AUTOCYTE INC, S-1/A, 1999-08-12

AUTOCYTE INC
S-1/A, 1999-08-12
LABORATORY ANALYTICAL INSTRUMENTS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1999

REGISTRATION NO. 333-82121
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AUTOCYTE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3826 56-1995728
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

780 PLANTATION DRIVE
BURLINGTON, NORTH CAROLINA 27215
(336) 222-9707
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

JAMES B. POWELL, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AUTOCYTE, INC.
780 PLANTATION DRIVE
BURLINGTON, NORTH CAROLINA 27215
(336) 222-9707
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

COPIES TO:

STEVEN N. FARBER, ESQ.
MARC A. RUBENSTEIN, ESQ.
PALMER & DODGE LLP
ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108
(617) 573-0100

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED AUGUST 12, 1999

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AUTOCYTE, INC.

780 PLANTATION DRIVE
BURLINGTON, NC 27215
(336) 222-9707

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

AUTOCYTE, INC.

1,400,000 SHARES
COMMON STOCK

This prospectus relates to 1,400,000 shares of common stock, $0.01 par
value per share, of AutoCyte. We are registering these shares on behalf of the
selling stockholder named on page 54 of this prospectus, to be offered and sold
and distributed by it from time to time. We are not selling any of these shares
and will not receive any proceeds from the sale of these shares. AutoCyte common
stock trades on the Nasdaq National Market under the symbol "ACYT." On August
10, 1999, the last reported per share sale price of AutoCyte common stock was
$4.125

The selling stockholder may sell or distribute the shares of common stock
at various times and in various types of transactions, including sales in the
open market, sales in negotiated transactions and sales by a combination of
these methods. The selling stockholder will pay all brokerage fees and
commissions in connection with the sale of the shares. We are paying expenses
relating to the registration of the shares with the Securities and Exchange
Commission.

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

SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES
OF COMMON STOCK.

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

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

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

THE DATE OF THIS PROSPECTUS IS , 1999.
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TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary.......................................... 3
AutoCyte.................................................. 3
Forward-Looking Statements................................ 4
The Offering.............................................. 4
Summary Financial Data...................................... 5
Risk Factors................................................ 6
Price Range of Common Stock................................. 14
Use of Proceeds............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 22
Management.................................................. 41
Summary Compensation Table................................ 45
Option Grants in Last Fiscal Year......................... 46
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 47
Stock Plans................................................. 47
Compensation Committee Interlocks, Insider Participation and
Certain Transactions...................................... 48
Principal and Selling Stockholders.......................... 49
Description of Capital Stock................................ 51
Plan of Distribution........................................ 52
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 53
</TABLE>

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PROSPECTUS SUMMARY

This summary is qualified by the more detailed information and Financial
Statements and Notes thereto appearing elsewhere in this prospectus. Where the
context permits or requires, references to AutoCyte also include the cytology
and pathology automation business as conducted by our predecessor, Roche Image
Analysis Systems, Inc. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors discussed under "Risk Factors" and elsewhere in this prospectus.

AUTOCYTE

AutoCyte develops, manufactures and markets the only integrated automated
sample preparation and image analysis system to support professionals in
cervical cancer screening. Our 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, we received regulatory
approval from the FDA to market PREP as a replacement for the conventional Pap
smear preparation. We are currently seeking regulatory approval of SCREEN for
sale in the United States for cervical cancer screening. We began sales of PREP
in the United States for non-gynecologic applications in 1993 and with recent
FDA approval, have begun selling PREP in the United States for gynecologic
applications, its principal application. In addition, our Pathology Workstation
product line works with some of our 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. We
designed PREP to operate both as an independent sample preparation system and
with SCREEN as part of an integrated diagnostic system. We believe 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 our own imaging
technology and classification software with off-the-shelf computer hardware to
screen and classify slides prepared using PREP. We 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,
we have developed a system which we believe 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 we completed our 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 our 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. Our purchase
of the intellectual property estate was completed when the bankruptcy court
subsequently approved the transaction.

On June 4, 1999, we signed an agreement to merge with NeoPath, Inc., a
provider of products used to screen conventional Pap smears. If this transaction
is completed, the stockholders of NeoPath would own approximately half of our
outstanding common stock. See the overview under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a description of
this transaction. We are currently working with NeoPath on a supplemental study
to obtain approval from the FDA to use NeoPath's AutoPap Primary Screening
System to screen our PREP slides. We believe that merging with NeoPath will
provide us with several strategic advantages. First, if the AutoPap PMA
supplement is approved, we will at that point have an FDA approved combined
system for cervical cytology sample preparation and computer-
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<PAGE> 5

ized screening. Second, AutoPap is currently FDA-approved to screen conventional
Pap smears. As a combined company, this will allow us to penetrate the clinical
laboratory market prior to its conversion to thin-layer technology.
Additionally, the combination of the two companies will provide cost savings
through elimination of redundant costs.

FORWARD-LOOKING STATEMENTS

This prospectus contains "forward-looking statements" as defined under
securities laws. These statements can be identified by the use of terminology
such as "believes," "expects," "anticipates," "plans," "may," "will,"
"projects," "continues," "estimates," "potential," "opportunity" and so on.
These forward-looking statements may be found in the "Summary," "Risk Factors,"
"Business," and other sections of this prospectus. Our actual results or
experience could differ significantly from the forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed in "Risk Factors," as well as those discussed elsewhere in this
prospectus. You should carefully consider that information before you make an
investment decision.

You should not place undue reliance on these statements, which speak only
as of the date that they were made. These cautionary statements should be
considered in connection with any written or oral forward-looking statements
that we may issue in the future. We do not undertake any obligation to release
publicly any revisions to these forward-looking statements after completion of
the offering to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.

THE OFFERING

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<S> <C>
Issuer............................................... AutoCyte, Inc.
Shares of common stock offered by the selling
stockholder........................................ 1,400,000
Common stock outstanding as of July 31, 1999......... 14,291,549
Use of Proceeds...................................... AutoCyte will not receive any proceeds from
sales made hereunder
Listing.............................................. Nasdaq National Market
Trading Symbol....................................... ACYT
</TABLE>

4
<PAGE> 6

SUMMARY FINANCIAL DATA

PRO FORMA
COMBINED
PREDECESSOR(1) PREDECESSOR
------------------- AND AUTOCYTE
YEARS ENDED AUTOCYTE AUTOCYTE SIX MONTHS
DECEMBER 31, YEAR ENDED YEAR ENDED DECEMBER 31, ENDED 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
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<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>

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(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 our 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 our 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.

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<PAGE> 7

RISK FACTORS

WE ARE A YOUNG COMPANY THAT HAS NOT YET GENERATED ANY SIGNIFICANT REVENUE
THROUGH THE SALE OF OUR PRODUCTS AND WE MAY NEVER GENERATE ANY SIGNIFICANT
REVENUE FROM THE SALE OF OUR PRODUCTS.

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

- the private placement and public sale of equity securities;

- borrowing; and

- limited sales of our products.

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

- successfully market PREP in the United States;

- develop new products;

- manufacture our 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 we fail or run into difficulties in any of these aspects of our business, it
would harm our future ability to become a profitable company.

OUR ABILITY TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS DEPENDS ON RECEIVING
AND MAINTAINING FDA APPROVAL OF OUR PRODUCTS AND WE HAVE YET TO OBTAIN FDA
APPROVAL FOR ONE OF OUR TWO PRINCIPAL PRODUCTS.

We must obtain FDA approval of our products before we can market and sell
them for their principal intended use in the United States. Our two principal
products are PREP and SCREEN. So far, only PREP has received FDA approval for
its principal intended use. If we fail to obtain and maintain FDA approval for
SCREEN, or any of our other products, our future product sales will be far less
than we anticipate and may be insufficient to continue our operations.

To obtain FDA approval for our products, we must submit a premarket
approval application to the FDA. Several factors affect our ability to
successfully obtain FDA approval for the sale of our 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;

- we have and may continue to encounter unanticipated delays or significant
unanticipated costs in our efforts to secure FDA approval;

- ultimately, we have no assurance that the FDA will ever approve our
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.

