in
screening thin-layer slides for cervical cancer until it receives PMA approval
from the FDA. AutoCyte expects to generate a substantial majority of its future
revenues from PREP and SCREEN. AutoCyte's long-term revenues and future success
are partially dependent upon its ability to obtain regulatory approval for, and
market and commercialize SCREEN for, cervical cancer screening in the United
States and abroad.

AutoCyte generates PREP revenue from both system sales and rentals. For
system sales, customers purchase the PREP instrument and make separate purchases
of related reagents and other disposables. For system rentals, AutoCyte places
the PREP instrument at the customer's site and charges the customer for reagents
and disposables at a price that includes a rental charge for the equipment. The
term of the PREP rental program is typically three years. For SCREEN customers
in the United States, AutoCyte intends to place instruments without charge at
customer locations and to charge customers on a per test, or fee-per-use, basis.
In foreign markets, AutoCyte plans to either sell or license SCREEN. An
important element of AutoCyte's business strategy is to obtain third-party
financing to support rentals of PREP and fee-per-use placements of SCREEN.
Financing for rentals of PREP is currently in place. AutoCyte cannot guarantee
that it will be able to obtain sufficient financing or, if so, on favorable
terms. AutoCyte's failure to obtain sufficient financing could have a material
adverse effect on its business, financial condition and results of operations.

AutoCyte's future revenues and the results of its operations may change
significantly from quarter to quarter and will depend on many factors,
including:

- the timing of FDA approval for SCREEN;

- the extent to which AutoCyte's products gain market acceptance;

- the timing and volume of sales and rental orders;

- regulatory and reimbursement matters;

- introduction of alternative technologies by competitors;

- pricing of competitive products; and

- the cost and effect of promotional discounts and marketing programs
AutoCyte adopts.

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Having received FDA approval to market PREP for gynecologic uses, AutoCyte
expects its marketing and sales expenditures to increase significantly. AutoCyte
also anticipates that research and development expenses, both in the areas of
product enhancement and new product development, and manufacturing expenses will
also increase as product commercialization increases. AutoCyte additionally
expects to incur compensation expense of $1.4 million as its deferred
compensation balance is amortized.

On March 25, 1999, AutoCyte entered into a purchase and sale agreement to
acquire the intellectual property estate of Neuromedical Systems, Inc., a
developer of interactive, neural net technology for the computer screening of
conventional Pap smears. Under the terms of the agreement, AutoCyte agreed to
acquire the entire patent estate (including the right to pursue any claims
relating to the patent estate), trademarks, regulatory applications, clinical
data and all other intellectual and intangible property rights relating to the
business of Neuromedical Systems, which, concurrent with the execution of the
agreement, filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court
for the District of Delaware. The bankruptcy court approved this agreement and
the transaction was closed on May 17, 1999. AutoCyte acquired these Neuromedical
Systems assets for $4.0 million in cash and the issuance of 1.4 million shares
of AutoCyte common stock valued at $9.5 million, representing a total purchase
price of $13.5 million, net of transaction costs.

Based upon the results of a valuation of the acquired property,
approximately $2.9 million of the total purchase price represents the
acquisition of in process research and development project, and accordingly was
expensed in the second quarter of 1999. The remaining purchase price was
assigned to patents and core technology acquired from Neuromedical Systems and
was capitalized and will be amortized over the estimated remaining useful life
of those assets of approximately 14 years.

On April 24, 1999, AutoCyte entered into a purchase and sale agreement with
NeoPath, Inc. The agreement between AutoCyte and NeoPath provides that, subject
to certain conditions, NeoPath will acquire an undivided interest in the
intellectual property acquired by AutoCyte from Neuromedical Systems. The
agreement further provides for termination of pending patent infringement
litigation between NeoPath and Neuromedical Systems over the patents included in
the intellectual property acquired by AutoCyte from Neuromedical Systems. The
agreement requires NeoPath to pay AutoCyte $2.2 million in cash and issue
AutoCyte 1,230,000 shares of NeoPath common stock. AutoCyte does not anticipate
that this transaction will ever be concluded if the merger with NeoPath, which
is described in the next paragraph, is completed. This transaction is only
expected to be completed if the merger agreement with NeoPath is terminated.
AutoCyte and NeoPath have agreed to extend the scheduled closing date for this
transaction to November 1, 1999. If the scheduled closing date for this
transaction occurs at a time that the NeoPath merger is still pending, AutoCyte
expects to further extend the closing date with NeoPath's consent.

On June 4, 1999, AutoCyte entered into an agreement to merge with NeoPath
in a transaction expected to be accounted for as a pooling of interests. Under
the terms of the agreement, each outstanding share of NeoPath common stock will
be exchanged for 0.7903 shares of AutoCyte common stock. Based on a total of
approximately 17,440,000 shares of NeoPath common stock outstanding on June 30,
1999, AutoCyte would issue approximately 13,783,000 shares of AutoCyte common
stock. The closing of this transaction is dependent on the satisfaction of
certain conditions, including approval by the stockholders of both AutoCyte and
NeoPath. This transaction is expected to be completed in the second half of
1999. If this transaction is completed, AutoCyte expects that it will incur
substantial expenses integrating the two businesses and that certain operating
expenses will increase and remain higher for the combined companies than their
current levels. This may cause AutoCyte to need to raise additional capital
sooner than it might otherwise.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

Net sales for the six months ended June 30, 1999 were $2.3 million,
approximately the same as with the corresponding period of 1998. AutoCyte's
gross margin during the six months ended June 30, 1999 was 23%, a decrease from
35% in the corresponding period of 1998. This decrease was due primarily to a

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change in product mix, as a greater percentage of revenues in the first half of
1999 were from the lower margin non-gynecologic applications of PREP. With the
recent FDA approval of PREP for gynecologic applications, we expect that our
margins will improve as sales volume increases and the product mix moves to a
greater concentration of the higher margin gynecologic applications of PREP.

Operating expenses increased 54% from $6.1 million in first half of 1998 to
$9.4 million in the first half of 1999. This increase was due primarily to $3.5
million of non-recurring expenses incurred in the second quarter of 1999,
consisting of $2.9 million of in-process research and development acquired from
Neuromedical Systems, Inc. and $600,000 of expenses associated with the pending
merger with NeoPath. This increase was partially offset by a reduction in
professional fees and consultant expenses. Sales and marketing expenses are
expected to increase significantly as sales and marketing efforts for PREP
increase in the United States. Net loss increased 85% from $4.6 million in the
first half of 1998 to $8.5 million in the first half of 1999, due primarily to
the non-recurring expenses incurred in 1999. Net loss per share was $0.65, an
increase from a net loss per share of $0.36 in the corresponding period of 1998.

Interest income decreased by 43% from $722,000 in the first half of 1998 to
$412,000 in the first half of 1999, due primarily to the lower average cash
balance during 1999.

YEARS ENDED DECEMBER 31, 1998 AND 1997

NET SALES AND GROSS PROFIT. Net sales increased by 79% from $2.7 million
in 1997 to $4.8 million in 1998. The increase was due to higher sales of PREP
units and related consumables and an increase in Pathology Workstation related
sales. Included in Pathology Workstation revenues in 1998 was $540,000 of
non-recurring revenue recognized pursuant to a world-wide distribution agreement
for ImageTiter(R), AutoCyte's product that enables the quantitative assessment
of anti-nuclear antibodies in a patient's blood specimen. AutoCyte's gross
profit during 1998 was $1.8 million, or 37% of sales, an increase from $715,000,
or 27% of sales, in 1997. This increase was due to the increased sales of PREP
consumables, as well as improved margins on Pathology Workstation products that
primarily resulted from the high margin on the ImageTiter(R) distribution
agreement revenue.

TOTAL OPERATING EXPENSES. Operating expenses increased by 11% from $11.0
million in 1997 to $12.2 million in 1998. Research and development costs for
1998 were $4.7 million, an increase of $238,000 from $4.5 million in 1997, due
primarily to increased regulatory expenses associated with the PREP and SCREEN
products. Selling, general and administrative costs for 1998 were $7.5 million,
an increase of $925,000 from $6.5 million in 1997, due primarily to higher costs
as AutoCyte increased its staffing levels and other expenditures to support
product commercialization.

INTEREST INCOME AND INTEREST EXPENSE, INCLUDING CREDIT AGREEMENT COMMITMENT
FEE. Interest income for 1998 was $1.3 million, an increase of 68% from
$773,000 in 1997, primarily attributable to the short-term investment of
proceeds from AutoCyte's initial public offering in September 1997. Interest
expense for 1998 was $21,000, a decrease from $1.5 million in 1997. The
significant interest expense in 1997 was due to the one-time, non-cash expense
resulting from the issuance of warrants as a commitment fee for a credit
agreement between AutoCyte and some of its principal stockholders.

YEARS ENDED DECEMBER 31, 1997 (AUTOCYTE) AND DECEMBER 31, 1996 (PRO FORMA
COMBINED)

NET SALES AND GROSS PROFIT. Net sales increased by 42% from $1.9 million
in 1996 to $2.7 million in 1997. The increase was primarily attributable to a
$1.1 million increase in PREP revenue from $65,000 in 1996 to $1.2 million in
1997 as AutoCyte increased the number of PREP placements in the United States
and international markets. This increase was partially offset by a $512,000
decrease in sales of Pathology Workstation products from $1.8 million in 1996 to
$1.3 million in 1997. This decrease was a result of management's decision to
focus on development and sales of PREP and SCREEN products. Additionally, SCREEN
revenues increased to $220,000 in 1997 from $0 in 1996, resulting from foreign
placements. Gross profit increased by $1.7 million from a loss of $1.0 million
in 1996 to gross profit of $715,000. The loss in 1996 was due primarily to the
write-off by AutoCyte's predecessor of $1.4 million of obsolete

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inventory in the fourth quarter of 1996 as a result of management's decision to
focus on development and sales of PREP and SCREEN products.

TOTAL OPERATING EXPENSES. Operating expenses decreased by 35% from $16.9
million in 1996 to $11.0 million in 1997. Research and development costs
remained relatively flat, increasing from $4.4 million in 1996 to $4.5 million
in 1997. Selling, general and administrative costs decreased by 48% from $12.5
million in 1996 to $6.5 million in 1997 due primarily to the write-down of
property and equipment by AutoCyte's predecessor of $3.9 million in the fourth
quarter of 1996, and other acquisition-related one-time charges in the fourth
quarter of 1996 of $1.5 million.

During 1997 AutoCyte granted options under the Amended and Restated 1996
Equity Incentive Plan to acquire 304,962 shares of common stock at an exercise
price of $0.2033 per share. AutoCyte also sold to certain members of management
48,819 shares of Series A Preferred Stock at a price of $2.048 per share.
AutoCyte recorded $1.7 million of deferred compensation expense and $432,000 of
compensation expense with respect to these transactions. AutoCyte also recorded
$705,000 of amortization of deferred compensation expense during 1997.

INTEREST INCOME AND INTEREST EXPENSE, INCLUDING CREDIT AGREEMENT COMMITMENT
FEE. On June 27, 1997 AutoCyte issued warrants to acquire 207,291 shares of
common stock at an exercise price of $2.033 per share as a commitment fee for a
credit agreement among AutoCyte and some of its principal stockholders. AutoCyte
recorded $1.5 million of commitment fee expense with respect to this
transaction, all of which was expensed in June 1997. This increase in interest
expense was partially offset by an increase in interest income of $730,000 which
was primarily attributable to the investment of the proceeds from AutoCyte's
initial public offering.

INCOME TAXES

AutoCyte has not generated any taxable income to date and, therefore, has
not paid any federal income taxes since its inception. Realization of deferred
tax assets is dependent on future earnings, if any, the timing and amount of
which are uncertain. Accordingly, valuation allowances in amounts equal to the
net deferred tax assets have been established in each period to reflect these
uncertainties.

At June 30, 1999, AutoCyte had net operating losses, for tax purposes, of
approximately $27.6 million that may be carried forward to offset future taxable
income. This amount expires in 2011 through 2014. Utilization of net operating
losses and any tax credit carryforwards are subject to complex treatment under
the Internal Revenue Code of 1986, as amended. Pursuant to Section 382 of the
Code, the change in ownership resulting from AutoCyte's initial public offering
in September 1997 and any other future sale of stock may limit utilization of
future losses in any one year.

YEAR 2000 READINESS

AutoCyte has established a task force comprised of experienced personnel
from all functional areas to determine the impact the Year 2000 problem will
have on its operations. The task force's activities are designed to ensure that
there is no adverse effect on AutoCyte's core business operations and that
transactions with customers and suppliers are fully supported before, during and
after January 1, 2000. The status of AutoCyte's Year 2000 readiness is reported
on a regular basis to executive management and the board of directors. AutoCyte
anticipates achieving complete Year 2000 readiness, including the development of
a contingency plan, if necessary, by September 30, 1999. The task force is
focusing its efforts on four key areas: products, information technology
systems, facilities, including non-information technology systems, and vendors
and service providers.

All shipments of PREP units made subsequent to September 1, 1998 are Year
2000 compliant, and AutoCyte is upgrading non-compliant units in the field in
conjunction with routine preventative maintenance visits. Most of AutoCyte's
Pathology Workstation products are currently Year 2000 compliant, and AutoCyte
is determining an appropriate course of action to deal with non-compliant
products. AutoCyte expects to complete its assessment of SCREEN by September
1999. AutoCyte has

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conducted a review of its internal information technology systems and facilities
and believes that all of its internal information technology systems and
facilities are Year 2000 compliant. AutoCyte also has initiated correspondence
with significant suppliers, large customers and financial institutions to ensure
that those parties have appropriate plans to remedy Year 2000 issues where their
systems could effect AutoCyte's operations. While AutoCyte believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that systems of other entities on which AutoCyte relies, including
financial institutions, customers, service providers, public utilities and
governments, will be converted on a timely basis and will not have a material
effect on AutoCyte's operations. AutoCyte is dependent on certain sole-source
suppliers. Failure on the part of those suppliers to become Year 2000 compliant
could affect AutoCyte's ability to obtain product from those suppliers and could
adversely affect operations and financial results. To-date, AutoCyte has not
incurred material costs in addressing the Year 2000, and the remaining costs of
the Year 2000 initiatives are not expected to be material to AutoCyte's results
of operation or financial position.

RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 1998, AutoCyte adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Standard No. 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The application of the new rules did not
have an impact on AutoCyte's financial statements since it has no items of other
comprehensive income in any period presented.

Effective January 1, 1998, AutoCyte adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Standard No. 131 changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial statements
to shareholders. Standard No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The application of the new rules did not have an impact on AutoCyte's financial
statements as it operates in only one business segment.

In June 1999, the FASB approved the Exposure Draft to defer for one year
the effective date of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is now
effective for years beginning after June 15, 2000. Standard No. 133 establishes
a comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. AutoCyte will adopt Standard No. 133 in
2001, which may result in additional disclosures. The application of the new
rules is not expected to have a significant impact on AutoCyte's financial
position or results from operations.

LIQUIDITY AND CAPITAL RESOURCES

Since AutoCyte's formation on October 24, 1996, its expenses have
significantly exceeded its revenues, resulting in an accumulated deficit of
$29.5 million as of June 30, 1999. AutoCyte has funded its operations primarily
through the private placement and public sale of equity securities, resulting in
net proceeds of $38.0 million, debt facilities and limited product sales. As of
June 30, 1999, AutoCyte had cash and cash equivalents of $11.8 million.

On May 17, 1999 AutoCyte completed its acquisition of the intellectual
property estate of Neuromedical Systems, Inc. for $4.0 million in cash and the
issuance of 1.4 million shares of AutoCyte common stock. Concurrent with the
execution of an asset purchase agreement on March 25, 1999, NSI filed a
voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of
Delaware. AutoCyte's purchase of the intellectual property estate was completed
when the bankruptcy court subsequently approved the transaction.

Cash used in AutoCyte's operations was $8.0 million in 1998, $8.1 million
during 1997, $10.0 million on a pro forma combined basis during 1996 and $3.8
million and $4.5 million during the six months ended June 30, 1999 and 1998
respectively. Negative operating cash flow was caused primarily by operating
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losses. AutoCyte's capital expenditures were $1.6 million in 1998, $1.0 million
during 1997, $377,000 on a pro forma combined basis during 1996, and $373,000
and $816,000 during the six months ended June 30, 1999 and 1998 respectively. A
significant portion of the capital expenditures were attributable to the
purchase of PREP units for rental and demonstration purposes. AutoCyte has no
material commitments for capital expenditures.

AutoCyte believes that its existing cash and existing or anticipated
additional debt and lease financing for internal use assets, rental placements
of PREP and fee-per-use placements of SCREEN (if and when FDA approval for
SCREEN is received), will be sufficient to enable it to meet its future cash
obligations through mid 2000. AutoCyte's future liquidity and capital
requirements will depend upon numerous factors, including:

- the availability of financing for AutoCyte's anticipated equipment lease
and rental programs;

- the level of placements of rental PREP systems and fee-per-use SCREEN
systems;

- the resources required to further develop AutoCyte's marketing and sales
capabilities domestically and internationally; and

- the resources required to expand manufacturing capacity and the extent to
which AutoCyte's products generate market acceptance and demand.

In particular AutoCyte anticipates that marketing and sales expenditures
for the PREP market launch for gynecologic uses in the United States and
expenditures related to manufacturing and other administrative costs will
increase significantly. AutoCyte cannot guarantee that it will not require
additional financing or will not in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when AutoCyte needs it or on terms
AutoCyte finds acceptable. AutoCyte's failure to obtain funding, would have a
material adverse effect on its business, financial condition and results of
operations.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

AutoCyte's financial results and cash flows are subject to fluctuation due
to changes in interest rates primarily from its investment of available cash
balances in highly rated institutions. AutoCyte's current policies do not allow
it to use interest rate derivative instruments to manage exposure to interest
rate changes. AutoCyte does not expect its operating results or cash flows to be
affected to any significant degree by a sudden change in market interest rates.

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NEOPATH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BACKGROUND

NeoPath began recognizing product revenues in 1996. NeoPath recognizes
revenue on either a product sale or fee-per-use basis. Sales of AutoPap Systems
are generally recognized at date of shipment and are subject to continuing
service and license agreements for which revenue is recognized over the
corresponding contract period. Fee-per-use revenue commences in the month an
AutoPap(R) System is initially placed in commercial use at a customer site and
consists of per-slide monthly billings, fixed rental billings, and minimum
payments due on certain fee-per-use contracts. Fee-per-use revenue is recognized
as earned. The cost of each AutoPap System is reclassified from inventories to
depreciable equipment upon shipment to a fee-per-use customer site. Such
equipment, reflected on the balance sheet under "fee-per-use systems, net," is
depreciated on a straight-line basis over a four-year period, commencing upon
commercial operation.

Because the AutoPap Screener is the only FDA-approved system for automated
primary screening of Pap smears, NeoPath's U.S. strategy includes offering
AutoPap Screeners to customers with initial fee-per-use pricing in line with
existing laboratory economics. Per-slide pricing may increase during contract
periods to reflect expected laboratory cost efficiencies and overall increased
third-party reimbursement levels.

In October 1998, NeoPath announced an agreement with SmithKline Beecham
Clinical Laboratories pursuant to which SmithKline agreed to adopt the AutoPap
Screener throughout its domestic laboratory organization. This four-year
contract is intended to enable SmithKline to process 100% of its Pap smear
volume on AutoPap Screeners. SmithKline is NeoPath's largest fee-per-use
customer. At current AutoPap processing rates, NeoPath estimates that SmithKline
may require up to 125 AutoPap Screeners to process its nationwide volume of Pap
smears under contract. As of June 30, 1999, SmithKline had about 70 AutoPap
Screeners installed at various laboratory sites.

In February 1999, SmithKline and Quest Diagnostics Incorporated announced
that Quest had agreed to purchase SmithKline's clinical laboratory business.
While NeoPath's national agreement with SmithKline is binding on successor
organizations, no additional AutoPap Systems were shipped to SmithKline during
the second quarter of 1999. Additional AutoPap Screener orders have been delayed
as the two laboratory companies work through their combined business issues.
Future negotiations with SmithKline and Quest could change the pricing and
placement rate under the existing SmithKline agreement. In addition, SmithKline
has not fully implemented certain shipped systems, and SmithKline's current
AutoPap Screener usage is below NeoPath's expectations. NeoPath continues to
work with SmithKline to fully optimize AutoPap usage at those SmithKline
laboratory sites.

In October 1998, NeoPath announced a national agreement with Kaiser
Permanente, which is the largest non-profit group health plan in the United
States. This national agreement allows Kaiser and affiliated entities to
purchase AutoPap Screeners during the two-year term of the agreement, with
additional annual service and licensing fees due over four years. At current
AutoPap processing rates, NeoPath estimates that Kaiser may require up to 35
AutoPap Screeners to process its nationwide volume of Pap smears. The timing of
specific purchase orders and AutoPap Screener shipments will depend on Kaiser's
adoption plans. NeoPath has not recognized any product revenues under this
agreement.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
------- ----------- ------- ----------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................. $12,079 $1,255 $10,824 $7,762 $3,062
12% 254%
</TABLE>

AutoPap System placements have consisted primarily of fee-per-use contracts
in the United States and sale contracts internationally. Because sale contracts
result in immediate revenue recognition, whereas

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fee-per-use contracts provide a recurring revenue stream over several years,
NeoPath's total revenues have included a significant sale component.

NeoPath's revenues for the year ended December 31, 1998 consisted of $4.4
million of fee-per-use and service fees, $7.3 million of AutoPap product sales,
and $0.4 million of Pathfinder product sales. Revenues in 1997 consisted of $3.4
million of fee-per-use and service fees, $7.2 million of AutoPap System product
sales, and $0.3 million of Pathfinder product sales. Revenues in 1996 consisted
of $1.1 million of fee-per-use and service fees and $1.9 million of AutoPap
System product sales.

Fee-per-use and service revenues in 1998 increased 33 percent from 1997.
Much of this increase occurred in the fourth quarter of 1998. The increase in
fee-per-use business resulted from higher overall per-slide pricing and
increased placements during the fourth quarter of 1998, primarily at SmithKline
sites. Fee-per-use and service revenues in 1997 increased 200 percent from 1996.
The increase was attributable to a greater number of AutoPap Systems processing
slides under fee-per-use contracts in 1997 as compared to 1996, the first year
of NeoPath's commercial operations.

Revenues from AutoPap product sales in 1998 increased 1 percent from 1997.
AutoPap product sales in 1997 increased 269 percent from 1996. Because sale
contracts result in immediate revenue recognition, whereas fee-per-use contracts
provide a recurring revenue stream over several years, any increase or decrease
in unit sale placements between periods can result in a significant fluctuation
in reported revenues. Since NeoPath's international AutoPap placements are
generally product sale agreements, in comparison to AutoPap placements in the
U.S. which are primarily fee-per-use, a decrease in the total number of
international shipments can correspondingly result in a significant fluctuation
in revenues.

NeoPath generated approximately 19 percent of its revenues in 1998 from
customers outside of the United States, compared to 51 percent in 1997 and 45
percent in 1996. International revenues in 1996 and 1997 included initial system
orders under a distribution agreement in Japan. The AutoPap technology is now
sold internationally at commercial laboratories in Taiwan, Japan, Hong Kong,
Korea, Australia, and in Europe. Total 1998 revenues included additional AutoPap
System placements in Taiwan, Hong Kong and Japan. International product
placements typically are denominated in U.S. dollars, but future product
revenues may be subject to foreign exchange rate fluctuations.

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE PERCENTAGE
1998 OF REVENUES 1997 OF REVENUES 1996 OF REVENUES
------ ----------- ------ ----------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>

Cost of revenues............. $6,711 56% $4,775 44% $1,905 62%
Gross margin................. $5,368 44% $6,049 56% $1,157 38%

</TABLE>

The primary components of fee-per-use cost of revenues include depreciation
and allocated service and support costs. For AutoPap Systems sold, cost of
revenues includes the related manufacturing cost and estimated one-year warranty
expense.

The decrease in gross margin percentage in 1998 reflects discounts and
incentives NeoPath offered in AutoPap QC sale pricing in the first half of 1998
as customers anticipated the FDA's approval of the AutoPap Screener, as well as
pricing incentives NeoPath offered in the second half of the year as it signed
initial orders for AutoPap Screeners. NeoPath had a higher comparative gross
margin percentage in 1997 because of international sales under a distribution
agreement with higher initial AutoPap System pricing.

Due to lower-than-optimal usage of certain AutoPap Systems on fee-per-use
contracts, the overall gross margin percentage on fee-per-use revenues has been
somewhat lower than the gross margin percentage on AutoPap Systems sold.
However, NeoPath expects primary screening systems to process a greater number
of slides, on average, than the prior installed base of AutoPap QCs. This should
improve

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the fee-per-use gross margin percentage. Fee-per-use revenues in the periods
included lower-margin initial AutoPap QC placements.

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
------- ----------- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and development expenses... $11,269 $(2,980) $14,249 $3,047 $11,202
(21)% 27%
</TABLE>

RESEARCH AND DEVELOPMENT EXPENSES INCLUDE:

- salaries and benefits of scientific, engineering, and regulatory
personnel;

- costs relating to clinical studies and submission of applications to the
FDA;

- testing equipment;

- components used in prototypes;

- relevant consulting services; and

- the costs of preparing and filing applications for patent protection of
NeoPath technologies.

NeoPath incurred higher research and development costs in 1997 than in
either 1998 or 1996 primarily due to its AutoPap Screener clinical study, which
NeoPath completed in 1997. NeoPath continues to focus research and development
efforts primarily on AutoPap enhancements and other applications of AutoPap
technology.

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
------- ----------- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses.......................... $17,950 $204 $17,746 $6,451 $11,295
1% 57%
</TABLE>

Selling, general and administrative expenses include:

- salaries and benefits of sales, marketing, administrative, and financial
personnel;

- non-patent application legal expenses;

- amortization of intangible assets; and

- certain facility-related costs.

Overall expenses in 1998 remained flat in comparison to the prior year,
despite significant increased expenses in the first half of 1998 to launch the
AutoPap Screener. NeoPath reduced overall spending in the second half of 1998 as
it carefully focused corporate spending.

Spending increased in 1997 relative to spending in 1996 because of
significant new sales and marketing initiatives, costs related to the purchase
and integration of the Pathfinder System product line, amortization of
Pathfinder intangible assets, increased personnel-related expenses, and
increased legal expenses relating primarily to the Neuromedical Systems, Inc.
lawsuits. See Note 9 of Notes to Financial Statements of NeoPath's 1998 Annual
Report.

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
------ ----------- ---- ----------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Write-off of intangible assets............. $3,084 $3,084 $-- $-- $--
</TABLE>

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<PAGE> 99

The intangible assets included the following:

<TABLE>
<CAPTION>
JUNE 1997 DECEMBER 1998
INITIAL ALLOCATION WRITE-OFF OF REMAINING
OF PURCHASE PRICE NET BOOK VALUE
------------------ ----------------------
<S> <C> <C>
Patents.................................. $2,000,000 $1,400,000
Trademark................................ 100,000 70,000
Copyright................................ 200,000 140,000
Non-compete agreement.................... 400,000 280,000
Goodwill................................. 1,609,195 1,194,289
---------- ----------
Total.......................... $4,309,195 $3,084,289
========== ==========
</TABLE>

At the time of the acquisition, NeoPath's financial projections indicated
that PathFinder would generate significant future revenues. NeoPath based its
initial PathFinder revenue projections on information available at the time,
making numerous assumptions about likely domestic and international market
acceptance rates, the robustness of the PathFinder technology, and the brief
selling history recorded by CompuCyte. Based on these factors, NeoPath also
expected significant undiscounted positive cash flows. However, actual revenues
and cash flows have been significantly below these original expectations.
PathFinder product sales accounted for 3 percent of total revenues in 1998, and
NeoPath no longer offers the PathFinder System.

NeoPath noted the following indications of impairment from PathFinder in
the fourth quarter of 1998:

- continued low revenue levels and operating losses from PathFinder,
despite initiatives to train sales personnel on PathFinder demonstrations
and sales commission incentives;

- a product assessment completed in the fourth quarter of 1998 that
demonstrated significant technology changes would be necessary to make
PathFinder commercially viable and acceptable to a broad base of
laboratory customers; and

- sales forecasts prepared in the fourth quarter of 1998 that predicted
continuing product line losses and negative cash flows.

Using revised PathFinder sales forecast figures, NeoPath prepared a cash
flow analysis and determined that future PathFinder undiscounted cash flows
would likely be negative. In accordance with required accounting practices,
NeoPath compared the carrying value of the PathFinder intangible assets to
expected future discounted cash flows applicable to the PathFinder product and,
as a result of the analysis, wrote off the entire $3.1 million remaining balance
of intangible assets.

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
------ ----------- ------ ----------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Income........................ $1,009 $(1,390) $2,399 $(1,343) $3,742
(58)% (36)%
</TABLE>

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Interest income decreased over the past two years because of NeoPath's
negative operating cash flow during these periods and the resulting decreased
cash available for investment purposes.

<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
1998 PRIOR YEAR 1997 PRIOR YEAR 1996
----- ----------- ---- ----------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Expense........................... $(253) $(202) $(51) $ 6 $(57)
396% (11)%
</TABLE>

The increase in interest expense in 1998 is due to NeoPath's initial
draw-down of its debt facility in June 1998.

THREE AND SIX MONTHS ENDED JUNE 30, 1999

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
JUNE 30, 1999 CHANGE JUNE 30, 1998
------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Three months ended............................ $2,939 $(1,369) $4,308
(32)%
Six months ended.............................. $4,965 $(2,906) $7,871
(37)%
</TABLE>

NeoPath's revenues for the three months ended June 30, 1999 consisted of
$2.1 million of fee-per-use and service fees and $0.8 million of AutoPap product
sales. Revenues in the comparable 1998 quarter included $0.9 million of
fee-per-use and service fees, $3.3 million of AutoPap System product sales, and
$0.1 million of Pathfinder product sales. Pathfinder product sales were not
significant in the three months ended June 30, 1999. NeoPath's fee-per-use and
service revenues increased 145 percent from the second quarter of 1998, while
AutoPap product sales decreased 77 percent in the same period. International
revenues accounted for 14 percent of total revenues in the second quarter of
1999, compared to 31 percent in the comparable period in 1998.

For the six months ended June 30, 1999, NeoPath's revenues consisted of
$4.2 million of AutoPap fee-per-use and service fees and $0.8 million of AutoPap
product sales. This compares to $2.0 million of fee-per-use and service fees,
$5.7 million of AutoPap product sales, and $0.2 million of Pathfinder product
sales in the six months ended June 30, 1998. NeoPath's fee-per-use and service
revenues increased 113 percent from the six months ended June 30, 1998, while
AutoPap product sales decreased 86 percent in the same period. International
revenues accounted for 10 percent of total revenues in the six months ended June
30, 1999, compared to 27 percent in the comparable period in 1998.

The increase in fee-per-use and service revenues in the three and six-month
periods ended June 30, 1999 was attributable to a greater number of AutoPap
Systems processing slides under fee-per-use contracts in 1999 as compared to
1998, as well as improved per-slide pricing in the current year. NeoPath's
AutoPap System placements have consisted primarily of fee-per-use contracts in
the United States and sale contracts internationally.

The decrease in total revenues from prior periods was primarily the result
of fewer AutoPap product sales in 1999 compared to 1998. In the second quarter
of 1998 NeoPath's sale transactions included four AutoPap Systems in Taiwan;
this contrasts with one international system sale in the second quarter of 1999.
In addition to the Taiwan sales in 1998, Neopath also recognized a greater
number of unit sales to certain other international and domestic customers in
the six months ended June 30, 1998 in comparison to the six months ended June
30, 1999. NeoPath anticipates that future periods will include product sales;
however, revenue trends are subject to actual product placements, which have
been difficult to project.

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<PAGE> 101

NeoPath's AutoPap technology is available internationally at commercial
laboratories in Taiwan, Japan, China (Hong Kong), Korea, Australia, and in
Europe. The Company's international product placements have primarily been
denominated in U.S. dollars in the past; however, future product revenues may be
subject to foreign exchange rate fluctuations. Payment for the AutoPap System
sold internationally during the second quarter of 1999 is due NeoPath in EUROS
and is therefore subject to exchange rate fluctuations until paid.

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
JUNE 30, 1999 OF REVENUES JUNE 30, 1998 OF REVENUES
------------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of revenues:
Three months ended...................... $1,588 54% $2,372 55%
Six months ended........................ $2,752 55% $4,413 56%
Gross margin:
Three months ended...................... $1,351 46% $1,937 45%
Six months ended........................ $2,213 45% $3,459 44%
</TABLE>

The gross margin in the three and six months ended June 30, 1999 included
the effect of lower margins on fee-per-use systems that were processing slides
below the systems' capacity. Margins are expected to increase in the future as
NeoPath works with its customers to optimize system utilization.

<TABLE>
<CAPTION>
JUNE 30, 1999 CHANGE JUNE 30, 1998
------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Research and development:
Three months ended............................ $2,362 $ (549) $2,911
(19)%
Six months ended.............................. $4,780 $(1,177) $5,957
(20)%
</TABLE>

NeoPath incurred lower research and development costs in the three and
six-month periods ended June 30, 1999, compared to the comparable periods in
1998, due primarily to decreased net development costs on other AutoPap
applications, elimination of Pathfinder development expenses, and lower patent
filing expenditures. These reductions were offset by increases in expenses
related to NeoPath's clinical study to support AutoPap processing of AutoCyte's
PREP Pap smear as well as $275,000 in severance-related expenses commensurate
with a June 7, 1999 reduction of 1/3 of NeoPath's overall work force.

<TABLE>
<CAPTION>
JUNE 30, 1999 CHANGE JUNE 30, 1998
------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Selling, general and administrative:
Three months ended............................ $2,632 $(2,698) $5,330
(51)%
Six months ended.............................. $6,190 $(3,646) $9,836
(37)%
</TABLE>

NeoPath has reduced its overall spending rate significantly over the past
several quarters and continues to carefully focus corporate spending. The
decrease in the first six months of 1999 compared to the same period in 1998 is
due primarily to these cost reduction efforts and reduced sales and marketing
expenditures. Decreased expenses also reflect lower required legal expenses as a
result of the expected resolution of outstanding law suits, and the elimination
of Pathfinder-related administrative expenses (including amortization) following
NeoPath's decision to write-off Pathfinder intangible assets in the fourth
quarter of 1998.

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<PAGE> 102

Decreased expenditures were offset by expenses incurred in the second
quarter of 1999 of approximately $500,000 related to NeoPath's announced merger
with AutoCyte, Inc. and $75,000 in severance-related expenses commensurate with
a June 7, 1999 reduction of 1/3 of NeoPath's work force.

<TABLE>
<CAPTION>
JUNE 30, 1999 CHANGE JUNE 30, 1998
------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>

Interest income:
Three months ended............................ $ 164 $ (103) $ 267
(39)%
Six months ended.............................. $ 301 $ (332) $ 633
(52)%
</TABLE>

The decrease in interest income in 1999 is due to decreased cash
equivalents and securities available-for-sale resulting from NeoPath's negative
operating cash flow.

<TABLE>
<CAPTION>
JUNE 30, 1999 CHANGE JUNE 30, 1998
------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense:
Three months ended............................ $ (71) $ (56) $ (15)
364%
Six months ended.............................. $ (161) $ (136) $ (25)
555%
</TABLE>

The increase in interest expense in 1999 is due to NeoPath's initial
draw-down of its debt facility in June 1998.

LIMITATION ON USE OF NET OPERATING LOSS AND TAX CREDIT CARRYFORWARDS

As of December 31, 1998, NeoPath had net operating loss carryforwards of
approximately $111.5 million and research and development credit carryforwards
of approximately $3.4 million for federal income tax purposes, which expire
between 2004 and 2013. Due to the issuance and sale of shares of preferred stock
prior to 1995 and its initial public offering completed in 1995, NeoPath
incurred "ownership changes" under regulations in effect under the Internal
Revenue Code of 1986, as amended. Therefore, its use of losses incurred through
the date of these ownership changes will be limited during the carryforward
period. The merger with AutoCyte will reinstate an additional "ownership change"
that may further limit the use of these losses. NeoPath estimates that the use
of approximately $28.0 million of losses incurred prior to one or more of the
ownership changes will be limited in the carryforward periods. Furthermore, the
"ownership change" arising from the merger with AutoCyte will limit the use of
NeoPath's net operating losses incurred after the date of the last ownership
change through the date of the merger (as noted above, it may also further limit
the use of previously incurred losses). To the extent that NeoPath does not use
any single-year loss to the full amount of the limitation, the unused loss is
carried over to subsequent years until NeoPath uses it or the carryforward
period expires. See Note 6 of Notes to the Financial Statements of NeoPath.

MARKET RISKS

NeoPath faces market risk related to changes in interest rates, which could
adversely affect the value of its investments in securities available-for-sale
or increase the interest expense on outstanding debt. NeoPath does not use
derivative financial instruments.

NeoPath maintains a short-term investment portfolio consisting of interest
bearing securities with an average maturity of less than two years. These
securities are classified as "available-for-sale" securities. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels at June 30, 1999, the fair value of
the portfolio would decline by an immaterial amount.

93
<PAGE> 103

Conversely, a 10% increase in market interest rates would not materially
affect NeoPath's long-term obligations. NeoPath does not expect its operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1999, NeoPath had $9.9 million in cash, cash equivalents,
and securities available-for-sale, compared to $9.0 million as of December 31,
1998. The increase was a result of a $14.5 million private equity transaction
completed in February 1999, offset by cash used during the six months ended June
30, 1999 for operating activities. As a result of the equity transaction,
NeoPath issued 2.9 million shares of common stock to existing institutional
NeoPath investors at a price of $5.00 per share. NeoPath has used, and will
continue to use, the proceeds of the transaction to fund its operating cash
requirements. On February 12, 1999, NeoPath filed a shelf registration statement
on Form S-3 that allows resale of the newly issued shares. NeoPath must use its
best efforts to keep this registration statement effective for two years.
Because the registration statement was not declared effective within 120 days of
the transaction closing, the agreement specified that the purchase price would
be reduced by 2 percent. As a result, NeoPath recognized a liability of $290,000
as of June 30, 1999.

NeoPath's cash used in operating activities was $12.1 million in the six
months ended June 30, 1999, compared to $12.5 million in the six months ended
June 30, 1998. NeoPath expended cash for property and equipment, excluding
AutoPap Systems reclassified to either fee-per-use systems or reclassified to
property and equipment, of $59,000 in the six months ended June 30, 1999,
compared to $531,000 in the six months ended June 30, 1998.

NeoPath has a debt facility with Silicon Valley Bank with $2.5 million
remaining outstanding as of the end of the second quarter. The bank facility's
interest rate was 8.75 percent as of June 30, 1999, and the facility is secured
by $2.0 million in restricted cash in an interest-bearing account with the bank.
The restricted cash is included in cash and cash equivalents on the balance
sheet. The remaining debt is due monthly through June 2000. NeoPath is required
to maintain certain financial covenants, including minimum liquidity coverage,
minimum tangible net worth, and minimum debt-to-tangible-net-worth figures.
NeoPath complied with all financial covenants as of June 30, 1999. The bank debt
is secured by substantially all of NeoPath's assets, excluding intellectual
property.

NeoPath estimates that existing cash and cash equivalents will meet its
capital requirements through 1999. In the year 2000, NeoPath expects that cash
requirement will depend primarily on the placement rate and pricing of
fee-per-use AutoPap Screeners. Fee-per-use placements require NeoPath to invest
in initial manufacturing costs to achieve long-term return through monthly
customer payments. NeoPath cannot guarantee that the assumptions underlying
these estimates will prove to be accurate.

NeoPath's future capital requirements will depend on numerous factors,
including:

- sales of AutoPap Screeners and fee-per-use revenues;

- completion of the announced merger with AutoCyte, and related expenses;

- research and development programs for the development of enhanced
products;

- additional clinical trials;

- relationships with existing and future corporate collaborators, if any;

- competing technological and market developments;

- the time and costs involved in obtaining regulatory approvals;

- the costs involved in filing, prosecuting, defending and enforcing patent
claims; and

- the time and costs of manufacturing scale-up and commercialization
activities.

NeoPath may require additional funds to produce AutoPap Systems for its
fee-per-use program and cover continuing losses. NeoPath may be unable to obtain
adequate funds, whether obtained through financial markets or from collaborative
or other arrangements with corporate partners or other sources, when the funds
are needed, or NeoPath may be unable to find adequate funding on favorable
terms, if at

94
<PAGE> 104

all. NeoPath intends to seek additional funding through private debt financing
to provide additional resources to support AutoPap Primary Screener production,
but may be unable to do so. To date, NeoPath has had discussions with various
potential lenders. A lender's collateral would be based primarily on AutoPap
Systems placed on multi-year fee-per-use contracts. SmithKline Beecham Clinical
Laboratories is NeoPath's largest customer; therefore, the February 1999
announcement that Quest Diagnostics Incorporated agreed to purchase SmithKline
may delay NeoPath's ability to obtain debt financing.

If NeoPath raises additional funds by issuing equity securities, existing
shareholders will suffer dilution of their interest in NeoPath. In addition, if
NeoPath obtains additional funds through arrangements with collaborative
partners, it may have to relinquish rights to certain technologies or potential
products that it would otherwise seek to develop or commercialize itself.

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of NeoPath's
internal or product computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system errors or failures, and
could significantly disrupt normal business activities.

Based on assessments made in 1998, NeoPath determined that it would be
required to modify or replace certain portions of its internal systems and
product software and certain hardware so that those systems will properly
recognize dates beyond December 31, 1999. To date, NeoPath has completed its
assessment of all internal and product systems that could be significantly
affected by the Year 2000 issue. The assessment indicated that certain of
NeoPath's internal and product systems could be affected. However, no
significant Year 2000 issues have been identified that cannot be resolved
through software or hardware upgrades that are currently available or expected
to be available soon. NeoPath presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue as
it relates to NeoPath's internal systems and products can be effectively
mitigated. However, if such modifications and replacements are not made, or are
not completed in a timely manner, the Year 2000 issue could have a material
impact on NeoPath's and its customers' operations. In addition, NeoPath has
gathered information about the Year 2000 compliance status of its significant
suppliers and subcontractors and continues to monitor their compliance.

NeoPath uses existing internal resources to reprogram or replace, test, and
implement the internal systems and product software and certain hardware
modifications necessary for Year 2000 compliance. The total cost of the Year
2000 project has been borne primarily by operating departments with existing
personnel and infrastructure; therefore, incremental costs have not been
material and remaining incremental costs are estimated at less than $100,000. A
significant portion of the project is complete, and NeoPath expects the
remaining items to be completed during the third quarter.

NeoPath has asked its significant suppliers and subcontractors about their
Year 2000 compliance status. NeoPath is not aware of any external agent with
Year 2000 problems that are likely to materially impact NeoPath's results of
operations, liquidity, or capital resources. However, NeoPath cannot ensure that
its external agents will be Year 2000 ready. NeoPath's business could be
affected if external agents do not complete their Year 2000 resolution process
in a timely fashion. NeoPath cannot determine the effect of non-compliance by
external agents.

NeoPath currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program, including if its external
agents are not Year 2000 ready. NeoPath evaluated its status during the second
quarter of 1999 and determined that no contingency plan is necessary. NeoPath
management believes it has an effective program in place to resolve the Year
2000 issues within its control in a timely manner. NeoPath believes that with
modifications to its products, existing internal software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, in the worst case scenario, if NeoPath or
external agents do not make necessary modifications and conversions, or do not
complete them on time, the Year 2000 issue could disrupt NeoPath's operations
and materially affect its business, financial condition, and results of
operations.

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<PAGE> 105

MANAGEMENT AFTER THE MERGER

EXECUTIVE DIRECTORS

The following individuals will serve as the directors and executive
officers of AutoCyte immediately following the effective time of the merger.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James B. Powell............... 61 President, Chief Executive Officer and Director
Ernest A. Knesel.............. 53 Vice President of Business Development
Thomas Gahm................... 43 Vice President of Cytology Research and Development
Shih-Jong James Lee........... 43 Vice President of Corporate Partner Advance Development
Eric W. Linsley............... 37 Chief Financial Officer, Vice President of Finance and Treasurer
Mary K. Norton................ 36 Vice President of Regulatory Affairs and Quality Assurance
David H. Robison.............. 49 Vice President of Operations
Thomas A. Bonfiglio........... 55 Director
Richard A. Charpie............ 47 Director
Robert E. Curry............... 52 Director
David A. Thompson............. 53 Director
Alan C. Nelson................ 49 Director
</TABLE>

James B. Powell has served as President and Chief Executive Officer of
AutoCyte since January 1997. Prior to joining AutoCyte, Dr. Powell served as the
President and Chief Executive Officer of Laboratory Corporation of America
Holdings from May 1995 until January 1997. From June 1982 until May 1995, Dr.
Powell served as President of Biomedical Reference Laboratories/Roche Biomedical
Laboratories, Inc., the predecessor to both LabCorp and Roche Image Analysis,
Inc., which he co-founded. He continues to serve on the board of LabCorp, a
publicly traded company. Dr. Powell received a B.A. degree from Virginia
Military Institute and a M.D. from Duke University, and is board certified in
anatomical and clinical pathology.

Ernest A. Knesel has served as Executive Vice President of AutoCyte since
November 1996 and served as our interim President from November 1996 until
January 1997. Previously, Mr. Knesel was a founder of Roche Image Analysis
Systems and served as its President from May 1989 until joining AutoCyte. Mr.
Knesel also was a co-founder of Biomedical Reference Laboratories/Roche
Biomedical Laboratories, Inc., for which he served as Senior Vice President and
was responsible for Scientific Affairs from June 1969 until 1993. Mr. Knesel
received a B.S. in medical technology and an M.S. in biochemistry from Fairleigh
Dickinson University.

Thomas Gahm, Ph.D. has served as Vice President of Computer Science of
AutoCyte since November 1996. Previously, he served Roche Image Analysis Systems
and Biomedical Reference Laboratories/Roche Biomedical Laboratories in the same
capacity since August 1993. From 1983 to 1993, Dr. Gahm was a Scientific Advisor
and Project Coordinator of Kontron Electronics, Image Analysis Division, where
he focused on the commercial development of microscopic image analysis. Dr. Gahm
received an engineering degree from the University of Stuttgart (Institute of
Physical Electronics) and a Ph.D. from the Medical and Technical University of
Hannover, Germany.

Shih-Jong James Lee, Ph.D., Vice President and Chief Technical Officer of
NeoPath, joined NeoPath in March 1989. Dr. Lee served as the Company's Chief
Scientist beginning March 1993 and Vice President, Chief Scientist in February
1995. In 1997, Dr. Lee was named Vice President and Chief Technical Officer. Dr.
Lee was Principal Engineer for the High Technology Center of the Boeing Company
from 1986 to 1989, and founded its Image Analysis Group. He currently serves on
the Editorial Board of the Pattern Recognition Journal.

Eric W. Linsley has served as Vice President of Operations and Business
Development of AutoCyte since May 1997. Prior to joining AutoCyte, Mr. Linsley
was a partner with Ampersand Ventures, a

96
<PAGE> 106

venture capital firm, from 1991 to May 1997, and, in connection with such
position, served as interim management in operating and financial roles for
various industrial products and health care companies. From 1989 to 1991, Mr.
Linsley was a management consultant with Bain & Co. In 1988, he served in the
same capacity with McKinsey & Co. He also has worked as a certified public
accountant with Arthur Andersen LLP from 1984 to 1987. He received a B.A. from
Trinity College, an M.S. in accounting from New York University and an M.B.A.
from the Wharton School at the University of Pennsylvania.

Mary K. Norton, Vice President, Regulatory/Government Affairs and Quality
Assurance of NeoPath, joined NeoPath in August 1996 as the Company's Director of
Regulatory and Clinical Affairs. In May 1998, Ms. Norton was named Vice
President, Regulatory Affairs and Quality Assurance, and in January 1999, was
named Vice President, Regulatory/Government Affairs & Quality Assurance. Prior
to joining NeoPath, Ms. Norton managed Regulatory Affairs and Quality Assurance
from July 1994 through May 1996 at Bioject, Inc., a company that develops,
manufactures and markets advanced needle-free drug delivery systems. Ms. Norton
was employed by Siemens Medical Systems, Ultrasound Group, as Senior Biomedical
Engineer from August 1992 to June 1994. From September 1987 to October 1990, Ms.
Norton was employed by Advanced Technology Laboratories.