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<PAGE> 8

In addition to the premarket approval application process, we may face
further difficulties in connection with FDA approval of our products 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 include significant limitations on the indicated uses
for which we may market our products;

- 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 our company, our officers
or our employees.

OUR LONG-TERM SUCCESS DEPENDS ON MARKET ACCEPTANCE OF OUR PRINCIPAL PRODUCTS IN
PLACE OF BOTH CONVENTIONAL PAP SMEARS AND COMPETITORS' PRODUCTS DESIGNED TO
REPLACE CONVENTIONAL PAP SMEARS AND WE HAVE NO ASSURANCE THAT OUR PRODUCTS WILL
BE SUCCESSFUL IN ACHIEVING THIS MARKET ACCEPTANCE.

Our success and growth depends primarily on market acceptance by clinical
laboratories, third party payors and health care providers of PREP and SCREEN
for their primary intended use in cervical cancer screening. PREP and SCREEN may
never be widely accepted by the market. Market acceptance of PREP and SCREEN
will depend on:

- our ability to convince the market that there are limitations in the
conventional Pap smear process of sample collection, slide preparation
and screening; and

- our ability to convince the market that PREP and SCREEN are better than
the conventional Pap smear process because they substantially overcome
its shortcomings.

We may not be able to convince the market that PREP and SCREEN are cost
competitive compared to the conventional Pap smear process. In addition,
clinical laboratories, third-party payors, and health care providers may not
accept PREP and SCREEN as a replacement to the conventional Pap smear collection
process. Even if PREP and SCREEN 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.

Beyond the uncertainty of general market acceptance, we also face
competition from other companies who have recently introduced systems for
screening conventional Pap smear slides. Like us, these competitors also claim
that their products offer substantial improvements over the conventional Pap
smear process. Widespread market acceptance of any of these competing products
or any other alternative cervical cancer screening systems could harm our
ability to successfully sell our products. If we are unable to sell our
products, it would prevent us from becoming a profitable company.

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THE CERVICAL CANCER DIAGNOSTIC MARKET HAS A NUMBER OF COMPANIES WITH PRODUCTS
THAT ARE ALREADY FDA APPROVED AND MANY OF THESE COMPANIES POSSESS SIGNIFICANT
COMPETITIVE ADVANTAGES OVER US.

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

Within the diagnostic market for cervical cancer, we face direct
competition from several publicly-traded and privately-held companies. Some of
these companies, like us, manufacture thin-layer slide preparation or automated
imaging systems. As a result, our products could be rendered obsolete or
uneconomical because of:

- technological advances by our current or future competitors;

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

- the introduction and market acceptance of new detection methods.

In addition, many of our existing and potential competitors have several
competitive advantages over us 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.

Finally, we currently have limited experience in several areas that could
limit our ability to compete, including:

- manufacturing efficiency;

- marketing and sales; and

- customer service and support.

SINCE OUR INCEPTION, WE HAVE INCURRED SUBSTANTIAL LOSSES AND WE HAVE NEVER MADE,
NOR MAY WE EVER IN THE FUTURE MAKE, ANY PROFIT FROM OPERATIONS.

Since our inception, we have incurred substantial losses and have an
accumulated deficit resulting primarily from the following operating expenses:

- research and development activities;

- clinical trials;

- preparation and submission of premarket approval applications to the FDA
for PREP and SCREEN; and

- general administrative functions.

We expect that our marketing and sales expenses will increase significantly in
the future which could contribute to financial losses.

Ultimately, we may never be able to generate significant revenues from the
sale of our products. Moreover, even if we did generate significant revenues
from the sale of our products, we still cannot guarantee that we will be able to
achieve or sustain profitability.

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WE MAY NEED TO RAISE A LARGE AMOUNT OF CAPITAL IN THE FUTURE TO SUSTAIN OUR
OPERATIONS AND THE FUNDING THAT WE MAY NEED MIGHT NOT BE AVAILABLE.

We believe that we may need additional funding until we are able to sustain
our operations from the sale of our products. We may not be able to obtain
funding when we need it. The purpose of this additional funding would be to
enable us to:

- manufacture a sufficient quantity of PREP and SCREEN;

- finance the placement of PREP and SCREEN instruments at customer sites;

- build the sales and marketing force necessary for market penetration of
PREP and SCREEN; and

- pay for general administrative and support expenses.

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 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 PREP.

We may choose to raise additional funding to meet our future capital
requirements through a variety of financing methods, including:

- lease arrangements;

- debt or equity financings; or

- strategic alliances.

If we were to choose to raise additional funding through the sale of equity or
securities convertible into equity, the value of the existing stockholders'
shares could be reduced.

Ultimately, additional future financing may not be available to us on terms
we find acceptable, or it may not be available at all. If we were unable to fund
our future capital requirements, it would significantly harm our ability to
become a profitable company.

OUR HEAVY RELIANCE ON THE DEVELOPMENT AND PROTECTION OF PROPRIETARY TECHNOLOGY
MAKES US VULNERABLE TO THE INHERENT UNCERTAINTIES INVOLVED IN THE PROCESS OF
PATENT APPROVAL AND THE PROTECTION OF PROPRIETARY TECHNOLOGY.

To protect our proprietary technology, rights and know-how, we rely on a
combination of:

- patents;

- trade secrets;

- copyrights; and

- confidentiality agreements.
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<PAGE> 11

We currently hold numerous issued United States patents and corresponding
foreign patent applications. We have additional United States patent
applications pending that relate to various aspects of our products.

Our reliance on patents poses the following risks for our company:

- our pending patent applications may not ultimately issue as patents;

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

- our existing or future patents may be successfully challenged or
circumvented by competitors.

In addition, the large role that patents play in our industry in general
may pose the following risks for our company:

- 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 any claims of infringement made by existing patent holders were upheld,
we could then be:

- prevented from selling our products;

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

- required to redesign our product.

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

THE SUCCESSFUL SALE OF OUR PRODUCTS DEPENDS ON WHETHER THIRD-PARTY PAYORS WILL
ADEQUATELY REIMBURSE THEIR CUSTOMERS FOR THE USE OF OUR PRODUCTS AND THIRD-PARTY
PAYORS MAY PROVIDE LITTLE IF ANY REIMBURSEMENT FOR THE USE OF OUR 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. There is generally significant
uncertainty concerning whether third-party payors will be willing to provide any
reimbursement for the use of medical devices that incorporate new technology
such as our two principal products, PREP and SCREEN. In addition, even if
third-party payors were willing to provide reimbursement for the use of PREP or
SCREEN, we do not know if the level of reimbursement provided would be adequate.

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 requires us to provide
scientific and clinical data to support the use of our products to each
payor separately.

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Ultimately, whether a third-party payor is willing to provide reimbursement
for the use of our products at a level that can allow our company to succeed
depends 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 may 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 will 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.

WE NEED TO INCREASE OUR MARKETING AND SALES CAPABILITIES AND WE MAY NOT BE ABLE
TO DO THIS SUCCESSFULLY.

We currently have a limited marketing and sales force. To effectively
market our products, we may need to substantially increase our 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 limited
market awareness that currently exists regarding 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 are 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 products;

- further develop our direct sales capabilities; and

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

To become a successful and profitable company, we must successfully market
our products. If we cannot successfully expand our marketing and sales
capabilities in the United States and in international markets, it would harm
our ability to become a profitable company.

WE CURRENTLY HAVE LIMITED INTERNATIONAL SALES CHANNELS IN PLACE AND WE MAY NEVER
BE ABLE TO ESTABLISH SIGNIFICANT INTERNATIONAL SALES CAPABILITIES.

We are currently selling our products to customers in Australia, Asia and
Europe, and we intend to substantially expand our international sales in the
future. We may never be able to successfully develop significant international
sales capabilities.

Even if we are able to establish significant international sales
capabilities, we may not be successful in obtaining any of the 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;

11
<PAGE> 13

- 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
our 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.
Even if in the future we are able to generate significant sales of our products
in foreign markets, any fluctuations in currency exchange rates and increases in
duty rates could seriously harm our profitability in foreign markets.

THERE ARE A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS.

Partly because of a recent trend toward consolidation of clinical
laboratories, we expect that a significant portion of our product sales will be
concentrated among a small number of large clinical laboratories. We will have
to first make this small potential customer base aware of our products and then
convince them to accept our products. To gain acceptance of our products within
this small customer base, we will have to successfully demonstrate the benefits
of PREP and SCREEN 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 our products among these clinical
laboratories, we believe that we will have to successfully:

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

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

Our dependence on sales to large clinical laboratories may strengthen the
purchasing leverage of these potential customers.

Ultimately, we may not be able to successfully sell our products to large
clinical laboratories. Even if we do successfully sell our products to large
clinical laboratories, those sales may not generate enough revenue to make us a
profitable company.

WE PLAN TO MANUFACTURE OUR PRODUCTS, BUT WE HAVE LIMITED MANUFACTURING
EXPERIENCE AND CAPACITY.

We intend to manufacture our products at our Burlington facility. Currently
we have limited manufacturing experience and capabilities.

We expect that we may have to substantially increase our 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 are able to
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 them commercially viable;

12
<PAGE> 14

- in conformance with Quality System requirements; or

- in a manner which otherwise insures our products' quality.

If we are unable to successfully increase our manufacturing capability and
capacity, or to successfully contract with third parties to manufacture our
products, it would harm our ability to become a profitable company.

WE DEPEND ON SINGLE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN COMPONENTS IN PREP
AND SCREEN.

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

If any of the components of PREP and SCREEN were no longer available in the
marketplace, we could be forced to further develop our technology to incorporate
alternate components. We also may try to establish relationships with additional
suppliers or vendors for components for our products, so long as we are not
prohibited from doing so by any existing contractual obligations. We may not be
able to further develop our technology to incorporate new components or
establish relationships with additional suppliers or vendors for the necessary
components.

The use of any new components or replacement components from alternative
suppliers into 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
our products with new or replacement components.

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

13
<PAGE> 15

PRICE RANGE OF COMMON STOCK

The common stock trades on the Nasdaq National Market under the symbol
"ACYT". The following table presents, for the periods indicated, the high and
low closing sales prices per share for the common stock.

<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------- ------
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
First Quarter........................................... $ 7.750 $3.375
Second Quarter.......................................... $ 8.250 $5.188
Third Quarter (through July 31, 1999)................... $ 6.563 $4.375
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, 1997
Third Quarter........................................... $10.125 $8.500
Fourth Quarter.......................................... $13.125 $7.000
</TABLE>

As of July 31, 1999, there were approximately 120 holders of record of our
common stock. On August 10, 1999, the last sale price reported on the Nasdaq
National Market for the common stock was $4.125.

We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain all future earnings, if any, to fund
the development and growth of our business and do not anticipate paying any cash
dividends on our capital stock in the foreseeable future.

USE OF PROCEEDS

The selling stockholders will receive all of the net proceeds from sales of
the common stock sold pursuant to this prospectus.

14
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below as of December 31,
1994 and 1995 and for the years ended December 31, 1994 and 1995 and for the
period from January 1, 1996 to November 21, 1996 are derived from Financial
Statements of our predecessor, the cytology and pathology automation business of
Roche Image Analysis Systems, included elsewhere herein, which have been audited
by Ernst & Young LLP, independent auditors. The selected financial data
presented below as of December 31, 1996, 1997 and 1998 and for the period from
November 22, 1996 through December 31, 1996 and the years ended December 31,
1997 and 1998 are derived from our Financial Statements, included elsewhere in
this prospectus, which have been audited by Ernst & Young LLP, independent
auditors. The selected financial data as of June 30, 1999 and for each of the
six-month periods ended June 30, 1998 and 1999 have been derived from our
unaudited Financial Statements. In the opinion of management, the unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1999. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Financial Statements, related Notes and other financial information included
herein.

<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PREDECESSOR
PREDECESSOR(1) AND
------------------- AUTOCYTE AUTOCYTE AUTOCYTE
YEARS ENDED YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
------------------- ------------ ------------------- ------------------
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>
PREDECESSOR(1) AUTOCYTE
------------------ -----------------------------------------
DECEMBER 31, DECEMBER 31,
------------------ ----------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 8 $ 10 $ 9,517 $28,655 $19,986 $11,817
Working capital....................... 1,600 3,585 10,673 30,209 22,115 13,227
Total assets.......................... 10,544 10,714 16,683 37,021 30,026 32,387
Redeemable convertible preferred
stock.............................. -- -- 9,882 -- -- --
Total stockholders' equity............ 8,966 10,002 5,235 35,027 26,847 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 our 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.

15
<PAGE> 17

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.

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.

16
<PAGE> 18

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 at the later of the
transaction closing date or September 1, 1999. 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. If the
closing date for this transaction occurs at a time that the NeoPath merger is
still pending, AutoCyte expects to 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
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

17
<PAGE> 19

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 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.

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<PAGE> 20

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 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

19
<PAGE> 21

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
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.

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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.

- the timing and success of the merger with NeoPath.

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. Additionally, if the transaction with NeoPath 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.

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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BUSINESS

The discussion included in this section as well as elsewhere in this
prospectus may contain forward-looking statements based on current expectations
of our 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 4 of this prospectus. Readers are cautioned not to place undue
reliance on the forward looking statements, which speak only as the date of this
prospectus. We have 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 cytology professionals
in cervical cancer screening. Our 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, we received regulatory
approval from the FDA to market PREP for cervical cancer screening. We are
currently seeking regulatory approval of SCREEN for sale in the United States
for cervical cancer screening. We began sales of PREP in the United States for
non-gynecologic applications in 1993 and with recent FDA approval, have begun
selling PREP in the United States for gynecologic applications, its principal
application. In addition, our Pathology Workstation product line works with some
of our other product offerings to provide tools for data handling of cytology
and pathology images, and tools for diagnosis of disease from cytology and
histology specimens.

PREP is a proprietary automated liquid-based sample preparation system that
prepares slides with a thin-layer of cervical cells. We designed PREP to operate
both as an independent sample preparation system and with SCREEN as part of an
integrated diagnostic system. We believe 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 our own imaging
technology and classification software with off-the-shelf computer hardware to
screen and classify slides prepared using PREP. We 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,
we have developed a system which we believe 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.

On June 4, 1999, we signed an agreement to merge with NeoPath, Inc., a
provider of products used to screen conventional PAP Smears. If this transaction
is completed, the stockholders of NeoPath would own approximately half of our
outstanding common stock. We are currently working with NeoPath on a
supplemental study to obtain approval from the FDA to use NeoPath's AutoPap
Primary Screening System to screen our PREP slides. We believe that merging with
NeoPath will provide us with several strategic advantages. First, if the NeoPath
supplement is approved it will immediately give us an FDA-approved combined
system for thin-layer cervical cytology sample preparation and computer
screening. Second, AutoPap is currently FDA-approved to screen conventional Pap
smears. As a combined company this will allow us to penetrate the clinical
laboratory market prior to its conversion to thin-layer technology.
Additionally, the combination of the two companies will eliminate redundant
costs and provide for additional cost savings due to economies of scale. See the
overview under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of this transaction.

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THE CONVENTIONAL PAP SMEAR PROCESS

Cervical cancer is the second most common form of cancer among women
throughout the world with approximately 247,000 deaths attributable to the
disease in 1996. Recent studies have also indicated that cervical cancer is
linked to the presence of certain strains of Human Papillomavirus. The
conventional Pap smear 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 smears annually. Using the conventional
Pap smear process, a clinician begins with the collection of cervical cells
during a gynecologic examination. To obtain a cervical cell sample, the
clinician uses a sampling device to scrape cells from the surface of the cervix.
The clinician then manually smears the sample onto a microscope slide. A
cytotechnologist, the analyst responsible for reviewing samples at a laboratory,
then reviews the slide using 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 each usable slide using a microscope to
differentiate diseased or abnormal cells from normal cells based on size, shape
and structural details of the cells and their nuclei. Typically, each
conventional Pap smear slide is then 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.