David H. Robison, Vice President, Operations of NeoPath, joined NeoPath in
May 1996. Prior to joining NeoPath, Mr. Robison was employed by Abbott
Laboratories in various positions from February 1978 through May 1996. From
February 1995 to May 1996, Mr. Robison was Research and Development Director for
Abbott's Diagnostic Division, and from May 1990 to February 1995 he was
Director, Customer Satisfaction.

Thomas A. Bonfiglio, M.D., serves as Senior Attending Pathologist and Head,
Division of Pathology, at The Genesee Hospital in Rochester, New York. Dr.
Bonfiglio is also a Clinical Professor at the University of Rochester's
Department of Pathology and Laboratory Medicine, where he has maintained various
academic positions since 1971. Since 1969, Dr. Bonfiglio has held pathology
positions at various hospitals, most recently as Pathologist in Chief at Strong
Memorial Hospital from 1989 to 1997. He is a past president of the American
Society of Clinical Pathologists and the American Society of Cytopathology and
has authored numerous medical publications.

Richard A. Charpie is Chairman of the AutoCyte board of directors. Dr.
Charpie is the Managing General Partner of Ampersand Ventures and all of its
affiliated partnerships. He founded Ampersand in 1988 as a spin-off from
PaineWebber Incorporated. Dr. Charpie is currently a director of V.I.
Technologies, Inc. and of several privately held companies. Dr. Charpie holds a
M.S. in physics and a Ph.D. in applied economics and finance, both from the
Massachusetts Institute of Technology.

Robert E. Curry is Vice President of DLJ Capital Corporation, a wholly
owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. He joined the Sprout
Group, a submanager of various venture capital funds within the Donaldson,
Lufkin & Jenrette organization, as a general partner in May 1991. Prior to
joining Sprout, Dr. Curry served in various capacities with Merrill Lynch R&D
Management and Merrill Lynch Venture Capital from 1984, including as President
of both organizations from January 1990 to May 1991. Previously, Dr. Curry was a
Vice President of Becton Dickinson from May 1980 to July 1984, and General
Manager of Bio-Rad Laboratory Inc.'s Diagnostics Systems Division from August
1976 to May 1980. He currently is a director of Adeza Biomedical, Inc.,
Biometric Imaging, Inc., Instrumentation Metrics, Inc., Mycotech, Inc.,
Urosurge, Inc., Prometheus Laboratories, Inc. and Photon Technology
International, Inc. Dr. Curry received a B.S. from the University of Illinois,
and a M.S. and Ph.D. in chemistry from Purdue University.

David A. Thompson has been a director of NeoPath since June 1995. Mr.
Thompson retired in June 1995 from Abbott Laboratories, a manufacturer and
distributor of pharmaceutical and nutritional products, where he served in
various capacities since 1964. From August 1983 to July 1990, he was Abbott's
Vice President, Diagnostic Operations and President, Diagnostics Division; from
July 1990 to June 1994, he was Abbott's Senior Vice President, Diagnostic
Operations and President, Diagnostics Division; and from June 1994 until his
retirement, he was Abbott's Senior Vice President, Strategic Improvement
Processes. Mr. Thompson is currently Chief Executive Officer of Diagnostic
Marketing
97
<PAGE> 107

Strategies, a private consulting firm. Mr. Thompson is also a director of HYCOR
Biomedical, Inc., NABI, LifeCell Corporation, and St. Jude Medical, Inc.

Alan C. Nelson, Ph.D., NeoPath's founder and chairman of the board, has
been a director since May 1989. He was NeoPath's Chairman of the board from
March 1991 until June 1994, when he became President and Chief Executive
Officer, a position he held until March 1999 when Ronald R. Bromfield joined
NeoPath as its President and Chief Executive Officer. In August 1998, Dr. Nelson
was again appointed Chairman of the board. From September 1986 to September
1992, Dr. Nelson was an associate professor at the Center for Bioengineering and
an adjunct professor in the Departments of Pathology, Radiology, and Electrical
Engineering at the University of Washington, where he directed that university's
Center for Imaging Systems Optimization from 1990 to 1991. Since 1991, Dr.
Nelson has held an affiliate professorship with the Center for Bioengineering at
the University of Washington.

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<PAGE> 108

COMPENSATION OF AUTOCYTE EXECUTIVE OFFICERS

The compensation paid in respect of the year ended December 31, 1998 to the
executive officers of AutoCyte who served during the year was as set forth
below.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION ALL OTHER
COMPENSATION AWARDS COMPENSATION
----------------- ------------ ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) OPTIONS(#)
--------------------------- ---- --------- ------------
<S> <C> <C> <C> <C>
James B. Powell, M.D. ......................... 1998 $171,976 4,125 $ 5,000(2)
President and Chief Executive Officer(4) 1997 $145,279 -- $ 2,542(2)
Ernest A. Knesel............................... 1998 $190,304 17,379 $ 5,000(2)
Executive Vice President(5) 1997 $184,032 -- $ 4,750(2)
1996 $193,931 245,941 $22,771(3)
Thomas Gahm, Ph.D. ............................ 1998 $175,976 17,165 $ 5,000(2)
Vice President of Computer Science 1997 $164,287 -- $ 4,750(2)
1996 $159,509 135,268 $ 6,775(3)
Eric W. Linsley................................ 1998 $148,195 16,471 $ 4,369(2)
Vice President of Operations and 1997 $ 88,266 135,268 $96,235(8)
Business Development(6)
Steven C. McPhail.............................. 1998 $158,556 16,719 $ 3,083(2)
Vice President of Sales and Marketing(7) 1997 $ 94,343 98,376 $96,798(9)
</TABLE>

- ---------------
(1) The amounts shown for 1996 represent amounts paid by Roche Image Analysis
Systems for services performed from January 1, 1996 to November 21, 1996,
and amounts paid by AutoCyte for services performed from November 22, 1996
to December 31, 1996.

(2) Represents contributions by AutoCyte to its 401(k) plan on behalf of the
executive officers.

(3) Represents payments made by RIAS in connection with the formation of
AutoCyte for accrued vacation time with RIAS.

(4) Dr. Powell joined AutoCyte as President and Chief Executive Officer in
January 1997.

(5) Mr. Knesel served as interim President from November 22, 1996 until January
1997. During that period, no executive officer held the title of Chief
Executive Officer.

(6) Mr. Linsley joined AutoCyte as Vice President of Operations and Business
Development in May 1997.

(7) Mr. McPhail served as Vice President of Sales and Marketing from May 1997 to
July 1999.

(8) Represents payments of $95,251 made by AutoCyte for relocation expenses and
related income tax gross-up payments and contributions of $984 by AutoCyte
to its 401(k) plan on behalf of the executive officer.

(9) Represents payments of $96,564 made by AutoCyte for relocation expenses and
related income tax gross-up payments and contributions of $234 by AutoCyte
to its 401(k) plan on behalf of the executive officer.

99
<PAGE> 109

The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1998 to AutoCyte's executive
officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE/SHARE DATE 5%(1) 10%(1)
---- ---------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James B. Powell, M.D. .......... 5,500(2) 1.18% $4.188 2/5/2008 $14,486 $36,710
Ernest A. Knesel................ 14,000(3) 3.01% $4.188 2/5/2008 $36,873 $93,444
4,506(4) 0.97% $4.188 2/5/2008 $11,868 $30,076
Thomas Gahm, Ph.D. ............. 14,000(3) 3.01% $4.188 2/5/2008 $36,873 $93,444
4,220(5) 0.91% $4.188 2/5/2008 $11,115 $28,167
Eric W. Linsley................. 14,000(3) 3.01% $4.188 2/5/2008 $36,873 $93,444
3,375(6) 0.78% $4.188 2/5/2008 $ 8,889 $22,527
Steven C. McPhail............... 14,000(3) 3.01% $4.188 2/5/2008 $36,873 $93,444
3,625(7) 0.73% $4.188 2/5/2008 $ 9,548 $24,195
</TABLE>

- ---------------
(1) The dollar amounts shown in these columns are the result of calculations at
the 5% and 10% rates required by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the underlying common stock. No gain to the optionee is
possible without an increase in price of the underlying common stock, which
will benefit all stockholders proportionately.

(2) These options became exercisable with respect to 4,125 shares on December
31, 1998 upon AutoCyte's achieving certain performance-based criteria. These
options terminated with respect to the remaining 1,375 shares on December
31, 1998.

(3) These options were granted on February 6, 1998 and become exercisable as to
1/48th of the shares on the first day of each month following the date of
grant.

(4) These options became exercisable with respect to 3,379 shares on December
31, 1998 upon AutoCyte's achieving certain performance-based criteria. These
options terminated with respect to the remaining 1,127 shares on December
31, 1998.

(5) These options became exercisable with respect to 3,165 shares on December
31, 1998 upon AutoCyte's achieving certain performance-based criteria. These
options terminated with respect to the remaining 1,055 shares on December
31, 1998.

(6) These options became exercisable with respect to 2,471 shares on December
31, 1998 upon AutoCyte's achieving certain performance-based criteria. These
options terminated with respect to the remaining 904 shares on December 31,
1998.

(7) These options became exercisable with respect to 2,719 shares on December
31, 1998 upon AutoCyte's achieving certain performance-based criteria. These
options terminated with respect to the remaining 906 shares on December 31,
1998.

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<PAGE> 110

The following table sets forth certain information concerning exercisable
and unexercisable stock options held by AutoCyte's executive officers as of
December 31, 1998.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
James B. Powell, M.D. ...... -- $ -- 4,125/-- $--/$--
Ernest A. Knesel............ 114,732 $494,632 11,533/134,055 $20,869/$489,941
Thomas Gahm, Ph.D. ......... 37,453 $153,754 34,262/78,718 $112,279/$269,467
Eric W. Linsley............. 28,471 $125,313 30,459/92,809 $101,051/$325,609
Steven C. McPhail........... 2,000 $ 14,718 40,575/70,520 $139,208/$236,805
</TABLE>

- ---------------
(1) Based on the difference between the last sale price of AutoCyte common stock
on the date of exercise, as reported on the Nasdaq National Market, and the
exercise price.

(2) Based on the difference between the last sale price of AutoCyte common stock
on December 31, 1998 as reported on the Nasdaq National Market of $4.1875,
and the option exercise price.

DIRECTOR COMPENSATION

Directors currently receive no compensation for their service on the Board
except pursuant to the 1997 Director Stock Option Plan, which was adopted by the
Board and stockholders of the Company in June 1997. All of the directors who are
not employees of the Company are currently eligible to participate in the
Director Plan. There are 100,000 shares of common stock reserved for issuance
under the Director Plan. Upon the election or reelection of an eligible
director, such director automatically will be granted an option to purchase
10,000 shares of common stock. Options become exercisable with respect to 2,000
shares on each anniversary of the date of grant for a period of five years,
provided that the optionee is still a director of the Company at the opening of
business on such date. Each option has a term of ten years. The exercise price
for each option is equal to the last sale price for the common stock on the
business day immediately preceding the date of grant, as reported on the Nasdaq
National Market. The exercise price may be paid in cash, shares of common stock
or a combination of both.

COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND CERTAIN
TRANSACTIONS OF AUTOCYTE

During fiscal year 1998, the AutoCyte compensation committee consisted of
Dr. Charpie, Dr. Curry and Mr. Mac Mahon. None of the members of the
compensation committee is an officer of AutoCyte.

Dr. Charpie is a general partner of (i) ASMC-III MCLP LLP, which is the
general partner of the general partner of both Ampersand Specialty Materials and
Chemicals III Limited Partnership and Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership, and (ii) Ampersand Lab
Partners MCLP LLP, which is the general partner of both Laboratory Partners I
Limited Partnership and Laboratory Partners Companion Fund Limited Partnership,
which, together, are a principal stockholder of AutoCyte.

Dr. Curry is divisional Vice President of DLJ Capital Corporation, the
managing general partner of Sprout Capital VII, L.P. and Sprout CEO Fund, L.P.,
and acts as attorney-in-fact with respect to DLJ Capital's direct and indirect
investments in AutoCyte. Together, these entities are a principal stockholder of
AutoCyte.

Mr. Mac Mahon succeeded Dr. Powell as President and Chief Executive Officer
of LabCorp, a publicly held company of which Dr. Powell currently is a director.
Mr. Mac Mahon also serves as LabCorp's Chairman of the board.

LABCORP ARRANGEMENTS

AutoCyte has entered into certain ongoing arrangements with LabCorp for
selling its products to LabCorp. In 1998, LabCorp purchased approximately
$635,000 worth of products from AutoCyte.

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<PAGE> 111

AutoCyte currently expects that LabCorp's purchases of AutoCyte products in 1999
will exceed 5% of AutoCyte's consolidated gross revenue for 1999.

AutoCyte has continuing arrangements with LabCorp (i) for leasing a portion
of LabCorp's facility in Elon College, North Carolina and (ii) for providing
cytology services in support of AutoCyte's clinical trials. In 1998, AutoCyte
paid LabCorp approximately $62,000 and $5,500, respectively, under these
arrangements.

COMPENSATION OF NEOPATH EXECUTIVE OFFICERS

The following table presents the compensation paid by NeoPath in the last
three fiscal years to its Chief Executive Officer and its four other most highly
compensated executive officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- -------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY(5) BONUS(6) COMPENSATION(7) OPTIONS(#)(8) (9)
- --------------------------- ---- --------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson(1)(2)............... 1998 $314,500 $ -- $56,251 288,780 $1,000
Chairman of the Board 1997 $300,014 $ -- $ -- 62,160 $1,400
(former President and 1996 $257,022 $102,150 $ -- 100,000 $ 750
Chief Executive Officer)
Shih-Jong James Lee................ 1998 $193,769 $ -- $44,623 105,813 $7,543
Vice President and 1997 $182,000 $ -- $ -- 26,000 $8,836
Chief Technical Officer 1996 $166,985 $ 54,146 $ -- 27,793 $1,500
Larry A. Nelson(1)................. 1998 $159,346 $ -- $ -- 78,250 $ 343
Vice President, Intellectual 1997 $145,616 $ -- $ -- 16,570 $1,400
Property and New Business 1996 $139,365 $ 38,744 $ -- 41,250 $ --
Development
Mary K. Norton(3).................. 1998 $118,529 $ 13,472 $ -- 56,850 $ --
Vice President, Regulatory/ 1997 $ 93,558 $ 2,478 $ -- 11,150 $ --
Government Affairs & Quality 1996 $ 38,585 $ -- $ -- 12,000 $ --
Assurance
David H. Robison(4)................ 1998 $169,969 $ -- $ -- 89,470 $ --
Vice President, Operations 1997 $155,616 $ -- $ -- 17,680 $ --
1996 $ 87,692 $ 28,652 $ -- 50,000 $ --
</TABLE>

- ---------------
(1) Alan C. Nelson and Larry A. Nelson are not related.

(2) Dr. Nelson was President and Chief Executive Officer until March 1999.

(3) Mary K. Norton joined NeoPath as Director, Regulatory Affairs in August
1996, and became a corporate officer in May 1998.

(4) David H. Robison joined NeoPath as Vice President, Operations in May 1996.

(5) Salary amounts in 1998 include 27 biweekly pay periods instead of the normal
26 pay periods; therefore, amounts shown are approximately 4% higher than
actual annual salary.

(6) Bonuses were earned by achievement of specified corporate goals approved by
the compensation committee of the NeoPath board. NeoPath paid these bonuses
within 60 days following the year-end. No bonus was paid to any person for
services as an officer in 1997 and 1998.

(7) Consists of amounts paid for accrued vacation, as approved by the
compensation committee.

(8) 1998 awards include options granted in exchange for previously granted
options pursuant to a repricing of options.

(9) Represents compensation paid in connection with the filing of patent
applications.

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<PAGE> 112

The following table presents information regarding stock options granted
during the fiscal year ended December 31, 1998 to NeoPath's executive officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
TOTAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(3)
OPTIONS IN PRICE EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson
(1) 76,620 4.4% $13.00 5/21/08 $ 626,417 $1,587,463
(2) 212,160 12.0 13.00 6/2/08 1,626,546 4,223,704
Shih-Jong James Lee
(1) 32,020 1.8 13.00 5/21/08 261,784 663,411
(2) 73,793 4.2 13.00 6/2/08 565,742 1,469,079
Larry A. Nelson
(1) 20,430 1.2 13.00 5/21/08 167,028 423,282
(2) 57,820 3.2 13.00 6/2/08 443,283 1,151,086
Mary K. Norton
(1) 16,850 1.0 13.88 5/5/08 147,032 372,607
(2) 40,000 2.4 13.00 6/2/08 306,663 796,324
David H. Robison
(1) 21,790 1.2 13.00 5/21/08 178,147 451,459
(2) 67,680 3.9 13.00 6/2/08 518,876 1,347,381
</TABLE>

- ---------------
(1) Represents annual stock option grant using a formula-based model applied to
all eligible NeoPath employees. One-quarter of the options vest on each
anniversary of the date of grant. All of these options had an exercise price
per share equal to the per share market price of NeoPath's common stock on
the date of grant.

(2) Represents options issued pursuant to a repricing of previously issued
options. These options retained the vesting schedules of the original
options.

(3) Based on the exercise price per share on the date of grant. The actual value
per share may differ from the potential realizable values presented in the
table.

The following table presents information regarding stock options exercised
during the fiscal year ended December 31, 1998 and options held at December 31,
1998 by NeoPath's executive officers.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED VALUE YEAR-END(#) YEAR-END($)(2)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson................ -- $ -- 217,273 164,908 $330,453 $ --
Shih-Jong James Lee........... 3,645 54,402 43,614 62,199 -- --
Larry A. Nelson............... -- -- 30,782 47,468 -- --
Mary K. Norton................ -- -- 9,788 30,212 -- --
David H. Robison.............. -- -- 36,710 52,760 -- --
</TABLE>

- ---------------
(1) Based on the closing price of NeoPath's common stock on the date of
exercise.

(2) Based on the closing price of NeoPath's Common Stock on December 31, 1998 of
$5.94 per share as reported by the Nasdaq stock market.

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<PAGE> 113

NEOPATH COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1998, the Compensation Committee was comprised of David A. Thompson
and Dr. Gail R. Wilensky, who were members throughout 1998, and Christina H.
Kepner, who became a member effective May 21, 1998. Alan D. Frazier, who left
the Board of Directors effective May 21, 1998, was a member of the compensation
committee in 1998 prior to his departure. Ms. Kepner is a principal at Invemed
Associates, Inc., which assisted NeoPath in a private equity placement
transaction completed in February 1999.

THE MERGER AGREEMENT

The following is a summary of significant provisions of the merger
agreement. The merger agreement is attached as Annex A and is incorporated into
this joint proxy statement/prospectus by reference. You should read the merger
agreement for a complete understanding of its terms.

STRUCTURE OF THE MERGER

The merger agreement provides that, following the approval of the merger
agreement by the NeoPath shareholders, the approval of the issuance of shares of
AutoCyte common stock in the merger by the AutoCyte stockholders and the
satisfaction or waiver of the other conditions to the merger, NeoPath will
become a wholly owned subsidiary of AutoCyte and NeoPath shareholders will
become AutoCyte stockholders.

EFFECTIVE TIME

We expect to close the merger before November 30, 1999. The merger will be
effective upon the filing of appropriate documents with the Delaware and
Washington Secretaries of State, or a later time that we specify in these
documents. AutoCyte and NeoPath plan to file these documents as soon as possible
after the AutoCyte and NeoPath shareholders meetings.

MERGER CONSIDERATION

The merger agreement provides that, at the effective time of the merger,
each share of NeoPath common stock outstanding immediately before the effective
time, other than dissenting shares, will be converted into the right to receive
0.7903 shares of AutoCyte common stock. The exchange ratio was agreed to as a
result of arm's-length negotiations between representatives of AutoCyte and
NeoPath, during which NeoPath and AutoCyte had the benefit of advice from their
respective financial advisors.

NO FRACTIONAL SHARES

AutoCyte will not issue fractional shares in the merger. Instead, AutoCyte
will pay to each holder of shares of NeoPath common stock who otherwise would be
entitled to receive a fraction of a share of AutoCyte common stock an amount in
cash, without interest, equal to the fraction multiplied by the market value of
a share of AutoCyte common stock, with the market value being based on the
average closing bid price of a share of AutoCyte common stock on the Nasdaq
National Market for the 10 trading days ending on the day before the effective
time.

EXCHANGE OF SHARE CERTIFICATES

After the closing, AutoCyte will mail transmittal forms to record holders
of NeoPath common stock for use in exchanging NeoPath common stock certificates
for AutoCyte common stock certificates and any cash for fractional shares. We
will send instructions specifying details of the exchange with the transmittal
forms.

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<PAGE> 114

NEOPATH SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.

After the effective time of the merger, each certificate evidencing shares
of NeoPath common stock, until surrendered and exchanged, will be deemed, for
all purposes, to represent the right to receive the number of shares of AutoCyte
common stock into which the shares of NeoPath common stock evidenced by such
certificate have been converted and the right to receive any cash payment in
lieu of a fractional share of AutoCyte common stock.

TREATMENT OF NEOPATH COMMON STOCK OPTIONS AND WARRANTS

At the effective time of the merger, each outstanding option to purchase
shares of NeoPath common stock under the NeoPath 1989 stock option plan (amended
and restated on February 26, 1998), the NeoPath stock option plan for
nonemployee directors (amended and restated on February 27, 1997) and the
NeoPath 1999 stock incentive compensation plan, whether or not exercisable, will
be assumed by AutoCyte. Each NeoPath option so assumed will continue to have,
and be subject to, the same terms and conditions set forth in the applicable
NeoPath stock option plan immediately before the effective time of the merger,
except that:

- each option will be exercisable for a number of shares of AutoCyte common
stock equal to the number of shares of NeoPath common stock that were
issuable upon exercise of the option immediately before the effective
time multiplied by 0.7903, rounded down to the nearest whole number of
shares of AutoCyte common stock;

- the per share exercise price for the shares of AutoCyte common stock
issuable upon exercise of the assumed option will be equal to the
exercise price per share of NeoPath common stock at which such option was
exercisable immediately before the effective time divided by 0.7903,
rounded up to the nearest whole cent; and

- all options to purchase shares of NeoPath common stock will become fully
vested and exercisable upon completion of the merger.

As of September 8, 1999, 1,998,303 shares of NeoPath common stock were
issuable upon the exercise of outstanding NeoPath options. These options will be
converted into options to purchase approximately 1,579,259 shares of AutoCyte
common stock. The weighted average exercise price per share of all NeoPath
options outstanding as of September 8, 1999 was $11.36 per share. The weighted
average exercise price of these options as converted into options to purchase
AutoCyte common stock will be $14.37.

At the effective time of the merger, AutoCyte will assume all warrants to
purchase shares of NeoPath common stock remaining outstanding after the merger
whether or not exercisable. Each warrant assumed by AutoCyte will continue to
have, and be subject to, the terms and conditions set forth in the applicable
warrant immediately before the effective time of the merger except that:

- each warrant will be exercisable for a number of shares of AutoCyte
common stock equal to the number of shares of NeoPath common stock that
are issuable upon exercise of the warrant immediately before the
effective time multiplied by 0.7903, rounded down to the nearest whole
number of shares of AutoCyte common stock; and

- the per share exercise price for the shares of AutoCyte common stock
issuable upon exercise of the assumed warrant will be equal to the
exercise price per share of NeoPath common stock at which such warrant
was exercisable immediately before the effective time divided by 0.7903,
rounded up to the nearest whole cent.

At September 8, 1999, 378,910 shares of NeoPath common stock were issuable
upon the exercise of outstanding and vested NeoPath warrants. Of the total
warrants outstanding, one warrant for the purchase of 100,000 shares will be
converted into a warrant to purchase approximately 79,030 shares of AutoCyte
common stock at the effective time. The remaining warrants will expire at the
effective time of the merger. The weighted average exercise price per share of
all NeoPath warrants outstanding as of
105
<PAGE> 115

September 8, 1999 is $5.89. The weighted average exercise price of certain
warrants as converted into warrants to purchase AutoCyte common stock will be
$7.45.

REPRESENTATIONS AND WARRANTIES

Each of AutoCyte and NeoPath has made customary representations and
warranties to the other in the merger agreement relating to, among other things:

- its organization, the organization of its subsidiaries and similar
corporate matters;

- its capital structure;

- the authorization, execution, delivery and performance of the merger
agreement and the absence of conflicts, violations or defaults under its
organizational documents and other agreements and documents or conflicts
with or violations of any laws as a result of executing the merger
agreement;

- governmental consents and filings;

- reports and financial statements filed with the SEC and the accuracy of
the information contained therein;

- the absence of any undisclosed liabilities and material adverse events
since March 31, 1999;

- the filing of tax returns and the payment of taxes;

- compliance with applicable laws and agreements and maintenance of
licenses and permits;

- the absence of litigation proceedings;

- its material contracts;

- its leased properties;

- ownership, use and non-infringement of intellectual property rights;

- title to its assets;

- its employee benefit plans;

- compliance with governmental regulations concerning employees and
relations with employees;

- disclosure of relationships with affiliates;

- maintenance of insurance coverage;

- brokers' and finders' fees incurred in connection with the merger;

- compliance with environmental laws and other environmental matters;

- the information provided for inclusion in this joint proxy
statement/prospectus;

- receipt of a fairness opinion;

- matters relating to accounting treatment of the merger; and

- full disclosure.

AutoCyte has made additional representations and warranties to NeoPath as
to the following:

- the capitalization of the subsidiary AutoCyte formed to effect the
merger; and

- the business activities of the subsidiary AutoCyte formed to effect the
merger.

106
<PAGE> 116

CERTAIN COVENANTS

INTERIM OPERATIONS OF AUTOCYTE AND NEOPATH

From the date of the execution of the merger agreement until the closing of
the merger, AutoCyte and NeoPath have each agreed to carry on their business
diligently and in the ordinary course. AutoCyte and NeoPath also have each
agreed to use reasonable efforts to preserve intact their business organization,
to keep available the services of its employees, to maintain its properties and
assets in good condition, to keep insurance policies in effect, to preserve and
protect its proprietary rights and to preserve its relationships with third
parties. These obligations are subject to exceptions provided in the merger
agreement and any other exceptions that are agreed to in writing.

During the period before the closing of the merger, neither AutoCyte nor
NeoPath, without the other's consent and subject to exceptions, will do or agree
to do any of the following:

- sell or transfer, or mortgage, pledge or create or permit to be created
any encumbrance on, any of its assets other than sales or transfers in
the ordinary course of business;

- voluntarily incur any obligation or liability other than in the ordinary
course of its business or incur any indebtedness for borrowed money, or
enter into any contracts or commitments involving payments of $50,000 or
more other than purchase orders or commitments for inventory materials
and supplies in the ordinary course of business;

- change the compensation or fringe benefits of any officer, director or
employee or modify any employee plan or any employment, severance or
other agreement with any officer, director or employee;

- grant or accelerate the exercisability of, any option, warrant or other
right to purchase, or to convert any obligation into, shares of its
capital stock, or declare or pay any dividend or other distribution with
respect to any shares of its capital stock, or reclassify, combine,
split, subdivide or redeem, purchase or otherwise acquire, directly or
indirectly, any of its capital stock, or issue any shares of its capital
stock, except upon the exercise of options outstanding on the date of the
merger agreement;

- amend its certificate or articles of incorporation or by-laws;

- acquire any business or make any material acquisition of assets or
property other than in the ordinary course of business;

- enter into or modify any material agreement with any other person or
entity other than in the ordinary course of business involving payments
of less than $50,000.

NEOPATH SPECIAL MEETING AND AUTOCYTE SPECIAL MEETING; RECOMMENDATION OF THE
NEOPATH BOARD AND THE AUTOCYTE BOARD

NeoPath has agreed to cause the NeoPath special meeting to be held as
promptly as practicable after the registration statement of AutoCyte of which
this joint proxy statement/prospectus is a part is declared effective by the SEC
for the purpose of considering adoption of the merger agreement. AutoCyte
similarly has agreed, in accordance with NASD rules, to cause the AutoCyte
special meeting to be held as promptly as practicable after the registration
statement is declared effective for the purpose of considering the approval of
the issuance of shares of AutoCyte common stock in the merger and the amendment
to AutoCyte's restated certificate of incorporation increasing the number of
authorized shares of AutoCyte common stock. The NeoPath board of directors and
the AutoCyte board of directors has each agreed, subject to its fiduciary
duties, to use its reasonable effects to solicit from its stockholders proxies
in favor of the adoption of the merger agreement and the issuance of shares of
AutoCyte common stock in the merger, respectively, and to take all other actions
necessary or advisable to secure the vote or consent of its stockholders
required to obtain such approval.

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<PAGE> 117

INDEMNIFICATION AND INSURANCE FOR NEOPATH OFFICERS AND DIRECTORS

AutoCyte has agreed to honor NeoPath's indemnification obligations under
NeoPath's articles of incorporation and by-laws as in effect before the
effective time. The indemnification obligations include only those arising
before the effective time. AutoCyte also agreed either to purchase or to keep in
effect directors' and officers' liability insurance coverage for these
indemnification obligations in an amount and containing terms and conditions
that are no less advantageous to the indemnified parties as NeoPath's existing
coverage. AutoCyte, however, will not be required to pay aggregate premiums in
excess of six times the current annual premium paid by NeoPath. See "The
Merger -- Potential Conflicts and Interests of Certain Persons in the Merger" on
page 48.

CERTAIN OTHER COVENANTS

The merger agreement contains mutual covenants, including covenants
relating to public announcements, notifications, access to information,
reporting of the transaction for federal income tax purposes, best efforts and
further assurances, compliance with legal requirements, cooperation relating to
obtaining consents and approvals and confidential treatment of non-public
information.

The merger agreement also contains covenants of AutoCyte, including
covenants obligating AutoCyte to use reasonable commercial efforts to list the
shares of AutoCyte common stock to be issued in the merger on the Nasdaq
National Market.

CONDITIONS TO THE MERGER

CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER

The obligation of AutoCyte and NeoPath to consummate the merger are subject
to the satisfaction or waiver of the following conditions:

- NeoPath shareholders must adopt the merger agreement;

- AutoCyte stockholders must approve the issuance of shares of AutoCyte
common stock in the merger and the amendment to AutoCyte's restated
certificate of incorporation increasing the number of authorized shares
of AutoCyte common stock;

- the registration statement of which this joint proxy statement/prospectus
is a part must have been declared effective by the SEC and not be subject
to any stop order or related proceeding by the SEC;

- no applicable law or regulation, judgment, injunction, order or decree of
a court of competent jurisdiction may prohibit, enjoin or have a material
adverse effect on NeoPath, AutoCyte or the consummation of the merger;

- AutoCyte and NeoPath must obtain all required approvals from governmental
entities;

- the shares of AutoCyte common stock to be issued in the merger must be
approved for quotation on the Nasdaq National Market; and

- AutoCyte and NeoPath will have received letters, at closing, from Ernst &
Young LLP regarding the appropriateness of pooling-of-interests
accounting for the merger under APB 16 if closed and consummated in
accordance with the agreement.

CONDITIONS TO THE OBLIGATION OF AUTOCYTE

The obligation of AutoCyte to effect the merger are subject to the
satisfaction or waiver of the following additional conditions:

- the representations and warranties of NeoPath contained in the merger
agreement must be accurate in all material respects;

- NeoPath must have performed in all material respects all of its
obligations under the merger agreement before the effective time;

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<PAGE> 118

- NeoPath must deliver to AutoCyte customary legal opinions, including
opinions relating to tax treatment of the merger, and other documents
described in the merger agreement;

- each of the individuals and entities who is an affiliate of NeoPath must
deliver to AutoCyte an agreement prohibiting transactions in NeoPath
common stock for 30 days before the effective time of the merger and
restricting resale of the shares of AutoCyte common stock issued in the
merger;

- not more than five percent (5%) of the shares of NeoPath common stock
issued and outstanding on the closing date of the merger may have
exercised dissenters' rights;

- NeoPath must have obtained all required third party waivers and consents.

CONDITIONS TO THE OBLIGATION OF NEOPATH

The obligation of NeoPath to effect the merger is subject to the
satisfaction or waiver of the following additional conditions:

- the representations and warranties of AutoCyte contained in the merger
agreement must be accurate in all material respects;

- AutoCyte must have performed in all material respects all of its
obligations under the merger agreement before the effective time;

- AutoCyte must deliver to NeoPath customary legal opinions, including
opinions relating to tax treatment of the merger, and other documents
described in the merger agreement;

- each of the individuals and entities who is an affiliate of AutoCyte must
deliver to NeoPath an agreement prohibiting transactions in AutoCyte
common stock and NeoPath common stock for 30 days before the effective
time and for a certain period after the effective time; and

- AutoCyte must have obtained all required third party waivers and
consents.

AMENDMENTS; WAIVERS

AutoCyte and NeoPath generally may amend or waive any provisions of the
merger agreement before the effective time.

NO SOLICITATION

AutoCyte and NeoPath have each agreed not to, directly or indirectly, (1)
solicit any proposal relating to a business combination involving either of them
or (2) except as required by fiduciary duties, engage in discussions or
negotiations with, or furnish information to, a third party seeking to engage in
such a transaction. AutoCyte and NeoPath have each agreed to inform the other of
any offer, proposal or inquiry relating to any acquisition proposal and to
promptly furnish to the other copies of any written communications or documents
received with respect to the acquisition proposal.

TERMINATION OF THE MERGER AGREEMENT

The merger agreement may be terminated at any time before the effective
time, whether before or after adoption of the merger agreement by NeoPath
shareholders or approval of the issuance of shares of AutoCyte common stock in
the merger by AutoCyte stockholders:

- by mutual written consent of AutoCyte and NeoPath;

- by NeoPath:

- for misrepresentation or significant uncured breaches by AutoCyte;

- if AutoCyte experiences a significant, uncorrected adverse event or
condition;

- if the AutoCyte board of directors withdraws its recommendation of the
merger agreement; or

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<PAGE> 119

- if the AutoCyte board of directors, in the exercise of its fiduciary
duties, recommends or resolves to recommend an alternative transaction
with a third party;

- by AutoCyte:

- for misrepresentation or significant uncured breaches by NeoPath;

- if NeoPath experiences a significant, uncorrected adverse event or
condition;

- if the NeoPath board of directors withdraws its recommendation of the
merger agreement; or

- if the NeoPath board of directors, in the exercise of its fiduciary
duties, recommends or resolves to recommend an alternative transaction
with a third party; or

- by AutoCyte or NeoPath:

- if the closing date has not occurred on or before November 30, 1999
(although this date may be extended by mutual consent), unless its
breach is the reason that the merger has not been consummated;

- if there is a nonappealable government action prohibiting the
consummation of the merger;

- if either NeoPath shareholders do not vote to adopt the merger
agreement or AutoCyte stockholders do not vote to issues the shares of
AutoCyte common stock in the merger; or

- if Ernst & Young or the SEC gives notice that the merger will not
qualify for pooling of interests accounting treatment.

TERMINATION FEES AND EXPENSES

PAYMENT OF EXPENSES OF THE MERGER GENERALLY

AutoCyte and NeoPath will share equally the fees and expenses incurred in
connection with the printing and filing of this joint proxy statement/prospectus
and the registration statement. Except as described below, AutoCyte and NeoPath
will each pay the fees and expenses it incurs in connection with the merger.

PAYMENT OF AUTOCYTE AND NEOPATH EXPENSES BY THE OTHER

AutoCyte and NeoPath have each agreed to (1) pay the other $2,800,000 and
(2) reimburse the other for all costs and expenses related to entering into the
merger agreement and seeking to consummate the merger if the other terminates
the merger agreement for certain reasons as follows (in each case, the
terminating party will receive $2,800,000 and reimbursement of its costs and
expenses):

- AutoCyte or NeoPath terminates the merger agreement because the board of
directors of the other has withdrawn its recommendation of the merger
agreement or has, in the exercise of its fiduciary duties, recommended or
resolved to recommend an alternative transaction with a third party; or

- AutoCyte or NeoPath terminates the merger agreement because the other's
stockholders have voted and failed, in the case of NeoPath, to adopt the
merger agreement or, in the case of AutoCyte, to approve the issuance of
the shares of AutoCyte common stock in the merger if at the time of that
failure (1) the terminating party's stockholders have voted and, in the
case of NeoPath, adopted the merger agreement or, in the case of
AutoCyte, approved the issuance of the shares of AutoCyte common stock in
the merger and (2) an alternative transaction between the other and a
third party has been announced or commenced and the other or the board of
directors of the other has taken any action not permitted, or failed to
take any action required, by the merger agreement with respect to that
alternative transaction or takes any prohibited action within 12 months
after the date of the special meeting of the other's stockholders.

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NO LIMITATIONS ON RECOVERING FOR WILLFUL BREACH

If the merger agreement is terminated by AutoCyte or NeoPath because of a
willful breach by the other, the merger agreement does not limit the remedies
the terminating party may seek.

STOCKHOLDER VOTING AGREEMENTS

Certain stockholders of NeoPath have entered into stockholder voting
agreements with AutoCyte in the form of Exhibit A to the merger agreement.
Similarly, certain stockholders of AutoCyte have entered into stockholder voting
agreements with NeoPath in the form of Exhibit B to the merger agreement.

Each of the stockholders that has signed these agreements has agreed, until
termination of the merger agreement, that it will (1) not transfer or otherwise
dispose of any shares of, in the case of NeoPath shareholders, NeoPath common
stock and, in the case of AutoCyte stockholders, AutoCyte common stock owned by
it and (2) vote all shares of, in the case of NeoPath shareholders, NeoPath
common stock and, in the case of AutoCyte stockholders, AutoCyte common stock in
favor of adopting the merger agreement and issuing the shares of AutoCyte common
stock in the merger, respectively, and against:

- any proposal made in opposition to or in competition with the merger;

- any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than AutoCyte or NeoPath and their
affiliates; and

- any proposed liquidation or winding up of either of them.

Each of the stockholders that has signed these agreements has granted
certain officers of AutoCyte and NeoPath, as applicable, irrevocable proxies to
vote its shares accordingly.

Directors and executive officers having the right to vote in the aggregate
557,569 shares of NeoPath common stock, or approximately 3.2% of the NeoPath
common stock outstanding as of the record date (excluding shares that the
stockholder has the right to acquire upon the exercise of stock options), have
executed the stockholder voting agreement. Directors and executive officers and
certain related entities having the right to vote in the aggregate 6,468,272
shares of AutoCyte common stock, or approximately 45% of the AutoCyte common
stock outstanding as of the record date (excluding shares that the stockholder
has the right to acquire upon the exercise of stock options), have executed the
stockholder voting agreement.

AFFILIATE LETTER; RESALES OF SHARES OF AUTOCYTE COMMON STOCK

AFFILIATE LETTERS

NeoPath has agreed to use its best efforts to cause each individual and
entity that may be an affiliate of NeoPath within the meaning of Rule 145 under
the Securities Act to execute an affiliate agreement in the form of Exhibit C to
the merger agreement promptly after the execution of the merger agreement.
Similarly, AutoCyte has agreed to use its best efforts to cause each individual
and entity that may be an affiliate of AutoCyte within the meaning of Rule 145
to execute an affiliate agreement in the form of Exhibit D to the merger
agreement promptly after the execution of the merger agreement.

Both forms of affiliate agreement provide that neither NeoPath nor AutoCyte
affiliates will sell, transfer, assign or otherwise dispose or reduce the risk
of ownership of any shares of NeoPath common stock owned by the affiliate during
the 30 days before the effective time of the merger, nor sell, transfer, assign
or otherwise dispose or reduce the risk of ownership of any shares of AutoCyte
common stock (including any shares issued in the merger) owned by the affiliate
from the date of execution of the affiliate agreement until after financial
results covering at least 30 days of combined operations of AutoCyte and NeoPath
after the effective time of the merger have been published.

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RESALES

The shares of AutoCyte common stock to be issued in the merger have been
registered under the Securities Act and may be traded without restriction by all
former NeoPath shareholders who are not affiliates of NeoPath. Directors and
certain executive officers of NeoPath, and certain members of their immediate
families and associates, may be deemed to be affiliates. The ability of
affiliates to sell the shares of AutoCyte common stock they receive in the
merger is restricted by Rule 145 under the Securities Act, and each NeoPath
affiliate executing the affiliate agreement has agreed to comply with these
restrictions.

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<PAGE> 122

PRINCIPAL STOCKHOLDERS

AUTOCYTE SHARE OWNERSHIP

The following table and footnotes set forth certain information regarding
the beneficial ownership of AutoCyte's common stock as of July 31, 1999 by (i)
each person known by AutoCyte to own beneficially 5% or more of its common
stock, (ii) each executive officer identified in the Summary Compensation Table
on page 99, (iii) each director of AutoCyte and (iv) all directors and executive
officers of the Company as a group:

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
----------------------
BENEFICIAL OWNER SHARES PERCENT
- ---------------- --------- -------
<S> <C> <C>
Roche Image Analysis Systems, Inc........................... 3,049,680 21.3%
1080 U.S. Highway 202
Somerville, NJ 08876-3771
Sprout Capital VII, L.P. and certain related entities(2).... 2,170,098 15.2%
3000 Sand Hill Road
Bldg 3, Suite 170
Menlo Park, CA 94025-7114
Ampersand Specialty Materials and Chemicals III Limited
Partnership and certain related entities(3)............... 2,156,411 15.1%
55 William Street
Suite 240
Wellesley, MA 02481
Allemanni, LLC.............................................. 1,991,763 13.9%
1573 York Place
Burlington, NC 27215
Neuromedical Systems, Inc. as debtor and debtor in
possession................................................ 1,400,000 9.8%
10 Mountainview Road, Suite C-100
Upper Saddle River, NJ 07458
James B. Powell, M.D.(4).................................... 2,151,138 15.0%
Richard Charpie, Ph.D.(5)................................... 2,156,411 15.1%
Robert E. Curry, Ph.D.(6)................................... 2,170,098 15.2%
Thomas P. Mac Mahon......................................... 48,819 *
Susan E. Whitehead(7)....................................... 12,918 *
Ernest A. Knesel(8)......................................... 280,080 2.0%
Thomas Gahm, Ph.D.(9)....................................... 129,970 *
Eric W. Linsley(10)......................................... 116,490 *
Steven C. McPhail(11)....................................... 76,018 *
All executive officers and directors as a group (12
persons)(12).............................................. 7,314,843 51.2%
</TABLE>

- ---------------
* Indicates less than 1%.

(1) The persons and entities named in the table have sole voting and investment
power with respect to the shares beneficially owned by them, except as
noted below. Share numbers include shares of common stock issuable pursuant
to outstanding options that may be exercised within the 60-day period
following July 31, 1999.

(2) Consists of the following shares: 1,887,760 shares held by Sprout Capital
VII, L.P.; 217,009 shares held by DLJ First ESC, L.L.C.; 43,401 shares held
by DLJ Capital Corporation; and 21,928 shares held by the Sprout CEO Fund,
L.P. DLJ Capital is the managing general partner of Sprout and Sprout CEO
and has voting and investment control over the shares held by those two
entities. DLJ LBO Plans Management Corporation is the manager of DLJ First
and has voting and investment control over the shares held by DLJ First.
DLJ Capital and DLJ LBO both are wholly owned

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<PAGE> 123

subsidiaries of Donaldson, Lufkin & Jenrette, Inc. Does not include 29,500
shares beneficially owned by Alliance Capital Management L.P. Both Alliance
and DLJ, Inc. are majority-owned subsidiaries of The Equitable Companies
Incorporated. In a Schedule 13G filed on February 16, 1999, The Equitable
reported that Alliance and DLJ, Inc. operate independent of The Equitable
and The Equitable has no power to vote or dispose of the shares owned by
Alliance or DLJ, Inc. or any of the DLJ, Inc. subsidiaries.

(3) Consists of the following shares: 1,724,126 shares held by Ampersand
Specialty Materials and Chemicals III Limited Partnership; 28,183 shares
held by Ampersand Specialty Materials and Chemicals III Companion Fund
Limited Partnership; 282,841 shares held by Laboratory Partners I Limited
Partnership; and 121,261 shares held by Laboratory Partners Companion Fund
Limited Partnership. ASMC-III MCLP LLP is the general partner of ASMC-III
Management Company Limited Partnership, which itself is the general partner
of both ASMC-III and ASMC-III C.F. and has voting and investment control
over the shares held by those two entities. Ampersand Lab Partners MCLP LLP
is the general partner of Ampersand Lab Partners Management Company Limited
Partnership which itself is the general partner of both Lab Partners I and
Lab Partners C.F. and has voting and investment control over the shares
held by those two entities.

(4) Includes 1,991,763 shares held by record by Allemanni, LLC. Dr. Powell is
the manager of Allemanni and has voting and investment control over the
shares held by that entity. Dr. Powell disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest. Also includes
9,375 shares that may be acquired within 60 days of July 31, 1999 upon the
exercise of options.

(5) Consists solely of shares as described in note (3). Dr. Charpie is a
general partner of ASMC-III MCLP LLP and Ampersand Lab Partners MCLP LLP
and thus may be considered the beneficial owner of the shares described in
note (3). Dr. Charpie disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest.

(6) Consists solely of shares as described in note (2). Dr. Curry is divisional
Vice President of DLJ Capital and acts as attorney-in-fact with respect to
its investment in AutoCyte and thus may be considered the beneficial owner
of the shares described in note (2). Dr. Curry disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.

(7) Includes 4,918 shares that may be acquired within 60 days of July 31, 1999
upon the exercise of options.

(8) Includes 97,638 shares held by LE'BET, LLC. Mr. Knesel is the general
manager of LE'BET and has voting and investment control over the shares
held by that entity. Mr. Knesel disclaims beneficial ownership of such
shares. Also includes 62,896 shares that may be acquired within 60 days of
July 31, 1999 upon the exercise of options.

(9) Includes 31,057 shares that may be acquired within 60 days of July 31, 1999
upon the exercise of options.

(10) Includes 27,255 shares that may be acquired within 60 days of July 31, 1999
upon the exercise of options.

(11) Includes 24,270 shares that may be acquired within 60 days of July 31, 1999
upon the exercise of options.

(12) See notes (2) through (11) above. Includes 261,595 shares that may be
acquired within 60 days of July 31, 1999 upon the exercise of options.

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<PAGE> 124

NEOPATH SHARE OWNERSHIP

The following table sets forth as of July 31, 1999, except as otherwise
noted, information with respect to the beneficial ownership of the NeoPath's
common stock by (i) each person known by NeoPath to beneficially own more than
5% of NeoPath's common stock, (ii) each director of NeoPath, (iii) the executive
officers, and (iv) all directors and executive officers of NeoPath as a group.
The beneficial ownership information excludes unvested stock options that would
become exercisable upon consummation of the merger. Except as otherwise
indicated, NeoPath believes that the beneficial owners of the common stock
listed below, based on information furnished by the owners, have sole voting and
investment power with respect to their shares.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
----------------------
BENEFICIAL OWNER SHARES PERCENT
- ---------------- --------- -------
<S> <C> <C>
Alan C. Nelson(1)........................................... 614,651 3.5%
Shih-Jong James Lee(2)...................................... 89,310 *
Robert C. Bateman(3)........................................ 32,208 *
Mary K. Norton(4)........................................... 17,461 *
David H. Robison(5)......................................... 57,573 *
Thomas A. Bonfiglio(6)...................................... 8,000 *
Cristina H. Kepner(7)....................................... 77,486 *
Walter L. Robb(8)........................................... 211,438 1.2%
William L. Scott(9)......................................... 42,608 *
David A. Thompson(10)....................................... 44,500 *
Ronald R. Bromfield......................................... -- *
Zesiger Capital Group LLC Investors(11)..................... 2,252,300 12.9%
320 Park Avenue
New York, NY10022
The Kaufmann Fund, Inc.(12)................................. 2,071,000 11.9%
140 East 45th Street, 43rd Floor
New York, NY10017
Trustees of General Electric Pension Trust(13).............. 1,526,463 8.8%
3033 Summer Street
Stamford, CT 06904-7900
Capital Research and Management Company, and SMALLCAP World
Fund, Inc.(14)............................................ 1,121,400 6.4%
333 South Hope Street
Los Angeles, CA 90071
All directors and executive officers as a group (11
persons)(15).............................................. 1,195,235 6.6%
</TABLE>

- ---------------
* Indicates less than 1%

(1) Includes 365,016 outstanding shares, 247,635 shares issuable upon exercise
of options that are exercisable within 60 days, and 2,000 shares held by
Dr. Nelson's wife for the benefit of her nephew. Dr. Nelson disclaims
beneficial ownership of the 2,000 shares held by his wife for the benefit
of her nephew.

(2) Includes 25,145 outstanding shares and 64,165 shares issuable upon exercise
of options that are exercisable within 60 days.