LIMITATIONS OF THE CONVENTIONAL PAP SMEAR PROCESS

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, batch staining, a procedure used in the conventional Pap smear
process, may result in cross-contamination among slide samples. We estimate 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.

Each 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.
Because it is difficult to properly evaluate and categorize subtle changes in
the size and/or shape of cells and their nuclei, there are often errors during
the review process.

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. We believe that the ability to access the remaining cellular material
from the original patient sample would lower the costs associated with
inconclusive Pap smear tests.

In 1988, Congress adopted the Clinical Laboratory Improvement Act of 1988,
which requires 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.

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Certain states have also adopted regulations further limiting the number of
slides that may be manually examined per day by a cytotechnologist. Because of
these regulations, it has become significantly more expensive for laboratories
to perform conventional Pap smear screening.

THE AUTOCYTE SOLUTION

We are 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.

The AutoCyte PREP System(TM)

PREP consists of our 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 our 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 our own liquid
density reagent in a plastic centrifuge tube using our patented
disaggregation syringe device. We are 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.

We believe 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 we believe should
reduce the risk of cross-contamination among cell samples.

- Because our 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.

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

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

- We believe that our 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.

- We believe 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 our 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 our
patented SCREEN process.

We believe that our 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.

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- 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 cytotechnologists to
concentrate on the most significant cells and clusters, thereby reducing
the complexity and tedious nature of manual review which we believe 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.

We believe that, by designing PREP and SCREEN to work together, we have
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 our
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. We also
provide a centrifuge as part of the system. We hold 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 our 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 us 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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PathologyWorkstation 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

Our 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. We have developed our own
preservatives that are created specifically for these non-gynecologic cytology
preparations.

REGULATORY STATUS

Prep

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

Status of SCREEN PMA

In October 1996, we 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 us 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, our
representatives met with the FDA to address specific questions regarding SCREEN
performance and the SCREEN clinical trial. On May 7, 1999 we filed a formal
amendment to the SCREEN PMA documenting our 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, we 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.

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In December 1998, our 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 we were notified in writing that
the facility had no outstanding deficiencies and that it had passed the
inspection.

Supplemental Study with NeoPath

In March 1999, we announced an agreement with NeoPath, Inc. 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. We
cannot guarantee that we will complete this clinical study or that we will
submit any PMA supplement to the FDA. Additionally, if we do 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.

Pathology Workstation

We have received FDA clearance of a premarket notification covering
ImageTiter, an application for the Pathology Workstation which we are currently
selling. We believe that we may need to obtain premarket notification clearance
to market in the United States certain additional Pathology Workstation
applications currently being developed.

MARKETING AND SALES

Our 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 has begun 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. for gynecologic applications, its primary
application. We generate 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, we intend to place instruments
without charge at customer locations and to charge customers on a per test, or
fee-per-use, basis. In foreign markets, we plan to either sell or license
SCREEN. As an important element of our business strategy, we have obtained
third-party financing to support rentals of PREP and will seek third-party
financing to support fee-per-use placements of SCREEN. We may never be able to
obtain SCREEN financing and, if we do, it may not be on favorable terms.

We sell Pathology Workstation products through distributors and original
equipment manufacturer vendors who integrate certain of the workstation software
into their own products. We have entered into an international distribution
agreement with Carl Zeiss Jena Gmbh, to distribute the Pathology Workstation in
the US and Europe. We have 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. We
have 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

We have recently commenced marketing PREP in the United States for cervical
cancer screening, and we expect to commence marketing SCREEN in the United
States for cervical cancer screening when and if FDA approval for cervical
cancer screening is obtained. We designed PREP to be sold as either a
stand-alone system or as an integrated system with SCREEN. We intend 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. We will address the needs of the
constituencies in the cervical cancer screening market in the manner described
below.
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Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. We believe 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. We believe that we can market
PREP successfully to this concentrated market segment. We also believe that
pressures associated with rising health care costs, rising litigation costs and
the limited supply of qualified cytotechnologists will make it easier for us to
market PREP and SCREEN to large laboratories. Because such a high volume of
testing is performed by a small number of large laboratories, we believe that a
relatively small number of employees will be able to effectively market our
systems to these customers.

Medium and small clinical laboratories. We also intend to devote a
substantial portion of our 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 our products.

Third-party payors. Customers will not accept our products unless we
ensure that the use of our products is supported by third-party payors. We will
promote the clinical and economic benefits of our 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, our cervical cancer
screening system will initially cost more per test. Because the up-front, direct
costs of using our products will be greater than the cost of the conventional
Pap smear, we will need to convince third-party payors that the overall cost
savings to the health care system will more than offset the cost of our
products. At least two of our competitors have received third-party
reimbursement for products that are similar to PREP and SCREEN. See "Third-Party
Reimbursement."

Health care providers. We intend 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 our sales and marketing program we will educate the medical community on the
advantages of our integrated cervical cancer screening system.

Marketing and Sales Organization

As of July 31, 1999, we had 25 employees worldwide to market, sell and
provide after-sale support of our products. We anticipate that our worldwide
base of employees to market, sell and provide after-sale support of our products
will grow to 30 to 35 persons by the end of 1999.

In the United States, we plan to do the following:

- Market our 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 our 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.

In international markets we market and sell our products primarily through
distributors. To support these efforts, we employ three people, consisting of
sales professionals, supporting product managers and after-sales support
personnel located in Europe and Australia. We anticipate that these distributor
organizations will ultimately assume responsibility for all sales and after
sales support activities as well as a portion of our marketing activities.

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We 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 our headquarters
and in select major metropolitan areas. Internationally, we plan to provide
these services through distributor organizations.

MANUFACTURING

Quality Systems

We are in the process of certifying our quality systems according to ISO
9001 standards. On June 24, 1999 we completed a favorable registration audit and
expect full certification within the next four months.

AutoCyte PREP System

We currently assemble, test and package components of the PREP system at
our manufacturing facility in Burlington, North Carolina. We also manufacture
our CytoRich line of reagents and stains for PREP at the Burlington facility. We
believe that our existing manufacturing and assembly processes are adequate to
meet the near-term, full-scale production requirements for PREP for cervical
cancer screening.

We purchase certain of the PREP instrument components from a single
original equipment manufacturer supplier in Europe. We purchase 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, we agreed to new multi-year exclusive contracts with two suppliers
of manufactured plastic components incorporated into our 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,
we have the ability to renegotiate pricing, or obtain the product elsewhere, if
we 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. We are 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 our quality and production requirements.

In June 1999 we 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. We expect to renew the
contract.

We believe that each of these suppliers has sufficient capacity to meet our
present and future supply requirements.

We may seek to establish other relationships with additional suppliers or
vendors for components of our products. We cannot guarantee, however, that we
will be successful in doing so. Additionally, if we add new components to our
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.

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<PAGE> 32

AutoCyte SCREEN System

We also intend to assemble, test, and package SCREEN at our 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.

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

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

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

Pathology WorkStation Products

We currently integrate and assemble the Pathology Workstation products at
our Burlington facility and believe we have sufficient capacity to meet
anticipated customer demand for this product. Our Pathology Workstation products
consist primarily of off-the-shelf components and our own software. The
components are supplied by a variety of vendors, some of which are sole-source
suppliers. We have been integrating and selling Workstation products since 1993.

Manufacturing Standards

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

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

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<PAGE> 33

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

RESEARCH AND DEVELOPMENT

Our 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.

We 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.

We 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. We are
developing SCREEN II to include networking and sophisticated database
capabilities.

We are continuing to develop additional applications to run on our
Pathology Workstation platform. These applications include quantitative image
analysis, tumor grading and slide management.

We cannot guarantee that any product enhancement or development project we
undertake will be successfully completed, receive regulatory approvals or be
successfully commercialized. Our failure to complete, receive approval for or
commercialize any such enhancement or project could prevent us from successfully
competing in our targeted markets and could have a material adverse effect on
our business, financial condition and results of operations.

As of July 31, 1999, we had 34 employees engaged in research and
development. The following table shows the approximate amounts we have spent on
research and development for the previous four years:

<TABLE>
<CAPTION>
APPROXIMATE
EXPENDITURE ON
RESEARCH &
FOR THE YEAR ENDED DECEMBER 31 DEVELOPMENT
- ------------------------------ --------------
<S> <C>
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
</TABLE>

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
--------------------------------
<S> <C>
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. We intend to focus on obtaining coverage and reimbursement from
major national and regional managed care organizations and insurance carriers
throughout the United States. We expect to emphasize the improved disease
detection and cost savings benefits (from both early disease

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<PAGE> 34

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. We 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, our business, financial condition and
results of operations could be materially adversely effected.

We have very limited experience in obtaining reimbursement for our 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 our products would have a material adverse effect on our
business, financial condition and results of operations. Further, outside of the
United States, health care reimbursement systems vary from country to country,
and we 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 our competitors. The Medical Advisory Panel
concluded that systems being marketed by our competitors offer only modest
improvements in diagnostic accuracy at a high cost. While our products were not
included in the study, we cannot guarantee that the report will not have an
adverse effect on market acceptance of our products. Further, in July 1998, the
American College of Obstetricians and Gynecologists released a report stating
that, while the new technologies improve 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, we cannot guarantee that
this information will not negatively affect acceptance of PREP and SCREEN in the
marketplace. We 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 us 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. We are unable to predict the
outcome or the effect on our business of the current health care reform debate.

PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS

We rely on a combination of patents, trade secrets, copyrights and
confidentiality agreements to protect our proprietary technology, rights and
know-how. We currently hold 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 our 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. We have also filed one patent
application which is pending in the United States and numerous patent
applications which are pending abroad.

We cannot guarantee that the claims allowed in any of our existing or
future patents will not be successfully challenged or circumvented by
competitors. Under current law, patent applications in the United
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<PAGE> 35

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. We cannot be sure that our
products or technologies do not infringe patents that may be granted in the
future pursuant to pending patent applications or that our products do not
infringe any patents or proprietary rights of third parties. We are aware that
several of our competitors hold several patents relating to automated slide
preparation and screening. We cannot guarantee that a court would rule that our
products do not infringe such third-party patents or would invalidate such
third-party patents.

We 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 us from selling our
products or could require us to obtain licenses from them. Alternatively, we
would have to redesign our products to avoid infringement. We cannot guarantee
that such licenses would be available or, if available, would be on terms
acceptable to us or that we would be successful in any attempt to redesign our
products or processes to avoid infringement. Our failure to obtain these
licenses or to redesign our products would have a material adverse effect on our
business, financial condition and results of operations.

We have entered into confidentiality agreements with all of our employees
and several of our consultants and third-party vendors. We cannot guarantee that
the obligations of our employees and employees of other companies with whom we
have entered into confidentiality agreements to maintain the confidentiality of
trade secrets and proprietary information will effectively prevent disclosure of
our confidential information. We also cannot guarantee that these agreements
will provide meaningful protection for our confidential information if there is
unauthorized use or disclosure, or that our trade secrets or proprietary
information will not be independently developed by our competitors. We also hold
unregistered rights to copyrights on documentation and operating software we
developed for PREP and SCREEN. We cannot guarantee that any copyrights we own
will not be challenged or circumvented by our competitors. Litigation may be
necessary to defend against claims of infringement, to enforce our patents and
copyrights, or to protect trade secrets. Litigation of this nature could result
in substantial cost to, and diversion of effort by, us. Furthermore, we cannot
guarantee that we would prevail in any infringement litigation. In addition, the
laws of some foreign countries do not protect our 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. Our 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 we are aware
have focused on:

- improvements in slide sample preparation;

- the development of automated, computerized screening systems and

- adjunctive testing technologies.

To date, we know 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 our competitors have
substantially greater financial, marketing, sales, distribution and technical
resources than we do. 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-

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<PAGE> 36

party reimbursement for their products. We believe that our 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 we believe that our products will have competitive advantages based
on some of these factors, we 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, we cannot guarantee that we 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 our business, financial
condition and results of operations. Our products could be rendered obsolete or
uneconomical by technological advances of our current or potential competitors,
the introduction and market acceptance of competing products or by other
approaches.

Our 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 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. We believe 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. We
are 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 us to
promote PREP in markets in which we compete with Cytyc.

In automated screening we currently face 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

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<PAGE> 37

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 our products,
which would result in a material adverse effect on our business, financial
condition and results of operations.

In March 1999, we announced an agreement with NeoPath, Inc. 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.

On June 4, 1999 we entered into an Agreement and Plan of Merger with
NeoPath pursuant to which NeoPath will become our wholly-owned subsidiary. See
"Management Discussion and Analysis" for a further discussion of this proposed
transaction.

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 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;

- 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.
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<PAGE> 38

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. Our 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 our 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 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.

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<PAGE> 39

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, 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 we 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 our 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 us
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 us and any of our 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 our ability to market or sell PREP, SCREEN or other of our products.

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We also are 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 we 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
our 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. We have been advised by various parties, including
consultants we 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 we 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, we 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 us to
obtain the permit. We received an FDA permit to export PREP and SCREEN to all
foreign countries in which we are currently selling these products and where
such a permit was required. There can be no assurance that we 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. Our 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 our business,
financial condition and results of operations.

The laboratories that would purchase our 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. We believe that our 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, we 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 our
products.

PRODUCT LIABILITY

Commercial use of any of our products may expose us to product liability
claims. We currently carry $12,000,000, limited to $11,000,000 per occurrence,
in general liability (including product liability) insurance coverage. We
believe that this amount is adequate to meet our 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, we have not experienced difficulty obtaining an amount of
insurance coverage commensurate with our level of sales. As our sales expand,
however, there can be no assurance that our existing product liability insurance
will be adequate or that additional product liability insurance will be
available to us at a reasonable cost, or that any product liability claim would
not have a material adverse effect on our business, financial condition and
results of operations.

39
<PAGE> 41

EMPLOYEES

As of July 31, 1999 we employed 83 persons on a full-time basis. We believe
that our relations with our employees are good. None of our employees are a
party to a collective bargaining agreement.

FACILITIES

We currently lease 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.

We also currently lease 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

We are not a party to any legal proceedings.

40
<PAGE> 42

MANAGEMENT

The following table provides information about our directors and executive
officers:

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION
- ---------------- --- --------
<S> <C> <C>
James B. Powell, M.D................. 60 President, Chief Executive Officer and Director
Ernest A. Knesel..................... 53... Executive Vice President
Thomas Gahm.......................... 42 Vice President of Computer Science
James W. Geyer....................... 54 Vice President of Laboratory Science
William O. Green..................... 41 Chief Financial Officer, Vice President of Finance and
Treasurer
Eric W. Linsley...................... 37 Vice President of Operations and Business Development
James M. Clinton..................... 49 Vice President of Regulatory Affairs and Quality
Assurance
Richard A. Charpie, Ph.D............. 47 Chairman of the board of directors
Robert E. Curry, Ph.D................ 52 Director
Thomas P. Mac Mahon.................. 52 Director
Susan E. Whitehead................... 45 Director
</TABLE>

JAMES B. POWELL, M.D.

James B. Powell, M.D. has served as a director of AutoCyte since November
1996 and as our President and Chief Executive Officer 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 Systems, the predecessor of
AutoCyte and which he co-founded. He continues to serve on the board of LabCorp,
a publicly traded company. Dr. Powell received a B.A. from Virginia Military
Institute and an M.D. from Duke University, and is board certified in anatomical
and clinical pathology.