(3) Includes 720 outstanding shares and 31,488 shares issuable upon exercise of
options that are exercisable within 60 days.

(4) Consists of shares issuable upon exercise of options that are exercisable
within 60 days.

(5) Includes 1,620 outstanding shares and 55,953 shares issuable upon exercise
of options that are exercisable within 60 days.

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<PAGE> 125

(6) Includes 1,000 outstanding shares and 7,000 shares issuable upon exercise
of options that are exercisable within 60 days.

(7) Includes 29,068 outstanding shares, 32,000 shares issuable upon exercise of
options that are exercisable within 60 days, and 16,418 shares issuable
upon exercise of warrants held by Ms. Kepner.

(8) Includes 128,000 outstanding shares and 83,438 shares issuable upon
exercise of options that are exercisable within 60 days.

(9) Consists of shares issuable upon exercise of options that are exercisable
within 60 days.

(10) Includes 5,000 outstanding shares and 39,500 shares issuable upon exercise
of options that are exercisable within 60 days.

(11) Consists of outstanding shares per NeoPath's filing on Form S-3 on February
12, 1999 combined with Zesiger's outstanding shares as of December 31, 1998
per filing on Schedule 13G. Zesiger Capital Group disclaims beneficial
ownership of these securities. Such securities are held in discretionary
accounts, which ZCG manages.

(12) Consists of outstanding shares per NeoPath's filing on Form S-3 on February
12, 1999.

(13) Consists of shares outstanding as of December 31, 1998 per filing on
Schedule 13G.

(14) Consists of outstanding shares per NeoPath's filing on Form S-3 on February
12, 1999. SMALLCAP World Fund, Inc. is the beneficial owner of the shares.
Capital Research and Management Company may be deemed to have beneficial
ownership of the shares, but specifically disclaims beneficial ownership.

(15) Includes 557,569 outstanding shares, 621,248 shares issuable upon exercise
of options that are exercisable within 60 days, and 16,418 shares issuable
upon exercise of warrants.

DESCRIPTION OF AUTOCYTE CAPITAL STOCK

AutoCyte's authorized capital stock currently consists of 20,650,000 shares
of common stock, $0.01 par value per share and 1,000,000 shares of preferred
stock. As of the date of this prospectus, there were approximately 14,292,942
shares of common stock outstanding.

The following summary of certain provisions of the common stock and
preferred stock does not purport to be complete and is subject to, and qualified
in its entirety by, (i) the provisions of AutoCyte's Restated Certificate of
Incorporation and Amended and Restated By-laws (each as filed and effective,
respectively, on or before the closing of this offering and included as exhibits
to the registration statement) and (ii) the provisions of applicable law.

COMMON STOCK

Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of common stock are entitled to receive dividends if, as and when declared by
the board of directors. AutoCyte will pay dividends out of funds legally
available for the payment of dividends. Upon AutoCyte's liquidation, dissolution
or winding up, holders of common stock are entitled to share ratably in our
assets available for distribution to our stockholders, subject to the
preferential rights of any then outstanding shares of preferred stock. No shares
of preferred stock are currently outstanding. The common stock outstanding upon
the effective date of the registration statement, and the shares offered by this
prospectus, upon issuance, will be fully paid and nonassessable.

PREFERRED STOCK

AutoCyte's board of directors has the authority to issue up to 1,000,000
shares of preferred stock in one or more series and to fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences, sinking fund
terms and the number of shares

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<PAGE> 126

constituting any series or the designation of such series, without further vote
or action by the stockholders. AutoCyte believes that the power to issue
preferred stock will provide flexibility in connection with possible corporate
transactions. The issuance of preferred stock could adversely affect the voting
power of the holders of common stock and restrict their rights to receive
payment upon liquidation and could have the effect of delaying, deferring or
preventing a change in our control. See -- "Anti-Takeover Measures." AutoCyte
has no present plans to issue any shares of preferred stock.

ANTI-TAKEOVER MEASURES

In addition to the board of directors' ability to issue shares of preferred
stock, the Restated Certificate and the By-laws contain several other provisions
that are commonly considered to discourage unsolicited takeover bids. The
Restated Certificate includes a provision classifying the board of directors
into three classes with staggered three-year terms. The Restated Certificate
also includes a provision prohibiting stockholder action by written consent
except as otherwise provided by law. Under the Restated Certificate and By-laws,
the board of directors may enlarge the size of the board and fill any vacancies
on the board. The Restated Certificate requires the approval of the holders of
at least 66 2/3% of AutoCyte's outstanding capital stock prior to (i) the merger
of AutoCyte into another entity, (ii) the sale or disposition of all or
substantially all of AutoCyte's assets, (iii) the issuance or transfer by
AutoCyte of its securities having a market value in excess of $500,000 and (iv)
engaging in any other business combination transaction unless, in each case,
such transaction has been approved by a majority of the board of directors.
Further, provisions of the By-laws and the Restated Certificate provide that the
stockholders may amend the By-laws or certain provisions of the Restated
Certificate only with the affirmative vote of 66 2/3% of our capital stock. The
By-laws provide that nominations for directors may not be made by stockholders
at any annual or special meeting unless the stockholder intending to make a
nomination notifies us of its intention a specified period in advance and
furnishes certain information. The By-laws also provide that special meetings of
AutoCyte's stockholders may be called only by the President or the board of
directors and require advance notice of business to be brought by a stockholder
before the annual meeting. AutoCyte is also subject to the provisions of Section
203 of the Delaware General Corporation Law, a law regulating corporate
takeovers. See "Comparative Rights of Holders of NeoPath and AutoCyte Common
Stock -- Provisions Relating to Acquisitions and Business Combinations."

The provisions of the Restated Certificate and By-laws and Delaware law
described above could have the effect of discouraging others from attempting
hostile takeovers of AutoCyte and, as a consequence, they may also inhibit
temporary fluctuations in the market price of the common stock that might result
from actual or rumored hostile takeover attempts. Such provisions may also have
the effect of preventing changes in AutoCyte management. It is possible that
such provisions could make it more difficult to accomplish transactions which
AutoCyte stockholders may otherwise deem to be in their best interests.

TRANSFER AGENT

The transfer agent and registrar for AutoCyte common stock is American
Stock Transfer and Trust Company. Its telephone number is (212) 936-5100.

COMPARATIVE RIGHTS OF HOLDERS OF NEOPATH
AND AUTOCYTE COMMON STOCK

The rights of AutoCyte stockholders are currently governed by the Delaware
General Corporation Law, AutoCyte's restated certificate of incorporation and
AutoCyte's by-laws. The rights of NeoPath shareholders are currently governed by
the Washington Business Corporation Act, NeoPath's restated articles of
incorporation and NeoPath's by-laws. Upon completion of the merger, the rights
of NeoPath shareholders who become stockholders of AutoCyte in the merger will
be governed by the Delaware General Corporation Law, AutoCyte's restated
certificate of incorporation and AutoCyte's by-laws.

The following description summarizes the material differences that may
affect the rights of stockholders of AutoCyte and shareholders of NeoPath but
does not purport to be a complete statement of
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<PAGE> 127

all those differences, or a complete description of the specific provisions
referred to in this summary. The identification of specific differences is not
intended to indicate that other equally or more significant differences do not
exist. Shareholders should read carefully the relevant provisions of the
Delaware General Corporation Law, AutoCyte's restated certificate of
incorporation, AutoCyte's by-laws, the Washington Business Corporation Act,
NeoPath's restated articles of incorporation and NeoPath's by-laws.

AUTHORIZED CAPITAL STOCK

NEOPATH. NeoPath is authorized to issue up to 40,000,000 shares of common
stock, $.01 par value per share and 10,000,000 shares of preferred stock, $.01
par value per share. With respect to NeoPath's preferred stock, the NeoPath
board is authorized, without shareholder approval, to designate one or more
series of preferred stock and to determine the number of shares included in any
series and the designation, preferences, limitations and relative rights of the
shares of any series. On the record date there were approximately 17,448,802
shares of NeoPath common stock and no shares of NeoPath preferred stock issued
and outstanding

AUTOCYTE. AutoCyte is authorized to issue up to 20,650,000 shares of
common stock, $.01 par value and 1,000,000 shares of preferred stock, $.01 par
value. With respect to AutoCyte's preferred stock, the AutoCyte board is
authorized, without stockholder approval, to designate the series of preferred
stock and to determine the number of shares included in the series and the
designation relative powers, preferences and rights and the qualifications,
limitations or restrictions of the series. On the record date there were
approximately 14,292,942 shares of AutoCyte common stock and no shares of
AutoCyte preferred stock issued and outstanding.

BOARDS OF DIRECTORS

NEOPATH. NeoPath's board of directors has seven members. The by-laws
provide that the number of directors must be at least two but no more than nine
and may be set by a resolution adopted by a majority of the directors present or
by the shareholders. As permitted under the Washington Business Corporation Act,
NeoPath's articles of incorporation provides that the NeoPath board of directors
will consist of three classes of directors as equal in number as possible. The
directors in each class serve on the NeoPath board of directors for
approximately three years each. Under NeoPath's by-laws, vacancies on the
NeoPath board of directors and newly created directorships resulting from any
increase in the authorized number of directors may be filled by shareholders,
the directors or, if the directors in office are fewer than a quorum, by the
affirmative vote of a majority of the remaining directors.

AUTOCYTE. The AutoCyte Board of Directors currently consists of five
members, with the number of directors constituting the AutoCyte board to be
fixed, from time to time by resolution of the AutoCyte board, but in no event
shall be less than three. The number of the board of directors may be increased
at any time, with the increase to be effective immediately, by vote of a
majority of the directors then in office. As permitted by the Delaware General
Corporation Law, AutoCyte's restated certificate of incorporation provides that
the AutoCyte board of directors will consist of three classes of directors as
equal in number as possible. The directors in each class serve on the AutoCyte
board of directors for approximately three years each. Each director shall hold
office until the second succeeding annual meeting and until their successors are
elected and qualified or until their earlier death, resignation or removal.

REMOVAL OF DIRECTORS

NEOPATH. The Washington Business Corporation Act provides that a
corporation's shareholders at a special meeting called expressly for that
purpose may remove one or more directors with or without cause unless the
articles of incorporation provide that directors may be removed only for cause.
NeoPath's articles of incorporation provide that directors may be removed only
for cause by the holders of not less than two-thirds of the shares entitled to
elect the director or directors whose removal is sought.

AUTOCYTE. Under the AutoCyte restated certificate of incorporation, a
director may be removed with cause, by the holders of a majority of the shares
entitled to vote at an election of directors, provided that

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the directors of a class elected by a particular class of stockholders may be
removed only by the vote of a majority of the shares of the particular class of
stockholders entitled to vote for the election of such directors.

SPECIAL MEETINGS OF STOCKHOLDERS; STOCKHOLDER ACTION WITHOUT MEETING

NEOPATH. Under the Washington Business Corporation Act, a special meeting
of shareholders may be called by a corporation's board of directors or other
persons authorized by the corporation's articles of incorporation or by-laws,
or, unless limited by the articles of incorporation, on written demand by
holders of at least 10% of all votes entitled to be cast on any issue proposed
to be considered at the proposed special meeting. NeoPath's articles of
incorporation provide that special meetings of the shareholders may be called in
the manner provided by the bylaws, provided that shareholders may call a special
meeting only if the holders of not less than 25% of all shares entitled to vote
at the special meeting so request. No action required or permitted to be taken
at any annual or special meeting of NeoPath's stockholders may be taken by less
than unanimous written consent.

AUTOCYTE. Special meetings of the stockholders may be called at any time
by AutoCyte's President or board of directors. No action required or permitted
to be taken at any annual or special meeting of AutoCyte's stockholders may be
taken by written consent.

STOCKHOLDER PROPOSALS

NEOPATH. NeoPath's bylaws do not limit or affect shareholder proposals.

AUTOCYTE. AutoCyte's by-laws provide that, for a stockholder proposal to
be properly brought before an annual meeting, the proposal must generally be
received not less than 50 nor more than 75 days prior to the meeting and must
contain certain specified information.

QUORUM FOR MEETING OF STOCKHOLDERS

NEOPATH. The holders of a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at a NeoPath
shareholder meeting, present in person or represented by proxy, shall constitute
a quorum for the consideration of such question.

AUTOCYTE. The holders of a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at an AutoCyte
stockholder meeting, present in person or represented by proxy, shall constitute
a quorum for the consideration of such question.

STOCKHOLDER'S VOTING RIGHTS

NEOPATH. The Washington Business Corporation Act allows for more or less
than one vote per share if provided in the articles of incorporation. The
Washington Business Corporation Act also permits cumulative voting for directors
unless otherwise provided in the articles of incorporation. Each holder of
NeoPath common stock is entitled to one vote for each share held of record, and
NeoPath's articles of incorporation do not permit cumulative voting for the
election of directors.

AUTOCYTE. Each share of AutoCyte common stock entitles the holder to one
vote.

PROVISIONS RELATING TO ACQUISITIONS AND BUSINESS COMBINATIONS

NEOPATH. Chapter 23B.19 of the Washington Business Corporation Act, which
applies to Washington corporations which have a class of voting stock registered
with the SEC under the Exchange Act, prohibits for a period of five years after
the acquisition, a "target corporation," with certain exceptions, from engaging
in certain "significant business transactions" with an acquirer which
beneficially owns 10% or more of the voting securities of the target corporation
unless the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. These prohibited transactions include, among other things, a
merger, share exchange or

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consolidation with, disposition of assets to, or issuance or redemption of stock
to or from, the acquirer, termination of 5% or more of the employees of the
target corporation employed in Washington as a result of the acquirer's
acquisition of 10% or more of the shares, or allowing the acquirer to receive
any disproportionate benefit as a shareholder. After the five-year period, a
"significant business transaction" may take place if it complies with certain
"fair price" provisions of the statute. A corporation may not "opt out" of this
statute, and NeoPath is subject to it. The merger with AutoCyte will not be
restricted by this statute because the NeoPath board has approved the merger
agreement.

AUTOCYTE. Section 203 of the Delaware General Corporation Law prohibits a
Delaware corporation from engaging in any "business combination" with any person
who owns 15% or more of a corporation's voting stock (i.e., an "interested
stockholder") for a period of three years following the time that person became
an interested stockholder, unless:

- the corporation's board of directors has approved, prior to the time on
which that person became an interested stockholder, either the business
combination or the transaction that resulted in the person becoming an
interested stockholder,

- upon consummation of the transaction that resulted in that person
becoming an interested stockholder, that person owned at least 85% of the
corporation's voting stock outstanding at that time, excluding shares
owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to
determine confidentially whether shares will be tendered in a tender or
exchange offer, or

- at or after the time on which that person became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote, at an annual or special
meeting and not by written consent, of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.

For purposes of determining whether a person is the "owner" of 15% or more
of a corporation's voting stock for purposes of Section 203 of the Delaware
General Corporation Law, ownership is defined broadly to include the right,
directly or indirectly, to acquire the stock or to control the voting or
disposition of the stock.

A "business combination" is also defined broadly to include:

- mergers and sales or other dispositions of 10% or more of the assets of a
corporation with or to an interested stockholder,

- certain transactions resulting in the issuance or transfer to the
interested stockholder of any stock of the corporation or its
subsidiaries,

- certain transactions that would result in an increase in the
proportionate share of a corporation's or its subsidiaries' stock owned
by the interested stockholder, and

- any receipt by the interested stockholder of the benefit, directly or
indirectly, except proportionately as a stockholder, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any of its subsidiaries.

A Delaware corporation may elect not to be governed by Section 203 by a
provision contained in its original certificate of incorporation, its by-laws,
or an amendment to the original certificate of incorporation, which amendment
must be approved by a majority of the shares entitled to vote and may not be
further amended by the board of directors. Such an amendment is effective
immediately in the case of a corporation that (1) has not elected in its
original certificate of incorporation or amendment thereto to be governed by
Section 203 and (2) has never had voting stock listed on a national securities
exchange, authorized for quotation on the Nasdaq Stock Market or held of record
by more than 2,000 stockholders. Otherwise this amendment is not effective until
12 months following its adoption. AutoCyte has not expressly made such an
election in its original certificate of incorporation or an amendment thereto or
in its by-laws.

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MERGERS, ACQUISITIONS AND OTHER TRANSACTIONS

NEOPATH. Under the Washington Business Corporation Act, a merger,
consolidation or sale of substantially all of a corporation's assets other than
in the regular course of business generally must be approved by the affirmative
vote of a majority of directors and by two-thirds of all votes entitled to be
cast by each voting group entitled to vote as a separate group, unless another
percentage, but not less than a majority of all votes entitled to be cast, is
specified in the articles of incorporation. NeoPath's articles of incorporation
require that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than
two-thirds of the outstanding shares, unless such business combination has been
approved by a majority of the board of directors, in which case the affirmative
vote required shall be a majority of the outstanding shares.

AUTOCYTE. Under the Delaware General Corporation Law, a merger,
consolidation or sale of all or substantially all of a corporation's assets must
be approved by the board of directors and by a majority of the outstanding stock
of the corporation entitled to vote thereon, provided that no vote of
stockholders of a constituent corporation surviving a merger is required unless
the corporation provides otherwise in its certificate of incorporation if:

- the merger agreement does not amend the certificate of incorporation of
the surviving corporation,

- each share of stock of the surviving corporation outstanding before the
merger is an identical outstanding or treasury share after the merger,
and

- either no shares of common stock of the surviving corporation are to be
issued or delivered pursuant to the merger or, if common stock will be
issued or delivered, it will not increase the number of shares of common
stock outstanding immediately prior to the merger by more than 20%.

DISSENTERS' RIGHTS

NEOPATH. Under the Washington Business Corporation Act, a shareholder of a
Washington corporation may exercise dissenters' rights in connection with:

- a plan of merger providing for a shareholder vote;

- a plan of exchange involving the acquisition of the corporation's shares
and providing for a shareholder vote;

- a sale or exchange of all, or substantially all, the property of the
corporation other than in the usual and regular course of business, if a
shareholder is entitled to vote on the sale or exchange;

- a reverse stock split that results in the shareholder owning a fractional
share if that fractional share is to be acquired for cash; and

- any corporate action taken by shareholder vote for which the articles of
incorporation, by-laws or resolution of the board of directors provide
for dissenters' rights.

Accordingly, NeoPath shareholders have the right to dissent from the merger
and receive payment of the fair value of their shares of NeoPath common stock.
See "NeoPath Shareholder Appraisal Rights" on page 46.

AUTOCYTE. The stockholders of AutoCyte are entitled to appraisal rights
under Section 262 of the Delaware General Corporation Law. Under Section 262 of
the Delaware General Corporation Law, stockholders who follow prescribed
statutory procedures are entitled, in the event of certain mergers or
consolidations, to surrender their shares to the corporation in exchange for the
judicially determined "fair value" of such shares. Stockholders are entitled to
these appraisal rights unless the shares of stock (or depositary receipts in
respect thereof) held by the stockholder are either (1) listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the

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National Association of Securities Dealers, Inc. or (2) held of record by more
than 2,000 holders. No appraisal rights are available for any shares of stock of
the constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in the Delaware General Corporation Law. Regardless of this provision
appraisal rights are available for the shares of any class or series of stock of
a constituent corporation if its holders are required by the terms of an
agreement of merger or consolidation to accept for such stock anything except
the following:

- shares of stock or depositary receipts of the surviving or resulting
corporation in the merger or consolidation;

- shares of stock or depositary receipts of any other corporation, which
shares of stock or depositary receipts, at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the NASD or held of record by more than
2,000 holders;

- cash in lieu of fractional shares or fractional depositary receipts
described in the two above clauses; and

- any combination of the shares of stock, depositary receipts and cash in
lieu of fractional shares, or fractional depositary receipts described in
all of the above clauses.

AMENDMENT OF GOVERNING INSTRUMENTS

NEOPATH. The Washington Business Corporation Act authorizes a
corporation's board of directors to make various changes of an administrative
nature to the corporation's articles of incorporation without shareholder
action. These changes include a change to the corporate name, changes to the
number of authorized shares solely to effectuate a stock split or stock dividend
in the corporation's shares and changes to or elimination of provisions with
respect to the par value of the corporation's stock. The Washington Business
Corporation Act requires that other amendments to a corporation's articles of
incorporation must be recommended to the shareholders by the board of directors,
unless the board determines that, because of a conflict of interest or other
special circumstances, it should make no recommendation and communicates the
basis for its determination to the shareholders. Under the Washington Business
Corporation Act, these other amendments must be approved by each voting group
entitled to vote thereon by a majority of all the votes entitled to be cast by
that voting group, unless another proportion is specified in the articles of
incorporation, by the board of directors as a condition to its recommendation,
or by the provisions of the Washington Business Corporation Act. NeoPath's
articles of incorporation permit the amendment or repeal any provisions of the
articles of incorporation by an affirmative vote of the holder of a majority of
outstanding shares entitled to vote thereon, except that amendments to
provisions of the articles of incorporation relating to the board of directors,
amendments to the bylaws and articles of incorporation, the calling of special
meetings of the shareholders and special voting requirements relating to
business combinations require the affirmative vote of the holders of two-thirds
of outstanding shares.

AUTOCYTE. Under Section 242 of the Delaware General Corporation Law, a
corporation's board of directors may propose, and its stockholders may adopt,
one or more amendments to the corporation's certificate of incorporation. Unless
the certificate of incorporation otherwise provides, these amendments may be
adopted by the vote of holders of a majority of the outstanding shares entitled
to vote thereon, and a majority of the outstanding stock of each class entitled
to vote thereon as a class. AutoCyte's certificate of incorporation provides
that certain provisions of the certificate of organization relating to the:

- certain transactions with a beneficial owner of 5% or more of AutoCyte's
capital stock entitled to vote for the election of directors; and

- prohibition against stockholder action by written consent,

may only be amended with the vote of the holders of 66% of the shares entitled
to vote for the election of directors. Under the Delaware General Corporation
Law, the power to amend the bylaws of a corporation

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is vested in the stockholders, but a corporation in its certificate of
incorporation may also confer such power upon the board of directors. AutoCyte's
bylaws provide that the board of directors may amend the bylaws.

DIVIDENDS

NEOPATH. Under the Washington Business Corporation Act, a corporation may
make a distribution in cash or in property to its shareholders upon the
authorization of its board of directors and subject to its articles of
incorporation unless, after giving effect to that distribution, (1) the
corporation would be unable to pay its debts as they become due in the usual
course of business or (2) the corporation's total assets would be less than the
sum of its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights of shareholders whose preferential rights are superior to
those receiving the distribution. The NeoPath certificate of incorporation and
the NeoPath bylaws do not restrict the payment of dividends.

AUTOCYTE. Section 154 of the Delaware General Corporation Law permits a
corporation to pay dividends on common stock, subject to any restrictions
contained in the certificate of incorporation, either (1) out of its surplus or
(2) if there is no surplus, out of its net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year; except that no
dividends may be paid out of such net profits if the net assets of the
corporation are less than the aggregate amount of capital represented by the
issued and outstanding stock having a preference upon the distribution of
assets. Surplus is defined in the Delaware General Corporation Law as the amount
by which net assets (total assets less total liabilities) exceeds the capital of
the corporation. In accordance with the Delaware General Corporation Law,
capital is determined by the board of directors and shall not be less than the
aggregate par value of the outstanding capital stock of the corporation having
par value. The AutoCyte restated certificate of incorporation and the AutoCyte
bylaws do not restrict the payment of dividends.

TERMS OF CONVERSION

NEOPATH. No convertible preferred stock is outstanding.

AUTOCYTE. No convertible preferred stock is outstanding.

LIQUIDATION RIGHTS

NEOPATH. In the event of the liquidation, dissolution, or winding up of
NeoPath, whether voluntary or involuntary, after payment shall have been made to
the holders of any preferred stock the full amount to which they are entitled,
the holders of common stock shall be entitled to share ratably according to the
number of shares of common stock held by them, in all remaining assets of
NeoPath available for distribution to its stockholders.

AUTOCYTE. In the event of the liquidation, dissolution, or winding up of
AutoCyte, whether voluntary or involuntary, after payment shall have been made
to the holders of any preferred stock the full amount to which they are
entitled, the holders of common stock shall be entitled to share ratably
according to the number of shares of common stock held by them, in all remaining
assets of AutoCyte available for distribution to its stockholders.

STOCKHOLDER RIGHTS PLANS

NEOPATH. NeoPath does not have a shareholders rights plan.

AUTOCYTE. AutoCyte does not have a stockholders rights plan.

LIABILITY OF DIRECTORS AND OFFICERS

NEOPATH. The Washington Business Corporation Act provides that a
corporation's articles of incorporation may include provisions that eliminate or
limit the personal liability of a director to the

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corporation or its shareholders for monetary damages for conduct as a director.
However, the provisions may not eliminate or limit the liability of a director
for acts or omissions that involve intentional misconduct by the director or a
knowing violation of law by the director, unlawful distributions, or any
transaction from which the director will personally receive a benefit in money,
property or services to which the director is not legally entitled. NeoPath's
articles of incorporation authorizes NeoPath to limit or eliminate the liability
of directors to the fullest extent permitted by the Washington Business
Corporation Act.

AUTOCYTE. The Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating the personal liability of directors for monetary damages for certain
breaches of fiduciary duty in a lawsuit by or on behalf of the corporation or in
an action by stockholders of the corporation. The AutoCyte restated certificate
of incorporation eliminates a director's monetary liability in a lawsuit by or
on behalf of the corporation or in an action by stockholders of the corporation
to the full extent permitted by the Delaware General Corporation Law.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

NEOPATH. Under the Washington Business Corporation Act, if authorized by
the articles of incorporation or a by-law adopted or ratified by the
shareholders or by a resolution adopted or ratified by the shareholders, a
corporation has the power to indemnify a director or officer made a party to a
proceeding, or advance or reimburse expenses incurred in a proceeding, except
that no indemnification is allowed on account of:

- acts or omissions of a director or officer finally adjudged to be an
intentional misconduct or a knowing violation of the law;

- conduct of a director or officer finally adjudged to be an unlawful
distribution;

- any transaction with respect to which it was finally adjudged that the
director or officer personally received a benefit in money, property or
services to which the director or officer was not legally entitled; and

- liability arising from a shareholder's derivative suit in which the
director or officer is found liable to the corporation.

Unless limited by the corporation's articles of incorporation, Washington law
requires indemnification if the director or officer is wholly successful on the
merits of the action or otherwise. Any indemnification of a director in a
derivative action must be reported to the shareholders in writing with or before
notice of the next shareholders meeting.

NeoPath's by-laws provide a right to indemnification to directors and
officers of NeoPath subject to the limitations under Washington law described in
the previous paragraph. Advancement of expenses may be made to a director upon
an undertaking by the director to repay the expenses if it is later determined
that the director was not entitled to indemnification. NeoPath's articles of
incorporation do not limit indemnification. The by-laws provide that the right
to indemnification is a contract right.

AUTOCYTE. Section 145 of the Delaware General Corporation Law provides
that a corporation may, and in certain circumstances, must, indemnify its
directors, officers, employees and agents for expenses, judgments or settlements
actually and reasonably incurred by them in connection with suits and other
legal actions or proceedings if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding had no
reasonable cause to believe their conduct was unlawful. In any such suit or
action brought by or on behalf of the corporation such indemnification is
limited to expenses reasonably incurred in defense or settlement of the suit or
action. The Delaware General Corporation Law also permits a corporation to adopt
procedures for advancing expenses to directors, officers and others without the
need for a case-by-case determination of eligibility, so long as in the case of
officers and directors, they undertake to repay the amounts advanced if it is
ultimately determined that the officer or director was not entitled to be

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indemnified. The AutoCyte restated certificate of incorporation and AutoCyte
bylaws contain provisions for advancing expenses in the manner provided for in
the Delaware General Corporation Law. The Delaware General Corporation Law
permits corporations to purchase and maintain insurance for directors and
officers against liability for expenses, judgments or settlements whether or not
the corporation would have the power to indemnify such persons therefor.

STOCKHOLDERS' SUITS

NEOPATH. Under Washington law, a shareholder may institute a lawsuit
against one or more directors, either on his own behalf, or derivatively on
behalf of the corporation. An individual shareholder may also commence a lawsuit
on behalf of himself and other similarly situated shareholder when the
requirements for maintaining a class action under Washington law have been met.
The Washington Business Corporation Act enables a corporation in its articles of
incorporation or by laws to eliminate or limit the personal liability of a
director for monetary damages for conduct as a director and to indemnify
directors and officers who are made parties to actions, including derivative
actions, in accordance with the procedures and standards described above.

AUTOCYTE. Under Delaware law, a stockholder may institute a lawsuit
against one or more directors, either on his own behalf, or derivatively on
behalf of the corporation. An individual stockholder may also commence a lawsuit
on behalf of himself and other similarly situated stockholders when the
requirements for maintaining a class action under Delaware law have been met.
Section 102(b)(7) of the Delaware General Corporation Law enables a corporation
in its certificate of incorporation to eliminate or limit the personal liability
of a director for monetary damages for violations of the director's fiduciary
duty, except for the following:

- any breach of a director's duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- liability under Section 174 of the DGCL which provides for director
liability for unlawful payment of dividends or unlawful stock purchases
or redemptions; or

- any transaction from which a director derived an improper personal
benefit.

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AMENDMENT OF AUTOCYTE'S RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK

Currently AutoCyte's restated certificate of incorporation authorizes the
issuance of 20,650,000 shares of common stock, and of 1,000,000 shares of
preferred stock. On July 20, 1999, AutoCyte's board of directors approved, and
recommended for adoption by the stockholders at the AutoCyte special meeting, a
proposed amendment to AutoCyte's restated certificate of incorporation which
would, if approved by the stockholders, effect an increase in the number of
authorized shares of common stock of AutoCyte from 20,650,000 shares to
49,000,000 shares, resulting in the aggregate number of authorized shares of
capital stock of AutoCyte to be increased from 21,650,000 shares to 50,000,000
shares.

As of the close of business on September 8, 1999, approximately 14,292,942
shares of common stock were issued and outstanding, leaving approximately
6,357,058 shares authorized but unissued. Of the authorized but unissued shares,
AutoCyte has currently reserved 2,986,325 shares under AutoCyte's amended and
restated 1996 equity incentive plan and 100,000 shares under AutoCyte's 1997
director stock option plan. Therefore, on September 8, 1999, out of the
20,650,000 authorized shares of common stock, approximately 3,270,733 shares
were available for issuance by AutoCyte.

The board of directors of AutoCyte believes that the adoption of the
proposed amendment to its restated certificate of incorporation increasing the
authorized shares of common stock is advisable and in the best interests of
AutoCyte and its stockholders. Approximately 14,000,000 shares of AutoCyte's
common stock will be issued pursuant to the merger. AutoCyte does not currently
have a sufficient number of authorized but unissued shares of common stock to
complete the merger. In order to issue the shares of AutoCyte common stock that
comprise the merger consideration, AutoCyte's restated certificate of
incorporation must be amended to increase the number of authorized shares of
capital stock of AutoCyte. The merger will not be completed unless the proposal
to increase the number of authorized AutoCyte common shares is approved.

In addition, adoption of the proposed amendment would increase the
flexibility of AutoCyte to issue common stock and would ensure that an adequate
supply of authorized and unissued shares of common stock is available for
general corporate needs, including stock splits, issuances under AutoCyte's
amended and restated 1996 equity incentive plan, and 1997 director stock option
plan, acquisitions and equity financings. The availability of additional shares
of common stock for issue, without the delay and expense of obtaining the
approval of stockholders at a special meeting, will afford AutoCyte greater
flexibility in taking these corporate actions.

The additional shares of common stock for which authorization is sought
would be identical to the shares of common stock of AutoCyte currently
authorized. The newly authorized common stock, like the currently authorized
common stock, may be used by AutoCyte for any proper corporate purpose. These
purposes may include issuance as part or all of the consideration required to be
paid by AutoCyte in the acquisition of other businesses or properties or
issuance in public or private sales for cash as a means of obtaining additional
capital for use in AutoCyte's business and operations.

If approved by the stockholders, the increased authorized shares of common
stock will be available for issue from time to time for such purposes and
consideration as the board of directors may approve, and no further vote of the
stockholders of AutoCyte will be required, except as required under the Delaware
General Corporation Law or the rules of any national securities exchange or
quotation system, such as the Nasdaq National Market, on which the shares of
AutoCyte are at the time listed or quoted.

Although the board of directors will authorize the issuance of additional
common stock based on its judgment as to the best interests of AutoCyte and its
stockholders, the issuance of common stock could have a dilutive effect on the
earnings per share, book value per share, and on the equity and voting power of
existing holders of common stock. Holders of common stock are not now, and will
not be, entitled to preemptive rights to purchase shares of any authorized
capital stock of AutoCyte. In addition, the issuance of additional shares of
common stock could, in certain instances, render more difficult or discourage a

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merger, tender offer, or proxy contest and thus potentially have an
"anti-takeover" effect, especially if common stock were issued in response to a
potential takeover.

If the amendment is approved by the stockholders, the first paragraph of
Article FOURTH of AutoCyte's restated certificate of incorporation will be
amended to read as follows:

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 50,000,000 shares consisting
of: (i) 49,000,000 shares of common stock, $.01 par value per share
("Common Stock"), and (ii) 1,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").

If approved by the stockholders, the amendment to AutoCyte's restated
certificate of incorporation increasing the authorized shares of common stock
will become effective upon the filing of an amendment to AutoCyte's restated
certificate of incorporation with the Secretary of State of the State of
Delaware, which is expected to occur promptly following approval by the
stockholders.

THE BOARD OF DIRECTORS OF AUTOCYTE RECOMMENDS THAT THE
AUTOCYTE STOCKHOLDERS VOTE IN FAVOR OF THE INCREASE IN THE
AUTHORIZED CAPITAL STOCK OF AUTOCYTE.

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AMENDMENT OF AUTOCYTE'S RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE AUTOCYTE'S NAME FROM "AUTOCYTE, INC." TO
"TRIPATH IMAGING, INC."

On August 25, 1999, the AutoCyte Board of Directors approved, and
recommended for adoption by the stockholders at the AutoCyte special Meeting, a
proposed amendment to Article FIRST of AutoCyte's restated certificate of
incorporation to change the name of AutoCyte upon completion of the merger with
NeoPath from "AutoCyte, Inc." to "TriPath Imaging, Inc." For the reasons
described below, the board believes that it would be in the best interests of
AutoCyte and its stockholders to make such a change to the name of AutoCyte. To
accomplish this name change, it is necessary to amend the applicable provision
of AutoCyte's restated certificate of incorporation.

AutoCyte believes that the new name, "TriPath Imaging, Inc.," better
focuses customer and consumer awareness on its control of the technologies of
three of the leaders in automated cytology imaging and its continuing commitment
to furthering the advancement of the pathology and cervical cancer screening
markets.

The change in AutoCyte's name will not affect in any way the validity of
currently outstanding stock certificates. Stockholders will not be required to
surrender or exchange any stock certificates that they currently hold.
Stockholders should keep the certificates that they now hold and should not send
them to AutoCyte or its transfer agent.

The board believes that the adoption of the proposed amendment to
AutoCyte's restated certificate of incorporation is advisable and in the best
interests of AutoCyte and its stockholders. Accordingly, the board is proposing
that Article FIRST of AutoCyte's restated certificate of incorporation be
amended to change the name of AutoCyte to "TriPath Imaging, Inc."

If the amendment is authorized, Article FIRST of AutoCyte's restated
certificate of incorporation will be amended to read as follows:

"The name of the Corporation is TriPath Imaging, Inc."

The affirmative vote of holders of a majority of the shares of common stock
outstanding and entitled to vote at the Meeting is required to approve this
proposal and adopt the proposed amendment to AutoCyte's restated certificate of
incorporation changing the name of AutoCyte to "Tri-Path Imaging, Inc." For
purposes of the vote to amend AutoCyte's restated certificate of incorporation,
abstentions and broker non-votes are treated as votes against the proposal.

If approved by the Stockholders, upon completion of the merger with
NeoPath, the change in AutoCyte's name will become effective upon the filing of
an amendment to AutoCyte's restated certificate of incorporation with the
Secretary of State of the State of Delaware. If the merger with NeoPath is not
completed for any reason, AutoCyte's name will not be changed.

THE BOARD OF DIRECTORS OF AUTOCYTE RECOMMENDS THAT THE AUTOCYTE
STOCKHOLDERS VOTE IN FAVOR OF THE CHANGE IN AUTOCYTE'S NAME.

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LEGAL MATTERS

Certain legal matters relating to AutoCyte in connection with the merger,
including, among other things, certain legal matters with respect to the
validity of the securities to be issued, will be passed upon for AutoCyte by
Palmer & Dodge LLP, Boston, Massachusetts. Steven N. Farber, a partner at Palmer
& Dodge, is the Secretary of AutoCyte, and Marc A. Rubenstein, a partner at
Palmer & Dodge, is an Assistant Secretary of AutoCyte.

Certain legal matters relating to NeoPath in connection with the merger
will be passed upon for NeoPath by Perkins Coie LLP, Seattle, Washington.

EXPERTS

Ernst & Young LLP, independent auditors, have audited AutoCyte's
consolidated financial statements as of December 31, 1998 and 1997 and for the
years ended December 31, 1998 and 1997 and for the period from November 22, 1996
(inception) to December 31, 1996 and of the Cytology and Pathology Automation
Business of Roche Image Analysis Systems as of December 31, 1995 and November
21, 1996 and for the years ended December 31, 1994 and 1995 and for the period
from January 1, 1996 to November 21, 1996 as set forth in their report. AutoCyte
has included its financial statements in the Prospectus and elsewhere in the
Registration Statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.

Ernst & Young LLP, independent auditors, have audited NeoPath's
consolidated financial statements and schedule as of December 31, 1998 and 1997
and each of the three years in the period ended December 31, 1998 as set forth
in their reports. NeoPath has included its financial statements in the
Prospectus and elsewhere in the Registration Statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.

FUTURE AUTOCYTE STOCKHOLDER PROPOSALS

As noted in AutoCyte's proxy statement for the 1998 annual meeting, the
deadline to have stockholder proposals included in the proxy statement for
AutoCyte's 2000 annual meeting is January 1, 2000. Proposals of stockholders
intended to be presented at such meeting must be received by AutoCyte at its
offices at 780 Plantation Drive, Burlington, North Carolina 27215, Attention
President, not later than sixty days prior to the meeting. Proposals must comply
with the SEC's proxy regulations relating to stockholder proposals in order to
be considered for inclusion in AutoCyte's proxy materials.

FUTURE NEOPATH SHAREHOLDER PROPOSALS

Assuming the timing of the consummation of the merger contemplated in the
merger agreement requires NeoPath to hold an annual meeting in 2000, proposals
of shareholders intended to be presented at such meeting must be received by
NeoPath at its offices at 8271 154th Avenue NE, Redmond, Washington 98052,
Attention: President, not later than sixty days prior to the meeting. As noted
in NeoPath's proxy statement for NeoPath's 1999 annual meeting, the deadline to
have stockholder proposals included in the proxy statement for the 2000 NeoPath
annual meeting is December 21, 1999. Proposals must comply with the SEC's proxy
regulations relating to stockholder proposals in order to be considered for
inclusion in NeoPath's proxy materials.

OTHER MATTERS

Neither AutoCyte nor NeoPath presently intends to bring before the AutoCyte
special meeting or the NeoPath special meeting, respectively, any matters other
than those specified, and neither AutoCyte nor NeoPath has any knowledge of any
other matters which may be brought up by other persons. However, if any other
matters not now known properly come before the AutoCyte special meeting or the
NeoPath

129
<PAGE> 139

special meeting or any adjournments of those meetings, the persons named in the
enclosed forms of the AutoCyte proxy or NeoPath proxy, as the case may be,
including any substitutes, will vote such proxies in accordance with their
judgment on that matter.

WHERE YOU CAN FIND MORE INFORMATION

AutoCyte and NeoPath file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that the companies file at the SEC's
public reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
AutoCyte's and NeoPath's SEC filings should also be available to the public from
commercial document retrieval services and at the Internet web site maintained
by the SEC at http://www.sec.gov.

If you are a stockholder, AutoCyte and NeoPath may have sent you some of
the documents incorporated by reference, but you can obtain any of them through
AutoCyte and NeoPath, the SEC or the SEC's Internet web site as described above.
Documents incorporated by reference are available from AutoCyte and NeoPath
without charge, excluding all exhibits except for exhibits which have been
specifically incorporated by reference as an exhibit in this joint proxy
statement/prospectus. Stockholders may obtain documents incorporated by
reference in this joint proxy statement/prospectus by requesting them in writing
or by telephone from the appropriate company at the following addresses:

<TABLE>
<S> <C>
AutoCyte, Inc. NeoPath, Inc.
780 Plantation Drive 8271 154th Avenue NE
Burlington, North Carolina 27215 Redmond, Washington 98052
(336) 222-9707 (425) 469-7584
</TABLE>

If you would like to request documents from AutoCyte or NeoPath, please do
so promptly in order to receive them before the special meetings; but you should
do so no later than five business days before the special meetings, which are on
September 30, 1999.

All information contained in or incorporated by reference into this joint
proxy statement/prospectus with respect to AutoCyte has been provided by
AutoCyte. All information contained in or incorporated by reference into this
joint proxy statement/prospectus with respect to NeoPath has been provided by
NeoPath. Neither AutoCyte nor NeoPath assumes any responsibility for the
accuracy or completeness of the information provided by the other party.

You should rely only on the information contained or incorporated by
reference in this joint proxy statement/prospectus to vote on the merger
agreement, or the stock issuance. Neither AutoCyte nor NeoPath has authorized
anyone to provide you with information that is different from what is contained
in this joint proxy statement/prospectus. This joint proxy statement/prospectus
is dated September 8, 1999. You should not assume that the information contained
in this joint proxy statement/prospectus is accurate as of any date other than
that date, and neither the mailing of this joint proxy statement/prospectus to
stockholders nor the issuance of AutoCyte's common stock in the merger shall
create any implication to the contrary.

130
<PAGE> 140

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUTOCYTE, INC.
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997
and June 30, 1999......................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997, for the Period from November
22, 1996 (inception) through December 31, 1996, and for
the Six Months Ended June 30, 1999 and 1998............... F-5
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity for the Years Ended
December 31, 1998 and 1997, for the Period from November
22, 1996 (inception) through December 31, 1996 and for the
Six Months Ended June 30, 1999............................ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997, for the Period from November
22, 1996 (inception) through December 31, 1996, and for
the Six Months Ended June 30, 1999 and 1998............... F-7
Notes to Consolidated Financial Statements.................. F-8

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF ROCHE IMAGE ANALYSIS
SYSTEMS, INC.
Report of Independent Auditors.............................. F-21
Balance Sheets as of December 31, 1995 and November 21,
1996...................................................... F-22
Statements of Operations for the Years Ended December 31,
1994 and 1995 and for the Period from January 1, 1996 to
November 21, 1996......................................... F-23
Statements of Cash Flows for the Years Ended December 31,
1994 and 1995 and for the Period from January 1, 1996 to
November 21, 1996......................................... F-24
Notes to Financial Statements............................... F-25

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF
AUTOCYTE, INC. AND NEOPATH, INC.
Introduction to Unaudited Pro Forma Combined Condensed
Financial Statements...................................... F-29
Unaudited Pro Forma Combined Condensed Balance Sheet as of
June 30, 1999............................................. F-30
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months Ended June 30, 1999......... F-31
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months Ended June 30, 1998......... F-31
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1998........... F-32
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1997........... F-32
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1996........... F-33

NEOPATH, INC.
Report of Independent Auditors.............................. F-34
Balance Sheets as of December 31, 1998 and 1997............. F-35
Statements of Operations for the Years Ended December 31,
1998, 1997, and 1996...................................... F-36
Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996......................... F-37
Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996...................................... F-38
Notes to Financial Statements............................... F-39
</TABLE>

F-1
<PAGE> 141

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED FINANCIAL STATEMENTS OF NEOPATH, INC.
Unaudited Balance Sheet for the Six Months Ended June 30,
1999...................................................... F-48
Unaudited Statement of Operations for the Three Months Ended
June 30, 1999 and 1998 and for the Six Months Ended June
30, 1999 and 1998......................................... F-49
Unaudited Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998.................................... F-50
Notes to Unaudited Financial Statements..................... F-51
</TABLE>

F-2
<PAGE> 142

AUTOCYTE, INC.

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AutoCyte, Inc.