ERNEST A. KNESEL

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.

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.

JAMES W. GEYER, PH.D.

James W. Geyer, Ph.D. has served as Vice President of Laboratory Science of
AutoCyte since November 1996. From 1991 until November 1996, Dr. Geyer served
Roche Image Analysis Systems in the same capacity. He also served as Vice
President of Product Development for Biomedical Reference Laboratories/Roche
Biomedical Laboratories, Inc. from 1991 until 1994. In September 1986, Dr. Geyer

41
<PAGE> 43

founded Genetic Design Inc., a genetic testing laboratory, and served as its
Vice President of Scientific Affairs until it was acquired by Genzyme
Corporation in 1991. From 1975 until 1986, Dr. Geyer served as Vice President of
Research and Development at Biomedical Reference Laboratories/Roche Biomedical
Laboratories. Dr. Geyer received a Ph.D. in immunology and microbiology and an
M.S. in biochemistry, both from Wayne State University School of Medicine.

WILLIAM O. GREEN

William O. Green joined AutoCyte as Controller in January 1997 and became
Chief Financial Officer and Vice President of Finance in April 1997. Prior to
joining AutoCyte, Mr. Green served from 1994 to 1996 as Vice President and Chief
Financial Officer of CORPEX Technologies, Inc., a specialty chemical company.
Prior to joining CORPEX, Mr. Green held various positions at Mann Industries,
Inc., a privately held manufacturer of technical man-made fibers and yarns from
1989 to 1993, serving most recently as Chief Operating Officer from 1992 to
1993. On September 16, 1993 Mann filed for receivership and subsequently was
liquidated. From 1981 to 1989, Mr. Green worked as a certified public accountant
at Arthur Andersen & Co. He received a B.S. in business administration from the
University of North Carolina, Chapel Hill.

ERIC W. LINSLEY

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 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.

JAMES M. CLINTON

James M. Clinton was promoted to Vice President of Regulatory Affairs and
Quality Assurance in February 1999 after serving as the department director
since joining AutoCyte in September 1998. Prior to joining AutoCyte, Mr. Clinton
worked as an independent consultant following nineteen years in the medical
device and pharmaceutical industries. From 1996 to 1997, Mr. Clinton served as
Director of Regulatory Affairs and Quality Assurance for Cardiovascular
Diagnostics, Inc.; from 1981 to 1995, for Bayer Corporation as a microbiologist,
supervisor and manager of medical device and pharmaceutical quality assurance
laboratories; and from 1978 to 1981 as a microbiologist and supervisor for
Boeringer Mannheim Corporation. Mr. Clinton holds a B.A in biology from the
University of Massachusetts and an M.S. in microbiology from Indiana University.

RICHARD A. CHARPIE, PH.D.

Richard A. Charpie, Ph.D. is Chairman of the 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, PH.D.

Robert E. Curry, Ph.D. is a director of AutoCyte. Dr. 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

42
<PAGE> 44

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., 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.

THOMAS P. MAC MAHON

Thomas P. Mac Mahon is a director of AutoCyte. Mr. Mac Mahon succeeded Dr.
Powell as President and Chief Executive Officer of LabCorp in January 1997 and
also serves as Chairman of the board of LabCorp. Mr. Mac Mahon served as Senior
Vice President of Hoffmann-La Roche Inc. from 1993 to January 1997 and President
of Roche Diagnostics Group and a Director and member of the Executive Committee
of Hoffmann-La Roche Inc. from 1988 to January 1997. A graduate of St. Peter's
College, Mr. Mac Mahon received a M.B.A. in marketing from Fairleigh Dickinson
University.

SUSAN E. WHITEHEAD

Susan E. Whitehead is a director of AutoCyte. Ms. Whitehead is Chair of the
Whitehead Institute for Biomedical Research, a trustee of the Massachusetts
Institute of Technology, a trustee of the Horizons Initiative, a Boston-based
group focused on the needs of homeless children and Chair of the Planned
Parenthood League of Massachusetts. From 1989 to 1995, Ms. Whitehead was an
attorney in private practice in Boston, Massachusetts. From 1982 until 1987, she
served as a prosecutor in New York City. Ms. Whitehead received a J.D. from
Cardozo School of Law, and a B.S. from Cornell University.

CLASSIFICATION OF THE BOARD OF DIRECTORS

Our Restated Certificate of Incorporation provides for a classified board
of directors consisting of three classes, with each class being as nearly equal
in number as possible. The term of one class expires and their successors are
elected for a term of three years at each annual meeting of our stockholders. We
have designated the following classes of directors:

<TABLE>
<CAPTION>
NAME TERM EXPIRES
---- ------------
<S> <C> <C>
CLASS I James B. Powell 2001
CLASS II Richard A. Charpie 2002
Robert E. Curry 2002
CLASS III Thomas P. Mac Mahon 2000
Susan E. Whitehead 2000
</TABLE>

The class I, class II and class III directors will serve until the annual
meeting of stockholders to be held in 2001, 2002 and 2000, respectively, and
until their respective successors are duly elected and qualified, or until their
earlier resignation or removal. The Restated Certificate provides that directors
may be removed only for cause by a majority of stockholders. See "Description of
Capital Stock -- Anti-Takeover Measures."

Each officer serves at the discretion of the board of directors. There are
no family relationships among any of the directors or executive officers.

BOARD COMMITTEES

We have standing audit and compensation committees of the board. We do not
have a nominating committee.

The audit committee consisted of Dr. Charpie, Dr. Curry and Ms. Whitehead
from January 1, 1998 until April 8, 1998. Mr. Mac Mahon replaced Ms. Whitehead
on the audit committee effective as of April 9, 1998. The audit committee
assists the board in the discharge of its duties and responsibilities by
providing the board

43
<PAGE> 45

with an independent review of our financial health and of the reliability of our
financial contracts and financial reporting systems. The audit committee
reviews:

- the general scope of our annual audit;

- the fee charged by our independent accountants; and

- other matters relating to internal control systems.

The compensation committee currently consists of Dr. Charpie, Dr. Curry and
Mr. Mac Mahon. The compensation committee determines the compensation paid to
all our executive officers, including the Chief Executive Officer. The
compensation committee's duties include the administration of our Amended and
Restated 1996 Equity Incentive Plan.

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 our stockholders in June 1997. All of the directors who are not
employees of AutoCyte are currently eligible to participate in the Director
Plan. Upon adoption, there were 100,000 shares of common stock reserved for
issuance under the Director Plan. Upon the election or reelection of an eligible
director, that 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 an AutoCyte director 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. During 1999, options to purchase 10,000 shares of
commons stock were granted to both Dr. Charpie and Dr. Curry upon their
reelection to the board.

44
<PAGE> 46

EXECUTIVE COMPENSATION

The following table presents certain compensation information for the Chief
Executive Officer and the named executive officers, the four other most highly
compensated executive officers whose total salary for the year ended December
31, 1998 exceeded $100,000:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) OPTIONS(#) COMPENSATION
- --------------------------- ----- ---------- ------------ ------------
<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 we paid for services performed from November 22, 1996 to
December 31, 1996.

(2) Represents our contributions to our 401(k) plan on behalf of the named
executive officers.

(3) Represents payments made by Roche Image Analysis Systems in connection with
the formation of AutoCyte for accrued vacation time with Roche Image
Analysis Systems.

(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 we made for relocation expenses and related
income tax gross-up payments and contributions of $984 we made to our 401(k)
plan on behalf of the named executive officer.

(9) Represents payments of $96,564 we made for relocation expenses and related
income tax gross-up payments and contributions of $234 we made to our 401(k)
plan on behalf of the named executive officer.

45
<PAGE> 47

The following table presents certain information regarding options we
granted during the fiscal year ended December 31, 1998 to the named executive
officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN OR 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 our 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 our 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 our 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 our 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 our achieving certain performance-based criteria. These
options terminated with respect to the remaining 906 shares on December 31,
1998.