We have audited the accompanying consolidated balance sheets of AutoCyte,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity and cash flows for the years ended December 31, 1998
and 1997 and for the period from November 22, 1996 (inception) through December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AutoCyte, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996 in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Raleigh, North Carolina
February 5, 1999

F-3
<PAGE> 143

AUTOCYTE, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1998 1997 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $19,986,107 $28,655,082 $11,817,123
Accounts receivable............................... 919,211 906,154 980,642
Inventory......................................... 3,240,869 2,191,995 3,229,746
Other current assets.............................. 353,878 400,510 409,011
----------- ----------- -----------
Total current assets................................ 24,500,065 32,153,741 16,436,522
Property and equipment.............................. 2,762,995 2,018,142 2,601,629
Intangible assets................................... 2,763,075 2,849,113 13,348,886
----------- ----------- -----------
Total assets........................................ $30,026,135 $37,020,996 $32,387,037
=========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,028,788 $ 1,129,016 $ 1,853,503
Accrued expenses.................................. 534,197 685,998 655,517
Deferred revenue.................................. 630,185 130,000 415,693
Current portion of long-term debt................. 191,795 -- 284,557
----------- ----------- -----------
Total current liabilities........................... 2,384,965 1,945,014 3,209,270
Long term debt, less current portion................ 689,782 -- 833,300
Other long-term liabilities......................... 104,514 48,768 87,240
Stockholders' equity:
Common stock, $0.01 par value; 20,650,000 shares
authorized; 12,729,925, 12,505,412 and 14,286,392
shares issued and outstanding at December 31, 1998
and 1997 and June 30, 1999, respectively.......... 127,299 125,054 142,864
Additional paid-in capital.......................... 49,598,025 49,553,302 59,068,268
Deferred compensation............................... (1,880,516) (2,743,280) (1,449,134)
Accumulated deficit................................. (20,997,934) (11,907,862) (29,504,771)
----------- ----------- -----------
Total stockholders' equity.......................... 26,846,874 35,027,214 28,257,227
----------- ----------- -----------
Total liabilities and stockholders' equity.......... $30,026,135 $37,020,996 $32,387,037
=========== =========== ===========
</TABLE>

See accompanying notes.
F-4
<PAGE> 144

AUTOCYTE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996
YEAR ENDED (INCEPTION) SIX MONTHS ENDED
DECEMBER 31, THROUGH JUNE 30,
--------------------------- DECEMBER 31, -------------------------
1998 1997 1996 1999 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.......................... $ 4,769,686 $ 2,667,837 $ 129,189 $ 2,349,410 $ 2,279,518
Cost of sales.................. 2,982,198 1,952,691 112,022 1,811,473 1,481,306
------------ ------------ --------- ----------- -----------
Gross profit................... 1,787,488 715,146 17,167 537,937 798,212
Operating expenses:
Research and development....... 4,700,003 4,461,881 457,918 2,285,589 2,273,333
Selling, general and
administrative............... 7,457,968 6,532,551 524,669 3,628,373 3,841,632
Nonrecurring expenses.......... -- -- -- 3,481,235 --
------------ ------------ --------- ----------- -----------
12,157,971 10,994,432 982,587 9,395,197 6,114,965
------------ ------------ --------- ----------- -----------
Operating loss................. (10,370,483) (10,279,286) (965,420) (8,857,260) (5,316,753)
Interest income................ 1,301,078 772,563 42,431 412,096 721,672
Interest expense, including
credit agreement commitment
fee.......................... (20,667) (1,478,150) -- (61,673) (7,831)
------------ ------------ --------- ----------- -----------
Net loss....................... $ (9,090,072) $(10,984,873) $(922,989) $(8,506,837) $(4,602,912)
============ ============ ========= =========== ===========
Net loss per common share
(basic and diluted).......... $ (0.72) $ (1.59) $ (0.22) $ (0.65) $ (0.36)
============ ============ ========= =========== ===========
Weighted-average common shares
outstanding.................. 12,664,223 6,903,290 4,279,389 13,163,406 12,637,903
============ ============ ========= =========== ===========
</TABLE>

See accompanying notes.
F-5
<PAGE> 145

AUTOCYTE, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
REDEEMABLE ADDITIONAL TOTAL
CONVERTIBLE COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
PREFERRED STOCK STOCK CAPITAL COMPENSATION DEFICIT EQUITY
--------------- -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Inception............. $ -- $ -- $ -- $ -- $ -- $ --
Net assets acquired in exchange
for common stock............. -- 36,891 5,963,109 -- -- 6,000,000
Issuance of common stock....... -- 5,903 114,097 -- -- 120,000
Issuance of redeemable
convertible preferred
stock........................ 9,882,000 -- -- -- -- --
Deferred compensation related
to issuance of restricted
stock and grant of stock
options...................... -- -- 1,821,750 (1,821,750) -- --
Amortization of deferred
compensation................. -- -- -- 37,807 -- 37,807
Net loss....................... -- -- -- -- (922,989) (922,989)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31, 1996..... 9,882,000 42,794 7,898,956 (1,783,943) (922,989) 5,234,818
Issuance of redeemable
convertible preferred stock
and stock options............ 100,000 -- 432,000 -- -- 432,000
Issuance of warrants........... -- -- 1,475,002 -- -- 1,475,002
Exercise of warrants........... -- 1,936 282,121 -- -- 284,057
Issuance of common stock....... -- 31,250 27,862,411 -- -- 27,893,661
Conversion of preferred
stock........................ (9,982,000) 48,819 9,933,181 -- -- 9,982,000
Exercise of stock options...... -- 255 4,937 -- -- 5,192
Deferred compensation related
to grant of stock options.... -- -- 1,664,694 (1,664,694) -- --
Amortization of deferred
compensation................. -- -- -- 705,357 -- 705,357
Net loss....................... -- -- -- -- (10,984,873) (10,984,873)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31, 1997..... -- 125,054 49,553,302 (2,743,280) (11,907,862) 35,027,214
Exercise of stock options...... -- 2,245 44,723 -- -- 46,968
Amortization of deferred
compensation................. -- -- -- 862,764 -- 862,764
Net loss....................... -- -- -- -- (9,090,072) (9,090,072)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31, 1998..... -- 127,299 49,598,025 (1,880,516) (20,997,934) 26,846,874
Exercise of stock options...... -- 1,565 34,243 -- -- 35,808
Common stock issued in exchange
for intangible assets........ -- 14,000 9,436,000 -- -- 9,450,000
Amortization of deferred
compensation................. -- -- -- 431,382 -- 431,382
Net loss....................... -- -- -- -- (8,506,837) (8,506,837)
----------- -------- ----------- ----------- ------------ ------------
Balance at June 30, 1999
(unaudited).................... $ -- $142,864 $59,068,268 $(1,449,134) $(29,504,771) $ 28,257,227
=========== ======== =========== =========== ============ ============
</TABLE>

See accompanying notes.
F-6
<PAGE> 146

AUTOCYTE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996
YEAR ENDED (INCEPTION) SIX MONTHS ENDED
DECEMBER 31, THROUGH JUNE 30,
-------------------------- DECEMBER 31, -------------------------
1998 1997 1996 1999 1998
----------- ------------ ---------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $(9,090,072) $(10,984,873) $ (922,989) $(8,506,837) $(4,602,912)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................. 857,333 477,686 39,797 534,513 372,105
Amortization of intangible assets............. 150,000 150,000 15,625 170,800 75,000
Amortization of deferred compensation......... 862,764 705,357 37,807 431,382 431,382
Purchased in-process research and
development................................. -- -- -- 2,922,000 --
Issuance of preferred stock and stock options
for services rendered....................... -- 432,000 -- -- --
Issuance of warrants as consideration for
credit agreement commitment fee............. -- 1,475,002 -- -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (13,057) (145,037) (48,792) (61,431) (553,416)
Inventory................................... (1,048,874) (280,589) (128,674) 11,123 (636,355)
Other current assets........................ 46,632 (351,302) 65 (55,133) 89,706
Accounts payable............................ (100,228) 56,090 225,511 824,715 371,248
Accrued expenses............................ (151,801) 192,430 334,785 121,320 (56,885)
Deferred revenue............................ 500,185 130,000 -- (214,492) --
----------- ------------ ----------- ----------- -----------
Net cash used in operating activities............. (7,987,118) (8,143,236) (446,865) (3,822,040) (4,510,127)
INVESTING ACTIVITIES
Purchases of property and equipment............... (1,602,186) (1,035,896) (47,889) (373,147) (816,179)
Additions to intangible assets.................... (63,962) (14,738) -- (4,228,611) (42,737)
Net cash acquired in acquisition of business...... -- -- 10,028 -- --
----------- ------------ ----------- ----------- -----------
Net cash used in investing activities............. (1,666,148) (1,050,634) (37,861) (4,601,758) (858,916)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock........ -- 27,893,661 120,000 -- --
Net proceeds from issuance of redeemable
convertible preferred stock..................... -- 100,000 9,882,000 -- --
Proceeds from exercise of warrants................ -- 284,057 -- -- --
Proceeds from exercise of stock options........... 46,968 5,192 -- 35,808 35,227
Increase (decrease) in other long-term
liabilities..................................... 55,746 48,768 -- (17,274) (4,037)
Proceeds from long-term debt...................... 905,019 -- -- 388,505 --
Payments on long-term debt........................ (23,442) -- -- (152,225) --
----------- ------------ ----------- ----------- -----------
Net cash provided by financing activities......... 984,291 28,331,678 10,002,000 254,814 31,190
----------- ------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... (8,668,975) 19,137,808 9,517,274 (8,168,984) (5,337,853)
Cash and cash equivalents at beginning of
period.......................................... 28,655,082 9,517,274 -- 19,986,107 28,655,082
----------- ------------ ----------- ----------- -----------
Cash and cash equivalents at end of period........ $19,986,107 $ 28,655,082 $ 9,517,274 $11,817,123 $23,317,229
=========== ============ =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................ $ 20,667 $ 3,148 $ -- $ 61,673 $ 7,831
=========== ============ =========== =========== ===========
</TABLE>

See accompanying notes.
F-7
<PAGE> 147

AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

AutoCyte, Inc. ("AutoCyte" or the "Company"), a Delaware Corporation, was
formed on October 24, 1996 to acquire the cytology and pathology automation
business (the "Business") then owned by Roche Image Analysis Systems, Inc.
("RIAS"), a wholly-owned subsidiary of Roche Holding Ltd. ("Roche"). The Company
develops, manufactures and markets the only integrated automated sample
preparation and image analysis system to support cytology professionals in
cervical cancer screening. The Company's integrated system is comprised of the
AutoCyte PREP System(TM) for sample preparation and the AutoCyte SCREEN
System(TM) for image analysis. The Company's Pathology Workstation product line
further integrates AutoCyte's product offerings into tools for data handling of
cytology and pathology images, and tools for determining prognosis of disease
from cytology and pathology specimens.

On November 22, 1996, the Company entered into a Contribution Agreement
(the "Agreement") with Roche and RIAS whereby the Company acquired the net
assets and liabilities of the cytology and pathology automation business of RIAS
in exchange for 3,689,129 shares of Common Stock valued at $6.0 million. The
transaction was accounted for as a purchase transaction in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations".

On September 5, 1997, the Company completed an initial public offering of
3,100,000 shares of $0.01 par value Common Stock (the "Offering"). The Offering
price was $10 per common share resulting in gross offering proceeds of
$31,000,000. Proceeds to the Company, net of underwriters' discount and offering
expenses were $27,661,161. Simultaneously with the Offering, the redeemable
convertible preferred stock of the Company was automatically converted into
4,881,936 shares of Common Stock. On October 10, 1997, the underwriters
exercised a portion of their over-allotment option and purchased an additional
25,000 shares of Common Stock at $10 per share resulting in additional net
proceeds of $232,500.

Revenues from sales of products have not generated sufficient cash to
support the Company's operations. Both the Company and its predecessor have
incurred substantial losses. The Company has funded its operations primarily
through the private sale of equity securities and its September 1997 initial
public offering. The Company continues to be subject to certain risks and
uncertainties common to early stage medical device companies including the
uncertainty of availability of additional financing, extensive government
regulation, uncertainty of market acceptance of its products, limited
manufacturing, marketing and sales experience and uncertainty of future
profitability.

2. SIGNIFICANT ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL INFORMATION

The statements of operations and cash flows for the six month periods ended
June 30, 1999 and 1998 and the balance sheet as of June 30, 1999 are unaudited
and reflect all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows. All information related to the
six month periods ended June 30, 1999 and 1998 is unaudited.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of AutoCyte,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

F-8
<PAGE> 148
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

The Company's principal financial instruments subject to potential
concentration of credit risk are cash, cash equivalents and unsecured accounts
receivable. The Company invests its funds in highly rated institutions, and
limits its investment in any individual debtor to $5 million. The Company
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable, which have historically been
minimal and within management's expectations.

REVENUE RECOGNITION

Revenue is recognized from product sales and rentals. Product sales revenue
is recognized when products are shipped, at which time sales are final, and
product rental revenue is recognized as earned.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

INVENTORY

Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Net realizable value of inventory is
reviewed in detail on an on-going basis, with consideration given to
deterioration, obsolescence and other factors.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $857,333 during 1998,
$477,686 during 1997, $39,797 during the period from November 22, 1996
(inception) through December 31, 1996 and $534,513 and $372,105 during the six
months ended June 30, 1999 and 1998, respectively.

Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. A listing of all demonstration equipment is
reviewed quarterly by the Company, and, based on various factors, including
whether or not the Company continues to market the products being demonstrated,
asset impairment reserves are established as necessary.

INTANGIBLE ASSETS

Intangible assets consists of patents and core technology acquired from
Neuromedical Systems, Inc. and goodwill. Such assets are amortized using the
straight-line method over estimated lives ranging from 14 to 20 years.

The Company periodically reviews the value of its intangible assets to
determine if an impairment has occurred. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", if this review
indicates that intangible assets will not be recoverable, as determined based on
an analysis of undiscounted cash
F-9
<PAGE> 149
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

flows over the remaining amortization period, the Company would reduce the
carrying value of its intangible assets accordingly.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to operations as incurred.

DEFERRED REVENUE

Deferred revenue at June 30, 1999 and December 31, 1998 relates primarily
to a worldwide exclusive international distributor agreement for the Company's
ImageTiter(R) product. Pursuant to the terms of this agreement, the Company
received $1,000,000 as a non-refundable upfront payment for the worldwide
exclusive distribution rights for ImageTiter, services to be performed, and as a
prepayment for future product shipments. Revenue related to the worldwide
exclusive distribution rights will be recognized ratably over the estimated life
of the agreement. Revenue related to services was recognized in 1998 as the
services were completed. Revenue for product shipments is recognized at the time
of shipment.

Deferred revenue at December 31, 1997 related to customer payments for PREP
units sold in 1997 that contained right of return provisions. During 1998 these
right of return provisions lapsed and the revenue was recognized.

INCOME TAXES

The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.

NET LOSS PER COMMON SHARE

The Company's calculation of earnings (loss) per share reflects the
completion of its initial public offering and the simultaneous conversion of its
convertible preferred stock into common stock in September 1997. As the Company
incurred losses during all periods presented, the effect of options, warrants
and convertible preferred stock is anti-dilutive and accordingly, there is no
difference between basic and diluted loss per share.

STOCK BASED COMPENSATION

The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, no compensation expense is recognized for
stock or stock options issued with an exercise price equivalent to the fair
value of the Company's Common Stock. For stock options granted at exercise
prices below the deemed fair value, the Company records deferred compensation
expense for the difference between the exercise price of the shares and the
deemed fair value. Any resulting deferred compensation expense is amortized
ratably over the vesting period of the individual options.

In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). For
companies that continue to account for stock based compensation arrangements
under APB 25, SFAS 123 requires disclosure of the pro forma effect on net income
(loss) and earnings (loss) per share as if the fair value based method
prescribed by SFAS 123 had been applied. The Company has adopted the pro forma
disclosure requirements of SFAS 123.

F-10
<PAGE> 150
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING EXPENSE

The cost of advertising is expensed as incurred. Advertising and marketing
expense, including trade show expense, amounted to $279,531 during 1998,
$157,095 during 1997, $3,900 during the period from November 22, 1996
(inception) through December 31, 1996 and $24,720 and $151,953 during the six
months ended June 30, 1999 and 1998, respectively.

RECLASSIFICATION

Certain amounts in the prior year financial statements have been
reclassified to conform to current classifications. These reclassifications had
no impact on net loss or stockholders' equity amounts previously reported.

RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. The application of the new rules did
not have an impact on the Company's financial statements since it has no items
of other comprehensive income in any period presented.

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
statements to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The application of the new rules did not have an impact on the Company's
financial statements as the Company operates in only one segment.

In June 1999, the FASB approved the Exposure Draft to defer for one year
the effective date of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is now effective for years beginning after June 15, 2000. SFAS 133
establishes a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company will adopt SFAS
133 in 2001, which may result in additional disclosures. The application of the
new rules is not expected to have a significant impact on the Company's
financial position or results from operations.

F-11
<PAGE> 151
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. BUSINESS SEGMENTS

The Company operates in a single business segment and is engaged in the
development and sale of cytology and pathology automation systems for use in
clinical laboratory applications. Revenues from significant customers, those
representing 10% or more of total revenues for the respective periods, are
summarized as follows:

<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
YEAR ENDED NOVEMBER 22, 1996 ENDED
DECEMBER 31, (INCEPTION) THROUGH JUNE 30,
------------ DECEMBER 31, ------------
1998 1997 1996 1999 1998
---- ---- ------------------- ---- ----
<S> <C> <C> <C> <C> <C>
Customer 1............................. 30% -- -- -- 22%
Customer 2............................. 13% -- -- -- 11%
Customer 3............................. -- 17% -- -- --
Customer 4............................. -- -- 70% -- --
Customer 5............................. -- -- -- 11% --
Customer 6............................. -- -- -- 21% --
Customer 7............................. -- -- -- 10% --
</TABLE>

Sales by geographic region were as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------ ------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States............................................ 37% 59% 35% 41%
Europe................................................... 28% 19% 47% 32%
Asia and Australia....................................... 35% 18% 18% 27%
Other International Sales................................ -- 4% -- --
</TABLE>

There were no international sales during the period from November 22, 1996
(inception) through December 31, 1996.

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of the allowance for doubtful accounts activity is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1998 1997 1996 1999 1998
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning balance............. $ 85,000 $17,500 $ 7,500 $184,875 $ 85,000
Amounts charged to expense.... 102,000 67,500 10,000 -- 102,000
Amounts written off........... (2,125) -- -- -- --
-------- ------- ------- -------- --------
Ending balance................ $184,875 $85,000 $17,500 $184,875 $187,000
======== ======= ======= ======== ========
</TABLE>

F-12
<PAGE> 152
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1997 1999
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials.................................. $1,685,495 $1,878,632 $2,120,533
Finished goods................................. 1,555,374 313,363 1,109,213
---------- ---------- ----------
$3,240,869 $2,191,995 $3,229,746
========== ========== ==========
</TABLE>

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1997 1999
----------- ---------- -----------
<S> <C> <C> <C>
Demonstration equipment...................... $ 1,291,105 $1,236,161 $ 1,392,417
Rental units................................. 1,172,575 320,607 1,295,144
Machinery and equipment...................... 761,536 457,228 825,724
Furniture, fixtures and improvements......... 160,829 87,859 160,829
Computer equipment and software.............. 503,045 424,278 541,096
----------- ---------- -----------
3,889,090 2,526,133 4,215,210
Less accumulated depreciation................ (1,126,095) (507,991) (1,613,581)
----------- ---------- -----------
$ 2,762,995 $2,018,142 $ 2,601,629
=========== ========== ===========
</TABLE>

7. INTANGIBLE ASSETS

Intangible assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1997 1999
---------- ---------- -----------
<S> <C> <C> <C>
Goodwill...................................... $3,000,000 $3,000,000 $ 3,000,000
Patents....................................... 78,700 14,738 9,495,971
Core technology............................... -- -- 1,339,340
---------- ---------- -----------
3,078,700 3,014,738 13,835,311
Less accumulated depreciation................. (315,625) (165,625) (486,425)
---------- ---------- -----------
$2,763,075 $2,849,113 $13,348,886
========== ========== ===========
</TABLE>

8. ACCRUED EXPENSES

Accrued expenses consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1997 1999
-------- -------- --------
<S> <C> <C> <C>
Accrued payroll and related benefits............... $161,461 $213,443 $314,909
Accrued warranty costs............................. 202,664 196,709 202,664
Other accrued expenses............................. 170,072 275,846 137,944
-------- -------- --------
$534,197 $685,998 $655,517
======== ======== ========
</TABLE>

F-13
<PAGE> 153
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. CREDIT AGREEMENT

On June 27, 1997, the Company entered into a credit agreement with certain
of its institutional stockholders and the Company's Chief Executive Officer. The
agreement provided the Company with access to a credit line of up to $8,000,000
at an interest rate of prime plus 1%. As consideration for this agreement, the
Company issued warrants to purchase 207,291 shares of its Common Stock at an
exercise price of $2.033 per share. The warrants were immediately exercisable,
with an expiration date ten years from the date of issuance. The Company
estimated the expense associated with the warrant issuance to be approximately
$1,475,000, all of which was expensed at the time of issuance as a credit
agreement commitment fee. No borrowings were made under this credit arrangement,
which expired upon the completion of the Offering in September 1997. On October
24, 1997, all of the outstanding warrants were exercised.

10. DEBT

During 1998, the Company entered into an agreement with an equipment
financing company to provide the Company with a $5,000,000 line of credit to
finance certain of the Company's equipment purchases. At December 31, 1998, the
Company had outstanding borrowings of $881,577 under the agreement with a loan
term of 48 months. The loan is secured by a security interest in the financed
equipment. Interest is calculated based on the four-year Treasury Bill Weekly
Average rate (4.447% at December 31, 1998) + 6.121%.

At December 31, 1998, maturities of the outstanding debt are as follows:

The fair value of the Company's long term debt, which approximates its
carrying value, is estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar type borrowing
arrangements.

11. LEASES

The Company leases its office and manufacturing facilities and certain
office equipment under operating leases expiring at various times through July
2005.

At December 31, 1998, future minimum lease payments under these leases are
as follows:

<TABLE>
<S> <C>
1999..................................................... $ 394,026
2000..................................................... 394,183
2001..................................................... 361,183
2002..................................................... 326,863
2003..................................................... 326,863
Thereafter............................................... 519,008
----------
$2,322,126
==========
</TABLE>

F-14
<PAGE> 154
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rent expense amounted to $378,004 during 1998, $281,424 during 1997,
$25,245 during the period from November 22, 1996 (inception) to December 31,
1996 and $212,905 and $149,106 during the six months ended June 30, 1999 and
1998, respectively.

Future minimum lease payments under these leases as of June 30, 1999 are
$2,125,192.

12. INCOME TAXES

The Company has cumulative net operating loss carryforwards available to
offset future taxable income of approximately $27,557,000 which expire in
2011 - 2014. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Components of
deferred taxes are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1998 1997 1999
------------ ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Inventory............................... $ 735,000 $ 1,174,000 $ $662,000
Property and equipment.................. 1,517,000 2,161,000 1,367,000
Intangible assets....................... 672,000 737,000 1,769,000
Net operating loss carry forward........ 8,728,000 4,429,000 10,747,000
Other................................... 176,000 189,000 169,000
------------ ----------- ------------
Total deferred tax asset.................. 11,828,000 8,690,000 14,714,000
Valuation allowance for deferred tax
asset................................... (11,828,000) (8,690,000) (14,714,000)
------------ ----------- ------------
Net deferred taxes........................ $ -- $ -- $ --
============ =========== ============
</TABLE>

13. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

REDEEMABLE CONVERTIBLE PREFERRED STOCK

The 9,925,000 shares of Series A Convertible Preferred Stock automatically
converted into 4,881,936 shares of Common Stock upon completion of the Offering
in September 1997.

Pursuant to the Company's amended and restated Certificate of
Incorporation, the Board of Directors has the authority, without further vote or
action by the stockholders, to issue up to 1,000,000 shares of Preferred Stock
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, any or all of
which may be greater that the rights of Common Stock. At December 31, 1998 and
June 30, 1999 there were no shares of Preferred Stock outstanding.

EQUITY INCENTIVE PLANS

At inception, the Company adopted the Amended and Restated 1996 Equity
Incentive Plan under which incentive and non-statutory stock options, stock
appreciation rights and restricted stock may be granted to employees or
consultants of the Company. Generally, options and restricted stock grants vest
ratably over a 48-month term. Stock options expire ten years from the date of
grant.

During 1997, the Board of Directors approved the adoption of the 1997
Director Stock Option Plan and reserved 100,000 shares of common stock for
issuance under the plan. Under the terms of this plan, directors who are not
employees of the Company are entitled to receive options to acquire shares of
F-15
<PAGE> 155
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock. During 1999, 20,000 options were granted pursuant to this plan.
Options vest 20% per year on the anniversary date of the grant for a period of
five years, provided that the optionee is still an AutoCyte director on that
date.

A summary of activity under the plans is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED-AVERAGE
SHARES RANGE EXERCISE PRICE
--------- -------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996.......... 689,836 $ 0.20 $0.20
Options granted......................... 349,962 0.20 - 10.50 1.47
Options exercised....................... (25,535) 0.20 0.20
Options canceled/expired................ (8,353) 0.20 0.20
--------- -------------- -----
Outstanding at December 31, 1997.......... 1,005,910 0.20 - 10.50 0.64
Options granted......................... 465,176 2.69 - 7.38 4.33
Options exercised....................... (224,513) 0.20 - 4.19 0.21
Options canceled/expired................ (78,092) 0.20 - 10.50 6.35
--------- -------------- -----
Outstanding at December 31, 1998.......... 1,168,481 0.20 - 10.00 1.81
Options granted......................... 490,282 4.31 - 7.75 4.75
Options exercised....................... (156,576) 0.20 - 4.19 0.23
Options cancelled/expired............... (19,577) 0.20 - 4.19 2.06
--------- -------------- -----
Outstanding at June 30, 1999
(unaudited)............................. 1,482,610 $0.20 - $10.00 $2.95
========= ============== =====
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICE RANGE DECEMBER 31, 1998 (YEARS) EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- -------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.20 718,713 8.0 $0.20 220,169 $0.20
2.69 - 3.13 24,000 9.7 3.03 1,394 3.06
4.19 - 6.25 402,157 9.2 4.27 124,391 4.25
6.56 - 9.75 21,611 9.2 7.44 4,426 7.53
10.00 2,000 8.9 10.00 500 10.00
- -------------- --------- --- ----- ------- -----
$0.20 - $10.00 1,168,481 8.5 $1.81 350,880 $1.76
============== ========= === ===== ======= =====
</TABLE>

The options outstanding as of June 30, 1999 had a weighted-average
remaining contractual life of 8.5 years. At June 30, 1999, options to purchase
392,481 shares were exercisable.

At inception, the Company sold 590,260 shares of restricted Common Stock
with a deemed fair value of $1.6264 per share to the Company's Chief Executive
Officer at a price of $0.2033 per share. Under the terms of the restricted stock
purchase agreement, the shares vest ratably over a 48-month term and are subject
to repurchase by the Company at the issuance price if the CEO ceases to be
employed by the Company. Under the terms of an amendment to the restricted stock
purchase agreement, in the event that the Chief Executive Officer terminates
employment with the Company other than for cause, in addition to all other
shares that have vested pursuant to the original agreement, 50% of the unvested
shares as of the date of departure shall become vested as of that date.

F-16
<PAGE> 156
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS 123

The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with SFAS 123, the fair value of each option grant was determined by
using the Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 22, 1996 SIX MONTHS
DECEMBER 31, (INCEPTION) THROUGH ENDED
---------------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1999
--------- --------- ------------------- ----------
<S> <C> <C> <C> <C>
Risk-free interest rate..... 5.29% 6.20% 5.92% 4.76%
Expected dividend yield..... 0.00% 0.00% 0.00% 0.00%
Expected lives.............. 48 months 48 months 48 months 48 months
Expected volatility......... 0.75 0.71 0.60 0.75
Weighted-average fair value
of grants................. $2.46 $5.63 $1.45 $2.80
</TABLE>

Had compensation cost for the Company's stock options been determined based
on the fair value at the date of grant consistent with the provisions of SFAS
123, the Company's pro forma net loss and net loss per share would have been:

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22, 1996 SIX MONTHS
YEAR ENDED DECEMBER 31, (INCEPTION) THROUGH ENDED
-------------------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1999
----------- ------------ ------------------- -----------
<S> <C> <C> <C> <C>
Net loss:
As reported................. $(9,090,072) $(10,984,873) $(922,989) $(8,506,837)
Pro forma................... $(9,517,798) $(10,987,980) $(929,276) $(8,754,971)
Net loss per common share
(basic & diluted):
As reported................. $ (0.72) $ (1.59) $ (0.22) $ (0.65)
Pro forma................... $ (0.75) $ (1.59) $ (0.22) $ (0.67)
</TABLE>

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At December 31, 1998 and June 30, 1999, respectively, the Company has
reserved authorized shares of Common Stock for future issuance as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
Outstanding stock options........................... 1,168,481 1,482,610
Possible future issuance under equity incentive
plans............................................. 177,536 606,831
--------- ---------
Total shares reserved..................... 1,346,017 2,089,441
========= =========
</TABLE>

DEFERRED COMPENSATION

The Company recorded deferred compensation of $1,664,694 during 1997 and
$1,821,750 during the period from November 22, 1996 (inception) through December
31, 1996 for the difference between the exercise price and the deemed fair value
of the Company's common stock option and restricted stock grants. The amount is
being amortized over the vesting period of the individual options, generally 48
months. Amortization of deferred compensation totaled $862,764 during 1998,
$705,357 during 1997,

F-17
<PAGE> 157
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$37,807 during the period from November 22, 1996 (inception) through December
31, 1996, and $431,382 during each of the six month periods ended June 30, 1999
and 1998.

14. RELATED PARTY TRANSACTIONS

The Company has entered into certain ongoing arrangements with Laboratory
Corporation of America Holdings, Inc. ("LabCorp"), a public company partially
owned by Roche, for selling its products to LabCorp. Roche is a shareholder of
the Company and the Company's Chief Executive Officer is a Director of LabCorp.
Sales to LabCorp amounted to $634,884 during 1998, $33,354 during 1997, and
$8,368 and $248,450 during the six months ended June 30, 1999 and 1998,
respectively. There were no sales to LabCorp during the period from November 22,
1996 (inception) through December 31, 1996.

The Company has a continuing arrangement with LabCorp for leasing a portion
of LabCorp's facility in Elon College, North Carolina. Total rent paid to
LabCorp amounted to $61,995 during 1998, $111,375 during 1997, $11,600 during
the period from November 22, 1996 (inception) through December 31, 1996, and
$6,307 and $55,688 during the six months ended June 30, 1999 and 1998,
respectively. Additionally, the Company owed approximately $184,000, $249,000
and $348,000 at June 30, 1999, December 31, 1998 and December 31, 1997,
respectively, to Roche or its affiliates for services provided.

15. RETIREMENT PLAN

The Company has a qualified 401(k) Retirement Plan (the "Plan").
Substantially all full-time employees are eligible to participate and
participants may contribute from 1% to 15% of their compensation to the Plan.
The Company matches 50% of each participant's contribution up to 6% of the
employee's compensation, and may make additional matching contributions at the
discretion of management, not to exceed 15% of the employee's compensation.
Total expense for the plan was $128,541 during 1998, $82,198 during 1997, $5,572
during the period from November 22, 1996 (inception) through December 31, 1996,
and $55,213 and $63,294 during the six months ended June 30, 1999 and 1998,
respectively.

F-18
<PAGE> 158
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. PRO FORMA COMBINED RESULTS OF OPERATIONS

The pro forma combined results of operations as if AutoCyte had acquired
the predecessor entity on January 1, 1996 and had been in operation for the
entire year as a combined entity would have been as follows:

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 NOVEMBER 22, 1996
THROUGH THROUGH YEAR ENDED
NOVEMBER 21, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
(PREDECESSOR) (AUTOCYTE) (PRO FORMA COMBINED)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Sales............................ $ 1,747,209 $ 129,189 $ 1,876,398
Cost of goods sold............... 2,796,802 112,022 2,908,824
------------ --------- ------------
Gross profit (loss).............. (1,049,593) 17,167 (1,032,426)
Operating expenses:
Research and development......... 3,907,682 457,918 4,365,600
Selling, general and
administrative................. 11,965,813 524,669 12,490,482
------------ --------- ------------
15,873,495 982,587 16,856,082
------------ --------- ------------
Operating loss................... (16,923,088) (965,420) (17,888,508)
Interest income.................. -- 42,431 42,431
------------ --------- ------------
Net loss......................... $(16,923,088) $(922,989) $(17,846,077)
============ ========= ============
</TABLE>

Net loss per share is not disclosed for 1996 since RIAS operated as a
wholly owned subsidiary of Roche Holding Ltd. prior to the formation of AutoCyte
on November 22, 1996.

17. SUBSEQUENT EVENTS (UNAUDITED)

On March 25, 1999, AutoCyte entered into a purchase and sale agreement to
acquire the intellectual property estate of Neuromedical Systems, Inc. ("NSI"),
a developer of interactive, neural net technology for the computer screening of
conventional Pap smears. Under the terms of the agreement, AutoCyte agreed to
acquire the entire patent estate (including the right to pursue any claims
relating to the patent estate), trademarks, regulatory applications, clinical
daa and all other intellectual and intangible property rights relating to the
business of NSI, which, concurrent with the execution of the agreement, filed a
voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of
Delaware. The bankruptcy court approved this agreement and the transaction was
closed on May 17, 1999.

The purchase price consisted of:

<TABLE>
<S> <C>
Cash consideration and transaction costs.............. $ 4,201,340
Common stock.......................................... 9,450,000
-----------
$13,651,340
===========
</TABLE>

The purchase price was allocated as follows:

<TABLE>
<S> <C>
Patents............................................... $ 9,390,000
In-process research and development................... 2,922,000
Core technology....................................... 1,339,340
-----------
$13,651,340
===========
</TABLE>

F-19
<PAGE> 159
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company charged to expense at the date of acquisition $2,922,000
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established.

On June 4, 1999, AutoCyte entered into an agreement to merge with NeoPath,
Inc. ("NeoPath") in a transaction expected to be accounted for as a pooling of
interests. Under the terms of the agreement, each outstanding share of NeoPath
common stock will be exchanged for 0.7903 shares of AutoCyte common stock. Based
on a total of approximately 17,440,000 shares of NeoPath common stock
outstanding on June 30, 1999, AutoCyte would issue approximately 13,783,000
shares of AutoCyte common stock. This transaction is expected to be completed in
the second half of 1999.

F-20
<PAGE> 160

AUTOCYTE, INC.

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AutoCyte, Inc.

We have audited the accompanying balance sheets of the Cytology and
Pathology Automation Business of Roche Image Analysis Systems, Inc. (the
"Business") as of December 31, 1995 and November 21, 1996, and the related
statements of operations and cash flows for the years ended December 31, 1994
and 1995 and for the period from January 1, 1996 to November 21, 1996. These
financial statements are the responsibility of the Business's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Cytology and Pathology
Automation Business of Roche Image Analysis Systems, Inc. at December 31, 1995
and November 21, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and for the period from January 1,
1996 to November 21, 1996 in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

Raleigh, North Carolina
June 13, 1997

F-21
<PAGE> 161

AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 9,530 $ 10,028
Accounts receivable, net.................................. 744,288 712,325
Inventory................................................. 3,508,756 1,782,732
Other current assets...................................... 34,575 49,273
----------- ----------
Total current assets.............................. 4,297,149 2,554,358
Property and equipment, net of accumulated depreciation of
$4,448,000 and $5,732,000 at December 31, 1995 and
November 21, 1996, respectively........................... 6,416,967 1,451,840
----------- ----------
Total assets...................................... $10,714,116 $4,006,198
=========== ==========

LIABILITIES AND BUSINESS EQUITY
Current liabilities:
Accounts payable.......................................... $ 411,647 $ 2,010
Accrued expenses.......................................... 300,231 1,004,188
----------- ----------
Total current liabilities......................... 711,878 1,006,198
Business equity................................... 10,002,238 3,000,000
----------- ----------
Total liabilities and business equity............. $10,714,116 $4,006,198
=========== ==========
</TABLE>

See accompanying notes.
F-22
<PAGE> 162

AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 TO
---------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Net sales to LabCorp and its predecessor....... $ 844,593 $ 598,174 $ 297,047
Net sales to third parties..................... 2,551,717 2,797,656 1,450,162
------------ ------------ ------------
3,396,310 3,395,830 1,747,209
Cost of goods sold............................. 2,599,859 2,413,886 2,796,802
------------ ------------ ------------
Gross profit (loss).......................... 796,451 981,944 (1,049,593)
Operating expenses:
Research and development....................... 3,604,898 5,073,764 3,907,682
Selling, general and administrative............ 8,479,057 7,895,394 11,965,813
------------ ------------ ------------
12,083,955 12,969,158 15,873,495
------------ ------------ ------------
Net loss..................................... $(11,287,504) $(11,987,214) $(16,923,088)
============ ============ ============
</TABLE>

See accompanying notes.
F-23
<PAGE> 163

AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1996 TO
---------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(11,287,504) $(11,987,214) $(16,923,088)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.............................. 1,915,481 2,242,320 1,359,527
Asset impairment write-down............... 1,980,596 506,241 5,256,680
Changes in operating assets and liabilities:
Accounts receivable....................... 1,916,368 105,938 31,963
Inventory................................. (162,485) (1,208,216) 403,810
Other current assets...................... 105,086 (15,150) (14,698)
Accounts payable.......................... (477,270) 157,953 417
Accrued expenses.......................... 384,384 (1,024,112) 293,903
------------ ------------ ------------
Net cash used in operating activities... (5,625,344) (11,222,240) (9,591,486)
Cash flows from investing activities:
Purchases of property and equipment.......... (1,702,032) (1,800,295) (328,866)
------------ ------------ ------------
Net cash used in investing activities..... (1,702,032) (1,800,295) (328,866)
Cash flows from financing activities:
Advances from Roche.......................... 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net cash provided by financing
activities........................... 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net increase in cash and cash equivalents...... 2,556 1,261 498
Cash and cash equivalents at beginning of
period....................................... 5,713 8,269 9,530
------------ ------------ ------------
Cash and cash equivalents at end of period..... $ 8,269 $ 9,530 $ 10,028
============ ============ ============
</TABLE>

See accompanying notes.
F-24
<PAGE> 164

AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF
ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
NOVEMBER 21, 1996

1. DESCRIPTION OF THE BUSINESS

The Cytology and Pathology Automation Business (the "Business") of Roche
Image Analysis Systems, Inc. ("RIAS") was engaged in the manufacturing and
marketing of automated pathology workstations, and in the development and
marketing of an integrated sample preparation and automated image analysis
system to support cytologists in cervical cancer screening. The Business
represents the predecessor entity of AutoCyte, Inc. ("AutoCyte"), a company
formed in October 1996 to acquire the Business including its two principal
product candidates, the AutoCyte PREP ("PREP") sample preparation system and the
AutoCyte SCREEN ("SCREEN") automated image analysis system. In addition to this
Business, RIAS, a wholly-owned subsidiary of Roche Holding Ltd ("Roche"), was
also engaged in the sale of human leukocyte antigen ("HLA") kits used for
paternity testing. The HLA business was not acquired by AutoCyte and is thus not
included in these predecessor entity financial statements.

On November 22, 1996, RIAS entered into a Contribution Agreement with
AutoCyte and Roche whereby AutoCyte acquired the net assets and liabilities of
the Business for 3,689,129 shares of AutoCyte common stock.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying financial statements have been prepared as if the Business
had existed as a separate, stand-alone entity during the periods presented and
include the historical assets, liabilities, revenues and expenses that are
directly related to the Business's operations. However, these financial
statements are not necessarily indicative of the financial position and results
of operations which would have occurred had the Business been an independent
company.

USE OF ESTIMATES

CONCENTRATIONS OF CREDIT RISK

The Business's principal financial instrument subject to potential
concentration of credit risk is unsecured accounts receivable. The Business
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable.

REVENUE RECOGNITION

Revenue from product sales is recognized when products are shipped.

CASH AND CASH EQUIVALENTS

The Business considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

F-25
<PAGE> 165
AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF
ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PRODUCT WARRANTY

The Business's products generally carry a one year warranty against
defects. The Business provides for estimated warranty costs in the period the
related sales are made.

IMPAIRMENT OF LONG-LIVED ASSETS

The Business adopted the Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS 21") in the first quarter of 1996. During 1996, the Business decided to
focus on its newer generation PREP and SCREEN systems. Accordingly, the Business
evaluated the ongoing value of the older model systems and other equipment
included in property and equipment. Based on this evaluation, the Business
determined that assets with a carrying amount of approximately $5.4 million were
impaired and wrote them down by $3.9 million to their estimated fair value. Fair
value was based on the estimated price at which the assets could be sold.
Additionally, the Business performed similar evaluations of fair values in 1995
and 1994 and wrote-down certain demonstration equipment and other equipment by
approximately $500,000 and approximately $2 million, respectively.

INCOME TAXES

The results of the Business's operations were included in the consolidated
income tax returns of its parent company. No provision for income taxes has been
included in these financial statements since the Business's significant
operating losses would have precluded recording any deferred tax assets if the
Business was a stand-alone taxpayer.

BUSINESS EQUITY

Because the Business operated as part of a wholly-owned subsidiary of
Roche, its equity accounts have been combined and presented as "Business Equity"
which includes net amounts advanced to the Business by Roche (Note 7).

INVENTORY

Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $1,915,481,
$2,242,320 and $1,359,527 during 1994, 1995 and the period from January 1, 1996
to November 21, 1996, respectively.

Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. As this equipment will likely not be sold
within the next year, the amounts are recorded as a component of property and
equipment rather than inventory, and are being depreciated over their estimated
useful life of four years.

F-26
<PAGE> 166
AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF
ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to operations as incurred.

ADVERTISING EXPENSE

The cost of advertising is expensed as incurred. Advertising expense
amounted to $302,444, $478,662 and $405,572 during 1994, 1995 and the period
from January 1, 1996 to November 21, 1996, respectively.

3. SALES AND ACCOUNTS RECEIVABLE

The Business operates in a single industry and is engaged in the
development and sale of cytology and pathology automation systems for use in
clinical laboratory testing. Revenues from significant customers, those
representing 10% or more of total revenues for the respective periods, are
summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996 TO
------------ NOVEMBER 21,
1994 1995 1996
---- ---- ------------------
<S> <C> <C> <C>
Customer 1............................................ 24.9% 17.6% 17.0%
Customer 2............................................ 19.5 -- --
Customer 3............................................ -- -- 13.7
</TABLE>

The Business sells its products to international customers, however, these
sales accounted for less than 10% of total sales during all periods presented.

4. INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials...................................... $1,119,173 $ 802,580
Finished goods..................................... 2,389,583 980,152
---------- ----------
$3,508,756 $1,782,732
========== ==========
</TABLE>

During 1996, the Business decided to focus on PREP and SCREEN systems. As a
result, certain inventory items were written down by approximately $1.4 million
to their estimated net realizable values.

5. LEASES

The Business leases its office and manufacturing facilities and certain
equipment under operating leases. Rent expense amounted to $391,684, $480,725
and $421,812 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.

6. CORPORATE ALLOCATIONS

Roche provided substantial services to the Business, including, but not
limited to, general administration, treasury, tax, financial reporting, payroll
administration, insurance, human resources and legal functions. Roche has
traditionally charged the Business for certain of these services through
corporate allocations which were generally based on a percent of sales. The
amount of corporate allocations was

F-27
<PAGE> 167
AUTOCYTE, INC.

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF
ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

dependent upon the total amount of anticipated allocable costs incurred by
Roche, less amounts charged as a specific cost or expense rather than by
allocation. The amounts allocated are not necessarily indicative of amounts that
would have been incurred by the Business had it operated on a stand-alone basis.
Management believes that the method of expense allocation is reasonable.

7. BUSINESS EQUITY

A summary of the Business equity account activity is as follows:

<TABLE>
<CAPTION>
ADVANCES ACCUMULATED
FROM ROCHE DEFICIT TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, 1993............... $22,044,244 $ (9,121,016) $12,923,228
Advances from Roche...................... 7,329,932 -- 7,329,932
Net loss for year........................ -- (11,287,504) (11,287,504)
----------- ------------ -----------
Balance at December 31, 1994............... 29,374,176 (20,408,520) 8,965,656
Advances from Roche...................... 13,023,796 -- 13,023,796
Net loss for year........................ -- (11,987,214) (11,987,214)
----------- ------------ -----------
Balance at December 31, 1995............... 42,397,972 (32,395,734) 10,002,238
Advances from Roche...................... 9,920,850 -- 9,920,850
Net loss for period...................... -- (16,923,088) (16,923,088)
----------- ------------ -----------
Balance at November 21, 1996............... $52,318,822 $(49,318,822) $ 3,000,000
=========== ============ ===========
</TABLE>

8. RELATED PARTY TRANSACTIONS

The Business entered into certain product sale arrangements with Laboratory
Corporation of America Holdings or its predecessor ("LabCorp"), a public company
partially owned by Roche. Sales to LabCorp amounted to $844,593, $598,174 and
$297,047 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.

Additionally, the Business rented its office facility from LabCorp. Rent
paid to LabCorp amounted to $96,000, $102,500 and $100,000 during 1994, 1995 and
during the period from January 1, 1996 to November 21, 1996, respectively.

F-28
<PAGE> 168

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements
and explanatory notes are presented to show the impact on the historical
financial position and results of operations of AutoCyte assuming the proposed
business combination of AutoCyte and NeoPath, which is expected to be accounted
for using the pooling of interests method of accounting, had occurred. Both
AutoCyte and NeoPath have a calendar year end.

In the proposed NeoPath business combination, each outstanding share of
NeoPath common stock will be exchanged for 0.7903 shares of AutoCyte common
stock. Based on a total of approximately 17,440,000 shares of NeoPath common
stock outstanding on June 30, 1999, AutoCyte would issue approximately
13,783,000 shares of AutoCyte common stock. AutoCyte will pay cash in lieu of
fractional shares. AutoCyte also will convert any remaining unexercised NeoPath
stock options into AutoCyte stock options at the exchange ratio.

The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of AutoCyte and NeoPath at June 30, 1999. The
unaudited pro forma combined condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and for the six months ended June 30,
1999 and 1998 reflect the combined historical operating results of AutoCyte and
NeoPath for such periods. The historical operating results of AutoCyte for the
year ended December 31, 1996 reflect the operations of its predecessor from
January 1, 1996 through November 21, 1996 and the operations of AutoCyte from
November 22, 1996 (inception) through December 31, 1996.

The unaudited pro forma combined condensed results presented do not reflect
any incremental direct costs, potential cost savings or revenue enhancements
which may result from the consolidation of certain operations of AutoCyte and
NeoPath. Therefore, the unaudited pro forma combined condensed statements of
operations may not be indicative of the results of future operations. No
assurances can be given with respect to the ultimate level of cost savings
and/or revenue enhancements that may be realized following consummation of the
proposed transaction.

The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combination occurred prior to the dates presented. The unaudited pro
forma combined condensed financial data should be read in conjunction with the
related historical financial statements and notes thereto of AutoCyte and
NeoPath appearing in this joint proxy statement/prospectus.

F-29
<PAGE> 169

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1999

<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------- ------------- --------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
securities
available-for-sale........... $ 11,817,123 $ 9,910,646 $ -- $ 21,727,769
Accounts receivable............. 980,642 3,017,766 -- 3,998,408
Inventory....................... 3,229,746 8,912,247 -- 12,141,993
Other current assets............ 409,011 421,677 -- 830,688
------------ ------------- ------------- -------------
Total current assets.... 16,436,522 22,262,336 -- 38,698,858
Customer use assets............. 858,917 15,087,925 -- 15,946,842
Property and equipment.......... 1,742,712 2,543,302 -- 4,286,014
Deposits and other assets....... -- 802,769 -- 802,769
Intangible assets............... 13,348,886 -- -- 13,348,886
------------ ------------- ------------- -------------
Total assets............ $ 32,387,037 $ 40,696,332 $ -- $ 73,083,369
============ ============= ============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 1,853,503 $ 1,494,461 $ 2,600,000(1) $ 5,947,964
Accrued expenses................ 655,517 2,480,458 -- 3,135,975
Deferred revenue................ 415,693 265,217 -- 680,910
Current portion of long-term
debt......................... 284,557 2,534,170 -- 2,818,727
------------ ------------- ------------- -------------
Total current
liabilities........... 3,209,270 6,774,306 2,600,000 12,583,576
Long-term debt, less current
portion......................... 833,300 -- -- 833,300
Other long-term liabilities....... 87,240 31,255 -- 118,495
Stockholders' equity:
Common stock...................... 142,864 156,329,799 (156,191,969)(2) 280,694
Additional paid-in capital........ 59,068,268 -- 156,191,969(2) 215,260,237
Deferred compensation............. (1,449,134) -- -- (1,449,134)
Accumulated deficit............... (29,504,771) (122,439,028) (2,600,000)(1) (154,543,799)
------------ ------------- ------------- -------------
Total stockholders'
equity................ 28,257,227 33,890,771 (2,600,000) 59,547,998
------------ ------------- ------------- -------------
Total liabilities and
stockholders'
equity................ $ 32,387,037 $ 40,696,332 $ -- $ 73,083,369
============ ============= ============= =============
</TABLE>

- ---------------
(1) To accrue additional non-recurring direct transaction costs (as currently
estimated by management), which are anticipated to be incurred in connection
with the NeoPath transaction.

(2) To reflect that each outstanding share of NeoPath common stock will be
exchanged for 0.7903 shares of AutoCyte common stock. Based on a total of
approximately 17,440,000 shares of NeoPath common stock outstanding on June
30, 1999. AutoCyte would issue approximately 13,783,000 shares of AutoCyte
common stock in the merger. AutoCyte will pay cash in lieu of fractional
shares.

F-30
<PAGE> 170

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999

<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS(1) PRO FORMA
----------- ----------- -------------- --------------------
<S> <C> <C> <C> <C>
Sales............................... $ 2,349,410 $ 4,965,287 $ -- $ 7,314,697
Cost of sales....................... 1,811,473 2,752,375 -- 4,563,848
----------- ----------- ------------- ------------
Gross profit........................ 537,937 2,212,912 -- 2,750,849
Operating Expenses
Research and development.......... 2,285,589 4,780,220 -- 7,065,809
Selling, general, and
administrative................. 3,628,373 5,694,641 -- 9,323,014
Nonrecurring expenses............. 3,481,235 495,644 -- 3,976,879
----------- ----------- ------------- ------------
9,395,197 10,970,505 -- 20,365,702
----------- ----------- ------------- ------------
Operating loss.................... (8,857,260) (8,757,593) -- (17,614,853)
Interest income................... 412,096 300,961 -- 713,057
Interest expense.................. (61,673) (160,888) -- (222,561)
----------- ----------- ------------- ------------
Net loss.......................... $(8,506,837) $(8,617,520) $ -- $(17,124,357)
=========== =========== ============= ============
Net loss per common share (basic and
diluted).......................... $ (0.65) $ (0.65)
=========== ============
Weighted-average common shares
outstanding....................... 13,163,406 26,443,734
=========== ============
</TABLE>

- ---------------
(1) Additional non-recurring direct transaction costs of approximately
$2,600,000 (as currently estimated by management), are anticipated to be
incurred in connection with the NeoPath transaction. Such costs will be
expensed as incurred, and have not been reflected in the unaudited pro forma
combined condensed statement of operations.