46
<PAGE> 48

The following table presents certain information concerning exercisable and
unexercisable stock options held by the named 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
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
ACQUIRED ON VALUE -------------------------- -------------------------
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.

STOCK PLANS

Amended and Restated 1996 Equity Incentive Plan

The Amended and Restated 1996 Equity Incentive Plan was adopted by the
board of directors in 1996 and was approved by our stockholders in June 1997.
The equity plan was subsequently amended in February 1999 to increase the number
of shares issuable under the equity plan. We may currently grant options and
award shares under the equity plan for a total of 2,986,325 shares of common
stock. The equity plan is designed to provide us flexibility in awarding equity
incentives by providing for multiple types of incentives that may be awarded.
The purpose of the Equity plan is to attract and retain our key personnel and to
enable them to participate in our long-term growth.

The equity plan provides for the grant of stock options (incentive and
nonstatutory), stock appreciation rights, performance shares, restricted stock
or stock units for the purchase of an aggregate of 2,986,325 shares of common
stock, subject to adjustment for stock-splits and similar capital changes. We
can grant awards under the equity plan to officers, employees, directors and
other individuals as determined by the committee of the board of directors which
administers the equity plan, each of whose members is a "non-employee director"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended.

The equity plan provides for the grant of stock options (incentive and
nonstatutory), stock appreciation rights and restricted stock to employees,
directors and consultants of AutoCyte and our affiliates. As of June 30, 1999,
80 employees were eligible to participate in the equity plan. The compensation
committee has delegated to James B. Powell the power to grant certain awards
under the equity plan to persons who are not subject to the reporting
requirements of Section 16 of the Exchange Act or whose income is not subject to
Section 162(m) of the Internal Revenue Code of 1986, as amended from time to
time, or any successor law.

The compensation committee grants a wards at its discretion, determines the
recipients of awards and establishes the terms and conditions upon which awards
will be granted, including the:

- exercise price;

- the form of payment of the exercise price;

- the number of shares subject to options or other equity rights; and

- the time at which such options become exercisable.

47
<PAGE> 49

However, the exercise price of any incentive stock option granted under the
equity plan may not be less than the fair market value of the common stock on
the date of grant.

The closing price of AutoCyte's common stock on August 10, 1999, as
reported by the Nasdaq National Market, was $4.125 per share.

The amount of awards to be received under the equity plan by each of the
executive officers named in the Summary Compensation Table, our current
executive officers as a group, all current directors who are also consultants to
AutoCyte and all employees, including all our current officers who are not
executive officers, as a group, is not determinable and is in the discretion of
the compensation committee. Details on options granted during the last fiscal
year under the equity plan to certain executive officers are presented in the
tables and text under the heading "Executive Compensation." In general, as of
July 31, 1999, options to purchase an aggregate of 1,846,749 shares of common
stock have been granted and not cancelled unexercised under the equity plan, of
which options to purchase 411,640 shares have been exercised and options to
purchase 1,435,190 shares were outstanding. In addition, a total of 590,260
shares of restricted stock have been granted, leaving 549,316 shares available
for future grants of awards as of July 31, 1999. Of the aggregate number of
options granted, options to purchase an aggregate of 917,145 shares of common
stock have been granted to all current executive officers as a group, options to
purchase an aggregate of 692,079 shares of common stock have been granted to all
named executive officers as a group, 298,314 of which have been exercised, and
options to purchase an aggregate of 1,288,727 shares of common stock have been
granted to all our other employees and consultants, 113,326 of which had been
exercised as of July 31, 1999.

COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND CERTAIN
TRANSACTIONS

During fiscal year 1998, the compensation committee consisted of Dr.
Charpie, Dr. Curry and Mr. Mac Mahon. None of the members of the compensation
committee is an officer of ours.

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 ours.

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
ours.

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

We have entered into certain ongoing arrangements with LabCorp for selling
our products to LabCorp. In 1998, LabCorp purchased approximately $635,000 worth
of products from us. We currently expect that LabCorp's purchases of our
products in 1999 will exceed 5% of our consolidated gross revenue for 1999.

We have 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 our clinical trials. In 1998, we paid LabCorp
approximately $62,000 and $5,500, respectively, under these arrangements.

48
<PAGE> 50

PRINCIPAL AND SELLING STOCKHOLDERS

The following table and footnotes set forth certain information regarding
the beneficial ownership of our common stock as of June 30, 1999 by (i) the
selling stockholder named in the table, (ii) each person we know to own
beneficially 5% or more of our common stock, (iii) each named executive officer,
(iv) each of our directors and (v) all our directors and executive officers as a
group:

<TABLE>
<CAPTION>
SHARES OF
NUMBER OF SHARES COMMON STOCK
OF COMMON STOCK BENEFICIALLY OWNED
BENEFICIALLY AFTER OFFERING(1)
OWNED PRIOR NUMBER OF SHARES --------------------
BENEFICIAL OWNER TO OFFERING BEING OFFERED SHARES PERCENT
---------------- ---------------- ---------------- --------- -------
<S> <C> <C> <C> <C>
Selling Stockholder
Neuromedical Systems, Inc.,
as debtor and debtor in possession(2).... 1,400,000 1,400,000 -- --
10 Mountainview Road, Suite C-100
Upper Saddle River, NJ 07458
Others
Roche Image Analysis Systems, Inc. ........ 3,049,680 -- 3,049,680 21.4%
1080 U.S. Highway 202
Somerville, NJ 08876-3771
Sprout Capital VII, L.P. and certain
related entities(3)...................... 2,170,098 -- 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(4)...................... 2,156,411 -- 2,156,411 15.1%
55 William Street
Suite 240
Wellesley, MA 02481
Allemanni, LLC............................. 1,991,763 -- 1,991,763 13.9%
1573 York Place
Burlington, NC 27215
James B. Powell, M.D.(5)................... 2,149,638 -- 2,149,638 15.0%
Richard Charpie, Ph.D.(6).................. 2,156,411 -- 2,156,411 15.1%
Robert E. Curry, Ph.D.(7).................. 2,170,098 -- 2,170,098 15.2%
Thomas P. Mac Mahon........................ 48,819 -- 48,819 *
Susan E. Whitehead(8)...................... 12,918 -- 12,918 *
Ernest A. Knesel(9)........................ 268,500 -- 268,500 1.9%
Thomas Gahm, Ph.D.(10)..................... 123,001 -- 123,001 *
Eric W. Linsley(11)........................ 109,521 -- 109,521 *
Steven C. McPhail(12)...................... 70,587 -- 70,587 *
All current executive officers and
directors as a group (12 persons)(13).... 7,271,726 -- 7,249,135 50.9%
</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 June 30, 1999.

(2) As discussed in the "Plan of Distribution" the selling stockholder acquired
the shares in exchange for certain assets purchased by us from the selling
stockholder out of the bankruptcy proceedings.

49
<PAGE> 51

(3) 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 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.

(4) 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.

(5) 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
7,875 shares that may be acquired within 60 days of June 30, 1999 upon the
exercise of options.

(6) Consists solely of shares as described in note (4). 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 (4). Dr. Charpie disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest.

(7) Consists solely of shares as described in note (3). 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 (3). Dr. Curry disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.

(8) Includes 4,918 shares that may be acquired within 60 days of June 30, 1999
upon the exercise of options.

(9) 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 51,316 shares that may be acquired within 60 days of
June 30, 1999 upon the exercise of options.

(10) Includes 24,088 shares that may be acquired within 60 days of June 30, 1999
upon the exercise of options.

(11) Includes 20,286 shares that may be acquired within 60 days of June 30, 1999
upon the exercise of options.

(12) Includes 18,839 shares that may be acquired within 60 days of June 30, 1999
upon the exercise of options.

(13) See notes (3) through (12) above. Includes 223,601 shares that may be
acquired within 60 days of June 30, 1999 upon the exercise of options.

50
<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

Our 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 July 31, 1999, there were 14,291,549 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 our 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. We will pay dividends out of funds legally available for
the payment of dividends. See "Dividend Policy." Upon our 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 and sale, will be fully paid and nonassessable.