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
----------- ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales.............................. $ 2,279,518 $ 7,871,156 $ -- $ 10,150,674
Cost of sales...................... 1,481,306 4,412,600 -- 5,893,906
----------- ------------ ------------- ------------
Gross profit....................... 798,212 3,458,556 -- 4,256,768
Operating Expenses
Research and development......... 2,273,333 5,957,243 -- 8,230,576
Selling, general, and
administrative................ 3,841,632 9,835,832 -- 13,677,464
----------- ------------ ------------- ------------
6,114,965 15,793,075 -- 21,908,040
----------- ------------ ------------- ------------
Operating loss................... (5,316,753) (12,334,519) -- (17,651,272)
Interest income.................. 721,672 633,076 -- 1,354,748
Interest expense................. (7,831) (24,567) -- (32,398)
----------- ------------ ------------- ------------
Net loss......................... $(4,602,912) $(11,726,010) $ -- $(16,328,922)
=========== ============ ============= ============
Net loss per common share (basic
and diluted)..................... $ (0.36) $ (0.68)
=========== ============
Weighted-average common shares
outstanding...................... 12,637,903 24,051,628
=========== ============
</TABLE>

F-31
<PAGE> 171

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 4,769,686 $ 12,078,936 $ -- $ 16,848,622
Cost of sales..................... 2,982,198 6,711,314 -- 9,693,512
------------ ------------ ------------- ------------
Gross profit...................... 1,787,488 5,367,622 -- 7,155,110
Operating Expenses
Research and development........ 4,700,003 11,269,363 -- 15,969,366
Selling, general, and
administrative............... 7,457,968 17,950,151 -- 25,408,119
Write-off of intangible
assets....................... -- 3,084,289 -- 3,084,289
------------ ------------ ------------- ------------
12,157,971 32,303,803 -- 44,461,774
------------ ------------ ------------- ------------
Operating loss.................. (10,370,483) (26,936,181) -- (37,306,664)
Interest income................. 1,301,078 1,008,638 -- 2,309,716
Interest expense................ (20,667) (253,038) -- (273,705)
------------ ------------ ------------- ------------
Net loss........................ $ (9,090,072) $(26,180,581) $ -- $(35,270,653)
============ ============ ============= ============
Net loss per common share (basic
and diluted).................... $ (0.72) $ (1.46)
============ ============
Weighted-average common shares
outstanding..................... 12,664,223 24,098,206
============ ============
</TABLE>

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 2,667,837 $ 10,824,380 $ -- $ 13,492,217
Cost of sales..................... 1,952,691 4,774,920 -- 6,727,611
------------ ------------ ------------- ------------
Gross profit...................... 715,146 6,049,460 -- 6,764,606
Operating Expenses
Research and development........ 4,461,881 14,248,669 -- 18,710,550
Selling, general, and
administrative............... 6,532,551 17,745,936 -- 24,278,487
------------ ------------ ------------- ------------
10,994,432 31,994,605 -- 42,989,037
------------ ------------ ------------- ------------
Operating loss.................. (10,279,286) (25,945,145) -- (36,224,431)
Interest income................. 772,563 2,399,117 -- 3,171,680
Interest expense................ (1,478,150) (50,884) -- (1,529,034)
------------ ------------ ------------- ------------
Net loss........................ $(10,984,873) $(23,596,912) $ -- $(34,581,785)
============ ============ ============= ============
Net loss per common share (basic
and diluted).................... $ (1.59) $ (1.91)
============ ============
Weighted-average common shares
outstanding..................... 6,903,290 18,123,422
============ ============
</TABLE>

F-32
<PAGE> 172

AUTOCYTE AND NEOPATH

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE(1) NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 1,876,398 $ 3,061,849 $ -- $ 4,938,247
Cost of sales..................... 2,908,824 1,904,559 -- 4,813,383
------------ ------------ ------------- ------------
Gross profit...................... (1,032,426) 1,157,290 -- 124,864
Operating Expenses
Research and development........ 4,365,600 11,202,375 -- 15,567,975
Selling, general, and
administrative............... 12,490,482 11,295,228 -- 23,785,710
------------ ------------ ------------- ------------
16,856,082 22,497,603 -- 39,353,685
------------ ------------ ------------- ------------
Operating loss.................... (17,888,508) (21,340,313) -- (39,228,821)
Interest income................... 42,431 3,741,843 -- 3,784,274
Interest expense.................. -- (56,813) -- (56,813)
------------ ------------ ------------- ------------
Net loss(2)....................... $(17,846,077) $(17,655,283) $ -- $(35,501,360)
============ ============ ============= ============
</TABLE>

- ---------------
(1) Reflects the operations of AutoCyte's predecessor from January 1, 1996
through November 21, 1996 and the operations of AutoCyte from November 22,
1996 (inception) through December 31, 1996.

(2) Net loss per share is not disclosed since AutoCyte's predecessor operated as
a wholly owned subsidiary of Roche Holding Ltd. prior to the formation of
Autocyte in November 1996.

F-33
<PAGE> 173

NEOPATH, INC.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
NeoPath, Inc.

We have audited the accompanying balance sheets of NeoPath, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPath, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Seattle, Washington
February 9, 1999

F-34
<PAGE> 174

NEOPATH, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,579,867 $ 3,308,970
Securities available-for-sale............................. 3,374,549 25,409,633
Accounts receivable, net.................................. 3,011,078 3,863,818
Inventories............................................... 6,744,417 7,514,001
Other current assets...................................... 392,415 187,147
------------- ------------
Total current assets........................................ 19,102,326 40,283,569
Fee-per-use systems, net.................................... 14,602,963 8,564,189
Property and equipment, net................................. 3,530,694 5,979,849
Intangible assets, net...................................... -- 3,383,925
Deposits and other assets................................... 913,850 729,280
------------- ------------
Total assets................................................ $ 38,149,833 $ 58,940,812
============= ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,944,252 $ 2,173,179
Salaries and wages payable................................ 1,681,710 2,357,045
Customer deposits......................................... 332,485 431,877
Other accrued liabilities................................. 1,157,077 567,759
Current portion of long-term obligations.................. 2,549,151 80,966
------------- ------------
Total current liabilities................................... 8,664,675 5,610,826
Long-term obligations, less current portion................. 1,257,027 101,872
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 14,504,623 and 14,389,378 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 142,057,561 141,057,881
Accumulated deficit....................................... (113,813,699) (87,633,118)
Accumulated other comprehensive loss...................... (15,731) (196,649)
------------- ------------
Total shareholders' equity.................................. 28,228,131 53,228,114
------------- ------------
Total liabilities and shareholders' equity.................. $ 38,149,833 $ 58,940,812
============= ============
</TABLE>

See accompanying notes.
F-35
<PAGE> 175

NEOPATH, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues......................................... $ 12,078,936 $ 10,824,380 $ 3,061,849
Cost of revenues................................. 6,711,314 4,774,920 1,904,559
------------ ------------ ------------
Gross margin................................... 5,367,622 6,049,460 1,157,290
Operating expenses:
Research and development....................... 11,269,363 14,248,669 11,202,375
Selling, general and administrative............ 17,950,151 17,745,936 11,295,228
Write-off of intangible assets................. 3,084,289 -- --
------------ ------------ ------------
32,303,803 31,994,605 22,497,603
------------ ------------ ------------
Loss from operations............................. (26,936,181) (25,945,145) (21,340,313)
Interest income.................................. 1,008,638 2,399,117 3,741,843
Interest expense................................. (253,038) (50,884) (56,813)
------------ ------------ ------------
Net loss......................................... $(26,180,581) $(23,596,912) $(17,655,283)
============ ============ ============
Basic and diluted net loss per share............. $ (1.81) $ (1.66) $ (1.36)
============ ============ ============
Weighted average common shares outstanding....... 14,467,902 14,197,307 13,029,314
============ ============ ============
</TABLE>

See accompanying notes.
F-36
<PAGE> 176

NEOPATH, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------------- OTHER
NUMBER OF DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT COMPENSATION DEFICIT INCOME (LOSS) TOTAL
---------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.... 9,819,487 $ 71,649,971 $(175,782) $ (46,380,923) $ 39,945 $ 25,133,211
Follow on public offering --
common stock, net of
issuance costs of
$4,384,649................ 2,875,000 61,740,351 -- -- -- 61,740,351
Exercise of options and
warrants.................. 957,669 2,889,169 -- -- -- 2,889,169
Amortization of deferred
compensation.............. -- (23,745) 101,536 -- -- 77,791
Unrealized loss on
securities
available-for-sale........ -- -- -- -- (583,103) (583,103)
Net loss.................... -- -- -- (17,655,283) -- (17,655,283)
------------
Comprehensive loss........ (18,238,386)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1996........................ 13,652,156 136,255,746 (74,246) (64,036,206) (543,158) 71,602,136
Exercise of options and
warrants.................. 688,658 3,952,135 -- -- -- 3,952,135
Amortization of deferred
compensation.............. -- -- 74,246 -- -- 74,246
Common stock issued on
purchase of Pathfinder
System product line....... 48,564 850,000 -- -- -- 850,000
Unrealized appreciation on
securities
available-for-sale........ -- -- -- -- 346,509 346,509
Net loss.................... -- -- -- (23,596,912) -- (23,596,912)
------------
Comprehensive loss........ (23,250,403)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1997........................ 14,389,378 141,057,881 -- (87,633,118) (196,649) 53,228,114
Exercise of options and
warrants.................. 56,520 119,752 -- -- -- 119,752
Release of common stock held
in escrow................. 42,050 549,278 -- -- -- 549,278
Issuance of common stock
under employee stock
purchase plan............. 16,675 130,650 -- -- -- 130,650
Stock-based compensation to
consultants............... -- 200,000 -- -- -- 200,000
Unrealized appreciation on
securities
available-for-sale........ -- -- -- -- 180,918 180,918
Net loss.................... -- -- -- (26,180,581) -- (26,180,581)
------------
Comprehensive loss........ (25,999,663)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1998........................ 14,504,623 $142,057,561 $ -- $(113,813,699) $ (15,731) $ 28,228,131
========== ============ ========= ============= ========= ============
</TABLE>

See accompanying notes.
F-37
<PAGE> 177

NEOPATH, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(26,180,581) $(23,596,912) $(17,655,283)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write-off of intangible assets.................. 3,084,289 -- --
Depreciation and amortization................... 5,699,537 4,326,157 1,994,064
Stock-based compensation........................ 200,000 74,246 77,791
Accrued interest on securities
available-for-sale............................ 562,267 1,152,187 660,623
Net change in operating accounts:
Accounts receivable........................... 852,740 (3,023,562) (840,256)
Inventories and fee-per-use systems........... (7,048,460) (8,243,774) (11,093,253)
Accounts payable and accrued liabilities...... 585,664 1,208,837 1,839,915
Other........................................... (364,591) (594,194) 40,888
------------ ------------ ------------
Net cash used in operating activities.............. (22,609,135) (28,697,015) (24,975,511)
INVESTING ACTIVITIES
Purchases of securities available-for-sale........... (1,743,949) (5,349,511) (75,750,434)
Maturities of securities available-for-sale.......... 23,397,684 29,750,677 43,169,070
Purchase of Pathfinder System product line........... -- (2,696,114) --
Additions to property and equipment.................. (640,689) (950,424) (3,325,122)
Other................................................ (6,756) 3,379 166,396
------------ ------------ ------------
Net cash provided by (used in) investing
activities......................................... 21,006,290 20,758,007 (35,740,090)
FINANCING ACTIVITIES
Proceeds from note payable to bank................... 4,950,000 -- --
Payments on note payable to bank..................... (1,236,369) -- --
Principal payments on obligations under capital
leases............................................. (90,291) (75,558) (193,441)
Payment on short-term note payable issued in purchase
of Pathfinder System product line.................. -- (500,000) --
Exercise of options and warrants..................... 119,752 3,952,135 2,889,169
Issuance of common stock under employee stock
purchase plan...................................... 130,650 -- --
Issuance of common stock, net........................ -- -- 61,740,351
------------ ------------ ------------
Net cash provided by financing activities............ 3,873,742 3,376,577 64,436,079
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 2,270,897 (4,562,431) 3,720,478
Cash and cash equivalents:
Beginning of year.................................. 3,308,970 7,871,401 4,150,923
------------ ------------ ------------
End of year........................................ $ 5,579,867 $ 3,308,970 $ 7,871,401
============ ============ ============
NONCASH TRANSACTIONS
AutoPap Systems reclassified to fee-per-use systems,
net................................................ $ 8,745,621 $ 4,152,386 $ 6,563,537
AutoPap Systems reclassified to (from) property and
equipment, net..................................... $ (663,839) $ 2,457,367 $ 729,362
</TABLE>

See accompanying notes.
F-38
<PAGE> 178

NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998

NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS NeoPath, Inc. ("NeoPath" or the "Company") develops and markets
visual intelligence technology to increase accuracy in medical testing.
NeoPath's initial products include two automated screening systems that
integrate proprietary high-speed morphology computers, video imaging technology,
and sophisticated image interpretation software to capture and analyze thousands
of microscopic images from a Papanicolaou ("Pap") smear slide for the early
detection of cervical cancer.

The AutoPap(R) 300 QC Automatic Pap Screener System (the "AutoPap QC") is a
rescreening device used for quality control and rescreening of previously
screened Pap smear slides. The AutoPap(R) Primary Screening System (the "AutoPap
Screener") is an enhanced system that classifies up to 25% of such slides as
requiring no further review.

The "AutoPap System" refers to the AutoPap Screener and the AutoPap QC
together.

REVENUES AND MARKETS NeoPath's primary market includes domestic and
foreign clinical laboratories. Domestic revenues are generated primarily through
NeoPath's direct sales activities; international revenues are derived primarily
through distributors. Approximately 19% of NeoPath's revenues in 1998 were from
customers outside of the United States, compared to 51% in 1997 and 45% in 1996.
The Company's four largest customers accounted for 41% of total revenues in
1998, compared to 65% in 1997 and 86% in 1996. The Company recognizes revenue on
either a product sale or fee-per-use basis (subject to service and license
agreements, rental contracts, and minimum payments on certain fee-per-use
contracts). Fee-per-use revenues commence in the month an AutoPap System is
initially placed in commercial use at the customer site. Sales of AutoPap
Systems are generally recognized at date of shipment. In the past three years,
sale revenues (including upgrades) have accounted for 61 to 65% of total
revenues. Remaining revenues consisted primarily of fee-per-use contract
billings.

CASH EQUIVALENTS Short-term investments with a purchased maturity of three
months or less are considered to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.

SECURITIES AVAILABLE-FOR-SALE NeoPath's investment portfolio is classified
as available-for-sale, and such securities are stated at fair value, with the
unrealized gains and losses included in other comprehensive income or loss.
Interest earned on securities available-for-sale is included in interest income.
The amortized cost of investments in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion are included in interest income. The cost of securities sold is
calculated using the specific identification method.

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

FEE-PER-USE SYSTEMS AutoPap Systems manufactured for fee-per-use
placements are carried in inventories until the AutoPap Systems are shipped, at
which time they are reclassified to fee-per-use systems (non-current assets).
Fee-per-use systems are depreciated on a straight-line basis over an estimated
useful life of four years.

NeoPath purchases all components for the AutoPap System from outside
vendors, including certain components from sole-source or single vendors. The
establishment of additional or replacement sources of supply for the AutoPap
System could require regulatory approval. In addition, a vendor's inability to
supply acceptable components in a timely manner and in the quantity required
could delay or halt the Company's manufacture of its products.

F-39
<PAGE> 179
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the term of the lease.

ASSET IMPAIRMENT In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," the Company recognizes impairment
losses on long-lived assets used in operations when indicators of impairment are
present and the discounted cash flows estimated to be generated by those assets
are less than the assets' carrying amounts. During 1998, the Company recognized
such a loss for the write down of intangible assets related to the Pathfinder
System product line (see Note 4). There were no such losses recognized in 1997
or 1996.

STOCK-BASED COMPENSATION NeoPath has elected to follow the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock options. Because the exercise price of the Company's stock options
generally equals the market price of the underlying stock on the date of grant,
no corresponding compensation expense has been recognized since NeoPath's
initial public stock offering. (See Note 7 for SFAS No. 123 "Accounting for
Stock-Based Compensation" pro forma disclosures.)

In accordance with applicable accounting standards, NeoPath recognizes
compensation expense for options and warrants granted to consultants in lieu of
cash payment.

ADVERTISING EXPENSES Advertising expenses are expensed as incurred. Total
advertising expenses incurred during 1998, 1997, and 1996 were $1.1 million,
$0.7 million, and $0.3 million, respectively.

BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share
is computed based on the weighted average number of shares of common stock
outstanding. Because NeoPath's stock options and warrants are not dilutive (due
to net losses) there is no difference between basic net loss per share and
diluted net loss per share.

COMPREHENSIVE INCOME As of January 1, 1998, NeoPath adopted SFAS No. 130,
"Reporting Comprehensive Income." Statement 130 established new rules for the
reporting and display of comprehensive income or loss and its components;
however, the adoption of this Statement had no impact on the Company's operating
results or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's securities available-for-sale, which prior to adoption
were reported within shareholders' equity, to be included in other comprehensive
income or loss. Statement 130 also requires presentation of accumulated other
comprehensive income or loss separately in shareholders' equity; accordingly,
prior year financial statements have been reclassified to conform to these
requirements.

BUSINESS SEGMENTS NeoPath currently operates in a single business
segment -- clinical laboratories -- and management evaluates its operating
performance based on this single segment.

CONCENTRATIONS OF CREDIT RISK The Company invests its excess cash in
accordance with guidelines that limit the credit exposure to any one financial
institution and to any one type of investment. The guidelines also specify that
the financial instruments are issued by institutions with strong credit ratings.
The securities are generally not collateralized and mature within two years.

USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

F-40
<PAGE> 180
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 SECURITIES AVAILABLE-FOR-SALE

Securities available-for-sale consist of the following:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1998 COST GAINS LOSSES FAIR VALUE
- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate bonds................... $ 3,390,280 $5,608 $ (21,339) $ 3,374,549
=========== ====== ========= ===========
</TABLE>

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE
- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate bonds................... $17,888,047 $ 835 $(112,479) $17,776,403
Government bonds.................. 7,718,235 -- (85,005) 7,633,230
----------- ------ --------- -----------
$25,606,282 $ 835 $(197,484) $25,409,633
=========== ====== ========= ===========
</TABLE>

There were realized gains of $5,092 and realized losses of $43,472 on sales
of securities available-for-sale for the year ended December 31, 1998. There
were no realized gains or losses on sales of securities available-for-sale for
the years ended December 31, 1997 and 1996. The net adjustment for unrealized
holding gains and losses on securities available-for-sale, included in other
comprehensive income or loss, was a gain of $180,918 in 1998, a gain of $346,509
in 1997, and a loss of $583,103 in 1996. The fair value of securities
available-for-sale maturing within one year totals $1,282,882. The fair value of
securities available-for-sale maturing between one and two years totals
$2,091,667. The Company considers all securities available-for-sale as available
for use in current operations.

NOTE 3 BALANCE SHEET INFORMATION

Detailed balance sheet data is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts receivable
Receivables............................................... $3,477,196 $4,363,818
Allowance for doubtful accounts........................ (466,118) (500,000)
---------- ----------
$3,011,078 $3,863,818
========== ==========
Inventories
Raw materials............................................. $2,093,748 $3,819,830
Work-in-process........................................... 2,365,472 1,061,900
Finished goods............................................ 2,285,197 2,632,271
---------- ----------
$6,744,417 $7,514,001
========== ==========
</TABLE>

F-41
<PAGE> 181
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Finished goods consist of AutoPap Systems that will be reclassified to
fee-per-use systems (non-current assets) when placed in commercial use, AutoPap
Systems to be sold, and AutoPap Systems used internally on a temporary basis.

<TABLE>
<S> <C> <C>
Fee-per-use systems
Systems................................................. $18,249,245 $10,628,468
Accumulated depreciation............................. (3,646,282) (2,064,279)
----------- -----------
$14,602,963 $ 8,564,189
=========== ===========
Property and equipment
Laboratory and other equipment.......................... $ 7,987,377 $ 8,206,222
Furniture and fixtures.................................. 1,156,863 1,108,168
Leasehold improvements.................................. 1,222,093 1,210,930
----------- -----------
Total property and equipment......................... 10,366,333 10,525,320
Accumulated depreciation and amortization............... (6,835,639) (4,545,471)
----------- -----------
$ 3,530,694 $ 5,979,849
=========== ===========
</TABLE>

At December 31, 1998 and 1997, the Company held equipment under capitalized
leases with an original cost of $317,594 and $373,432, and a net book value of
$73,172 and $147,219, respectively.

<TABLE>
<S> <C> <C>
Intangible assets
Intangible assets......................................... $ -- $3,759,917
Accumulated amortization............................... $ -- (375,992)
---------- ----------
$ -- $3,383,925
========== ==========
</TABLE>

NOTE 4 PATHFINDER SYSTEM PRODUCT LINE

In the quarter ended December 31, 1998, NeoPath wrote off $3.1 million of
intangible assets related to the Pathfinder System product line. The write-off
did not involve any cash expenditure. NeoPath acquired the Pathfinder System
product line in June 1997 for an initial purchase price of $4.1 million. The
initial purchase price included cash of $2.7 million (including
transaction-related expenses), a $500,000 short-term note paid in October 1997,
and 48,564 shares of NeoPath common stock. In addition, certain shares of
NeoPath common stock were issued and were held in escrow until April 1998, when
the Company released the remaining 42,050 shares, which added approximately
$550,000 to Pathfinder intangible assets. As a result of the purchase, NeoPath
recognized $4.3 million in intangible assets that were to be amortized over five
years. As a result of continuing low sales levels of Pathfinder Systems, and
related losses attributable directly to the Pathfinder product line, the Company
identified indications of impairment in the fourth quarter of 1998 and later
decided to discontinue immediate continued development and commercialization of
this product line. The Company then compared the carrying value of these
intangible assets to expected future cash flows applicable to the Pathfinder
product and, as a result, wrote off the remaining balance of intangible assets.
Pathfinder product sales accounted for 3% of total revenues in each of the two
years ended December 31, 1998 and 1997.

NOTE 5 LONG-TERM OBLIGATIONS AND COMMITMENTS

NOTE PAYABLE TO BANK In April 1998, NeoPath entered into a loan agreement
with a bank pursuant to which the Company could borrow amounts based on the
manufacturing cost of AutoPap Systems placed on fee-per-use contracts.
Accordingly, in June 1998, NeoPath borrowed $5.0 million under the loan
agreement. The bank debt is secured by substantially all of NeoPath's assets,
excluding

F-42
<PAGE> 182
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

intellectual property, and amounts are repaid over 24 months from the date of
each drawdown. In addition, NeoPath must comply with certain financial
covenants. As of December 31, 1998, the bank facility was secured by $2.0
million in restricted cash in an interest-bearing account with the bank. The
restricted cash is included in cash and cash equivalents on the balance sheet.
Borrowings under this agreement bear interest at the bank's prime rate plus 1
percent per annum (8.75% at December 31, 1998).

LEASE AGREEMENTS NeoPath leases certain property and equipment under
capital leases pursuant to master equipment lease agreements. Under such
agreements, the Company entered into multiple capital leases for property and
equipment. The agreements included lease terms ranging from 36 to 60 months and
purchase options at the end of each lease. Interest rates on capitalized leases
approximate 10%.

The Company leases office and operating facilities under operating leases
expiring in January 1999 through August 2007, with various renewal options, and
other leased items through 2002. Operating lease expense was $833,590 in 1998,
compared to $831,983 in 1997, and $620,895 in 1996.

Minimum future payments as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
LEASES
NOTE PAYABLE --------------------
TO BANK CAPITAL OPERATING
------------ ------- ---------
<S> <C> <C> <C>
1999.............................................. $2,475,000 $80,168 $806,807
2000.............................................. 1,238,631 19,050 31,328
2001.............................................. -- -- 31,328
2002.............................................. -- -- 31,328
2003.............................................. -- -- 31,328
Thereafter........................................ -- -- 44,926
---------- ------- --------
Total minimum payments............................ 99,218 $977,045
========
Less amount representing interest................. 6,671
-------
Present value of minimum payment.................. 3,713,631 92,547
Current portion................................... 2,475,000 74,151
---------- -------
Long-term obligations, less current portion....... $1,238,631 $18,396
========== =======
</TABLE>

NOTE 6 INCOME TAXES

As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $111.5 million and research and development credit
carryforwards of approximately $3.4 million for federal income tax purposes,
which expire between 2004 and 2013. Due to the issuance and sale of shares of
preferred stock prior to 1995 and the Company's initial public offering
completed in 1995, the Company incurred "ownership changes" pursuant to
applicable regulations in effect under the Internal Revenue Code of 1986, as
amended. Therefore, the Company's use of losses incurred through the date of
these ownership changes will be limited during the carryforward period. The
Company estimates that the use of approximately $28.0 million of losses incurred
prior to one or more of the ownership changes would be limited in the
carryforward periods. To the extent that any single-year loss is not utilized to
the full amount of the limitation, such unused loss is carried over to
subsequent years until the earlier of its utilization or the expiration of the
relevant carryforward period. Approximately $5.1 million of the net operating
loss carryforward is attributed to the deduction for stock options, the tax
effect of which will be credited to common stock when recognized.

F-43
<PAGE> 183
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and the corresponding financial
statement amounts. Significant components of the Company's deferred income tax
assets (liabilities) at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 37,904,000 $ 29,416,000
Research and development credits........................ 3,377,000 2,374,000
Amortization and write-off of intangible assets......... 1,331,000 85,000
Research and development costs.......................... 335,000 548,000
Allowance for doubtful accounts......................... 243,000 238,000
Deferred compensation................................... 192,000 168,000
Accrued vacation........................................ 155,000 219,000
Charitable contribution carryforwards................... 126,000 125,000
Other................................................... 475,000 387,000
Property and equipment.................................. (501,000) 97,000
Valuation allowance..................................... (43,637,000) (33,657,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>

Due to the uncertainty of the Company's ability to generate taxable income
to realize its deferred tax assets, a valuation allowance has been established
for financial reporting purposes equal to the amount of the net deferred tax
assets. The Company's valuation allowance increased $10.0 million and $9.5
million for the years ended December 31, 1998 and 1997, respectively.

NOTE 7 SHAREHOLDERS' EQUITY

COMMON STOCK On February 9, 1999, NeoPath completed a $14.5 million
private equity transaction in which the Company issued 2.9 million shares of
common stock to investors at a price of $5.00 per share. In connection with the
financing, NeoPath issued to Invemed Associates, Inc., a related party,
five-year warrants to purchase 100,000 shares of common stock at an exercise
price of $5.89 per share.

STOCK OPTION PLANS The Company has two stock option plans that provide for
option grants to employees, directors, and others. The options generally vest
over four years or as otherwise determined by the plan administrator. Options to
purchase shares expire no later than ten years after the date of grant.

In May 1998, Neopath's Board of Directors approved a plan to allow all
Company personnel the opportunity to surrender previously granted stock options
in exchange for a new option at the current market price. In total, 1,357,836
options were surrendered and canceled; a corresponding number of new options
were issued with an exercise price of $13.00 per share.

F-44
<PAGE> 184
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1996................. 1,027,242 $ 6.59 483,974 $ 1.66
======= ======
Granted............................. 838,218 22.91
Exercised........................... (195,429) 2.60
Canceled............................ (65,811) 10.66
---------- ------
Balance, December 31, 1996............... 1,604,220 15.39 524,318 $ 5.12
======= ======
Granted............................. 845,025 16.46
Exercised........................... (225,165) 2.07
Canceled............................ (285,532) 20.18
---------- ------
Balance, December 31, 1997............... 1,938,548 16.68 655,156 $13.56
======= ======
Granted............................. 1,785,083 12.35
Exercised........................... (51,904) 1.73
Canceled............................ (1,808,561) 18.01
========== ======
Balance, December 31, 1998............... 1,863,166 $11.64 839,279 $11.16
========== ====== ======= ======
Available for grant at December 31,
1998................................... 1,065,020
==========
</TABLE>

Outstanding and exercisable stock options by price range as of December 31,
1998 are as follows:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
RANGE OF EXERCISE PRICE AS OF REMAINING EXERCISE AS OF EXERCISE
PER SHARE DEC. 31, 1998 TERM (YEARS) PRICE DEC. 31, 1998 PRICE
- ----------------------- ------------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.60 - $ 1.20 35,463 4.24 $ 1.15 34,713 $ 1.15
1.80 - 2.40 136,939 5.53 2.38 136,939 2.38
4.00 - 6.00 103,128 9.68 4.64 13,178 4.28
6.50 - 9.00 57,676 9.58 6.88 1,979 8.77
11.25 - 12.69 51,500 8.36 11.86 16,000 11.25
13.00 - 13.00 1,385,129 9.41 13.00 558,775 13.00
13.75 - 23.63 93,331 7.70 19.61 77,695 19.09
--------- ---- ------ ------- ------
$ 0.60 - $23.63 1,863,166 8.93 $11.64 839,279 $11.16
========= ==== ====== ======= ======
</TABLE>

Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted-average assumptions
for 1998, 1997, and 1996, respectively: risk-free interest rates of 5.18%,
6.08%, and 6.01%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 0.8992, 0.6589, and 0.5512; and a
weighted-average expected life of the option of 1.47, 1.47, and 1.46 years after
vest date.

The Black-Scholes option value model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models

F-45
<PAGE> 185
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss........................... $(32,951,440) $(27,930,575) $(20,717,024)
Pro forma basic and diluted net loss per
share...................................... (2.28) (1.97) (1.59)
</TABLE>

SFAS No. 123 pro forma disclosures above are not necessarily indicative of
future pro forma disclosures because of the manner in which SFAS 123
calculations are phased in over time.

The weighted average fair value for options granted during 1998, 1997, and
1996 using the Black-Scholes multiple option pricing model is $6.99, $8.81, and
$10.86, respectively.

WARRANTS In 1998, NeoPath issued a warrant to a consultant to purchase
60,000 shares of NeoPath common stock at $4.31 per share, which was the closing
price of the Company's common stock on the date of the initial agreement. The
Company also issued a comparable stock option grant to the same consultant. As a
result, in 1998 the Company recognized $200,000 in non-cash expenses related to
the consulting agreement and will continue to recognize non-cash expenses during
the one-year agreement.

Common stock warrants outstanding at December 31, 1998 totaled 278,910 at a
weighted average exercise price per share of $6.86. These warrants expire at
various dates through 2004.

During 1998, warrants were exercised to purchase 4,616 shares of NeoPath's
common stock. During 1997, warrants were exercised to purchase 463,493 shares of
the Company's common stock, of which 13,273 shares were issued through "net
exercise" rights, for which the Company received no proceeds. Such rights allow
the warrant holder to exercise the warrant and "pay" the warrant price through
the intrinsic value of the warrants; therefore, fewer shares of common stock are
issued as a result. During 1996, warrants were exercised to purchase 762,240
shares of the Company's common stock, of which 346,468 shares were issued
through net exercise rights. The remaining warrants outstanding as of December
31, 1998 have net exercise rights.

COMMON STOCK RESERVED At December 31, 1998, common stock was reserved for
the following purposes:

<TABLE>
<S> <C>
Stock options............................................. 2,928,186
Common stock warrants..................................... 278,910
Employee stock purchase plan.............................. 133,325
---------
3,340,421
=========
</TABLE>

NOTE 8 EMPLOYEE BENEFITS

The Company has a retirement plan covering substantially all employees that
provides for voluntary salary deferral contributions on a pre-tax basis in
accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended.
To date, the Company has made no contributions to the plan.

F-46
<PAGE> 186
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In May 1997, NeoPath's shareholders approved the 1997 Employee Stock
Purchase Plan (the "ESPP") and authorized the issuance of up to 150,000 shares
of the Company's common stock under the plan. The ESPP permits eligible
employees of the Company to purchase common stock at not less than 85% of fair
market value as defined in the ESPP through payroll deductions of up to 15% of
their compensation, provided that no employee may purchase common stock worth
more than $25,000 in any calendar year. Participants are required to hold ESPP
stock for a minimum of six months following the purchase date. The ESPP will
expire in 2007.

NOTE 9 LITIGATION

On July 15, 1996, Neuromedical Systems, Inc. ("Neuromedical") filed a
lawsuit against NeoPath in the United States District Court for the Southern
District of New York. The complaint alleges patent infringement, unfair
competition, false advertising, and related claims. On September 5, 1996,
NeoPath filed its answer and counter claims. In May 1998, a judge in the United
States District Court for the Southern District of New York denied
Neuromedical's motion for a preliminary injunction against the Company. The
parties have agreed to dismiss their claims and counter claims on all but the
patent issues, and Neuromedical accordingly served an amended complaint on July
27, 1998 asserting only patent infringement claims. This lawsuit is still in the
discovery stage, and a trial date has not been set. The Company believes it has
a strong position in this action and continues to defend itself vigorously.

On March 31, 1997, the Company filed a patent infringement lawsuit against
Neuromedical in the United States District Court for the Western District of
Washington. The complaint alleges patent infringement and seeks permanent
injunctions against Neuromedical. In March and April 1998 this lawsuit was
amended, and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment, which the court
denied in April 1998. In October 1998, Neuromedical filed another motion for
summary judgment that the court denied. The Company expects trial on the first
Washington lawsuit to begin in 1999. The second Washington lawsuit is currently
in the discovery stage.

F-47
<PAGE> 187

NEOPATH, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,320,707 $ 5,579,867
Securities available-for-sale............................. 3,589,939 3,374,549
Accounts receivable, net.................................. 3,017,766 3,011,078
Inventories............................................... 8,912,247 6,744,417
Other current assets...................................... 421,677 392,415
------------- -------------
Total current assets........................................ 22,262,336 19,102,326
Fee-per-use systems, net.................................... 15,087,925 14,602,963
Property and equipment, net................................. 2,543,302 3,530,694
Deposits and other assets................................... 802,769 913,850
------------- -------------
Total assets................................................ $ 40,696,332 $ 38,149,833
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,494,461 $ 2,944,252
Salaries and wages payable................................ 887,477 1,681,710
Customer deposits......................................... 265,217 332,485
Other accrued liabilities................................. 1,592,981 1,157,077
Current portion of long-term obligations.................. 2,534,170 2,549,151
------------- -------------
Total current liabilities................................... 6,774,306 8,664,675
Long-term obligations, less current portion................. 31,255 1,257,027
Shareholders' equity:
Common stock.............................................. 156,329,799 142,057,561
Accumulated deficit....................................... (122,431,241) (113,813,699)
Accumulated other comprehensive loss...................... (7,787) (15,731)
------------- -------------
Total shareholders' equity.................................. 33,890,771 28,228,131
------------- -------------
Total liabilities and shareholders' equity.................. $ 40,696,332 $ 38,149,833
============= =============
</TABLE>

See accompanying notes.
F-48
<PAGE> 188

NEOPATH, INC.

STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 2,939,429 $ 4,308,465 $ 4,965,287 $ 7,871,156
Cost of revenues..................... 1,587,985 2,371,840 2,752,375 4,412,600
----------- ----------- ----------- ------------
Gross margin....................... 1,351,444 1,936,625 2,212,912 3,458,556
Operating expenses:
Research and development........... 2,362,183 2,911,427 4,780,220 5,957,243
Selling, general and
administrative.................. 2,631,579 5,329,589 6,190,285 9,835,832
----------- ----------- ----------- ------------
4,993,762 8,241,016 10,970,505 15,793,075
----------- ----------- ----------- ------------
Loss from operations................. (3,642,318) (6,304,391) (8,757,593) (12,334,519)
Interest income...................... 163,717 267,302 300,961 633,076
Interest expense..................... (70,903) (15,288) (160,888) (24,567)
----------- ----------- ----------- ------------
Net loss............................. $(3,549,504) $(6,052,377) $(8,617,520) $(11,726,010)
=========== =========== =========== ============
Basic and diluted net loss per
share.............................. $ (0.20) $ (0.42) $ (0.51) $ (0.81)
=========== =========== =========== ============
Weighted average common shares
Outstanding........................ 17,420,160 14,468,686 16,804,161 14,442,269
=========== =========== =========== ============
</TABLE>

See accompanying notes.
F-49
<PAGE> 189

NEOPATH, INC.

STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (8,617,520) $(11,726,010)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 2,885,176 2,790,942
Stock-based compensation.................................. 7,100 --
Accrued interest on securities available-for-sale......... 183,206 360,694
Net change in operating accounts:
Accounts receivable.................................... (6,688) (1,008,775)
Inventories and fee-per-use systems.................... (4,479,262) (1,474,927)
Accounts payable and accrued liabilities............... (2,165,388) (563,874)
Other.................................................. 102,460 (922,894)
------------ ------------
Net cash used in operating activities....................... (12,090,916) (12,544,844)
INVESTING ACTIVITIES
Purchases of securities available-for-sale.................. (7,199,372) (202,310)
Sales and maturities of securities available-for-sale....... 6,808,719 12,934,765
Additions to property and equipment......................... (58,591) (531,042)
Other....................................................... (3,077) --
------------ ------------
Net cash (used in) provided by investing activities......... (452,321) 12,201,413
FINANCING ACTIVITIES
Proceeds from private equity transaction, net............... 14,442,688 --
Proceeds from note payable to bank.......................... -- 4,950,000
Payments on note payable to bank............................ (1,237,500) --
Issuance of common stock under employee stock purchase
plan...................................................... 38,932 70,482
Exercise of options and warrants............................ 73,518 76,660
Principal payments on obligations under capital leases...... (33,561) (37,656)
------------ ------------
Net cash provided by financing activities................... 13,284,077 5,059,486
------------ ------------
Net increase in cash and cash equivalents................... 740,840 4,716,055
Cash and cash equivalents:
Beginning of period....................................... 5,579,867 3,308,970
------------ ------------
End of period............................................. $ 6,320,707 $ 8,025,025
============ ============
NONCASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES
AutoPap Systems reclassified to fee-per-use systems, net.... $ 2,426,091 $ 441,736
</TABLE>

See accompanying notes.
F-50
<PAGE> 190

NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared by
NeoPath, Inc. ("NeoPath" or the "Company") in accordance with generally accepted
accounting principles for interim financial information and according to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. The balance
sheet at December 31, 1998 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the three-month and
six-month periods ended June 30, 1999, are not necessarily indicative of results
to be expected for the entire year ending December 31, 1999 or for any other
fiscal period. For further information, refer to the financial statements and
footnotes thereto incorporated by reference in the Company's Form 10-K for the
year ended December 31, 1998.

NOTE 2 -- REVENUE RECOGNITION

The Company recognizes revenue on either a product sale or fee-per-use
basis. Sales of AutoPap(R) Systems are generally recognized at date of shipment
and are subject to continuing service and license agreements for which revenue
is recognized over the corresponding contract period. Fee-per-use revenue
commences in the month an AutoPap System is initially placed in commercial use
at a customer site and consists of per-slide monthly billings, fixed rental
billings, and minimum payments due on certain fee-per-use contracts. Fee-per-use
revenue is recognized as earned.

NOTE 3 -- COMPREHENSIVE NET LOSS

Components of comprehensive net loss, as defined by applicable accounting
and reporting standards, are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net loss......................................... $(3,549,504) $ (6,052,377)
Unrealized gain on Securities
available-for-sale............................. 15,115 41,507
----------- ------------
Comprehensive net loss........................... $(3,534,389) $ (6,010,870)
=========== ============
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net loss......................................... $(8,617,520) $(11,726,010)
Unrealized gain on Securities
available-for-sale............................. 7,944 103,024
----------- ------------
Comprehensive net loss........................... $(8,609,576) $(11,622,986)
=========== ============
</TABLE>

F-51
<PAGE> 191
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

NOTE 4 -- INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials.................................. $3,202,689 $2,093,748
Work-in-process................................ 1,732,102 2,365,472
Finished goods................................. 3,977,456 2,285,197
---------- ----------
$8,912,247 $6,744,417
========== ==========
</TABLE>

NOTE 5 -- PRIVATE EQUITY TRANSACTION

On February 9, 1999, NeoPath completed a $14.5 million private equity
transaction in which the Company issued 2.9 million shares of common stock to
investors at a price of $5.00 per share. In connection with the financing,
NeoPath issued to Invemed Associates, Inc., a related party, five-year warrants
to purchase 100,000 shares of common stock at an exercise price of $5.89 per
share. On February 12, 1999, NeoPath filed a shelf registration statement on
Form S-3 that will, when declared effective by the Securities and Exchange
Commission, allow resale of the newly issued shares. NeoPath must use its best
efforts to keep this registration statement effective for two years. Because the
registration statement was not declared effective within 120 days of the
transaction closing, the agreement specified that the purchase price would be
reduced by 2 percent. As a result, NeoPath recognized a liability of $290,000 as
of June 30, 1999.

NOTE 6 -- AGREEMENT TO ACQUIRE TECHNOLOGY RIGHTS

On March 26, 1999, AutoCyte, Inc. announced an agreement to purchase
certain Neuromedical, Inc. technology, including patent rights, for $4.0 million
in cash and 1.4 million shares of AutoCyte common stock. On April 26, 1999,
NeoPath and AutoCyte announced an agreement whereby NeoPath may acquire an
undivided interest in the intellectual property estate of Neuromedical that
AutoCyte had agreed to acquire. Subject to certain conditions, NeoPath will pay
AutoCyte $2.2 million in cash and issue AutoCyte 1.2 million shares of NeoPath
common stock at the later of the transaction closing date or September 1, 1999.
On May 18, 1999, AutoCyte announced that it had completed its acquisition of the
Neuromedical technology.

NOTE 7 -- AGREEMENT TO MERGE WITH AUTOCYTE

On June 4, 1999, NeoPath and AutoCyte agreed to a merger in which a wholly
owned subsidiary of AutoCyte will merge with NeoPath, and NeoPath will become a
wholly owned subsidiary of AutoCyte. On the effective date of the merger, each
issued and outstanding share of NeoPath common stock will automatically convert
into the right to receive 0.7903 shares of AutoCyte common stock. AutoCyte will
pay cash in lieu of issuing fractional shares of AutoCyte common stock.
Outstanding employee and director options and certain warrants to purchase
shares of NeoPath common stock will be converted to AutoCyte options and
warrants at the same exchange ratio. The parties expect the merger to be a
tax-free reorganization and to be accounted for as a pooling of interests.
Completion of the acquisition is subject to approval by AutoCyte's and NeoPath's
shareholders and to other customary closing conditions.

NOTE 8 -- LITIGATION

On July 15, 1996, Neuromedical Systems, Inc. filed a lawsuit against
NeoPath in the United States District Court for the Southern District of New
York. The complaint alleged patent infringement, unfair

F-52
<PAGE> 192
NEOPATH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

competition, false advertising, and related claims and requested monetary
damages and injunctive relief. On September 5, 1996, NeoPath filed its answer
and counter claims. In May 1998, a judge in the United States District Court for
the Southern District of New York denied Neuromedical's motion for a preliminary
injunction against the Company. The parties agreed to dismiss their claims and
counterclaims on all but the patent issues, and Neuromedical accordingly served
an amended complaint on July 27, 1998 asserting only patent infringement claims.
Virtually all of NeoPath's domestic revenues, which represented 90 percent of
total revenues in the six months ended June 30, 1999, are derived from products
that incorporate technology covered by this patent. NeoPath believes it has a
strong position in this action, and will defend itself vigorously against these
claims. On March 26, 1999, Neuromedical announced that it had filed a voluntary
chapter 11 petition for bankruptcy. On April 6, 1999, the court removed the case
from its active docket pending further developments in Neuromedical's bankruptcy
proceedings.

On March 31, 1997, NeoPath filed a patent infringement lawsuit against
Neuromedical in the United States District Court for the Western District of
Washington. The complaint alleges patent infringement and seeks permanent
injunctions against Neuromedical. In March and April 1998 this lawsuit was
amended, and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment, which the court
denied in April 1998. In October 1998, Neuromedical filed another motion for
summary judgment that the court denied. By court order on March 30, 1999,
proceedings have been stayed pending resolution of Neuromedical's bankruptcy
proceedings. Furthermore, the court ordered that these cases be removed from the
court's active caseload.

NeoPath's intellectual property acquisition agreement with AutoCyte
provides that the patent infringement litigation between NeoPath and
Neuromedical will be terminated.

NOTE 9 -- RECLASSIFICATIONS

Certain prior-period amounts have been reclassified to conform to the
current-period presentation.

F-53
<PAGE> 193

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 194

ANNEX A

AGREEMENT AND PLAN OF MERGER

AMONG

AUTOCYTE, INC.

TRILOGY ACQUISITION CORPORATION,

AND

NEOPATH, INC.

DATED AS OF JUNE 4, 1999

A-1
<PAGE> 195

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 -- THE MERGER..................................... 6
1.1 The Merger.......................................... 6
1.2 Effective Time...................................... 6
1.3 Effects of the Merger............................... 7
1.4 Certificate of Incorporation and Bylaws............. 7
1.5 Officers and Directors.............................. 7
1.6 Effect on Capital Stock............................. 7
1.7 Closing of NeoPath Transfer Books................... 8
1.8 NeoPath Dissenting Shares........................... 8
1.9 Issuance of AutoCyte Certificates................... 9
1.10 Lost, Stolen or Destroyed Certificates.............. 9
1.11 No Further Ownership Rights in NeoPath Common
Stock.................................................. 10
1.12 Tax and Accounting Consequences..................... 10
SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF NEOPATH...... 10
2.1 Organization and Qualification...................... 10
2.2 Capitalization...................................... 10
2.3 Authority to Execute and Perform Agreements......... 11
2.4 Subsidiaries and Other Affiliates................... 11
2.5 Charter and Bylaws; Books and Records............... 11
2.6 SEC Reports......................................... 11
2.7 Financial Statements................................ 12
2.8 Absence of Undisclosed Liabilities.................. 12
2.9 No Material Adverse Change.......................... 12
2.10 Tax Matters......................................... 13
2.11 Compliance with Laws................................ 14
2.12 Consents; No Breach................................. 14
2.13 Actions and Proceedings............................. 15
2.14 Contracts and Other Agreements...................... 15
2.15 Real Property; Leases............................... 16
2.16 Tangible Property................................... 16
2.17 Intellectual Property............................... 17
2.18 Title to Assets; Liens.............................. 17
2.19 Employee Benefit Plans.............................. 17
2.20 Employee Relations.................................. 18
2.21 Relationships with Affiliates....................... 18
2.22 Insurance........................................... 18
2.23 Brokerage........................................... 19
2.24 Hazardous Materials................................. 19
2.25 Registration Statement; Proxy Statement............. 19
2.26 Opinion of Financial Adviser........................ 19
2.27 Accounting Matters.................................. 20
2.28 Full Disclosure..................................... 20
SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF AUTOCYTE..... 20
3.1 Organization and Qualification...................... 20
3.2 Capitalization...................................... 20
3.3 Authority to Execute and Perform Agreements......... 21
</TABLE>

A-2
<PAGE> 196

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.4 Subsidiaries and Other Affiliates................... 21
3.5 Charter and By-laws; Books and Records.............. 21
3.6 SEC Reports......................................... 21
3.7 Financial Statements................................ 21
3.8 Absence of Undisclosed Liabilities.................. 22
3.9 No Material Adverse Change.......................... 22
3.10 Tax Matters......................................... 23
3.11 Compliance with Laws................................ 24
3.12 Consents; No Breach................................. 24
3.13 Actions and Proceedings............................. 25
3.14 Contracts and Other Agreements...................... 25
3.15 Real Property; Leases............................... 26
3.16 Tangible Property................................... 26
3.17 Intellectual Property............................... 26
3.18 Title to Assets; Liens.............................. 27
3.19 Employee Benefit Plans.............................. 27
3.20 Employee Relations.................................. 28
3.21 Relationships with Affiliates....................... 28
3.22 Insurance........................................... 28
3.23 Brokerage........................................... 29
3.24 Hazardous Materials................................. 29
3.25 Registration Statement; Proxy Statement............. 29
3.26 Opinion of Financial Adviser........................ 29
3.27 Accounting Matters.................................. 29
3.28 Full Disclosure..................................... 29
SECTION 4 -- COVENANTS AND AGREEMENTS....................... 30
4.1 Conduct of NeoPath Business......................... 30
4.2 Conduct of AutoCyte Business........................ 31
4.3 Nasdaq Listing...................................... 32
4.4 Corporate Examinations and Investigations........... 32
4.5 Agreement not to Entertain Other Offers............. 32
4.6 Authorization from Others........................... 33
4.7 Consummation of Agreement........................... 33
4.8 Further Assurances.................................. 34
4.9 Joint Proxy Statement/Prospectus; Registration
Statement.............................................. 34
4.10 NeoPath Stockholder Meeting......................... 34
4.11 AutoCyte Stockholder Meeting........................ 34
4.12 Public Announcements and Confidentiality............ 35
4.13 NeoPath Affiliate Agreements........................ 35
4.14 AutoCyte Affiliate Agreements....................... 35
4.15 AutoCyte SEC Filings................................ 35
4.16 NeoPath SEC Filings................................. 35
4.17 Stock Options; Employee Stock Purchase Plan......... 36
4.18 AutoCyte Form S-8................................... 36
4.19 FIRPTA.............................................. 36
4.20 Notification of Certain Matters..................... 36
4.21 Tax-Free Reorganization............................. 37
4.22 Indemnification..................................... 37
</TABLE>

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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
4.23 Pooling of Interests................................ 37
4.24 Letters of AutoCyte's and NeoPath's Accountants..... 37
4.25 Employee Benefit Plans; Existing Agreement.......... 38
SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH
PARTY TO CONSUMMATE THE MERGER............................ 38
5.1 Stockholder Approvals............................... 38
5.2 Government Approvals................................ 38
5.3 Absence of Restraints............................... 38
5.4 Nasdaq Listing...................................... 38
5.5 Effectiveness of Registration Statement............. 39
5.6 Tax Opinions........................................ 39
5.7 Pooling Letters..................................... 39
SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF
AUTOCYTE TO CONSUMMATE THE MERGER......................... 39
6.1 Representations, Warranties and Covenants........... 39
6.2 NeoPath Affiliate Agreements........................ 39
6.3 Voting Agreement.................................... 39
6.4 Opinion of Counsel to NeoPath....................... 39
6.5 Merger Documents.................................... 39
6.6 Consents............................................ 39
6.7 Dissenting Shares................................... 39
6.8 Certificates........................................ 40
SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION OF
NEOPATH TO CONSUMMATE THE MERGER.......................... 40
7.1 Representations, Warranties and Covenants........... 40
7.2 AutoCyte Affiliate Agreements....................... 40
7.3 Voting Agreement.................................... 40
7.4 Consents............................................ 40
7.5 Opinion of Counsel to AutoCyte...................... 40
7.6 Certificates........................................ 40
SECTION 8 -- TERMINATION.................................... 40
8.1 Termination......................................... 40
8.2 Notice of Termination; Effect of Termination........ 42
8.3 Fees and Expenses................................... 42
SECTION 9 -- MISCELLANEOUS.................................. 44
9.1 Notices............................................. 44
9.2 Amendment........................................... 45
9.3 Waiver.............................................. 45
9.4 Entire Agreement.................................... 45
9.5 Governing Law....................................... 45
9.6 Binding Effect; No Assignment....................... 45
9.7 Variations in Pronouns.............................. 45
9.8 Counterparts........................................ 45
9.9 Exhibits and Disclosure Schedules................... 45
</TABLE>

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INDEX OF SCHEDULES AND EXHIBITS

Schedule 1 Officers of AutoCyte Immediately after the Effective Time.

Schedule 2 Board of Directors of AutoCyte Immediately After the Effective Time

AutoCyte Disclosure Schedule

Exhibit A -- Form of NeoPath Voting Agreement

Exhibit B -- Form of AutoCyte Voting Agreement

Exhibit C -- Form of NeoPath Affiliate Agreement

Exhibit D -- Form of AutoCyte Affiliate Agreement

Exhibit E -- Form of Opinion of Perkins Coie LLP

Exhibit F -- Form of Opinion of Palmer & Dodge LLP

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER dated as of June 4, 1999 (this
"Agreement") is among AutoCyte, Inc. ("AutoCyte"), a Delaware corporation,
Trilogy Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of AutoCyte ("Merger Sub") and NeoPath, Inc. ("NeoPath"), a
Washington corporation. The parties wish to effect the combination of NeoPath
and AutoCyte through a merger of Merger Sub into NeoPath on the terms and
conditions hereof. This Agreement is intended to be a "plan of reorganization"
within the meaning of sec.368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").

RECITALS

A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law (the "DGCL") and the
Washington Business Corporation Act (the "WBCA"), AutoCyte, Merger Sub and
NeoPath will enter into a business combination transaction pursuant to which
Merger Sub will merge with and into NeoPath (the "Merger").

B. The Board of Directors of AutoCyte (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
AutoCyte and fair to, and in the best interests of, AutoCyte and its
stockholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement, and (iii) has recommended approval
of this Agreement by the stockholders of AutoCyte.

C. The Board of Directors of NeoPath (i) has determined that the merger is
consistent with and in furtherance of the long-term business strategy of NeoPath
and fair to, and in the best interest of, NeoPath and its stockholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has recommended the approval of this Agreement by the
stockholders of NeoPath.

D. Concurrently with the execution of this Agreement, and as a condition
and inducement to AutoCyte's willingness to enter into this Agreement, certain
affiliates of NeoPath shall each enter into a Voting Agreement in the form
attached hereto as Exhibit A (the "NeoPath Voting Agreements").

E. Concurrently with the execution of this Agreement, and as a condition
and inducement to NeoPath's willingness to enter into this Agreement, certain
affiliates of AutoCyte shall each enter into a Voting Agreement in the form
attached hereto as Exhibit B (the "AutoCyte Voting Agreements").

F. AutoCyte, Merger Sub and NeoPath desire to make certain representations
and warranties and other agreements in connection with the Merger.

G. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning on Section 368 of the Code.

Accordingly, in consideration of the mutual representations, warranties and
covenants contained herein, the parties hereto agree as follows:

SECTION 1 -- THE MERGER

1.1 The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the DGCL and the WBCA, Merger Sub shall be merged with and
into NeoPath. The Merger shall occur at the Effective Time (as defined herein).
Following the Merger, NeoPath shall continue as the surviving corporation (the
"Surviving Corporation") and the separate corporate existence of Merger Sub
shall cease.

1.2 Effective Time. As soon as practicable after satisfaction or waiver of
all conditions to the Merger, the parties shall cause merger documents to be
filed in accordance with Section 23B.11.070 of the WBCA and a Certificate of
Merger to be filed in accordance with Section 252 of the DGCL (the Washington
merger documents and the Certificate of Merger are referred to collectively
herein as the

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"Merger Documents") and shall take all such further actions as may be required
by law to make the Merger effective. The Merger shall be effective at such time
as the Merger Documents are filed, as appropriate, with the Secretary of State
of the State of Washington in accordance with the WBCA and with the Secretary of
State of the State of Delaware in accordance with the DGCL or at such later time
as is specified in such documents (the "Effective Time"). Immediately prior to
the filing of the Merger Documents, a closing (the "Closing") will be held at
the offices of Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts (or
such other place as the parties may agree) for the purpose of confirming
satisfaction or waiver of all conditions to the Merger. Subject to satisfaction
or waiver of each of the conditions specified in Sections 5, 6 and 7 hereof, the
Closing shall take place within three business days after the last to occur of:

(a) the day the Merger is approved by the stockholders of NeoPath
pursuant to Section 4.10; or

(b) the day the issuance of the AutoCyte Common Stock (as defined
below) is approved by the stockholders of AutoCyte pursuant to Section
4.11;

or on such other date as the parties may agree, but not later than November 30,
1999. The date on which the Closing occurs is referred to herein as the "Closing
Date".

1.3 Effects of the Merger. The Merger shall have the effects set forth in
Section 23B.11.060 of the WBCA and Sections 259, 260 and 261 of the DGCL.

1.4 Certificate of Incorporation and Bylaws. The Articles of Incorporation
(the "Articles of Incorporation") and Bylaws (the "Bylaws") of NeoPath, in each
case as in effect immediately prior to the Effective Time, shall be the Articles
of Incorporation and Bylaws of the Surviving Corporation immediately after the
Effective Time, until duly amended in accordance with applicable law and such
Articles of Incorporation.

1.5 Officers and Directors.

(a) Officers. Immediately prior to the Effective Time, the persons listed
on Schedule 1 attached hereto shall be the officers of AutoCyte and such persons
shall be the initial officers of the Surviving Corporation, each person to hold
the office set forth opposite each such person's name in accordance with the
Certificate of Incorporation and Bylaws of AutoCyte and the Articles of
Incorporation and Bylaws of the Surviving Corporation, respectively.

(b) Directors. Prior to the Effective Time, AutoCyte shall (i) increase
the number of the members of the Board of Directors of AutoCyte to seven (7) and
(ii) take such action as may be necessary to ensure that the Board of Directors
of AutoCyte, immediately after the Effective Time, is comprised of the persons
listed on Schedule 2 attached hereto. The initial directors of the Surviving
Corporation shall be the persons listed on Schedule 2.

1.6 Effect on Capital Stock.

(a) Conversion of NeoPath Common Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of AutoCyte or NeoPath:

(i) each share of Common Stock, $.01 par value, of NeoPath (the
"NeoPath Common Stock") issued and outstanding immediately prior to the
Effective Time (other than any shares of NeoPath Common Stock to be
cancelled pursuant to Section 1.6(a)(iii) and other than Dissenting Shares
(as defined in Section 1.8)) will be cancelled and extinguished and
automatically be converted (subject to Section 1.6(b) and (c)) into the
right to receive 0.7903 (the "Exchange Ratio") shares of Common Stock, $.01
par value, of AutoCyte (the "AutoCyte Common Stock") upon surrender of the
certificate representing such share of NeoPath Common Stock in the manner
provided in Section 1.9 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the
manner provided in Section 1.10);

(ii) subject to and in accordance with Section 4.17, all options and
warrants to purchase NeoPath Stock outstanding immediately prior to the
Effective Time, shall be exchanged for options of
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AutoCyte exercisable for that number of shares of AutoCyte Common Stock
which such option or warrant holder would have been entitled to receive if
the underlying NeoPath Common Stock had converted in the Merger, at an
exercise price per share equal to the aggregate exercise price of the
NeoPath option or warrant exchanged divided by the number of shares of
AutoCyte Common Stock subject to the new option or warrant, and otherwise
having the same terms and conditions as the NeoPath option or warrant and
otherwise;

(iii) all shares of NeoPath Common Stock held at the Effective Time by
NeoPath as treasury stock, by AutoCyte or by a subsidiary of either NeoPath
or AutoCyte shall be canceled and no payment shall be made with respect
thereto; and

(iv) all Dissenting Shares shall be dealt with in accordance with
Section 1.8;

(b) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse stock split, stock dividend
(including any dividend or distribution of securities convertible into AutoCyte
Common Stock or NeoPath Common Stock), recapitalization or other like change
without receipt of consideration with respect to AutoCyte Common Stock or
NeoPath Common Stock occurring on or after the date hereof and prior to the
Effective Time. In addition, during the period from the date of this Agreement
and continuing until the earlier of the termination of the Agreement or the
Effective Time, AutoCyte shall not, without the prior written consent of
NeoPath, declare or pay any dividend or distribution on the AutoCyte Common
Stock (other than ordinary cash dividends) unless prior thereto either (i)
AutoCyte shall have provided that holders of NeoPath Common Stock, upon the
Effective Time, shall receive such dividend or distribution to the same extent
they would have if their shares of NeoPath Common Stock had been converted to
AutoCyte Common Stock immediately prior to the record date of any such dividend
or distribution or (ii) AutoCyte and NeoPath shall mutually have agreed upon an
adjustment of the Exchange Ratio to fully reflect the effect of any such
dividend or distribution.

(c) Fractional Shares. No fraction of a share of AutoCyte Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of NeoPath Common Stock who would otherwise be entitled to a fraction of
a share of AutoCyte Common Stock (after aggregating all fractional shares of
AutoCyte Common Stock to be received by such holder) shall receive from AutoCyte
an amount of cash (rounded to the nearest whole cent) equal to the product of
(i) such fraction, multiplied by (ii) the average closing price of a share of
AutoCyte Common Stock for the ten most recent days that AutoCyte Common Stock
has traded ending on the trading day immediately prior to the Effective Time, as
reported on the Nasdaq National Market.

1.7 Closing of NeoPath Transfer Books. At the Effective Time, the stock
transfer books of NeoPath shall be closed and no transfer of NeoPath Common
Stock shall thereafter be made. If, after the Effective Time, certificates
representing shares of NeoPath Common Stock are presented to the Exchange Agent
(as defined in Section 1.9), they shall be canceled and exchanged for
certificates representing AutoCyte Common Stock as provided in this Section 1.

1.8 NeoPath Dissenting Shares. Shares of NeoPath Common Stock held by a
stockholder who has properly exercised appraisal rights with respect thereto in
accordance with Section 23B.13.020 of the WBCA are referred to herein as
"Dissenting Shares". Shares of NeoPath Common Stock that constitute Dissenting
Shares shall not be converted into shares of AutoCyte Common Stock and shares of
AutoCyte Common Stock shall not be issued pursuant to Section 1.6(a) in exchange
therefor. From and after the Effective Time, a stockholder who has properly
exercised such appraisal rights shall no longer retain any rights of a
stockholder of NeoPath or the Surviving Corporation, except those provided under
the WBCA. NeoPath shall give AutoCyte (i) prompt notice of any written notices
and demands under Section 23B.13.210 of the WBCA with respect to any shares of
capital stock of NeoPath, any withdrawal of any such demands and any other
instruments served pursuant to the WBCA and (ii) the right to participate in all
negotiations and proceedings with respect to any demands under Section
23B.13.020 of the WBCA with respect to any shares of capital stock of NeoPath.
NeoPath shall cooperate with

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AutoCyte concerning, and shall not, except with the prior written consent of
AutoCyte, voluntarily make any payment with respect to, or offer to settle or
settle, any such demands.

1.9 Issuance of AutoCyte Certificates.

(a) Exchange Agent. Prior to the Effective Time, AutoCyte shall authorize
one or more persons to act as Exchange Agent hereunder (the "Exchange Agent")
and shall deposit with or for the account of the Exchange Agent certificates
representing the number of shares of AutoCyte Common Stock issuable pursuant to
Section 1.6 and cash in lieu of fractional shares of AutoCyte Common Stock.

(b) Exchange Procedures. As soon as practicable after the Effective Time,
(i) NeoPath shall deliver to AutoCyte a list of all record holders of NeoPath
Common Stock immediately prior to the Effective Time (the "Record Holders"),
setting forth each stockholder's name, address and number of shares of NeoPath
Common Stock held prior to the Effective Time and such other information as may
be reasonably requested by the Exchange Agent, certified by the Chief Executive
Officer of NeoPath (the "Stockholder List") and (ii) the Exchange Agent shall be
instructed to mail to each Record Holder a form of letter of transmittal which
shall specify instructions for use in effecting the surrender of NeoPath Common
Stock certificates in exchange for AutoCyte Common Stock certificates and cash
in lieu of fractional shares. Upon the Exchange Agent's receipt of the letter of
transmittal and any certificate held by a stockholder, each stockholder shall be
entitled to receive a certificate representing that number of whole shares of
AutoCyte Common Stock into which the shares of NeoPath Common Stock as set forth
on the Stockholder List shall have been converted pursuant to the provisions of
this Agreement. The shares of NeoPath Common Stock outstanding immediately prior
to the Effective Time (and any certificates representing such shares) shall be
deemed canceled as of the Effective Time. AutoCyte Common Stock into which
NeoPath Common Stock shall be converted in the Merger shall be deemed to have
been issued at the Effective Time. If any AutoCyte Common Stock certificates are
to be issued in a name other than that in which the NeoPath Common Stock was
registered immediately prior to the Effective Time, it shall be a condition of
such issuance that the person requesting such issuance shall deliver to the
Exchange Agent all documents necessary to evidence and effect such transfer and
shall pay to the Exchange Agent any transfer or other taxes required by reason
of the issuance of certificates for such shares of AutoCyte Common Stock in a
name other than that of the registered holder of the certificate or surrendered
or establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Neither AutoCyte nor NeoPath shall be liable to any
stockholder for shares of stock or any cash in lieu of fractional interests
delivered to a public official pursuant to applicable escheat or abandoned
property laws.

(c) Distributions of NeoPath Common Stock. No dividends or other
distributions declared or made after the date of this Agreement with respect to
AutoCyte Common Stock with a record date after the Effective Time will be paid
to the holder of any unsurrendered certificate of NeoPath Common Stock with
respect to the shares of AutoCyte Common Stock represented thereby until the
holder of record of such certificate shall surrender such certificate. Subject
to applicable law, following surrender of any such certificate, there shall be
paid to the record holder thereof certificates representing whole shares of
AutoCyte Common Stock issued in exchange therefor, without interest, along with
the amount of dividends or other distributions with a record date after the
Effective Time payable with respect to such whole shares of AutoCyte Common
Stock and cash in lieu of any fractional shares in accordance with Section
1.6(c).

1.10 Lost, Stolen or Destroyed Certificates. In the event any NeoPath
Common Stock certificates shall have been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
certificates, upon the making of an affidavit of that fact by the holder
thereof, such shares of AutoCyte Common Stock, cash for fractional shares, if
any, as may be required pursuant to Section 1.6(c) and any dividends or
distributions payable pursuant to Section 1.9(c); provided, however, that
AutoCyte may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against AutoCyte or the Exchange Agent with respect to
the certificates alleged to have been lost, stolen or destroyed.

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1.11 No Further Ownership Rights in NeoPath Common Stock. All shares of
AutoCyte Common Stock issued upon the surrender for exchange of shares of
NeoPath Common Stock in accordance with the terms hereof (including any cash
paid in respect thereof pursuant to Sections 1.6(c) and 1.9) shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares of
NeoPath Common Stock, and there shall be no further registration of transfers on
the records of AutoCyte of shares of NeoPath Common Stock that were outstanding
immediately prior to the Effective Time.

1.12 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368 of the Code. It is also intended by the parties hereto that the Merger shall
be treated as a "pooling of interests" for accounting purposes.

SECTION 2 -- REPRESENTATIONS AND WARRANTIES OF NEOPATH

Except as set forth on the disclosure schedule (the "NeoPath Disclosure
Schedule") delivered to AutoCyte on the date hereof (regardless of whether the
NeoPath Disclosure Schedule is referenced in any particular subsection of this
Section 2), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer, NeoPath represents and
warrants to AutoCyte as set forth below:

2.1 Organization and Qualification. NeoPath is a corporation duly
organized, validly existing and in good standing under the laws of the state or
other jurisdiction of its incorporation and has full corporate power and
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being and as heretofore conducted. NeoPath is
qualified or is otherwise authorized to transact business as a foreign
corporation in each jurisdiction (in the United States and outside of the United
States) in which the failure to so qualify would have a NeoPath Material Adverse
Effect, all of which jurisdictions are identified in Section 2.1 of the NeoPath
Disclosure Schedule. A "Material Adverse Effect" on NeoPath or AutoCyte, as the
case may be, means (unless otherwise specified) any condition or event that (i)
materially adversely affects the assets, business, financial condition,
operations or prospects of such party, other than any condition or event (A)
relating to the economy in general, (B) relating to the industries in which such
party operates in general, (C) arising out of or resulting from actions
contemplated by the parties in connection with, or which is attributable to, the
announcement of this Agreement and the transactions contemplated hereby
(including loss of personnel, customers or suppliers or the delay or
cancellation of orders for products) or (D) litigation brought or threatened
against such party or any member of their respective Boards of Directors in
respect of this Agreement, (ii) materially impairs the ability of such party to
perform its obligations under this Agreement or (iii) prevents or materially
delays the consummation of the transactions contemplated under this Agreement.

2.2 Capitalization.

(a) Outstanding Capital Stock. NeoPath's authorized capital stock consists
of 40,000,000 shares of Common Stock, $.01 par value per share, of which
17,414,230 shares are issued and outstanding as of June 4, 1999, and 10,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares are
issued and outstanding. Except as disclosed in NeoPath's proxy statement for its
annual meeting of stockholders held on May 20, 1999, NeoPath is not aware of any
record or beneficial holder of more than five percent (5%) of the outstanding
shares of NeoPath Common Stock. The outstanding shares of NeoPath Common Stock
are duly authorized, validly issued, fully paid and nonassessable and have been
issued in compliance with all charter documents of NeoPath and all applicable
federal and state laws. Except as set forth in this Section 2.2(a), no other
capital stock of NeoPath is authorized or outstanding.

(b) Options or Other Rights. Section 2.2(b) of the NeoPath Disclosure
Schedule lists each outstanding option to acquire shares of NeoPath Common Stock
under the NeoPath, Inc. 1989 Stock Option Plan (Amended and Restated on February
26, 1998), the NeoPath, Inc. Stock Option Plan for Nonemployee Directors
(Amended and Restated on February 27, 1997 or the NeoPath, Inc. 1999 Stock
Incentive Compensation Plan (together, the "NeoPath Stock Option Plans") as of
the date hereof, the name of the holder of such option, the number of shares
subject to such option, the exercise price of such

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option, the number of shares as to which such option will have vested at such
date and whether the exercisability of such option will be accelerated in any
way by the transactions contemplated by this Agreement or for any other reason,
and indicates the extent of acceleration, if any. Except as set forth in the
NeoPath Disclosure Schedule, (i) no subscription, warrant, option, preemptive
right, convertible security or other right (contingent or otherwise) to purchase
or acquire any shares of capital stock or other security of NeoPath issued by
NeoPath is authorized or outstanding, (ii) there is no commitment or offer by
NeoPath to issue or provide any such subscription, warrant, option, preemptive
right, convertible security or other right or to issue or distribute to holders
of any shares of its capital stock any evidences of indebtedness or assets of
NeoPath, (iii) NeoPath has no obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof, (iv) there are no restrictions on the transfer of NeoPath's capital
stock other than those arising from securities laws, and (v) there are no voting
trusts, proxies or other agreements, instruments or understandings with respect
to outstanding shares of NeoPath's capital stock to which NeoPath is a party.

2.3 Authority to Execute and Perform Agreements. NeoPath has the requisite
corporate power and authority to execute and deliver this Agreement and each
agreement, document and instrument contemplated by this Agreement to which it is
a party and, subject to the requirement to obtain stockholder approval under the
WBCA, to consummate the transactions contemplated hereby and thereby and to
perform fully its respective obligations hereunder and thereunder. The
execution, delivery and performance of this Agreement and each such other
agreement, document and instrument to which it is a party and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of NeoPath, subject, in the case of
the Merger, to the requirement to obtain stockholder approval under the WBCA.
This Agreement and each agreement, document and instrument executed and
delivered by NeoPath pursuant to this Agreement constitutes, or when executed
and delivered will constitute, valid and binding obligations of NeoPath,
enforceable in accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity.

2.4 Subsidiaries and Other Affiliates. NeoPath does not have any
subsidiary or directly or indirectly own or have any investment in any of the
capital stock of, or any other interest in, any other person or entity

2.5 Charter and Bylaws; Books and Records. NeoPath has heretofore
delivered or made available to AutoCyte true and complete copies of the Articles
of Incorporation (certified by the Secretary of State or comparable authority of
its jurisdiction of incorporation) and Bylaws as in effect on the date hereof,
and corporate minute books. NeoPath is not in default in the performance,
observation or fulfillment of either its charter or Bylaws. The minute books of
NeoPath contain true and complete records of all meetings and consents in lieu
of meetings of the Board of Directors and of the stockholders prior to the date
hereof, and accurately reflect all transactions referred to in such minutes and
consents in lieu of meetings.

2.6 SEC Reports. NeoPath has previously delivered to AutoCyte its (i)
Annual Report on Form 10-K for the years ended December 31, 1998 (the "NeoPath
10-K") and 1997, as filed with the Securities and Exchange Commission (the
"SEC"), (ii) the proxy statement relating to NeoPath's annual meeting of
stockholders held on May 20, 1999 and (iii) all other reports filed by NeoPath
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), since January 1, 1998 (the "NeoPath SEC Documents"). As of
their respective dates, the NeoPath SEC Documents complied as to form in all
material respects with applicable SEC requirements and, except to the extent
that information contained in any NeoPath SEC Document has been revised and
superseded by a later filed NeoPath SEC Document, did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. NeoPath has timely
filed with the SEC all reports required to be filed under Sections 13, 14 or
15(d) of the Exchange Act since January 1, 1998.

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2.7 Financial Statements. The financial statements contained in the
NeoPath 10-K and in NeoPath's quarterly report on Form 10-Q for the quarter
ended March 31, 1999 (the "NeoPath 10-Q") have been prepared from, and are in
accordance with, the books and records of NeoPath and fairly present the
financial condition, results of operations and cash flows of NeoPath as of the
dates and for the periods presented therein, all in accordance with generally
accepted accounting principles applied on a consistent basis, except as
otherwise indicated therein and subject (in the case of the unaudited financial
statements included in the NeoPath 10-Q) to normal period-end and audit
adjustments and footnote disclosures, which in the aggregate are not material.

2.8 Absence of Undisclosed Liabilities. Except as set forth in the NeoPath
Disclosure Schedule, at December 31, 1998, NeoPath had no material liabilities
of any nature, whether accrued, absolute, contingent or otherwise (including
without limitation, liabilities as guarantor or otherwise with respect to
obligations of others or liabilities for taxes due or then accrued or to become
due), required to be reflected or disclosed in the balance sheet dated December
31, 1998 (or the notes thereto) included in the NeoPath 10-K (the "NeoPath
Balance Sheet") that were not adequately reflected or reserved against on such
balance sheet. Except as set forth in the NeoPath Disclosure Schedule, NeoPath
has no such liabilities, except as and to the extent (i) adequately reflected
and reserved against in the NeoPath Balance Sheet, (ii) adequately reflected and
reserved against in the NeoPath unaudited balance sheet dated March 31, 1999
included in the NeoPath 10-Q (the "NeoPath Interim Balance Sheet"), or (iii)
incurred since March 31, 1999 in the ordinary course of business.

2.9 No Material Adverse Change. Except as set forth in the NeoPath
Disclosure Schedule, since March 31, 1999, there has not been:

(a) any event or occurrence that could reasonably be expected to have
a NeoPath Material Adverse Effect;

(b) any material change in the method of operating the business of
NeoPath, in the manner of keeping the books, accounts or records of, or in
any accounting method or practice of NeoPath;

(c) any sale, lease, mortgage, pledge, encumber, abandonment or
disposition of, or agreement to sell, lease, mortgage, pledge, encumber,
abandon or dispose of, any material assets or properties of NeoPath, other
than in the usual and ordinary course of business;

(d) any material transaction, commitment, contract or agreement
entered into by NeoPath, or any relinquishment or abandonment by NeoPath of
any material contract or right, or any modification, waiver, amendment,
release, recision, or termination of any material term, condition or
provision of any contract to which NeoPath is a party and is or should be
set forth on the NeoPath Disclosure Schedule in accordance with Section
2.14 (other than any satisfaction by performance in accordance with the
terms thereof), other than in the usual and ordinary course of business;

(e) any adverse relationships or conditions with employees, suppliers,
lenders, customers or governmental agencies that could reasonably be
anticipated to have a NeoPath Material Adverse Effect;

(f) any acquisition by NeoPath (other than property or interests
therein acquired in the ordinary course of its business) of all or any part
of the assets, properties, capital stock or business of any other person or
entity;

(g) any redemption or other acquisition by NeoPath of any of its
capital stock or any declaration, setting aside or payment of any dividend
or distribution of any kind with respect to shares of its capital stock;

(h) any loan or advance by NeoPath to any stockholder, officer,
director or consultant, or any other loan or advance other than in the
ordinary course of business;

(i) any cancellation, nonrenewal, material reduction in limits or
coverage or material premium increase for all insurance policies maintained
by NeoPath;

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(j) except as set forth in the NeoPath Disclosure Schedule, any new
employment or consulting agreement, any increase in compensation, bonus or
other benefits payable or to become payable by NeoPath to any director,
officer or employee, other than regularly scheduled increases consistent
with past practice in the ordinary course of business, or any new grant of
severance or termination rights, or increase in rights or benefits payable
under existing severance or termination policies or agreements, to any
director, officer or employee of NeoPath; or

(k) commitment, understanding or agreement of NeoPath or any officer
or employee thereof to do any of the things described in the preceding
clauses (a) through (i) (other than this Agreement).

2.10 Tax Matters.

(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or, collectively, "Taxes", means any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities in the nature of a tax including taxes based
upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll, recapture, employment, excise and property taxes, together with
all interest, penalties and additions imposed with respect to such amounts
and any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes
of a predecessor entity.

(b) Tax Returns and Audits. Except as set forth in the NeoPath
Disclosure Schedule:

(i) NeoPath has prepared and filed (or received an appropriate
extension of time to file) all federal, state, local and foreign
returns, forms, estimates, information statements, reports and other
documents ("Returns") required to be filed relating to any and all Taxes
concerning or attributable to NeoPath or its operations and such Returns
are true and correct in all material respects and have been completed in
all material respects in accordance with applicable law.

(ii) NeoPath (A) has paid all Taxes set forth and shown as due on
its Returns and (B) has withheld and paid (or will pay at the time
required) all Taxes required to be withheld, including with respect to
its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld.

(iii) NeoPath is not delinquent in any material respect in the
payment of any Tax nor is there any material Tax deficiency outstanding,
proposed or assessed against NeoPath, nor has NeoPath executed any
waiver of any statute of limitations on, or any consent extending, the
period for the assessment or collection of any Tax.

(iv) No audit or other examination of any Return of NeoPath is
currently in progress, nor has NeoPath been notified of any request for
such an audit or other examination.

(v) NeoPath did not have, as of March 31, 1999, any liabilities,
whether asserted or unasserted, contingent or otherwise, for unpaid
federal, state, local and foreign Taxes which have not been accrued or
reserved against in accordance with GAAP on the NeoPath Interim Balance
Sheet, and NeoPath has not incurred any such liabilities since such date
except in the ordinary course of business and consistent with past
practices.

(vi) There are (and as of immediately following the Effective Date
there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") of a material nature on the
assets of NeoPath relating to or attributable to Taxes, except for Liens
for Taxes not yet due and payable or that are being contested in good
faith by appropriate proceedings.

(vii) NeoPath has not received written or oral notice of any claim
relating or attributable to Taxes that, if adversely determined, would
result in any Lien on the assets of NeoPath.

(viii) None of NeoPath's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
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(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee
of NeoPath that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Section
280G of the Code or the limitations in Section 162(m) of the Code.

(x) NeoPath has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by NeoPath.

(xi) NeoPath is not a party to any tax sharing or allocation
agreements, arrangements or practices nor does NeoPath owe any amount
under any such agreement, arrangement or practice.

(xii) NeoPath is not nor has been at any time during the period
specified in Section 897(c)(1)(A)(ii) of the Code, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.

(xiii) NeoPath has not agreed to, or is required to, make any
adjustments under Section 481(c) of the Code by reason of a change in
accounting method or otherwise.

2.11 Compliance with Laws.

(a) NeoPath is not in violation in any material respect of any order,
judgment, injunction, award or decree, or any federal, state, local or
foreign law, ordinance or regulation or any other requirement of any
governmental or regulatory body, court or arbitrator, and is in compliance
in all material respects with all of the foregoing that are applicable to
it, its business or its assets. NeoPath has not received notice of, and
there has not been any citation, fine or penalty imposed or asserted
against any of them for, any such violation or alleged violation that has
not been favorably and fully resolved.

(b) NeoPath holds all licenses, permits, certificates, franchises,
orders or approvals of any federal, state, local or foreign governmental or
regulatory body, that are material to the conduct of NeoPath's business and
the uses of its assets necessary to operate its business as presently
conducted, other than those (i) which are ministerial in nature and which
NeoPath has no reason to believe would not be issued in due course and (ii)
which, the failure of NeoPath to possess, would not result in a NeoPath
Material Adverse Effect (the "NeoPath Permits"). The NeoPath Disclosure
Schedule contains a true and complete list of all such NeoPath Permits as
of the date hereof. Such NeoPath Permits are in full force and effect and
the validity and effectiveness of such NeoPath Permits will not be affected
by the transactions contemplated hereby. No violations are or have been
recorded with any governmental or regulatory body in respect of any NeoPath
Permit, no proceeding is pending or, to the best knowledge of NeoPath,
threatened to revoke or limit any NeoPath Permit, and NeoPath knows of no
grounds for any such revocation or limitation.

2.12 Consents; No Breach. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by NeoPath are set forth in Section 2.12 of the
NeoPath Disclosure Schedule, other than those which the failure to obtain would
reasonably be expected to have a NeoPath Material Adverse Effect. Subject to any
prior approval requirements set forth in Section 2.12 of the NeoPath Disclosure
Schedule, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not (i) violate any
provision of the Articles of Incorporation or Bylaws of NeoPath; (ii) violate,
conflict with or result in the breach of any of the terms or conditions of,
result in a material modification of, or otherwise give any other contracting
party the right to terminate, or constitute (or with notice or lapse of time or
both constitute) a default under, any material instrument, contract or other
agreement to which NeoPath is a party or to which NeoPath or any of their assets
or properties is bound or subject; (iii) violate any statute, law or regulation
of any jurisdiction or any order, judgment, injunction, award or decree of any
court, arbitrator or governmental or regulatory body applicable to or binding
upon NeoPath or any of their securities, properties, assets or business; (iv)
violate any material Permit; (v) require any filing with,
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notice to, or approval or consent of any foreign, federal, state, local or other
governmental or regulatory body or any other person or entity; (vi) give rise to
any obligation to make any material payment; or (vii) result in the creation of
any material lien or encumbrance on the assets or properties of NeoPath,
excluding from the foregoing clauses (ii), (iii), (iv) and (v) any exceptions to
the foregoing that, in the aggregate, would not reasonably be expected to have a
NeoPath Material Adverse and the following: (y) the filing of the Merger
Documents with the Secretary of State of the State of Washington and the
Secretary of State of the State of Delaware and (z) the filing with the SEC of
(A) the Proxy Statement (as defined in Section 4.9 below) and (B) such reports
under Section 13(a), 13(d), 15(d) or 16(a) of the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
hereby and thereby.

2.13 Actions and Proceedings. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal against or involving NeoPath or any of its securities,
assets, or properties. Except as set forth in the NeoPath Disclosure Schedule,
there are no actions, suits or claims or legal, judicial, administrative or
arbitral proceedings or investigations (whether or not the defense thereof or
liabilities in respect thereof are covered by insurance) pending or, to the best
knowledge of NeoPath, threatened against or involving NeoPath or any of its
securities, assets or properties, that if determined adverse to NeoPath, would
have a NeoPath Material Adverse Effect.

2.14 Contracts and Other Agreements. Section 2.14 of the NeoPath
Disclosure Schedule sets forth a correct and complete list all of the following
currently effective contracts:

(a) written contracts and other agreements with or for the benefit of
any current or former officer, director, stockholder or employee of NeoPath
involving more than $25,000 (provided, in the case of a loan by NeoPath to
any such person, the NeoPath Disclosure Schedule shall list all such loan
arrangements, whether or not in writing, involving at least $1,000), and
contracts and other agreements for the payment of fees or other
consideration to any entity in which NeoPath has an interest;

(b) contracts and other agreements with any labor union or association
representing any employee of NeoPath or otherwise providing for any form of
collective bargaining;

(c) contracts and other agreements for the purchase or sale of
materials, supplies, equipment, merchandise or services that contain an
escalation, renegotiation or redetermination clause or that obligate
NeoPath to purchase all or substantially all of its requirements of a
particular product from a supplier, or for periodic minimum purchases of a
particular product from a supplier;

(d) contracts and other agreements for the sale of any of the assets
or properties of NeoPath other than in the ordinary course of business or
for the grant to any person of any options, rights of first refusal, or
preferential or similar rights to purchase any of such assets or
properties;

(e) partnership or joint venture agreements;

(f) contracts with agents or foreign representatives regarding the
sales or marketing of the services or products of NeoPath;

(g) contracts or other agreements under which NeoPath agrees to act as
surety or guarantor for or to indemnify any party (other than required
indemnification provisions in customer contracts) or to share the tax
liability of any party;

(h) contracts, options, outstanding purchase orders and other
agreements for the purchase of any material asset, tangible or intangible;

(i) contracts and other agreements with customers, suppliers or other
parties for the sharing of fees, the rebating of charges or other similar
arrangements other than such contracts entered into in the normal course of
business;

(j) contracts and other agreements containing obligations or
liabilities of any kind to holders of the securities of NeoPath as such
(including, without limitation, an obligation to register any of such
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securities under any federal or state securities laws) and contracts
obligating NeoPath to issue or repurchase any securities;

(k) contracts and other agreements containing covenants of NeoPath not
to compete in any line of business or with any person or entity or
covenants of any other person or entity not to compete with NeoPath in any
line of business;

(l) contracts and other agreements relating to the acquisition by
NeoPath of any operating business or the capital stock of any other person
or entity;

(m) contracts and other agreements requiring the payment to any party
of a brokerage or sales commission or a finder's or referral fee;

(n) contracts, indentures, mortgages, promissory notes, debentures
loan agreements, guaranties, security agreements, pledge agreements, and
other agreements and instruments relating to the borrowing or lending of
money or securing any such liability in an amount greater than $50,000;

(o) any agreement or series of related agreements requiring aggregate
payments by or to NeoPath of more than $50,000;

(p) contracts under which NeoPath will acquire or has acquired
ownership of, or license to, intangible property, including software other
than commercially available end-user licenses; and

(q) any other contract or other agreement whether or not made in the
ordinary course of business, the absence of which would have a NeoPath
Material Adverse Effect.

There have been delivered or made available to AutoCyte true and complete
copies of all of the contracts and other agreements (and all amendments, waivers
or other modifications thereto) set forth in Section 2.14 of the NeoPath
Disclosure Schedule. All of such contracts and other agreements are valid,
subsisting, in full force and effect, binding upon NeoPath (as the case may be),
and to the best knowledge of NeoPath, binding upon the other parties thereto in
accordance with their terms. Other than defaults which would not, either singly
or in the aggregate, have a NeoPath Material Adverse Effect, NeoPath is not in
default under any of such scheduled contracts, nor, to the best knowledge of
NeoPath, is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist that constitutes or with notice or
lapse of time or both would constitute a default thereunder.

2.15 Real Property; Leases. NeoPath does not own any real property or any
buildings or other structures or has any options or any contractual obligations
to purchase or acquire any interest in real property. Section 2.15 of the
NeoPath Disclosure Schedule sets forth a correct and complete list of all leases
of real property to which NeoPath is a party (collectively, the "NeoPath
Leases"). True and complete copies of the NeoPath Leases and all amendments,
modifications and supplemental agreements thereto have been delivered by NeoPath
to AutoCyte. The NeoPath Leases are in full force and effect and, to the best
knowledge of NeoPath, are binding and enforceable against each of the parties
thereto in accordance with their respective terms. To the best knowledge of
NeoPath, no party to any NeoPath Lease has given notice to any other party
thereto claiming the existence or occurrence of a breach or default thereunder
and there has not occurred any event or circumstances which constitutes, or with
the passage of time or the giving of notice or both would constitute, a breach
or default thereunder, other than defaults which would not, either singly or in
the aggregate, have a NeoPath Material Adverse Effect.

2.16 Tangible Property. NeoPath has good and marketable title to, free and
clear of all encumbrances, or otherwise has the unrestricted right to use, each
item of equipment, furniture, leasehold improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible property material
to the business of NeoPath ("NeoPath Tangible Property"). All such NeoPath
Tangible Property is in good and sufficient operating condition and repair,
ordinary wear and tear excepted, and, to the best knowledge of NeoPath, NeoPath
has not received notice that any of the NeoPath Tangible Property is in
violation of any existing law or any building, zoning, health, safety or other
ordinance, code or regulation.

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2.17 Intellectual Property.

(a) NeoPath owns, or is licensed to use, or otherwise has the right to
use all patents, trademarks, service marks, trade names, trade secrets,
logos, franchises, and copyrights, and all applications for any of the
foregoing, and all technology, inventions, trade secrets, know-how,
computer software and processes that are material in the conduct of its
business as now conducted (collectively, the "NeoPath Proprietary Rights").
NeoPath has previously delivered to AutoCyte a list of all such patents and
registered copyrights and trademarks, and all applications therefor (the
"NeoPath Registered Rights"). All of the NeoPath Registered Rights owned by
NeoPath, and to the best knowledge of NeoPath, all NeoPath Registered
Rights licensed to NeoPath have been registered in, filed in or issued by
the United States Patent and Trademark Office, the United States Register
of Copyrights, or the corresponding offices of other jurisdictions as
identified in Section 2.17 of the NeoPath Disclosure Schedule, and have
been properly maintained and renewed in accordance with all applicable
provisions of law and administrative regulations in the United States and
in each such other jurisdiction.

(b) To the best knowledge of NeoPath, (i) the businesses of NeoPath as
currently conducted does not infringe upon the proprietary rights of
others, nor has NeoPath received any notice or claim from any third party
of such infringement by NeoPath, (ii) there is not any material unlicensed
infringement by any third party on, or any issued competing claim of right
to use or own any of, the NeoPath Proprietary Rights and (iii) none of the
activities of the employees of NeoPath on behalf of NeoPath violates any
agreements or arrangements that any such employees have with former
employers.

2.18 Title to Assets; Liens. NeoPath owns outright, leases or rents, and
has good title to all of its material assets and properties, including, without
limitation, all of the assets and properties reflected on the NeoPath Interim
Balance Sheet, free and clear of any encumbrance, except for (i) assets and
properties disposed of in the ordinary course of business and as disclosed on
the NeoPath Disclosure Schedule, (ii) encumbrances securing the claims of
materialmen, carriers, landlords and like persons, all of which are not yet due
and payable, (iii) liens for taxes not yet due and payable or for taxes being
contested in good faith by appropriate proceedings or (iv) encumbrances
reflected on the NeoPath Interim Balance Sheet.

2.19 Employee Benefit Plans. Section 2.19 of the NeoPath Disclosure
Schedule sets forth a correct and complete list of all pension, profit sharing,
retirement, deferred compensation, welfare, insurance, disability, bonus,
vacation pay, severance pay and similar plans, programs or arrangements,
including without limitation all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") with respect to which NeoPath is the "Plan Sponsor" within the meaning
of Section 3(16)(B) of ERISA, or in which NeoPath participates (the "NeoPath
Plans"). Each NeoPath Plan which is intended to be qualified under Section
401(a) or 501(c)(9) of the Internal Revenue Code of 1986, as amended (the
"Code"), has received a favorable determination letter from the Internal Revenue
Service that remains in effect. Each NeoPath Plan has been maintained, operated,
funded and administered in all material respects in accordance with the terms of
such NeoPath Plan and the provisions of any and all applicable statutes, orders
or governmental rules and regulations, including without limitation ERISA and
the Code. To the best knowledge of NeoPath, nothing has occurred or failed to
occur with respect to any NeoPath Plan which is intended to comply with Section
401(a) or 501(c)(9) of the Code that would adversely affect the qualified status
of such NeoPath Plan or result in any material liability on the part of NeoPath
including, without limitation, under Title I of ERISA or Section 4975 of the
Code (other than changes in applicable law for which the remedial amendment
period has not yet expired). All material reports, returns, notices and
documents required to be filed with respect to all NeoPath Plans, including
without limitation annual reports on Form 5500, have been timely filed, except
for any failures as could not reasonably be expected to result in a material
liability (either individually or in the aggregate) to NeoPath. All
contributions required by law or the terms of any NeoPath Plan have been made.
All claims for welfare benefits incurred by employees of NeoPath on or before
the Closing are or will be fully covered by third-party insurance policies or
programs. Neither NeoPath nor any of its ERISA Affiliates maintains or
contributes to, or has ever
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maintained or contributed to (or been obligated to contribute to), any
multiemployer plan as defined in Section 4001(a)(3) of ERISA, any employee
benefit plan that is subject to Section 412 of the Code or Section 302 of ERISA
or any employee benefit plan that is subject to Title IV of ERISA. Neither
NeoPath nor any NeoPath Plan provides or has any obligation to provide (or
contribute toward the cost of) health benefits with respect to any current or
former, officer, employee, agent, director or independent contractor of NeoPath
or any other entity beyond such individual's retirement or other termination of
service, other than as required by applicable law, including without limitation,
Section 4980B(f) of the Code and Sections 601 through 608 of ERISA. There are no
actions, suits or claims (other than routine claims for benefits) pending or, to
the best knowledge of NeoPath, threatened with respect to (or against the assets
of) any NeoPath Plan, nor, to the best knowledge of NeoPath, is there a
reasonable basis for any such action, suit or claim. No NeoPath Plan is
currently under investigation, audit or review, directly or indirectly, by the
IRS, the Department of Labor (the "DOL") or any other governmental entity or
agency, and, to the best knowledge of NeoPath, no such action is contemplated or
under consideration by the IRS, the DOL or any other governmental entity or
agency. Complete copies of the following documents with respect to each NeoPath
Plan (as applicable) have been delivered to AutoCyte: (i) each relevant NeoPath
Plan document, as currently in effect, and subsequent amendment thereto; (ii)
each trust agreement, group annuity contract, insurance policy or contract, as
currently in effect; (iii) each Form 5500 series annual report with each
required schedule and attachment for each of the three (3) most recent plan
years; (iv) the most recent IRS determination letter; and (v) the most recent
summary plan description and each summary of material modification thereto. An
"ERISA Affiliate" of NeoPath means any corporation, trade, business or other
entity (whether or not incorporated) that together with NeoPath would have been
deemed a "single employer" within the meaning of Section 414(b), (c), (m) or (o)
of the Code at any time within the five-year period ending on the Closing Date.

2.20 Employee Relations. NeoPath has approximately 150 full-time
equivalent employees and generally enjoys good employer-employee relations.
NeoPath's employees are not represented by any labor union. NeoPath is not
delinquent in payments to any of its employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees or consultants. Neither NeoPath, AutoCyte nor the Surviving
Corporation will by reason of the Merger or anything done prior to the Closing
be liable to any NeoPath employee for severance pay or any other payments (other
than accrued salary, vacation or sick pay in accordance with NeoPath's normal
policies) in the event any such employees are terminated. Each employee of
NeoPath has executed NeoPath's standard form of Confidential Information,
Inventions and Noncompetition Agreement. Correct and complete information as to
all current directors, officers, employees or consultants of NeoPath including,
in each case, name, current job title and annual rate of compensation has been
provided by NeoPath to AutoCyte.

2.21 Relationships with Affiliates. To the best knowledge of NeoPath, no
officer or director of NeoPath has directly or indirectly any interest in (i)
any property or assets of NeoPath (except as a stockholder of NeoPath), (ii) any
competitor or customer of NeoPath, (iii) any supplier or lender to NeoPath or
(iv) any party to any material contract or agreement with NeoPath.

2.22 Insurance. Section 2.22 of the NeoPath Disclosure Schedule sets forth
a correct and complete list of all policies or binders of fire, liability,
product liability, workmen's compensation, vehicular, directors' and officers'
and other insurance held by or on behalf of NeoPath specifying in each case the
type and scope of coverage, the amount of coverage, the premium, the insurer,
the expiration date and all claims made thereunder within the past three years.
Such policies and binders are in full force and effect, are reasonably believed
to be adequate for the businesses engaged in by NeoPath, are in conformity with
the requirements of all leases or other agreements to which NeoPath is a party
and are valid and enforceable in accordance with their terms. All premiums due
under such policies and binders have been paid, and NeoPath is not in default
with respect to any provision contained in any such policy or binder nor has
NeoPath failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. There are no outstanding unpaid claims under
any such policy or binder. NeoPath has not

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received notice of cancellation or non-renewal of, or any material amendment to,
or any material increase in deductibles or premiums under, any such policy or
binder. Correct and complete copies of certificates of insurance with respect to
all such policies and binders have been provided by NeoPath to AutoCyte.

2.23 Brokerage. Except as set forth in the NeoPath Disclosure Schedule, no
broker, finder, agent or similar intermediary has acted on behalf of NeoPath in
connection with this Agreement or the transactions contemplated hereby, and
there are no brokerage commissions, finders fees or similar fees or commissions
payable in connection therewith based on any agreement, arrangement or
understanding with, or any action taken by NeoPath.

2.24 Hazardous Materials. NeoPath has not generated, used or handled any
Hazardous Materials (as defined below), nor has NeoPath treated, stored or
disposed of any Hazardous Materials at any site owned or leased at any time by
NeoPath or shipped any Hazardous Materials for treatment, storage or disposal at
any other site or facility, except in compliance with all applicable laws. To
the best knowledge of NeoPath, no other person has generated, used, handled,
stored or disposed of any Hazardous Materials at any site owned or premises
leased by NeoPath at any time or at any site in which NeoPath presently holds a
mortgage or similar interest, nor has there been or is there threatened any
release of any Hazardous Materials on or at any such site or premises. NeoPath
does not presently operate or lease, nor has it operated or leased, any site on
which underground storage tanks are or were located and which tanks are the
responsibility of NeoPath to operate. To the best knowledge of NeoPath, without
investigation, no lien has been imposed by any governmental agency in connection
with the presence of any Hazardous Materials on any property, facility,
machinery, or equipment operated or leased by NeoPath or in which NeoPath holds
any mortgage, lien, or similar interest. For purposes of this Section 2.24,
"Hazardous Materials" shall mean and include any "hazardous waste" as defined in
either the United States Resource Conservation and Recovery Act, 42 U.S.C. sec.
6901, or regulations adopted pursuant to said Act, and also any "hazardous
substances" or "hazardous materials" as defined in the United States
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
sec. 9601, but excludes ordinary and customary materials in quantities
reasonably required to be used by NeoPath in the ordinary course of NeoPath's
business.

2.25 Registration Statement; Proxy Statement. The information supplied or
to be supplied by NeoPath specifically for inclusion or incorporation by
reference in (i) the Registration Statement (as defined in Section 4.9 below) to
be filed with the SEC by AutoCyte in connection with the issuance of AutoCyte
Common Stock in the Merger will not, at the time the Registration Statement
becomes effective under the Securities Act of 1933, as amended (the "Securities
Act"), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) the Proxy Statement (as defined in Section 4.9
below) will not, at the date it is first mailed to the stockholders of NeoPath
and at the time of the special meeting of stockholders of NeoPath held pursuant
to Section 4.10 hereof, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations
thereunder. Notwithstanding this Section 2.25, no representation or warranty is
made by NeoPath with respect to statements made or incorporated by reference
therein based on information supplied by AutoCyte specifically for inclusion or
incorporation by reference in the Proxy Statement.

2.26 Opinion of Financial Adviser. NeoPath has received the opinion of
Credit Suisse First Boston Corporation, dated the date of this Agreement, to the
effect that, as of such date and based upon and subject to the matters set forth
therein, the Exchange Ratio is fair from a financial point of view to the
holders of NeoPath Common Stock (other than AutoCyte and its Subsidiaries), a
signed copy of which opinion has been or will promptly be delivered to AutoCyte.

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2.27 Accounting Matters. To the best knowledge of NeoPath, neither NeoPath
nor any of its affiliates has taken or agreed to take any action that would
prevent the business combination to be effected by the Merger to be accounted
for as a pooling of interests.

2.28 Full Disclosure. No representation, warranty or statement of NeoPath
made in this Agreement or in any Exhibit or the NeoPath Disclosure Schedule
attached hereto or in any document, statement or certificate furnished to
AutoCyte pursuant to this Agreement, when taken as a whole, contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements made, in light of the
circumstance under which they were made, not false or misleading.

SECTION 3 -- REPRESENTATIONS AND WARRANTIES OF AUTOCYTE

Except as set forth on the disclosure schedule (the "AutoCyte Disclosure
Schedule") delivered to NeoPath on the date hereof (regardless of whether the
AutoCyte Disclosure Schedule is referenced in any particular subsection of this
Section 3), the subsection numbers of which are numbered to correspond to the
subsection numbers of this Agreement to which they refer, AutoCyte and Merger
Sub represent and warrant to NeoPath as set forth below:

3.1 Organization and Qualification. Each of AutoCyte and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the state or other jurisdiction of its incorporation and has full corporate
power and authority to own, lease and operate its assets, properties and
business and to carry on its business as now being and as heretofore conducted.
AutoCyte is qualified or is otherwise authorized to transact business as a
foreign corporation in each jurisdiction (in the United States and outside of
the United States) in which the failure to so qualify would have an AutoCyte
Material Adverse Effect, all of which jurisdictions are identified in Section
3.1 of the AutoCyte Disclosure Schedule.

3.2 Capitalization.

(a) Outstanding Capital Stock. AutoCyte's authorized capital stock
consists of 20,650,000 shares of Common Stock, $.01 par value per share, of
which 14,282,676 shares are issued and outstanding as of June 3, 1999, and
1,000,000 shares of Preferred Stock, $.01 par value per share, of which no
shares are issued and outstanding. Merger Sub's authorized capital stock
consists of 1,000 shares of Common Stock, $.01 par value per share, all of
which are issued and outstanding as of June 3, 1999. All of the outstanding
shares of Merger Sub are owned by AutoCyte. Except as disclosed in
AutoCyte's proxy statement for its annual meeting of stockholders held on
May 26, 1999, AutoCyte is not aware of any record or beneficial holder of
more than five percent (5%) of the outstanding shares of AutoCyte Stock.
The outstanding shares of AutoCyte Stock and Merger Sub capital stock are
duly authorized, validly issued, fully paid, and nonassessable and have
been issued in compliance with all charter documents of AutoCyte and Merger
Sub, respectively, and all applicable federal and state laws. Except as set
forth in this Section 4.2(a), no other capital stock of AutoCyte or Merger
Sub is authorized or outstanding.

(b) Options or Other Rights. Section 3.2(b) of the AutoCyte
Disclosure Schedule lists each outstanding option to acquire shares of
AutoCyte Common Stock under the AutoCyte, Inc. Amended and Restated 1996
Equity Incentive Plan or the AutoCyte, Inc. 1997 Director Stock Option Plan
as of the date hereof, the name of the holder of such option, the number of
shares subject to such option, the exercise price of such option, the
number of shares as to which such option will have vested at such date and
whether the exercisability of such option will be accelerated in any way by
the transactions contemplated by this Agreement or for any other reason,
and indicates the extent of acceleration, if any. Except as set forth in
the AutoCyte Disclosure Schedule, (i) no subscription, warrant, option,
preemptive right, convertible security or other right (contingent or
otherwise) to purchase or acquire any shares of capital stock or other
security of AutoCyte or Merger Sub issued by AutoCyte or Merger Sub is
authorized or outstanding, (ii) there is no commitment or offer by

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AutoCyte or Merger Sub to issue or provide any such subscription, warrant,
option, preemptive right, convertible security or other right or to issue
or distribute to holders of any shares of its capital stock any evidences
of indebtedness or assets of AutoCyte or Merger Sub, (iii) neither AutoCyte
nor Merger Sub has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof, (iv) there are no restrictions on the transfer of capital stock of
AutoCyte or Merger Sub other than those arising from securities laws, and
(v) there are no voting trusts, proxies or other agreements, instruments or
understandings with respect to outstanding shares of AutoCyte's or Merger
Sub's capital stock to which AutoCyte or Merger Sub is a party.

3.3 Authority to Execute and Perform Agreements. Each of AutoCyte and
Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and each agreement, document and instrument contemplated
by this Agreement to which it is a party and, subject to the requirement to
obtain stockholder approval under the DGCL and the Marketplace Rules of the
Nasdaq Stock Market, to consummate the transactions contemplated hereby and
thereby and to perform fully its respective obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and each
such other agreement, document and instrument to which it is a party and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of AutoCyte and Merger
Sub, as appropriate, subject, in the case of the Merger, to the requirement to
obtain stockholder approval under the DGCL and the Marketplace Rules of the
Nasdaq Stock Market. This Agreement and each agreement, document and instrument
executed and delivered by AutoCyte and Merger Sub pursuant to this Agreement
constitutes, or when executed and delivered will constitute, valid and binding
obligations of AutoCyte and Merger Sub, enforceable in accordance with their
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general principles of equity.

3.4 Subsidiaries and Other Affiliates. Except as set forth in the AutoCyte
Disclosure Schedule, AutoCyte does not have any subsidiary or directly or
indirectly own or have any investment in any of the capital stock of, or any
other interest in, any other person or entity other than Merger Sub.

3.5 Charter and By-laws; Books and Records. Each of AutoCyte and Merger
Sub has heretofore delivered or made available to NeoPath true and complete
copies of its Certificate of Incorporation (certified by the Secretary of State
or comparable authority of its jurisdiction of incorporation) and Bylaws as in
effect on the date hereof, and corporate minute books. Neither AutoCyte nor
Merger Sub is in default in the performance, observation or fulfillment of
either its charter or Bylaws. The minute books of AutoCyte and Merger Sub
contain true and complete records of all meetings and consents in lieu of
meetings of the Board of Directors and of the stockholders of AutoCyte and
Merger Sub, respectively, prior to the date hereof, and accurately reflect all
transactions referred to in such minutes and consents in lieu of meetings.

3.6 SEC Reports. AutoCyte has previously delivered to NeoPath its (i)
Annual Report on Form 10-K for the year ended December 31, 1998 (the "AutoCyte
10-K") and 1997, as filed with SEC, (ii) the proxy statement relating to
AutoCyte's annual meeting of stockholders held on May 26, 1999 and (iii) all
other reports filed by AutoCyte with the SEC under the Exchange Act, since
January 1, 1998 (the "AutoCyte SEC Documents"). As of their respective dates,
the AutoCyte SEC Documents complied as to form in all material respects with
applicable SEC requirements and, except to the extent that information contained
in the AutoCyte SEC Documents has been revised and superseded by a later filed
AutoCyte SEC Document, did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. AutoCyte has timely filed with the SEC all reports
required to be filed under Sections 13, 14 or 15(d) of the Exchange Act since
January 1, 1998.

3.7 Financial Statements. The consolidated financial statements contained
in the AutoCyte 10-K and in AutoCyte's quarterly report on Form 10-Q for the
quarter ended March 31, 1999 (the "AutoCyte

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10-Q") have been prepared from, and are in accordance with, the books and
records of AutoCyte and fairly present the consolidated financial condition,
results of operations and cash flows of AutoCyte as of the dates and for the
periods presented therein, all in accordance with generally accepted accounting
principles applied on a consistent basis, except as otherwise indicated therein
and subject (in the case of the unaudited financial statements included in the
AutoCyte 10-Q) to normal period-end and audit adjustments and footnote
disclosures, which in the aggregate are not material.

3.8 Absence of Undisclosed Liabilities. Except as set forth in the
AutoCyte Disclosure Schedule, at December 31, 1998, AutoCyte had no material
liabilities of any nature, whether accrued, absolute, contingent or otherwise
(including without limitation, liabilities as guarantor or otherwise with
respect to obligations of others or liabilities for taxes due or then accrued or
to become due), required to be reflected or disclosed in the balance sheet dated
December 31, 1998 (or the notes thereto) included in the AutoCyte 10-K (the
"AutoCyte Balance Sheet") that were not adequately reflected or reserved against
on such balance sheet. Except as set forth in the AutoCyte Disclosure Schedule,
AutoCyte has no such liabilities, except as and to the extent (i) adequately
reflected and reserved against in the AutoCyte Balance Sheet, (ii)adequately
reflected and reserved against in the AutoCyte unaudited balance sheet dated
March 31, 1999 included in the AutoCyte 10-Q (the "AutoCyte Interim Balance
Sheet") or (iii) incurred since December 31, 1998 in the ordinary course of
business.

3.9 No Material Adverse Change. Except as set forth in the AutoCyte
Disclosure Schedule, since March 31, 1999, except as set forth in the AutoCyte
Disclosure Schedule, there has not been:

(a) any event or occurrence that could reasonably be expected to have
an AutoCyte Material Adverse Effect;

(b) any material change in the method of operating the business of
AutoCyte or Merger Sub, in the manner of keeping the books, accounts or
records of AutoCyte or Merger Sub, or in any accounting method or practice
of AutoCyte or Merger Sub;

(c) any sale, lease, mortgage, pledge, encumber, abandonment or
disposition of, or agreement to sell, lease, mortgage, pledge, encumber,
abandon or dispose of, any material assets or properties of AutoCyte or
Merger Sub, other than in the usual and ordinary course of business;

(d) any material transaction, commitment, contract or agreement
entered into by AutoCyte or Merger Sub, or any relinquishment or
abandonment by AutoCyte or Merger Sub of any material contract or right, or
any modification, waiver, amendment, release, recision, or termination of
any material term, condition or provision of any contract to which AutoCyte
or Merger Sub is a party and is or should be set forth on the AutoCyte
Disclosure Schedule in accordance with Section 3.14 (other than any
satisfaction by performance in accordance with the terms thereof), other
than in the usual and ordinary course of business;

(e) any adverse relationships or conditions with employees, suppliers,
lenders, customers or governmental agencies that could reasonably be
anticipated to have an AutoCyte Material Adverse Effect;

(f) any acquisition by AutoCyte or Merger Sub (other than property or
interests therein acquired in the ordinary course of its lending business)
of all or any part of the assets, properties, capital stock or business of
any other person or entity;

(g) any redemption or other acquisition by AutoCyte or Merger Sub of
any of its capital stock or any declaration, setting aside or payment of
any dividend or distribution of any kind with respect to shares of its
capital stock;

(h) any loan or advance by AutoCyte or Merger Sub to any stockholder,
officer, director or consultant, or any other loan or advance other than in
the ordinary course of business;

(i) any cancellation, nonrenewal, material reduction in limits or
coverage or material premium increase for all insurance policies maintained
by AutoCyte;

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(j) except as set forth in the AutoCyte Disclosure Schedule, any new
employment or consulting agreement, any increase in compensation, bonus or
other benefits payable or to become payable by AutoCyte or Merger Sub to
any director, officer or employee, other than regularly scheduled increases
consistent with past practice in the ordinary course of business, or any
new grant of severance or termination rights, or increase in rights or
benefits payable under existing severance or termination policies or
agreements, to any director, officer or employee of AutoCyte or Merger Sub;
or

(k) commitment, understanding or agreement by AutoCyte nor Merger Sub
or any of its officers or employees to do any of the things described in
the preceding classes (a) through (i) (other than this Agreement).

3.10 Tax Matters. Except as set forth in the AutoCyte Disclosure Schedule:

(a) AutoCyte has prepared and filed (or received an appropriate
extension of time to file) all Returns required to be filed relating to any
and all Taxes concerning or attributable to AutoCyte or its operations and
such Returns are true and correct in all material respects and have been
completed in all material respects in accordance with applicable law.

(b) AutoCyte (i) has paid all Taxes shown as due on its Returns and
(ii) has withheld and paid (or will pay at the time required) all Taxes
required to be withheld, including with respect to its employees all
federal and state income taxes, FICA, FUTA and other Taxes required to be
withheld.

(c) AutoCyte is not delinquent in any material respect in the payment
of any Tax nor is there any material Tax deficiency outstanding, proposed
or assessed against AutoCyte, nor has AutoCyte executed any waiver of any
statute of limitations on, or any consent extending, the period for the
assessment or collection of any Tax.

(d) No audit or other examination of any Return of AutoCyte is
currently in progress, nor has AutoCyte been notified of any request for
such an audit or other examination.

(e) AutoCyte did not have, as of March 31, 1999, any liabilities,
whether asserted or unasserted, contingent or otherwise, for unpaid
federal, state, local and foreign Taxes which have not been accrued or
reserved against in accordance with GAAP on the AutoCyte Interim Balance
Sheet, and AutoCyte has not incurred any such liabilities since such date
except in the ordinary course of business and consistent with past
practices.

(f) There are (and as of immediately following the Effective Date
there will be) no Liens of a material nature on the assets of AutoCyte
relating to or attributable to Taxes, except for Liens for Taxes not yet
due and payable or that are being contested in good faith by appropriate
proceedings.

(g) AutoCyte has not received written or oral notice of any claim
relating or attributable to Taxes that, if adversely determined, would
result in any Lien on the assets of AutoCyte.

(h) None of AutoCyte's assets are treated as "tax-exempt use property"
within the meaning of Section 168(h) of the Code.

(i) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions
of this Agreement, covering any employee or former employee of AutoCyte
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to Section 280G of the Code or
the limitations in Section 162(m) of the Code.

(j) AutoCyte has not filed any consent agreement under Section 341(f)
of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by AutoCyte.

(k) AutoCyte is not a party to any tax sharing or allocation
agreements, arrangements or practices nor does AutoCyte owe any amount
under any such agreement, arrangement or practice.

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(l) AutoCyte is not nor has been at any time during the period
specified in Section 897(c)(1)(A)(ii) of the Code, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.

(m) AutoCyte has not agreed to, nor is it required to, make any
adjustments under Section 481(c) of the Code by reason of a change in
accounting method or otherwise.

3.11 Compliance with Laws.

(a) Neither AutoCyte nor Merger Sub is in violation in any material
respect of any order, judgment, injunction, award or decree, or any
federal, state, local or foreign law, ordinance or regulation or any other
requirement of any governmental or regulatory body, court or arbitrator,
and is in compliance in all material respects with all of the foregoing
that are applicable to it, its business or its assets. Neither AutoCyte nor
Merger Sub has received notice of, and there has not been any citation,
fine or penalty imposed or asserted against any of them for, any such
violation or alleged violation that has not been favorably and fully
resolved.

(b) Each of AutoCyte and Merger Sub holds all licenses, permits,
certificates, franchises, orders or approvals of any federal, state, local
or foreign governmental or regulatory body, that are material to the
conduct of AutoCyte's business and the uses of its assets necessary to
operate its business as presently conducted, other than those (i) which are
ministerial in nature and which AutoCyte has no reason to believe would not
be issued in due course and (ii) which, the failure of AutoCyte or Merger
Sub to possess, would result in an AutoCyte Material Adverse Effect (the
"AutoCyte Permits"). The AutoCyte Disclosure Schedule contains a true and
complete list of all such AutoCyte Permits as of the date hereof. Such
AutoCyte Permits are in full force and effect and the validity and
effectiveness of such AutoCyte Permits will not be affected by the
transactions contemplated hereby. No violations are or have been recorded
with any governmental or regulatory body in respect of any AutoCyte Permit,
no proceeding is pending or, to the best knowledge of AutoCyte, threatened
to revoke or limit any AutoCyte Permit, and AutoCyte knows of no grounds
for any such revocation or limitation.

3.12 Consents; No Breach. All consents, permits, authorizations and
approvals from any person or entity that are required pursuant to applicable
law, or agreement or otherwise in connection with the execution, delivery and
performance of this Agreement by AutoCyte and Merger Sub are set forth in
Section 3.12 of the AutoCyte Disclosure Schedule, other than those which the
failure to obtain would reasonably be expected to have an AutoCyte Material
Adverse Effect. Subject to any prior approval requirements set forth in Section
3.12 of the AutoCyte Disclosure Schedule, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not (i) violate any provision of the Certificate of
Incorporation or Bylaws of AutoCyte or Merger Sub; (ii) violate, conflict with
or result in the breach of any of the terms or conditions of, result in a
material modification of, or otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any material instrument, contract or other
agreement to which AutoCyte or Merger Sub is a party or to which either of
AutoCyte or Merger Sub or any of its assets or properties is bound or subject;
(iii) violate any statute, law or regulation of any jurisdiction or any order,
judgment, injunction, award or decree of any court, arbitrator or governmental
or regulatory body applicable to or binding upon AutoCyte or Merger Sub or its
securities, properties, assets or business; (iv) violate any material AutoCyte
Permit; (v) require any filing with, notice to, or approval or consent of any
foreign, federal, state, local or other governmental or regulatory body or any
other person or entity; (vi) give rise to any obligation to make any material
payment; or (vii) result in the creation of any material lien or encumbrance on
the assets or properties of AutoCyte or Merger Sub, excluding from the foregoing
clauses (ii), (iii), (iv) and (v) any exceptions to the foregoing that, in the
aggregate, would not reasonably to expected to have an AutoCyte Material Adverse
Effect and the following: (w) the filing of the Merger Documents with the
Secretary of State of the State of Washington and the Secretary of State of the
State of Delaware, (x) filings with various state blue sky authorities, (y) the
filing with Nasdaq of an application for listing of the shares of AutoCyte
Common Stock to be issued in the Merger and (z) the filing with the SEC of (A)
the Proxy Statement (as defined in Section 4.9 below), (B) the

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Registration Statement (as defined in Section 4.9 below) and (C) such reports
under Section 13(a), 13(d), 15(d) or 16(a) of the Exchange Act as may be
required in connection with this Agreement and the transaction contemplated
hereby and thereby.

3.13 Actions and Proceedings. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal against or involving AutoCyte or Merger Sub or any of its
securities, assets, or properties. There are no actions, suits or claims or
legal, judicial, administrative or arbitral proceedings or investigations
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending or, to the best knowledge of AutoCyte, threatened
against or involving AutoCyte or Merger Sub or any of its securities, assets or
properties that if determined adverse to AutoCyte or Merger Sub would have an
AutoCyte Material Adverse Effect.

3.14 Contracts and Other Agreements. Section 3.14 of the AutoCyte
Disclosure Schedule sets forth a correct and complete list all of the following
currently effective contracts:

(a) written contracts and other agreements with or for the benefit of
any current or former officer, director, stockholder or employee of
AutoCyte involving more than $25,000 (provided, in the case of a loan by
AutoCyte to any such person, the AutoCyte Disclosure Schedule shall list
all such loan arrangements, whether or not in writing, involving at least
$1,000), and contracts and other agreements for the payment of fees or
other consideration to any entity in which AutoCyte has an interest;

(b) contracts and other agreements with any labor union or association
representing any employee of AutoCyte or otherwise providing for any form
of collective bargaining;

(c) contracts and other agreements for the purchase or sale of
materials, supplies, equipment, merchandise or services that contain an
escalation, renegotiation or redetermination clause or that obligate
AutoCyte to purchase all or substantially all of its requirements of a
particular product from a supplier, or for periodic minimum purchases of a
particular product from a supplier;

(d) contracts and other agreements for the sale of any of the assets
or properties of AutoCyte other than in the ordinary course of business or
for the grant to any person of any options, rights of first refusal, or
preferential or similar rights to purchase any of such assets or
properties;

(e) partnership or joint venture agreements;

(f) contracts with agents or foreign representatives regarding the
sales or marketing of AutoCyte's services or products;

(g) contracts or other agreements under which AutoCyte agrees to act
as surety or guarantor for or to indemnify any party (other than required
indemnification provisions in customer contracts) or to share the tax
liability of any party;

(h) contracts, options, outstanding purchase orders and other
agreements for the purchase of any material asset, tangible or intangible;

(j) contracts and other agreements containing obligations or
liabilities of any kind to holders of the securities of AutoCyte as such
(including, without limitation, an obligation to register any of such
securities under any federal or state securities laws) and contracts
obligating AutoCyte to issue or repurchase any AutoCyte securities;

(k) contracts and other agreements containing covenants of AutoCyte
not to compete in any line of business or with any person or entity or
covenants of any other person or entity not to compete with AutoCyte in any
line of business;

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(l) contracts and other agreements relating to the acquisition by
AutoCyte of any operating business or the capital stock of any other person
or entity;

(m) contracts and other agreements requiring the payment to any party
of a brokerage or sales commission or a finder's or referral fee;

(o) any agreement or series of related agreements requiring aggregate
payments by or to AutoCyte of more than $50,000;

(p) contracts under which AutoCyte will acquire or has acquired
ownership of, or license to, intangible property, including software other
than commercially available end-user licenses; and

(q) any other material contract or other agreement whether or not made
in the ordinary course of business, the absence of which would have an
AutoCyte Material Adverse Effect.

Merger Sub is not a party to any contract or agreement other than the
agreement contemplated hereby. There have been delivered or made available to
NeoPath true and complete copies of all of the contracts and other agreements
(and all amendments, waivers or other modifications thereto) set forth in
Section 3.14 of the AutoCyte Disclosure Schedule. All of such contracts and
other agreements are valid, subsisting, in full force and effect, binding upon
AutoCyte, and to the best knowledge of AutoCyte, binding upon the other parties
thereto in accordance with their terms. Other than defaults which would not,
either singly or in the aggregate, have an AutoCyte Material Adverse Effect,
AutoCyte is not in default under any of such scheduled contracts, nor, to the
best knowledge of AutoCyte, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist that constitutes
or with notice or lapse of time or both would constitute a default thereunder.

3.15 Real Property; Leases. Neither AutoCyte nor Merger Sub owns any real
property or any buildings or other structures and does not have any options or
any contractual obligations to purchase or acquire any interest in real
property. Section 3.15 of the AutoCyte Disclosure Schedule sets forth a correct
and complete list of all leases of real property to which AutoCyte or Merger Sub
is a party (collectively, the "AutoCyte Leases"). True and complete copies of
the AutoCyte Leases and all amendments, modifications and supplemental
agreements thereto have been delivered by AutoCyte to NeoPath. The AutoCyte
Leases are in full force and effect and, to the best knowledge of AutoCyte, are
binding and enforceable against each of the parties thereto in accordance with
their respective terms. To the best knowledge of AutoCyte, no party to any
AutoCyte Lease has given notice to any other party thereto claiming the
existence or occurrence of a breach or default thereunder and there has not
occurred any event or circumstances which constitutes, or with the passage of
time or the giving of notice or both would constitute, a breach or default
thereunder, other than defaults which would not, either singly or in the
aggregate, have an AutoCyte Material Adverse Effect.

3.16 Tangible Property. Each of AutoCyte and Merger Sub has good and
marketable title to, free and clear of all encumbrances, or otherwise has the
unrestricted right to use, each item of equipment, furniture, leasehold
improvements, fixtures, vehicles, structures, any related capitalized items and
other tangible property material to the business of AutoCyte ("AutoCyte Tangible
Property"). All such AutoCyte Tangible Property is in good and sufficient
operating condition and repair, ordinary wear and tear excepted, and, to the
best knowledge of AutoCyte, AutoCyte has not received notice that any of the
AutoCyte Tangible Property is in violation of any existing law or any building,
zoning, health, safety or other ordinance, code or regulation.

3.17 Intellectual Property.

(a) AutoCyte owns, or is licensed to use, or otherwise has the right
to use all patents, trademarks, service marks, trade names, trade secrets,
logos, franchises, and copyrights, and all applications for any of the
foregoing, and all technology, inventions, trade secrets, know-how,
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computer software and processes that are material in the conduct of its
business as now conducted (collectively, the "AutoCyte Proprietary
Rights"). AutoCyte has previously delivered to NeoPath a list of all such
patents and registered copyrights and trademarks, and all applications
therefor (the "AutoCyte Registered Rights"). All of the AutoCyte Registered
Rights owned by AutoCyte, and to the best knowledge of AutoCyte, all
AutoCyte Registered Rights licensed to AutoCyte, have been registered in,
filed in or issued by the United States Patent and Trademark Office, the
United States Register of Copyrights, or the corresponding offices of other
jurisdictions as identified in Section 3.17 of the AutoCyte Disclosure
Schedule, and have been properly maintained and renewed in accordance with
all applicable provisions of law and administrative regulations in the
United States and in each such other jurisdiction.

(b) To the best knowledge of AutoCyte, (i) the business of AutoCyte as
currently conducted does not infringe upon the proprietary rights of
others, nor has AutoCyte received any notice or claim from any third party
of such infringement by AutoCyte, (ii) there is not any material unlicensed
infringement by any third party on, or any issued competing claim of right
to use or own any of, the AutoCyte Proprietary Rights of AutoCyte and (iii)
none of the activities of the employees of AutoCyte on behalf of AutoCyte
violates any agreements or arrangements that any such employees have with
former employers.

3.18 Title to Assets; Liens. AutoCyte owns outright, leases or rents, and
has good title to all of its material assets and properties, including, without
limitation, all of the assets and properties reflected on the AutoCyte Interim
Balance Sheet, free and clear of any encumbrance, except for (i) assets and
properties disposed of in the ordinary course of business and as disclosed in
the AutoCyte Disclosure Schedule, (ii) encumbrances securing the claims of
materialmen, carriers, landlords and like persons, all of which are not yet due
and payable, (iii) liens for taxes not yet due and payable or for taxes being
contested in good faith by appropriate proceedings or (iv) encumbrances
reflected on the AutoCyte Interim Balance Sheet.

3.19 Employee Benefit Plans. Section 4.19 of the AutoCyte Disclosure
Schedule sets forth a correct and complete list of all pension, profit sharing,
retirement, deferred compensation, welfare, insurance, disability, bonus,
vacation pay, severance pay and similar plans, programs or arrangements,
including without limitation all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") with respect to which AutoCyte is the "Plan Sponsor" within the
meaning of Section 3(16)(B) of ERISA, or in which AutoCyte participates (the
"AutoCyte Plans"). Each AutoCyte Plan which is intended to be qualified under
Section 401(a) or 501(c)(9) of the Internal Revenue Code of 1986, as amended
(the "Code"), has received a favorable determination letter from the Internal
Revenue Service that remains in effect. Each AutoCyte Plan has been maintained,
operated, funded and administered in all material respects in accordance with
the terms of such AutoCyte Plan and the provisions of any and all applicable
statutes, orders or governmental rules and regulations, including without
limitation ERISA and the Code. To the best knowledge of AutoCyte, nothing has
occurred or failed to occur with respect to any AutoCyte Plan which is intended
to comply with Section 401(a) or 501(c)(9) of the Code that would adversely
affect the qualified status of such AutoCyte Plan or result in any material
liability on the part of AutoCyte including, without limitation, under Title I
of ERISA or Section 4975 of the Code (other than changes in applicable law for
which the remedial amendment period has not yet expired). All material reports,
returns, notices and documents required to be filed with respect to all AutoCyte
Plans, including without limitation annual reports on Form 5500, have been
timely filed, except for any failures as could not reasonably be expected to
result in a material liability (either individually or in the aggregate) to
AutoCyte. All contributions required by law or the terms of any AutoCyte Plan
have been made. All claims for welfare benefits incurred by employees of
AutoCyte on or before the Closing are or will be fully covered by third-party
insurance policies or programs. Neither AutoCyte nor any of its ERISA Affiliates
maintains or contributes to, or has ever maintained or contributed to (or been
obligated to contribute to), any multiemployer plan as defined in Section
4001(a)(3) of ERISA, any employee benefit plan that is subject to Section 412 of
the Code or Section 302 of ERISA or any employee benefit plan that is subject to
Title IV of ERISA. Neither AutoCyte nor any AutoCyte Plan provides or has any
obligation to provide (or contribute toward the cost

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of) health benefits with respect to any current or former, officer, employee,
agent, director or independent contractor of AutoCyte or any other entity beyond
such individual's retirement or other termination of service, other than as
required by applicable law, including without limitation, Section 4980B(f) of
the Code and Sections 601 through 608 of ERISA. There are no actions, suits or
claims (other than routine claims for benefits) pending or, to the best
knowledge of AutoCyte, threatened with respect to (or against the assets of) any
AutoCyte Plan, nor, to the best knowledge of AutoCyte, is there a reasonable
basis for any such action, suit or claim. No AutoCyte Plan is currently under
investigation, audit or review, directly or indirectly, by the IRS, the DOL or
any other governmental entity or agency, and, to the best knowledge of AutoCyte,
no such action is contemplated or under consideration by the IRS, the DOL or any
other governmental entity or agency. Complete copies of the following documents
with respect to each AutoCyte Plan (as applicable) have been delivered to
NeoPath: (i) each relevant AutoCyte Plan document, as currently in effect, and
subsequent amendment thereto; (ii) each trust agreement, group annuity contract,
insurance policy or contract, as currently in effect; (iii) each Form 5500
series annual report with each required schedule and attachment for each of the
three (3) most recent plan years; (iv) the most recent IRS determination letter;
and (v) the most recent summary plan description and each summary of material
modification thereto. An "ERISA Affiliate" of AutoCyte means any corporation,
trade, business or other entity (whether or not incorporated) that together with
AutoCyte would have been deemed a "single employer" within the meaning of
Section 414(b), (c), (m) or (o) of the Code at any time within the five-year
period ending on the Closing Date.

3.20 Employee Relations. AutoCyte has approximately 83 full-time
equivalent employees and generally enjoys good employer-employee relations. None
of AutoCyte's employees are represented by any labor union. AutoCyte is not
delinquent in payments to any of its employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees or consultants. AutoCyte will not by reason of the Merger or
anything done prior to the Closing be liable to any AutoCyte employees for
severance pay or any other payments (other than accrued salary, vacation or sick
pay in accordance with AutoCyte's normal policies) in the event any such
employees are terminated. Each employee of AutoCyte has executed AutoCyte's
standard form of Confidentiality and Assignment of Inventions Agreement. Correct
and complete information as to all current directors, officers, employees or
consultants of AutoCyte including, in each case, name, current job title and
annual rate of compensation has been provided by AutoCyte to NeoPath.

3.21 Relationships with Affiliates. Except as set forth in Section 3.21 of
the AutoCyte Disclosure Schedule, to the best knowledge of AutoCyte, no officer
or director of AutoCyte has directly or indirectly any interest in (i) any
property or assets of AutoCyte (except as a stockholder of AutoCyte), (ii) any
competitor or customer of AutoCyte, (iii) any supplier or lender to AutoCyte or
(iv) any party to any material contract or agreement with AutoCyte.

3.22 Insurance. Section 3.22 of the AutoCyte Disclosure Schedule sets
forth a correct and complete list of all policies or binders of fire, liability,
product liability, workmen's compensation, vehicular, directors' and officers'
and other insurance held by or on behalf of AutoCyte specifying in each case the
type and scope of coverage, the amount of coverage, the premium, the insurer,
the expiration date and all claims made thereunder within the past three years.
Such policies and binders are in full force and effect, are reasonably believed
to be adequate for the businesses engaged in by AutoCyte, are in conformity with
the requirements of all leases or other agreements to which AutoCyte is a party
and are valid and enforceable in accordance with their terms. All premiums due
under such policies and binders have been paid, and AutoCyte is not in default
with respect to any provision contained in any such policy or binder nor has
AutoCyte failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. There are no outstanding unpaid claims under
any such policy or binder. AutoCyte has not received notice of cancellation or
non-renewal of, or any material amendment to, or any material increase in
deductibles or premiums under, any such policy or binder. Correct and complete
copies of certificates of insurance with respect to all such policies and
binders have been provided by AutoCyte to NeoPath.

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3.23 Brokerage. No broker, finder, agent or similar intermediary has acted
on behalf of AutoCyte or Merger Sub in connection with this Agreement or the
transactions contemplated hereby, and there are no brokerage commissions,
finders fees or similar fees or commissions payable in connection therewith
based on any agreement, arrangement or understanding with, or any action taken
by AutoCyte or Merger Sub.

3.24 Hazardous Materials. Neither AutoCyte nor Merger Sub has generated,
used or handled any Hazardous Materials (as defined below), nor has AutoCyte or
Merger Sub treated, stored or disposed of any Hazardous Materials at any site
owned or leased at any time by AutoCyte or Merger Sub or shipped any Hazardous
Materials for treatment, storage or disposal at any other site or facility,
except in compliance with all applicable laws. To the knowledge of AutoCyte, no
other person has generated, used, handled, stored or disposed of any Hazardous
Materials at any site owned or premises leased by AutoCyte or Merger Sub at any
time or at any site in which AutoCyte or Merger Sub presently holds a mortgage
or similar interest, nor has there been or is there threatened any release of
any Hazardous Materials on or at any such site or premises. Neither AutoCyte nor
Merger Sub presently operates or leases, nor has either operated or leased, any
site on which underground storage tanks are or were located and which tanks are
the responsibility of AutoCyte or Merger Sub to operate. To the best knowledge
of AutoCyte, without investigation, no lien has been imposed by any governmental
agency in connection with the presence of any Hazardous Materials on any
property, facility, machinery, or equipment operated or leased by AutoCyte or
Merger Sub or in which AutoCyte or Merger Sub holds any mortgage, lien, or
similar interest. For purposes of this Section 3.24, "Hazardous Materials" shall
mean and include any "hazardous waste" as defined in either the United States
Resource Conservation and Recovery Act, 42 U.S.C. sec.6901, or regulations
adopted pursuant to said Act, and also any "hazardous substances" or "hazardous
materials" as defined in the United States Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. sec.9601, but excludes ordinary and
customary materials in quantities reasonably required to be used by AutoCyte in
the ordinary course of AutoCyte's business.

3.25 Registration Statement; Proxy Statement. The information supplied or
to be supplied by AutoCyte specifically for inclusion or incorporation by
reference in (i) the Registration Statement (as defined in Section 4.9 below) to
be filed with the SEC by AutoCyte in connection with the issuance of AutoCyte
Common Stock in the Merger will not, at the time the Registration Statement
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (ii) the Proxy
Statement (as defined in Section 4.9 below) will not, at the date it is first
mailed to the stockholders of AutoCyte and at the time of the special meeting of
stockholders of AutoCyte held pursuant to Section 4.11 hereof, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder. Notwithstanding
this Section 3.25, no representation or warranty is made by AutoCyte with
respect to statements made or incorporated by reference therein based on
information supplied by NeoPath specifically for inclusion or incorporation by
reference in the Proxy Statement.

3.26 Opinion of Financial Adviser. AutoCyte has received the opinion of
Warburg Dillon Read LLC, dated the date of this Agreement, to the effect that,
as of such date, the Merger is fair from a financial point of view to the
holders of AutoCyte Common Stock (other than NeoPath and its affiliates), a
signed copy of which opinion has been or will promptly be delivered to NeoPath.

3.27 Accounting Matters. To the best knowledge of AutoCyte, neither
AutoCyte nor any of its affiliates has taken or agreed to take any action that
would prevent the business combination to be effected by the Merger to be
accounted for as a pooling of interests.

3.28 Full Disclosure. No representation, warranty or statement of AutoCyte
or Merger Sub made in this Agreement or in any Exhibit or the AutoCyte
Disclosure Schedule attached hereto or in any document, statement or certificate
furnished to NeoPath pursuant to this Agreement, when taken as a whole, contains
any untrue statement of a material fact or omits to state a material fact
required to be

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stated therein or necessary to make the statements made, in light of the
circumstance under which they were made, not false or misleading.

SECTION 4 -- COVENANTS AND AGREEMENTS

The parties covenant and agree as follows:

4.1 Conduct of NeoPath Business. Except with the prior written consent of
AutoCyte and except as otherwise contemplated herein or as set forth in the
NeoPath Disclosure Schedule, during the period from the date hereof to the
Closing Date, NeoPath shall observe the following covenants:

(a) Affirmative Covenants Pending Closing. NeoPath will:

(i) Preservation of Personnel. Use all reasonable efforts to
preserve intact their business organizations and keep available the
services of present employees, in each case in accordance with past
practice, it being understood that termination of employees with poor
performance ratings shall not constitute a violation of this covenant;

(ii) Insurance. Use all reasonable efforts to keep in effect all
insurance coverage that was in force as of March 31, 1999, including,
but not limited to (A) policies insuring loss or destruction of, or
damage to, property, (B) third party liability policies such as, but not
limited to, commercial general liability, automobile liability,
employers liability, and umbrella liability, (C) workers compensation
insurance, (D) directors and officers liability, (E) policies insuring
employees for health, dental, life and accident benefits on a group
basis;

(iii) Preservation of the Business; Maintenance of Properties,
Contracts. Use all reasonable efforts to preserve their businesses,
advertise, promote and market their services, keep their properties
intact, preserve their goodwill and maintain all physical properties in
good operating condition;

(iv) Intellectual Property Rights. Use all reasonable efforts to
preserve and protect the NeoPath Proprietary Rights; and

(v) Ordinary Course of Business. Operate their businesses
diligently and in the ordinary course.

(b) Negative Covenants Pending Closing. NeoPath will not:

(i) Disposition of Assets. Sell or transfer, or mortgage, pledge
or create or permit to be created any encumbrance on, any of their
assets, other than sales or transfers in the ordinary course of business
and liens existing under arrangements disclosed herein or permitted
under Section 2.18;

(ii) Liabilities. (A) voluntarily incur any obligation or
liability other than in the ordinary course of their business (provided
that NeoPath may incur reasonable and appropriate expenses in connection
with this transaction), (B) incur any indebtedness for borrowed money or
enter into any contracts or commitments involving payments by NeoPath of
$50,000 or more, other than purchase orders or commitments for inventory
materials and supplies in the ordinary course of business;

(iii) Compensation. (A) change the compensation or fringe benefits
of any officer, director or employee, or (B) enter into or modify any
Plan or any employment, severance or other agreement with any officer,
director or employee of NeoPath other than changes required by law to
maintain the tax-qualified status of any Plan or as otherwise required
by law;

indirectly, any of its capital stock or (D) issue any shares of its
capital stock, except upon the exercise of options outstanding on the
date hereof;

(v) Articles of Incorporation and Bylaws. Amend the Articles of
Incorporation or Bylaws of NeoPath;

(vii) Material Agreements. Enter into or modify any material
agreement with any other person or entity (other than agreements in the
ordinary course of its business involving payments by NeoPath of less
than $50,000); or

(viii) Other. Agree in writing or otherwise to take any of the
actions described in this Section 4.1(b).

4.2 Conduct of AutoCyte Business. Except with the prior written consent of
NeoPath and except as otherwise contemplated herein or as set forth in the
AutoCyte Disclosure Schedule, during the period from the date hereof to the
Closing Date, AutoCyte and Merger Sub shall observe the following covenants:

(a) Affirmative Covenants Pending Closing. Each of AutoCyte and
Merger Sub will:

(iv) Intellectual Property Rights. Use all reasonable efforts to
preserve and protect the AutoCyte Proprietary Rights; and

(v) Ordinary Course of Business. Operate its business diligently
and in the ordinary course.

(b) Negative Covenants Pending Closing. Neither AutoCyte nor Merger
Sub will:

(i) Disposition of Assets. Sell or transfer, or mortgage, pledge
or create or permit to be created any encumbrance on, any of its assets,
other than sales or transfers in the ordinary course of business and
liens existing under arrangements disclosed herein or of the type
permitted under Section 3.18;

(ii) Liabilities. (A) voluntarily incur any obligation or
liability other than in the ordinary course of their business (provided
that AutoCyte may incur reasonable and appropriate expenses in
connection with this transaction), (B) incur any indebtedness for
borrowed money or enter into any contracts or commitments involving
payments by AutoCyte of $50,000 or more, other than purchase orders or
commitments for inventory materials and supplies in the ordinary course
of business;
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(iii) Compensation. (A) Change the compensation or fringe benefits
of any officer, director or employee, or (B) enter into or modify any
Plan or any employment, severance or other agreement with any officer,
director or employee of AutoCyte other than changes required by law to
maintain the tax-qualified status of any Plan or as otherwise required
by law;

(iv) Capital Stock. (A) Grant or accelerate the exercisability of,
any option, warrant or other right to purchase, or to convert any
obligation into, shares of its capital stock, (B) declare or pay any
dividend or other distribution with respect to any shares of its capital
stock, (C) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock or
(D) issue any shares of its capital stock, except (i) upon the exercise
of options outstanding on the date hereof or (ii) in connection with the
consummation of the transaction contemplated by the Asset Purchase
Agreement dated as of March 25, 1999 (the "Asset Purchase Agreement")
between AutoCyte and Neuromedical Systems, Inc. ("NSI");

(v) Certification of Incorporation and ByLaws. Amend the
Certification of Incorporation or Bylaws of AutoCyte;

(vi) Acquisitions. Acquire (including, without limitation, by
merger, consolidation, or acquisition of stock or assets) any
corporation, partnership, other business organization or any division
thereof or acquire any material amount of assets or property other than
(i) the acquisition of the certain assets of NSI that are the subject of
the Asset Purchase Agreement or (ii) an acquisition (by stock or asset
purchase, merger or otherwise) of Cell Analysis Systems, Inc. or other
acquisitions in the ordinary course of AutoCyte's business;

(vii) Material Agreements. Enter into or modify any material
agreement with any other person or entity, other than in the ordinary
course of its business; or

(viii) Other. Agree in writing or otherwise to take any of the
actions described in this Section 4.2(b).

4.3 Nasdaq Listing. AutoCyte shall take such actions as may be necessary
to cause the shares of AutoCyte Common Stock to be issued hereunder to be
approved for quotation on the Nasdaq National Market.

4.4 Corporate Examinations and Investigations. Prior to the Effective
Time, each of AutoCyte and NeoPath shall be entitled, through its employees and
representatives, to have such access to the assets, properties, business, books,
records and operations of the other as AutoCyte or NeoPath, as the case may be,
shall reasonably request in connection with such party's investigation of the
other with respect to the transaction contemplated hereby. Any such
investigation or examination shall be conducted at reasonable times and the
party being investigated shall cooperate fully therein. For the purposes of this
Agreement, actual knowledge shall mean the conscious knowledge of the executive
officers of a party who have given substantive attention to this transaction. In
order that each of AutoCyte and NeoPath may have full opportunity to make such
investigation, the party being investigated shall furnish the representatives of
the other during such period with all such information and copies of such
documents concerning the affairs of the party being investigated as such
representatives may reasonably request and cause its officers, employees,
consultants, agents, accountants and attorneys to cooperate fully with such
representatives in connection with such investigation.

4.5 Agreement not to Entertain Other Offers.

(a) In consideration of the efforts and expenses undertaken by both
parties in pursuing the Merger and other valuable consideration, the
receipt and adequacy of which are acknowledged, AutoCyte and NeoPath agree
that until the Closing Date or until this Agreement is otherwise

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terminated pursuant to Section 8, neither AutoCyte nor NeoPath nor any of
their authorized representatives shall:

(i) directly or indirectly, solicit any proposal relating to the
acquisition by another party of all or any portion of the capital stock
of such company or substantially all of the assets of such company
(whether by merger or otherwise);

(ii) directly or indirectly, engage in any discussions or
negotiations with any other party regarding any such acquisition, or
otherwise encourage or facilitate any efforts by any other party to
engage in such an acquisition; or

(iii) sell, transfer or dispose of all or any portion of the
capital stock of such company or substantially all of the assets of such
company (whether by merger or otherwise);

including, without limitation, furnishing to any other person information
with respect to, any effort or attempt by any other person to do or to seek
any such transaction identified in any of the foregoing clauses (i) through
(iii); provided, however, that, notwithstanding the foregoing, each of
AutoCyte and NeoPath and its authorized representatives may participate in
discussions or negotiations with, provide information to, and consummate a
transaction with, a third party that would otherwise be prohibited by this
section, if (A) such discussions or negotiations had been commenced prior
to the date hereof or if commenced after the date hereof, were not
solicited by or on behalf of such company and (B) such discussions or
negotiations were being continued or initiated after the Board of Directors
of such company determines in good faith (after consultation with
independent counsel, which may be the company's regular outside counsel)
that such action is necessary for such Board to comply with its fiduciary
duties to its stockholders under applicable law.

(b) AutoCyte and NeoPath each agree to inform the other orally and in
writing in reasonable detail (including without limitation the applicable
terms and conditions and identity of the other person) within one business
day of receipt of any offer, proposal or inquiry relating to any of the
transactions identified in Section 4.5(a) and of any modification thereof
or any proposed agreement and to promptly furnish to the other copies of
any written communications or documents received with respect to the
foregoing.

4.6 Authorization from Others. Prior to the Closing Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits required to permit the consummation of the transactions contemplated by
this Agreement, including without limitation all consents required from third
parties who have contractual relationships with NeoPath.

4.7 Consummation of Agreement. Each party shall use all reasonable efforts
to perform and fulfill all conditions and obligations to be performed and
fulfilled by it under this Agreement and to ensure that to the extent within its
control or capable of influence by it, no breach of any of the respective
representations, warranties and agreements hereunder occurs or exists on or
prior to the Effective Time, all to the end that the transactions contemplated
by this Agreement shall be fully carried out in a timely fashion. Without
limiting the generality of the foregoing, each party shall (i) use all
reasonable efforts to defend any lawsuits or other legal proceedings, whether
judicial or administrative, challenging this Agreement or the consummation of
the transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other governmental
entity vacated or reversed and (ii) (A) use all reasonable efforts to ensure
that no state takeover statute or similar statute or regulation is or becomes
applicable to the Merger, this Agreement or any of the other transactions
contemplated by this Agreement and (B) if any state takeover statute or similar
statute or regulation becomes applicable to the Merger, this Agreement or any
other transaction contemplated by this Agreement, use all reasonable efforts to
ensure that the Merger and the other transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger and the other transactions contemplated by this Agreement.

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4.8 Further Assurances. Each of the parties shall execute such documents,
further instruments of transfer and assignment and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby.

4.9 Joint Proxy Statement/Prospectus; Registration Statement. As soon as
practicable after the date of this Agreement, AutoCyte and NeoPath shall jointly
prepare and file with the SEC, subject to the prior approval of the other party,
which approval shall not be unreasonably withheld, preliminary joint proxy
materials relating to the special meetings of the stockholders of NeoPath and
AutoCyte held in accordance with Sections 4.10 and 4.11 hereof, respectively,
and as required by the Exchange Act, and a Registration Statement on Form S-4
(as amended or supplemented, the "Registration Statement") relating to the
registration under the Securities Act of the shares of AutoCyte Common Stock to
be issued in the Merger. Each of AutoCyte and NeoPath shall use all reasonable
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. AutoCyte shall also
use all reasonable efforts to qualify the shares of AutoCyte Common Stock to be
issued in the Merger under the securities or "blue sky" laws of every state
necessary to offer and issue the shares of AutoCyte Common Stock issuable
pursuant to Section 1.6(a) to the stockholders of NeoPath at the Closing, except
any such state with respect to which counsel for AutoCyte has determined that
such qualification is not required under the securities or "blue sky" laws of
such state, and except that in no event shall AutoCyte be obligated to qualify
as a foreign corporation or to execute a general consent to service of process
in any state in which it has not previously so qualified or has not previously
so consented. The joint proxy statement/prospectus included in the Registration
Statement at the time it initially is mailed to the stockholders of AutoCyte and
shareholders of NeoPath and all duly filed supplements, amendments or revisions
made thereto, if any, similarly mailed are hereinafter referred to as the "Proxy
Statement." No filing of, or amendment or supplement to, the Registration
Statement will be made by AutoCyte, or the Proxy Statement will be made by
NeoPath or AutoCyte, without providing the other party the opportunity to review
and comment thereon. If, at any time prior to the Effective Time, any event
relating to either AutoCyte or NeoPath or any of its affiliates, officers or
directors is discovered that is required to be set forth in an amendment to the
Registration Statement or filings under blue sky laws or a supplement to the
Proxy Statement, such party will promptly inform the other party, and such
amendment or supplement will be promptly filed with the SEC and appropriate
state securities administrators and disseminated to the stockholders of AutoCyte
and NeoPath, to the extent required by applicable federal and state securities
laws.

4.10 NeoPath Stockholder Meeting. NeoPath, acting through its Board of
Directors, shall, in accordance with applicable law and its Articles of
Incorporation and Bylaws:

(a) at a special meeting of stockholders of NeoPath and at any
adjournment thereof, submit to the stockholders a proposal to consider and
act on this Agreement to obtain such approval required under the WBCA for
the consummation of the transactions contemplated hereby;

(b) include in the Proxy Statement to be delivered to the stockholders
of NeoPath soliciting their approval of the transactions contemplated
hereby the recommendation of its Board of Directors that the stockholders
vote in favor of the adoption of this Agreement; and

(c) use all reasonable efforts (i) to obtain and furnish the
information required to be included by it in the Proxy Statement, (ii) to
cause the Proxy Statement to be mailed to its stockholders at the earliest
practicable time after the effectiveness of the Registration Statement and
(iii) to obtain the necessary approvals by its stockholders of the
transactions contemplated hereby.

4.11 AutoCyte Stockholder Meeting. AutoCyte, acting through its Board of
Directors, shall, in accordance with applicable law and its Certificate of
Incorporation and Bylaws:

(a) at a special meeting of stockholders of AutoCyte and at any
adjournment thereof, submit to the stockholders a proposal to obtain such
approval required pursuant to the Nasdaq Market Rules;

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(b) include in the Proxy Statement to be delivered to the stockholders
of AutoCyte soliciting their approval of this Agreement and the
transactions contemplated hereby the recommendation of its Board of
Directors that the stockholders vote in favor of such transactions; and

4.12 Public Announcements and Confidentiality. Any press release or other
information to the press or any third party with respect to this Agreement or
the transactions contemplated hereby shall require the prior approval of
AutoCyte and NeoPath, which approval shall not be unreasonably withheld,
provided that a party shall not be prevented from making such disclosure as it
shall be advised by counsel is required by law or any listing agreement with a
national security exchange or the Nasdaq National Market. The parties
acknowledge that AutoCyte and NeoPath have previously executed a
Confidentiality/Non-Disclosure Agreement, dated April 29, 1999 (the
"Confidentiality Agreement"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms, except as is necessary to
comply with the terms of this Agreement.

4.13 NeoPath Affiliate Agreements. Set forth on Section 4.13 of the
NeoPath Disclosure Schedule is a list of those persons who, at the time of the
vote of NeoPath's stockholders on the Merger, NeoPath believes may be
"affiliates" of NeoPath within the meaning of Rule 145 under the Securities Act
or applicable SEC accounting releases with respect to "pooling of interests"
accounting treatment. NeoPath shall use all reasonable efforts to provide
AutoCyte with such information as AutoCyte shall reasonably request for purposes
of reviewing such list. NeoPath shall use its best efforts to deliver or cause
to be delivered to AutoCyte promptly after the date hereof from each of the
affiliates listed in Section 4.13 of the NeoPath Disclosure Schedule an
Affiliate Agreement in substantially the form attached as Exhibit C hereto (the
"NeoPath Affiliate Agreement"), each of which will be in full force and effect
as of the Effective Time. AutoCyte will be entitled to place appropriate legends
on the certificates evidencing any AutoCyte Common Stock to be received by any
such affiliate pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the AutoCyte Common Stock,
consistent with the terms of the Affiliate Agreement.

4.14 AutoCyte Affiliate Agreements. Set forth on Section 4.14 of the
AutoCyte Disclosure Schedule is a list of those persons who, at the time of the
vote of AutoCyte's stockholders on the Merger, AutoCyte believes may be
"affiliates" of AutoCyte within the meaning of applicable SEC accounting
releases with respect to "pooling of interests" accounting treatment. AutoCyte
shall use all reasonable efforts to provide NeoPath with such information as
NeoPath shall reasonably request for purposes of reviewing such list. AutoCyte
shall use its best efforts to deliver or cause to be delivered to NeoPath
promptly after the date hereof from each of the affiliates listed in Section
4.14 of the AutoCyte Disclosure Schedule an Affiliate Agreement in substantially
the form attached as Exhibit D hereto (the "AutoCyte Affiliate Agreement"), each
of which will be in full force and effect as of the Effective Time.

4.15 AutoCyte SEC Filings. Until the Closing Date, AutoCyte shall furnish
NeoPath with a copy of each periodic or current report filed by AutoCyte under
the Exchange Act promptly after filing the same. All filings made by AutoCyte
after the date hereof pursuant to the Exchange Act will be made in a timely
fashion, will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.

4.16 NeoPath SEC Filings. Until the Closing Date, NeoPath shall furnish
AutoCyte with a copy of each periodic or current report filed by NeoPath under
the Exchange Act promptly after filing the same. All filings made by NeoPath
after the date hereof pursuant to the Exchange Act will be made in a timely
fashion, will comply as to form in all material respects with the applicable
provisions of the Exchange Act
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and the rules and regulations thereunder and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.

4.17 Stock Options; Employee Stock Purchase Plan.

(a) At the Effective Time, each outstanding option to purchase shares
of NeoPath Common Stock (each a "NeoPath Stock Option") under the NeoPath
Stock Option Plans, whether or not exercisable, will be assumed by
AutoCyte. Each NeoPath Stock Option so assumed by AutoCyte under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable NeoPath Stock Option Plan
immediately prior to the Effective Time (including, without limitation, any
repurchase rights), except that (i) each NeoPath Stock Option will be
exercisable (or will become exercisable in accordance with its terms) for
that number of whole shares of AutoCyte Common Stock equal to the product
of the number of shares of NeoPath Common Stock that were issuable upon
exercise of such NeoPath Stock Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole
number of shares of AutoCyte Common Stock, and (ii) the per share exercise
price for the shares of AutoCyte Common Stock issuable upon exercise of
such assumed NeoPath Stock Option will be equal to the quotient determined
by dividing the exercise price per share of NeoPath Common Stock at which
such NeoPath Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, AutoCyte will issue to each holder of an
outstanding NeoPath Stock Option a notice describing the foregoing
assumption of such NeoPath Stock Option by AutoCyte.

(b) It is the intention of the parties that NeoPath Stock Options
assumed by AutoCyte qualify following the Effective Time as incentive stock
options as defined in Section 422 of the Code to the extent NeoPath Stock
Options qualified as incentive stock options immediately prior to the
Effective Time; and that notwithstanding anything contained in Section
1.6(a)(ii) or Section 4.17 hereof, or any other provision of this
Agreement, the exercise price, the number of shares purchasable and the
terms and conditions applicable to any NeoPath Stock Options shall be
determined so as to comply with Sections 422 and 424 of the Code and the
regulations promulgated thereunder.

(c) The Board of Directors of NeoPath shall, prior to or as of the
Effective Time, take appropriate action to approve the deemed cancellation
of the NeoPath Stock Options for purposes of Section 16(b) of the Exchange
Act. The Board of Directors of AutoCyte shall, prior to or as of the
Effective Time, take appropriate action to approve the deemed grant of
options to purchase AutoCyte Common Stock under the NeoPath Stock Options
(as converted pursuant to this Section 4.17) for purposes of Section 16(b)
of the Exchange Act.

(d) AutoCyte will reserve sufficient shares of AutoCyte Common Stock
for issuance under Section 4.17(a) and under Section 1.6(a)(ii) hereof.

(e) NeoPath shall not commence any offering under its Employee Stock
Purchase Plan after the date hereof.

4.18 AutoCyte Form S-8. AutoCyte agrees to file a registration statement
on Form S-8 for the shares of AutoCyte Common Stock issuable with respect to the
assumed NeoPath Stock Options no later than three business days after the
Effective Time and shall keep such registration statement effective for so long
as any such NeoPath Stock Options remain outstanding.

4.19 FIRPTA. At or prior to the Closing, NeoPath, if requested by AutoCyte
and in a form specified by AutoCyte, shall deliver to the IRS a notice that the
NeoPath Common Stock is not a "U.S. Real Property Interest" as defined and in
accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2).

4.20 Notification of Certain Matters. AutoCyte will give prompt notice to
NeoPath, and NeoPath will give prompt notice to AutoCyte, of the occurrence, or
failure to occur, of any event, which occurrence

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or failure to occur would be reasonably likely to cause (a) any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time or (b) any material failure of AutoCyte or NeoPath, as the case may be, or
of any officer, director, employee or agent thereof, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement. Notwithstanding the above, the delivery of any notice
pursuant to this section will not limit or otherwise affect the remedies
available hereunder to the party receiving such notice or the conditions to such
party's obligation to consummate the Merger.

4.21 Tax-Free Reorganization. AutoCyte and NeoPath will each use all
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368 of the Code. AutoCyte and NeoPath will each make
available to the other party and their respective legal counsel copies of all
Returns reasonably requested by the other party. AutoCyte and NeoPath will make
such representations as reasonably requested by legal counsel for the purpose of
rendering the opinions contemplated by Section 5.7.

4.22 Indemnification. (a) From and after the Effective Time, AutoCyte
shall fulfill and honor in all respects the obligations of NeoPath to indemnify
each person who is or was a director or officer (an "Indemnified Party") of
NeoPath pursuant to any indemnification provisions of NeoPath's Articles of
Incorporation or Bylaws as each is in effect on the date hereof.

(b) For a period of six years after the Effective Time, AutoCyte shall
cause to be maintained in effect the current officers' and directors' liability
insurance maintained by NeoPath with respect to the Indemnified Parties
(provided that AutoCyte may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are no less
advantageous to the Indemnified parties than such existing insurance) covering
acts or omissions occurring prior to the Effective Time; provided, that AutoCyte
shall not be required in order to maintain or procure such coverage to pay an
annual premium in excess of the current annual premium paid by NeoPath for its
existing coverage or, alternatively, a single payment in excess of six times the
current annual premium paid by NeoPath for its existing coverage (the "Cap");
and provided, further, that if existing coverage cannot be maintained or
equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of the Cap, AutoCyte shall only be required to obtain
as much coverage as can be obtained by paying an annual premium equal to the
Cap. The current annual premium paid by NeoPath for its existing coverage is set
forth in Section 4.22(a) of the NeoPath Disclosure Schedule.

(c) This Section 4.22 shall survive the closing of all the transactions
contemplated hereby, is intended to benefit the Indemnified Parties and their
respective heirs and personal representatives to the extent that the provisions
of NeoPath's Articles of Incorporation or Bylaws and NeoPath's current officers'
and directors' liability insurance benefit such individuals (each of which shall
be entitled to enforce this Section 4.22 against AutoCyte as a third-party
beneficiary of this Agreement to such extent).

4.23 Pooling of Interests. Each of AutoCyte and NeoPath shall use all
reasonable efforts to cause the transaction contemplated by this Agreement,
including the Merger, to be accounted for as a pooling of interests under
Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations, and AutoCyte's and NeoPath's respective management's conclusion
that such accounting treatment is appropriate for the Merger to be concurred
with by each of AutoCyte's and NeoPath's auditors and by the SEC, respectively,
and neither AutoCyte nor NeoPath shall voluntarily take any action that would
cause such accounting treatment not to be obtained.

4.24 Letters of AutoCyte's and NeoPath's Accountants. (a) AutoCyte shall
use all reasonable efforts to cause its independent public accountants to
deliver to NeoPath a letter, dated a date within two business days before the
Closing Date, addressed to NeoPath, in form and substance reasonably
satisfactory to NeoPath and customary in scope and substance for comfort letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement. AutoCyte shall also provide
reasonable cooperation to each of AutoCyte's and NeoPath's independent public
accountants to enable them to issue the letters referred to in Section 5.7.

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(b) NeoPath shall use all reasonable efforts to cause its independent
public accountants to deliver to AutoCyte a letter, dated a date within two
business days before the Closing Date, addressed to AutoCyte, in form and
substance reasonably satisfactory to AutoCyte and customary in scope and
substance for comfort letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
NeoPath shall also provide reasonable cooperation to each of NeoPath's and
AutoCyte's independent public accountants to enable them to issue the letters
referred to in Section 5.7.

4.25 Employee Benefit Plans; Existing Agreement. (a) As soon as
practicable after the Effective Time (the "Benefits Date"), AutoCyte shall
provide, or cause to be provided, to each employee of NeoPath employee benefit
plans, programs and arrangements that are the same as those made generally
available to similarly situated non-represented employees of AutoCyte who are
hired by AutoCyte after December 31, 1998. From the Effective Time to the
Benefits Date (which the parties acknowledge may occur on different dates with
respect to different plans, programs or arrangements of NeoPath) (the
"Continuation Period"), AutoCyte shall provide, or cause to be provided, the
employee benefit plans, programs and arrangements of NeoPath provided to
employees of NeoPath as of the date hereof.

(b) With respect to each benefit plan, program practice, policy or
arrangement maintained by AutoCyte (the "AutoCyte Plans") in which employees of
NeoPath subsequently participate, for purposes of determining vesting and
entitlement to benefits, including for severance benefits and vacation
entitlement (but not for accrual of benefits), service with NeoPath (or
predecessor employers to the extent NeoPath provides past service credit) shall
be treated as service with AutoCyte; provided, that such service shall not be
recognized to the extent that such recognition would result in a duplication of
benefits. Such service also shall apply for purposes of satisfying any waiting
periods, evidence of insurability requirements, or the application of any
pre-existing condition limitations. Each AutoCyte Plan shall waive pre-existing
condition limitations to the same extent waived under the applicable NeoPath
benefit plan. NeoPath employees shall be given credit for amounts paid under a
corresponding benefit plan during the same period for purposes of applying
deductible, copayments and out-of-pocket maximums as though such amounts had
been paid in accordance with the terms and conditions of the AutoCyte Plan.

SECTION 5 -- CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF EACH PARTY TO CONSUMMATE THE MERGER

The respective obligations of each party to consummate the Merger shall be
subject to the satisfaction or waiver, at or before the Effective Time, of each
of the following conditions:

5.1 Stockholder Approvals. All required approvals of the stockholders of
NeoPath, AutoCyte and Merger Sub shall have been obtained.

5.2 Government Approvals. All authorizations, consents, orders,
declarations or approvals of, or filings with, any governmental or regulatory
authority, domestic or foreign, which the failure to obtain, make or occur would
have the effect of making the Merger or any of the transactions contemplated
hereby illegal or would have a Material Adverse Effect on AutoCyte or NeoPath,
assuming the Merger had taken place, shall have been obtained, made or occurred.

5.3 Absence of Restraints. No judgment, order, decree, statute, law,
ordinance, rule or regulation, entered, enacted, promulgated, enforced or issued
by any court or other governmental entity of competent jurisdiction or other
legal restraint or prohibition (collectively, "restraints") shall be in effect,
and there shall not be pending any suit, action or proceeding by any
governmental entity (i) preventing the consummation of the Merger or (ii) which
otherwise is reasonably likely to have a Material Adverse Effect on AutoCyte or
NeoPath, as applicable; provided, that each of the parties shall have used all
reasonable efforts to prevent the entry of any such restraints and to appeal as
promptly as possible any such restraints that may be entered.

5.4 Nasdaq Listing. The shares of AutoCyte Common Stock to be issued in
the Merger shall have been approved for quotation on the Nasdaq National Market.
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5.5 Effectiveness of Registration Statement. The Registration Statement
shall have been declared effective by the SEC and there shall not be any stop
order in effect with respect to the Registration Statement.

5.6 Tax Opinions. AutoCyte and NeoPath each shall have received
substantially identical written opinions from their counsel, Palmer & Dodge LLP
and Perkins & Coie LLP, respectively, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; provided that
if the respective counsel to AutoCyte or NeoPath does not render such opinion,
this condition shall nonetheless be deemed satisfied with respect to such party
if counsel to the other party renders such opinion to such party.

5.7 Pooling Letters. Each of AutoCyte and NeoPath shall have received
letters, dated as of the Closing Date, in each case addressed to AutoCyte and
NeoPath, from Ernst & Young LLP stating in substance that pooling of interests
accounting is appropriate for the Merger under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations.

SECTION 6 -- CONDITIONS PRECEDENT TO THE OBLIGATION
OF AUTOCYTE TO CONSUMMATE THE MERGER

The obligation of AutoCyte to consummate the Merger is subject to the
satisfaction or waiver by AutoCyte, at or before the Effective Time, of the
following conditions:

6.1 Representations, Warranties and Covenants. Each of the representations
and warranties of NeoPath contained in this Agreement to the extent it is
qualified by NeoPath Material Adverse Effect shall be true and correct and each
of the representations and warranties to the extent it is not so qualified by
NeoPath Material Adverse Effect shall be true and correct in all material
respects, in each case, on and as of the Effective Time with the same force and
effect as though made on and as of the Effective Time (with such exceptions as
may be permitted under or contemplated by this Agreement and except to the
extent that such representations and warranties expressly relate to an earlier
date, in which case such representations and warranties shall be as of such
earlier date). NeoPath shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by them on or prior to the Effective Time. AutoCyte
shall have received from NeoPath a certificate, dated the Closing Date, to the
foregoing effect signed on behalf of NeoPath by the Chief Executive Officer of
NeoPath.

6.2 NeoPath Affiliate Agreements. Except as set forth thereon, each of the
individuals and entities listed on Section 4.13 of the NeoPath Disclosure
Schedule shall have entered into a NeoPath Affiliate Agreement in the form
attached hereto as Exhibit C, and such agreements are in full force and effect.

6.3 Voting Agreement. Each of the individuals and entities listed on
Section 4.13 of the NeoPath Disclosure Schedule shall have entered into a Voting
Agreement with AutoCyte in the form attached hereto as Exhibit A, and such
agreements shall be in full force and effect.

6.4 Opinion of Counsel to NeoPath. AutoCyte shall have received a legal
opinion from Perkins & Coie LLP, counsel to NeoPath, dated the Closing Date and
in form and substance reasonably acceptable to Palmer & Dodge LLP, counsel to
AutoCyte, as to the matters set forth in Exhibit E hereto.

6.5 Merger Documents. NeoPath shall have executed and delivered the Merger
Documents referred to in Section 1.2.

6.6 Consents. NeoPath shall have received all necessary consents or
waivers from the other parties to each contract, lease or agreement to which
NeoPath is a party, except where the failure to receive such consent would not
reasonably be expected, individually or in the aggregate, to have a NeoPath
Material Adverse Effect.

6.7 Dissenting Shares. The Dissenting Shares shall not exceed five percent
(5%) of the shares of the NeoPath Common Stock issued and outstanding or
issuable on the Closing Date.

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6.8 Certificates. NeoPath shall have furnished AutoCyte with such
documents and certificates as may be reasonably requested by AutoCyte.

SECTION 7 -- CONDITIONS PRECEDENT TO THE OBLIGATION
OF NEOPATH TO CONSUMMATE THE MERGER

The obligation of NeoPath to consummate the Merger is subject to the
satisfaction or waiver by NeoPath, at or before the Effective Time, of the
following conditions:

7.1 Representations, Warranties and Covenants. Each of the representations
and warranties of AutoCyte and Merger Sub contained in this Agreement to the
extent it is qualified by AutoCyte Material Adverse Effect shall be true and
correct and each of the representations and warranties to the extent it is not
so qualified by AutoCyte Material Adverse Effect, shall be true and correct in
all material respects on and as of the Effective Time with the same force and
effect as though made on and as of the Effective Time (with such exceptions as
may be permitted under or contemplated by this Agreement and except to the
extent that such representations and warranties expressly relate to an earlier
date, in which case such representations and warranties shall be as of such
earlier date). AutoCyte shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it on or prior to the Effective Time. NeoPath
shall have received from AutoCyte a certificate, dated the Closing Date, to the
foregoing effect signed on behalf of AutoCyte by the Chief Executive Officer of
AutoCyte.

7.2 AutoCyte Affiliate Agreements. Except as set forth thereon, each of
the individuals and entities listed on Section 4.14 of the AutoCyte Disclosure
Schedule shall have entered into an AutoCyte Affiliate Agreement in the form
attached hereto as Exhibit D, and such agreements are in full force and effect.

7.3 Voting Agreement. Each of Richard Charpie, Robert Curry and James
Powell shall have entered into a Voting Agreement with AutoCyte on behalf of
himself and all other entities of which such individuals exercise voting control
in the form attached hereto as Exhibit B, and such agreements shall be in full
force and effect.

7.4 Consents. AutoCyte shall have received all necessary consents or
waivers from the other parties to each contract, lease or agreement to which
AutoCyte is a party, except where the failure to receive such consent would not
reasonably be expected, individually or in the aggregate, to have an AutoCyte
Material Adverse Effect.

7.5 Opinion of Counsel to AutoCyte. NeoPath shall have received a legal
opinion from Palmer & Dodge LLP, counsel to AutoCyte, dated the Closing Date and
in form and substance reasonably acceptable to Perkins & Coie LLP, counsel to
NeoPath, as to the matters set forth in Exhibit F hereto.

7.6 Certificates. AutoCyte shall have furnished NeoPath with such
documents and certificates as may be reasonably requested by NeoPath.

SECTION 8 -- TERMINATION

8.1 Termination. This Agreement may be terminated at any time on or prior
to the Effective Time of the Merger, whether prior to or after approval by
NeoPath's stockholders or AutoCyte's stockholders, as follows:

(a) by AutoCyte or NeoPath if, without fault of the terminating party,
the Closing Date shall not have occurred on or before November 30, 1999,
which date may be extended by mutual consent of the parties;

(b) by AutoCyte upon written notice to NeoPath if any representation
or warranty made herein by NeoPath was not true and correct in all material
respects when made or NeoPath has materially breached any covenant
contained herein and has not cured such breach within ten (10) business
days of receipt of written notice from AutoCyte or by the Closing Date,
whichever occurs first;
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(c) by NeoPath upon written notice to AutoCyte if any representation
or warranty of AutoCyte made herein was not true and correct in all
material respects when made or AutoCyte has materially breached any
covenant contained herein and has not cured such breach within ten (10)
business days of receipt of written notice from NeoPath or by the Closing
Date, whichever occurs first;

(d) by AutoCyte or NeoPath if any court of competent jurisdiction or
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree or ruling shall have become final and nonappealable;

(e) by AutoCyte or NeoPath if either the AutoCyte or NeoPath
stockholders vote and fail to approve the Merger as required by the DGCL or
WBCA, respectively;

(f) by AutoCyte if NeoPath's Board of Directors (i) fails to include
in the Proxy Statement its recommendation that NeoPath stockholders vote in
favor of the adoption of this Agreement or (ii) withdraws its
recommendation that stockholders vote in favor (other than in connection
with exercising NeoPath's rights to terminate this Agreement pursuant to
subsection (c) or (d) of this Section 9.1);

(g) by NeoPath if AutoCyte's Board of Directors (i) fails to include
in the Proxy Statement its recommendation that AutoCyte stockholders vote
in favor of the adoption of this Agreement or (ii) withdraws its
recommendation that stockholders vote in favor (other than in connection
with exercising AutoCyte rights to terminate this Agreement pursuant to
Subsection (b) or (d) of this Section 9.1);

(h) at any time with the written consent of AutoCyte and NeoPath duly
authorized by their respective Boards of Directors;

(i) by AutoCyte, if there shall have occurred any event or condition
that constitutes a NeoPath Material Adverse Effect since the date of this
Agreement, which condition or event shall not have been ameliorated such
that it is no longer a NeoPath Material Adverse Effect within ten (10)
business days following receipt by NeoPath of notice from AutoCyte;

(j) by NeoPath, if there shall have occurred any event or condition
that constitutes an AutoCyte Material Adverse Effect since the date of this
Agreement, which condition or event shall not have been ameliorated such
that it is no longer an AutoCyte Material Adverse Effect within ten (10)
business days following receipt by AutoCyte of notice from NeoPath;

(k) by AutoCyte or NeoPath, in the event that it receives written
notice from either Ernst & Young LLP or the SEC that, in the opinion of the
entity giving such notice, the Merger will not qualify for pooling of
interests accounting treatment;

(l) by NeoPath, if the Board of Directors of NeoPath shall have,
pursuant to Section 4.5, recommended or resolved to recommend to the
shareholders of NeoPath a proposal for an Alternative Transaction (as
defined in Section 8.3(d)) under circumstances where the Board of Directors
determines in good faith (after consultation with legal counsel, which may
be NeoPath's regular outside counsel) that acceptance of such proposal is
necessary for such Board to comply with its fiduciary duties to its
stockholders under applicable law, but only after the third business day
following AutoCyte's receipt of written notice advising AutoCyte that such
Board is prepared to accept a proposal for an Alternative Transaction and
identifying the terms of the Alternative Transaction and the Person making
the proposal for an Alternative Transaction and NeoPath makes the payment
required pursuant to Section 8.3 of this Agreement; and

(m) by AutoCyte, if the Board of Directors of AutoCyte shall have,
pursuant to Section 4.5, recommended or resolved to recommend to the
shareholders of AutoCyte a proposal for an Alternative Transaction (as
defined in Section 8.3(d)) under circumstances where the Board of Directors
determines in good faith (after consultation with legal counsel, which may
be AutoCyte's regular outside counsel) that acceptance of such proposal is
necessary for such Board to comply with its fiduciary duties to its
stockholders under applicable law, but only after the third business day
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following NeoPath's receipt of written notice advising NeoPath that such
Board is prepared to accept a proposal for an Alternative Transaction and
identifying the terms of the Alternative Transaction and the Person making
the proposal for an Alternative Transaction and AutoCyte makes the payment
required pursuant to Section 8.3 of this Agreement.

8.2 Notice of Termination; Effect of Termination. If this Agreement is
terminated as provided in Section 8.1, this Agreement shall forthwith become
void and have no effect, without further obligation on the part of any party,
its directors, officers or stockholders following the date of such termination
other than the provisions of this Section 8.2, Section 8.3 and Section 9
(Miscellaneous); provided, however, that nothing herein shall relieve any party
from liability for the willful and material breach of any of its
representations, warranties, covenants or agreements set forth in this
Agreement; provided further, however, that if either party has received the fee
contemplated by Section 8.3(b) or (c), the party receiving such fee shall not
assert or pursue in any manner, directly or indirectly, any claim or cause of
action against the party paying such fee or any of its officers or directors
based in whole or in part upon its or their receipt, consideration,
recommendation or approval of a proposal for a Alternative Transaction or the
exercise of the right of the party paying such fee to terminate this Agreement.
No termination of this Agreement shall affect the obligations of the parties
contained in the Confidentiality Agreement, all of which obligations shall
survive termination of this Agreement in accordance with their terms.

8.3 Fees and Expenses.

(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses,
whether or not the Merger is consummated; provided, however, that AutoCyte
and NeoPath shall share equally all fees and expenses, other than
attorneys' and accountants fees and expenses, incurred in relation to the
printing and filing of the Proxy Statement (including any preliminary
materials related thereto) and the Registration Statement (including
financial statements and exhibits) and any amendments or supplements
thereto. Notwithstanding the foregoing, in order to induce the other party
to enter into this Agreement and to reimburse the other party for its costs
and expenses and loss of other opportunities related to negotiating and
entering into this Agreement and investigating the desirability of and
seeking to consummate the transactions contemplated by this Agreement,
AutoCyte and NeoPath agree to make cash payments to each other in the
circumstances, and in the amounts, set forth in Sections 8.3(b) and (c).

(b) NeoPath shall pay AutoCyte a termination fee in an amount equal to
the sum of (x) two million eight hundred thousand dollars ($2,800,000) and
(y) all of AutoCyte's fees and expenses reasonably incurred in connection
with this Agreement and the transactions contemplated hereby, upon the
earliest to occur of the following events:

(i) the termination of this Agreement by NeoPath pursuant to
Section 8.1(l);

(ii) the termination of this Agreement by AutoCyte pursuant to
Section 8.1(e) (but only if the AutoCyte stockholders shall have
approved the Merger as required by the DGCL and the WBCA) as a result of
the failure to receive the requisite vote for approval of this Agreement
and the Merger by the stockholders of NeoPath at the NeoPath
stockholders' meeting if, at the time of such failure,

(A) there shall have been announced or commenced an Alternative
Transaction (as defined in Section 8.3(d)) and NeoPath shall have
either (x) executed an agreement to engage in the same or (y) the
NeoPath Board of Directors shall not have recommended against such
Alternative Transaction affirmatively or, if the NeoPath Board of
Directors has recommended against such Alternative Transaction, the
NeoPath Board of Directors shall have withdrawn such recommendation
against such Alternative Transaction or modified such recommendation
in a manner adverse to AutoCyte, or

(B) there shall have been announced or commenced an Alternative
Transaction (as defined in Section 8.3(d)) and (x) NeoPath shall have
engaged in, or entered into an
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agreement to engage in, an Alternative Transaction with such Third
Party or any affiliate thereof within twelve months after the date of
the NeoPath stockholders' meeting or (y) the NeoPath Board of
Directors shall have recommended an Alternative Transaction with the
Third Party proposing such Alternative Transaction or any affiliate
thereof within twelve months after the date of the NeoPath
stockholders' meeting; or

(iii) the termination of this Agreement by AutoCyte pursuant to
Section 8.1(f) if before such termination or within twelve months
thereafter NeoPath shall have entered into an agreement to engage in or
shall have engaged in an Alternative Transaction.

The expenses and fees, if applicable, payable pursuant to this Section
8.3(b) shall be paid within five business days after the first to occur of the
events described in clauses (ii) or (iii) and prior to the exercise by NeoPath
of its rights as described in clause (i); provided that, (I) despite the
foregoing provision, if NeoPath is obligated to pay a termination fee to
AutoCyte pursuant to Section 8.3(b)(ii)(B) or 8.3(b)(iii), then the fees payable
by NeoPath to AutoCyte pursuant to Section 8.3(b)(ii) or 8.3(b)(iii) shall be
paid within five business days after the occurrence of the transaction or
recommendation occurring or continuing after the NeoPath stockholders' meeting
which gives rise to the rights to receive the termination fee and (II) in no
event shall NeoPath be required to pay any expenses or termination fees to
AutoCyte if, immediately prior to the termination of this Agreement, AutoCyte
was in breach of any of its material obligations under this Agreement.

(c) AutoCyte shall pay NeoPath a termination fee in an amount equal to
the sum of (x) two million eight hundred thousand dollars ($2,800,000) and
(y) all of NeoPath's fees and expenses reasonably incurred in connection
with this Agreement and the transactions contemplated hereby, upon the
earliest to occur of the following events:

(i) the termination of this Agreement by AutoCyte pursuant to
Section 8.1(m);

(ii) the termination of this Agreement by NeoPath pursuant to
Section 8.1(e) (but only if the NeoPath stockholders shall have approved
the Merger as required by the DGCL and the WBCA) as a result of the
failure to receive the requisite vote for approval of this Agreement and
the Merger by the stockholders of AutoCyte at the AutoCyte stockholders'
meeting if, at the time of such failure,

(A) there shall have been announced or commenced an Alternative
Transaction (as defined in Section 8.3(d)) and AutoCyte shall have
either (x) executed an agreement to engage in the same or (y) the
AutoCyte Board of Directors shall not have recommended against such
Alternative Transaction affirmatively or, if the AutoCyte Board of
Directors has recommended against such Alternative Transaction, the
AutoCyte Board of Directors shall have withdrawn such recommendation
against such Alternative Transaction or modified such recommendation
in a manner adverse to NeoPath, or

(B) there shall have been announced or commenced an Alternative
Transaction (as defined in Section 8.3(d)) and (x) AutoCyte shall
have engaged in, or entered into an agreement to engage in, an
Alternative Transaction with such Third Party or any affiliate
thereof within twelve months after the date of the AutoCyte
stockholders' meeting or (y) the AutoCyte Board of Directors shall
have recommended an Alternative Transaction with the Third Party
proposing such Alternative Transaction or any affiliate thereof
within twelve months after the date of the AutoCyte stockholders'
meeting; or

(iii) the termination of this Agreement by NeoPath pursuant to
Section 8.1(g) if before such termination or within twelve months
thereafter AutoCyte shall have entered into an agreement to engage in or
shall have engaged in an Alternative Transaction.

The expenses and fees, if applicable, payable pursuant to this Section
8.3(c) shall be paid within five business days after the first to occur of the
events described in clauses (ii) or (iii) and prior to the exercise by AutoCyte
of its rights as described in clause (i); provided that, (I) despite the
foregoing

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provision, if AutoCyte is obligated to pay a termination fee to NeoPath pursuant
to Section 8.3(b)(ii)(B) or 8.3(b)(iii), then the fees payable by AutoCyte to
NeoPath pursuant to Section 8.3(b)(ii) or 8.3(b)(iii) shall be paid within five
business days after the occurrence of the transaction or recommendation
occurring or continuing after the AutoCyte stockholders' meeting which gives
rise to the rights to receive the termination fee and (II) in no event shall
AutoCyte be required to pay any expenses or termination fees to NeoPath if,
immediately prior to the termination of this Agreement, NeoPath was in breach of
any of its material obligations under this Agreement.

(d) As used in this Agreement, "Alternative Transaction" means either
(i) a transaction pursuant to which any person (or group of persons) other
than AutoCyte or NeoPath, or either of their respective affiliates (a
"Third Party"), acquires more than 15% of the outstanding shares of
AutoCyte Common Stock or NeoPath Common Stock, as applicable, pursuant to a
tender offer or exchange offer of otherwise, (ii) a merger or other
business combination involving either AutoCyte or NeoPath, as applicable,
pursuant to which any Third Party acquires more than 15% of the outstanding
equity securities of AutoCyte or NeoPath, as applicable, or the entity
surviving such merger or business combination, (iii) any other transaction
pursuant to which any Third Party acquires control of assets of AutoCyte or
NeoPath having a fair market value (as determined by the Board of Directors
of AutoCyte or NeoPath, as applicable, in good faith) equal to more than
15% of the fair market value of all the assets of AutoCyte or NeoPath, as
applicable, immediately prior to such transaction ("Material Assets"), or
(iv) any public announcement of a proposal, plan or intention to do any of
the foregoing or any agreement to engage in any of the foregoing.

SECTION 9 -- MISCELLANEOUS

9.1 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:

(a) if to AutoCyte or Merger Sub, to:

AutoCyte, Inc.
780 Plantation Drive
Burlington, NC 27215
Attention: President
Tel: (336) 222-9707
Fax: (336) 513-0411

with a copy to:

Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: Steven N. Farber
Marc A. Rubenstein
Tel: (617) 573-0100
Fax: (617) 227-4420

(b) if to NeoPath, to:

NeoPath, Inc.
8271 154th Avenue NE
Redmond, WA 98052
Attention: President
Tel: (425) 869-7284
Fax: (425) 556-3064

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with a copy to:

Perkins & Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attention: Michael E. Stansbury
Tel: (206) 583-8888
Fax: (206) 583-8500

Any party may by notice given in accordance with this Section 9.1 to the other
parties designate another address or person for receipt of notices hereunder.

9.2 Amendment. This Agreement may not be amended except by an instrument
signed by each party hereto.

9.3 Waiver. At any time prior to the Effective Time, any party hereto may,
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or any conditions to its own obligations, in each case only to
the extent such obligations, agreements and conditions are intended for its
benefit; provided that any such extension or waiver shall be binding upon a
party only if such extension or waiver is set forth in a writing executed by
such party.

9.4 Entire Agreement. This Agreement contains the entire agreement among
the parties with respect to the Merger and related transactions, and supersedes
all prior agreements, written or oral, with respect thereto, it being understood
that the Confidentiality Agreement shall continue in full force and effect until
the Closing and shall survive any termination of this Agreement.

9.5 Governing Law. This Agreement is governed by the laws of the State of
Delaware without regard to its conflict of law provisions.

9.6 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns.

9.7 Variations in Pronouns. All pronouns and any variations thereof refer
to the masculine, feminine or neuter, singular or plural, as the context may
require.

9.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.

9.9 Exhibits and Disclosure Schedules. The Exhibits and Disclosure
Schedules are a part of this Agreement as if fully set forth herein.

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IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date first stated above.

AUTOCYTE, INC.

By /s/ JAMES B. POWELL

------------------------------------
Name: James B. Powell
Title: President and Chief
Executive Officer

NEOPATH, INC.

By /s/ ALAN C. NELSON

------------------------------------
Name: Alan C. Nelson
Title: Chairman

TRILOGY ACQUISITION CORPORATION

By /s/ JAMES B. POWELL

------------------------------------
Name: James B. Powell
Title: President

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SCHEDULE 1

BOARD OF DIRECTORS OF SURVIVING CORPORATION
IMMEDIATELY AFTER THE EFFECTIVE TIME

Thomas A. Bonfiglio
Richard A. Charpie
Robert E. Curry
Alan C. Nelson
James B. Powell
David A. Thompson
[outside director to be determined]

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SCHEDULE 2

OFFICERS OF SURVIVING CORPORATION
IMMEDIATELY AFTER THE EFFECTIVE TIME

James B. Powell, President and Chief Executive Officer
Ernest A. Knesel, Executive Vice President
Thomas Gahm, Vice President of Cytology Research and Development
Eric W. Linsley, Chief Financial Officer, Vice President of Finance and
Treasurer
Shih-Jong James Lee, Vice President and Corporate Partner Advance
Development
Steven C. McPhail, Vice President of Sales and Marketing
Mary K. Norton, Vice President of Regulatory Affairs and Quality
Assurance
David H. Robison, Vice President of Operations

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APPENDIX B

CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)

23B.13.010 DEFINITIONS

As used in this chapter:

(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.

(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and
in the manner required by RCW 23B.13.200 through 23B.13.280.

(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.

(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.

(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.

(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.

(7) "Shareholder" means the record shareholder or the beneficial
shareholder.

23B.13.020 RIGHT TO DISSENT

(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:

(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation
is a subsidiary that is merged with its parent under RCW 23B.11.040;

(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;

(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;

(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or

(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.

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(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.

(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:

(a) The proposed corporate action is abandoned or rescinded;

(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or

23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS

(1) A record shareholder may assert dissenters' rights as to fewer than all
shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.

(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:

(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and

(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.

23B.13.200 NOTICE OF DISSENTERS' RIGHTS

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.

(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.

23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.

(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.

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23B.13.220 DISSENTERS' NOTICE

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.

(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:

(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;

(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;

(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;

(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered;
and

(e) Be accompanied by a copy of this chapter.

23B.13.230 DUTY TO DEMAND PAYMENT

(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.

(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.

(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.

23B.13.240 SHARE RESTRICTIONS

(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.

(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.

23B.13.250 PAYMENT

(1) Except as provided in RC 23B.13.270, within thirty days of the later of
the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.

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(2) The payment must be accompanied by:

(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;

(b) An explanation of how the corporation estimated the fair value of
the shares;

(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and

(e) A copy of this chapter.

23B.13.260 FAILURE TO TAKE ACTION

(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.

(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.

23B.13.270 AFTER-ACQUIRED SHARES

(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.

(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.

23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER

(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:

(a) The dissenter believes that the amount paid under RCW 23B.13.250
or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;

(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or

(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.

(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.

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23B. 13.300 COURT ACTION

(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.

(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.

(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.

(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.

(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.

(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.

23B.13.310 COURT COSTS AND COUNSEL FEES

(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.

(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:

(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or

(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.

(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.

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ANNEX C

LOGO

WARBURG DILLON READ LLC

299 Park Avenue

New York, NY 10171-0026

Telephone 212 821-4000

www.wdr.com

June 4, 1999

The Board of Directors
AutoCyte, Inc.
780 Plantation Drive
Burlington, NC 27215

Dear Member of the Board:

We understand that AutoCyte, Inc., a Delaware corporation ("AutoCyte" or
the "Company"), is considering a transaction whereby pursuant to the terms of a
draft Agreement and Plan of Merger (the "Merger Agreement") the Company will
undertake a series of transactions whereby NeoPath, Inc., a Washington
corporation ("NeoPath"), will become a wholly owned subsidiary of the Company
(the "Transaction"). Pursuant to the terms of the Merger Agreement all of the
issued and outstanding shares of the capital stock of NeoPath, $0.10 par value,
will be converted, in the aggregate, into 13.8 million shares of Common Stock,
$0.01 par value, of the Company (the "Exchange Ratio"). No Company Common Stock
will be issued to holders of fractional shares of NeoPath Common Stock. The
terms and conditions of the Transaction are more fully set forth in the Merger
Agreement.

You have requested our opinion as to the fairness to the Company from a
financial point of view of the Consideration to be paid by the Company to the
shareholders of NeoPath in the Transaction.

In the past, Warburg Dillon Read LLC ("WDR") and its predecessors have
provided investment banking services to the Company and received customary
compensation for the rendering of such services. In the ordinary course of
business, WDR, its successors and affiliates may have traded securities of the
Company or NeoPath for their own accounts and, accordingly, may at any time hold
a long or short position in such securities.

Our opinion does not address the Company's underlying business decision to
effect the Transaction or constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote with respect to the Transaction.
At your direction, we have not been asked to, nor do we, offer any opinion as to
the material terms of the Merger Agreement or the form of the Transaction. In
rendering this opinion, we have assumed, with your consent, that the final
executed form of the Merger Agreement does not differ in any material respect
from the draft that we have examined, and that the Company and NeoPath will
comply with all the material terms of the Merger Agreement.

WARBURG DILLON READ LLC IS A SUBSIDIARY OF UBS AG.

WARBURG DILLON READ IS THE INVESTMENT BANKING DIVISION OF UBS AG.

MEMBER SIPC

MEMBER NEW YORK STOCK EXCHANGE

AND OTHER PRINCIPAL EXCHANGES

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In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and NeoPath, (ii) reviewed certain internal financial
information and other data relating to the business and financial prospects of
the Company, including estimates and financial forecasts prepared by management
of the Company, that were provided to us by the Company and not publicly
available, (iii) reviewed certain internal financial information and other data
relating to the business and financial prospects of NeoPath, including estimates
and financial forecasts prepared by the management of the Company and NeoPath
and not publicly available, (iv) conducted discussions with members of the
senior managements of the Company and NeoPath, (v) reviewed publicly available
financial and stock market data with respect to certain other companies in lines
of business we believe to be generally comparable to those of the Company and
NeoPath, (vi) compared the financial terms of the Transaction with the publicly
available financial terms of certain other transactions which we believe to be
generally relevant, (vii) considered certain pro forma effects of the
Transaction on the Company's financial statements, (viii) reviewed drafts of the
Merger Agreement, and (ix) conducted such other financial studies, analyses, and
investigations, and considered such other information as we deemed necessary or
appropriate.

In connection with our review, at your direction, we have not assumed any
responsibility for independent verification for any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on its
being complete and accurate in all material respects. In addition, at your
direction, we have not made or received any independent evaluation or appraisal
of any of the assets or liabilities (contingent or otherwise) of the Company or
NeoPath, nor have we been furnished with any such evaluation or appraisal. With
respect to the financial forecasts, estimates, and pro forma effects referred to
above, we have assumed, at your direction, that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of each company as to the future performance of
their respective companies. Our opinion is necessarily based on economic,
monetary, market and other conditions as in effect on, and the information made
available to us as of the date hereof.

In rendering our opinion, we have assumed, with your consent, that the
Transaction will receive pooling-of-interests accounting treatment and will
qualify as a tax-free reorganization.

Based upon and subject to the foregoing, it is our opinion that, as the
date hereof, the Exchange Ratio to be offered by the Company to the shareholders
of NeoPath in the Transaction is fair, from a financial point of view, to the
Company.

Very truly yours,

WARBURG DILLON READ LLC

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ANNEX D

LOGO

CREDIT SUISSE FIRST BOSTON CORPORATION

ELEVEN MADISON AVENUE TELEPHONE 212 325-2000

NEW YORK, NY 10010-3629

June 4, 1999

Board of Directors
NeoPath, Inc.
8271-154th Avenue NE
Redmond, WA 98052

Dear Members of the Board:

You have asked us to advise you with respect to the fairness to the
stockholders of NeoPath, Inc. (the "Company"), other than AutoCyte, Inc. (the
"Acquiror") and its subsidiaries, from a financial point of view of the Exchange
Ratio (as defined below) provided for in the Agreement and Plan of Merger, dated
as of June 4, 1999 (the "Merger Agreement"), between the Acquiror, Trilogy
Acquisition Corporation ("Sub") and the Company. The Merger Agreement provides
for the merger (the "Merger") of Sub with and into the Company pursuant to which
the Company will become a wholly owned subsidiary of the Acquiror and each
outstanding share of common stock, par value $0.01 per share, of the Company
(the "Company Common Stock") will be converted into the right to receive 0.790
of a share (the "Exchange Ratio") of common stock, par value $0.01 per share, of
the Acquiror (the "Acquiror Common Stock").

In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror, as
well as the Merger Agreement. We have also reviewed certain other information,
including financial forecasts, provided to us by the Company and the Acquiror,
and have met with the Company's and the Acquiror's managements to discuss the
business and prospects of the Company and the Acquiror.

We have also considered certain financial and stock market data of the
Company and the Acquiror, and we have compared those data with similar data for
other publicly held companies in businesses similar to those of the Company and
the Acquiror and we have considered the financial terms of certain other
business combinations and other transactions which have recently been effected.
We have had discussions with managements of the Company and the Acquiror
concerning the business, operational and strategic benefits and implications of
the Merger, and the synergistic values and operating cost savings expected to be
achieved through the combination of the operations of the Company and the
Acquiror. We also considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria which we deemed
relevant.

In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's and the Acquiror's managements as to the future financial performance
of the Company and the Acquiror. In addition, we have not been requested to
make, and have not made, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or the Acquiror, nor have
we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon financial, economic, market and other conditions as they
exist and can be evaluated on the date hereof. We are not expressing any opinion
as to the actual value of the Acquiror Common Stock when issued to the Company's
stockholders pursuant to the Merger or the prices at which such Acquiror Common
Stock will trade subsequent to Merger. We were not requested to, and did not,
solicit third party indications of interest in acquiring all or any part of the
Company. We have assumed with your consent that the Merger

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Board of Directors
June 4, 1999
Page 2

will be accounted for as a "pooling of interests" under Accounting Principles
Board Opinion No. 16 and will qualify as a tax-free "plan of reorganization"
pursuant to Section 368 of the Internal Revenue Code of 1986, as amended.

We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In the past, we have
performed certain investment banking services for the Company and have received
customary fees for such services.

In the ordinary course of our business, we and our affiliates may actively
trade the equity securities of both the Company and the Acquiror for our and
such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.

It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the Merger,
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote with respect to the Merger, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.

Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the stockholders of the Company,
other than the Acquiror and its subsidiaries, from a financial point of view.

Very truly yours,

CREDIT SUISSE FIRST BOSTON
CORPORATION

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<PAGE> 252
EXHIBIT 99.1

[FRONT]

AUTOCYTE, INC.
780 Plantation Drive
Burlington, North Carolina 27215
(336) 222-9707

Proxy for Special Meeting of Shareholders
to be held at 10:00 a.m. on September 30, 1999

This Proxy is solicited on behalf of the Board of Directors

The undersigned hereby appoints Richard A. Charpie, Ph.D. and James B. Powell,
M.D., and each of them, the true and lawful attorneys and proxies, with full
power of substitution in the name, place and stead of the undersigned to vote at
a Special Meeting of Shareholders (the "Meeting") of AutoCyte, Inc. (the
"Company") to be held on September 30, 1999 at 10:00 a.m., or at any adjournment
or postponement thereof, in the manner designated below, all of shares of the
Company's common stock that the undersigned would be entitled to vote if
personally present upon the following matters.
<PAGE> 253
[BACK]

THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR APPROVAL OF THE STOCK ISSUANCE AND
THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION.

1. To approve the proposal to amend the AutoCyte restated certificate of
incorporation to increase the authorized shares of common stock from 20,650,000
shares to 49,000,000 shares.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

2. To approve the proposal to issue shares of AutoCyte common stock in
connection with the merger of a wholly-owned subsidiary of AutoCyte with and
into NeoPath, Inc.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. To approve the proposal to amend the AutoCyte restated certificate of
incorporation to change AutoCyte's name from "AutoCyte, Inc." to "TriPath
Imaging, Inc."

[ ] FOR [ ] AGAINST [ ] ABSTAIN

4. To consider and act upon such other business as may properly come before the
Meeting or any adjournment or postponement thereof.

Please sign and date exactly as your name(s) appear(s) at the left and
return in the enclosed envelope. When shares are held jointly, both holders
should sign. When signing as an attorney, executor, administrator, trustee,
guardian, or corporate officer, please indicate the capacity in which signing.

Signature:___________________ Date:____________, 1999