PREFERRED STOCK

Our board of directors have 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 constituting any series or the designation of
such series, without further vote or action by the stockholders. We believe 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 "Description of Capital
Stock -- Anti-Takeover Provisions." We have 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 our 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
our stockholders may be called only by the

51
<PAGE> 53

President or the board of directors and require advance notice of business to be
brought by a stockholder before the annual meeting.

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, a law regulating corporate takeovers. In certain circumstances,
the Anti-Takeover Law prevents certain Delaware corporations, including those
whose securities are listed on the Nasdaq National Market, from engaging in a
"business combination" (which includes a merger or sale of more than ten percent
of the corporation's assets) with an "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock) for three years
following the date on which such stockholder became an "interested stockholder"
subject to certain exceptions, unless the transaction is approved by the board
of directors and the holders of at least 66 2/3% of the outstanding voting stock
of the corporation (excluding shares held by the interested stockholder). The
statutory ban does not apply if, upon consummation of the transaction in which
any person becomes an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock of the corporation (excluding shares
held by persons who are both directors and officers or by certain employee stock
plans). A Delaware corporation subject to the Anti-Takeover Law may "opt out" of
the Anti-Takeover Law with an express provision either in its certificate of
incorporation or by-laws resulting from a stockholders' amendment approved by at
least a majority of the outstanding voting shares; such an amendment is
effective following expiration of twelve months from adoption. We have not
"opted out" of the Anti-Takeover Law.

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 our management. It is possible that such
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.

TRANSFER AGENT

The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company. Its telephone number is (212) 936-5100.

PLAN OF DISTRIBUTION

The selling stockholder is a debtor in proceedings for reorganization under
Chapter 11 of the United States Bankruptcy Code and received the shares covered
by this prospectus in exchange for certain assets purchased by us from the
selling stockholder as the result of a sale process conducted in the bankruptcy
proceedings. The selling stockholder holds the shares as assets of the debtor
and debtor in possession in the Chapter 11 proceedings for the benefit of its
creditors and may sell or distribute the shares only as authorized in the
Chapter 11 proceedings. Subject thereto, the selling stockholder (and donees,
pledgees, transferees or other successors in interest receiving shares from the
selling stockholder after the date of this prospectus) may offer the shares of
common stock covered by this prospectus from time to time in privately
negotiated transactions, including transactions with its creditors and
shareholders, or in open market transactions, including transactions in the
over-the-counter market, on any exchange where the common stock is then listed,
with broker-dealers or third-parties other than in the over-the-counter market
or on an exchange (including in block sales), in connection with short sales, in
connection with writing call options or in other hedging arrangements, or in
transactions involving a combination of such methods.

The selling stockholder may sell its shares at market prices prevailing at
the time of sale, at prices related to such prevailing market prices, at
negotiated prices or at fixed prices.

The selling stockholder may use dealers, agents or underwriters to sell its
shares. Underwriters may use dealers to sell such shares. If this happens, the
dealers, agents or underwriters may receive compensation in the form of
discounts or commissions from the selling stockholder, purchasers of shares or
both (which compensation to a particular broker might be in excess of customary
compensation).

52
<PAGE> 54

The selling stockholder and any dealers, agents or underwriters that
participate with the selling stockholder in the distribution of the shares may
be deemed to be "underwriters" as such term is defined in the Securities Act of
1933, as amended. Any commissions paid or any discounts or concessions allowed
to any such persons, and any profits received on the resale of such shares of
common stock offered by this prospectus, may be deemed to be underwriting
commissions or discounts under the Securities Act.

As of the date of this prospectus, the selling stockholder has not advised
us that it has made, or the court has approved, any arrangements as to the
distribution of the shares covered by this prospectus in the form of a plan of
reorganization or otherwise except for the transfer of a certain number of
shares to Houlihan, Lockey, Howard & Zuckin for services rendered to the selling
stockholder. To the extent required, we will amend or supplement this prospectus
to disclose material arrangements regarding the plan of distribution.

To comply with the securities laws of certain jurisdictions, the shares
offered by this prospectus may need to be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers.

Under applicable rules and regulations under the Securities Exchange Act,
any person engaged in a distribution of the shares of common stock covered by
this prospectus may be limited in its ability to engage in market activities
with respect to such shares. The selling stockholder, for example, will be
subject to applicable provisions of the Securities Exchange Act of 1934 and the
rules and regulations under it, which provisions may limit the timing of
purchases and sales of any shares of common stock by the selling stockholder.
The foregoing may affect the marketability of the shares offered by this
prospectus.

We will pay certain expenses of the offering and issuance of the shares
covered by this prospectus, including the printing, legal and accounting
expenses we incur and the registration and filing fees imposed by the SEC or the
Nasdaq National Market. We also have agreed to indemnify the selling
stockholders against certain civil liabilities, including liabilities under the
Securities Act. We will not pay brokerage commissions or taxes associated with
sales by the selling stockholders or any legal, accounting and other expenses of
the selling stockholder.

We have agreed with the selling stockholder, subject to certain conditions,
to keep the registration statement of which this prospectus constitutes a part
effective until the selling stockholder may sell all of the shares without
registration pursuant to Rule 144(k) under the Securities act or, if earlier,
such time as all of the shares have been disposed of pursuant to and in
accordance with the registration statement.

LEGAL MATTERS

Palmer & Dodge LLP, Boston, Massachusetts, counsel to AutoCyte, is giving
AutoCyte an opinion on the validity of the shares covered by this prospectus.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our 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. We have included our
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.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available on the SEC's
Website at "http://www.sec.gov."

53
<PAGE> 55

You may request a copy of these filings, at no cost, by writing or
telephoning us using the following contact information:
AutoCyte, Inc.
780 Plantation Drive
Burlington, NC 27215
(800) 426-2176

You should rely only on the information provided in this prospectus or any
supplement. We have not authorized anyone else to provide you with different
information. The selling stockholders will not make an offer of these shares in
any state where the offer is not permitted. You should not assume that the
information in this prospectus or any supplement is accurate as of any date
other than the date on the front of those documents.

54
<PAGE> 56

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUTOCYTE, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997
and June 30, 1999......................................... F-3
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-4
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-5
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-6
Notes to Consolidated Financial Statements.................. F-7

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF ROCHE IMAGE ANALYSIS
SYSTEMS, INC.
Report of Independent Auditors.............................. F-19
Balance Sheets as of December 31, 1995 and November 21,
1996...................................................... F-20
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-21
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-22
Notes to Financial Statements............................... F-23

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF
AUTOCYTE, INC. AND NEOPATH, INC.
Introduction to Unaudited Pro Forma Combined Condensed
Financial Statements...................................... F-27
Unaudited Pro Forma Combined Condensed Balance Sheet as of
June 30, 1999............................................. F-28
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months Ended June 30, 1999......... F-29
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months Ended June 30, 1998......... F-29
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31,
1998...................................................... F-30
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31,
1997...................................................... F-30
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31,
1996...................................................... F-31
</TABLE>

F-1
<PAGE> 57

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-2
<PAGE> 58

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-3
<PAGE> 59

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-4
<PAGE> 60

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-5
<PAGE> 61

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-6
<PAGE> 62

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-7
<PAGE> 63
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 flows over
F-8
<PAGE> 64
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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-9
<PAGE> 65
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-10
<PAGE> 66
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-11
<PAGE> 67
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 amortization................. (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-12
<PAGE> 68
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>

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.

F-13
<PAGE> 69
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
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.

F-14
<PAGE> 70
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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-15
<PAGE> 71
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, $37,807 during

F-16
<PAGE> 72
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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>

F-17
<PAGE> 73
AUTOCYTE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>

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-18
<PAGE> 74

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-19
<PAGE> 75

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-20
<PAGE> 76

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-21
<PAGE> 77

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-22

<PAGE> 78

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.

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.

F-23
<PAGE> 79

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF

ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-24
<PAGE> 80

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF

ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

F-25
<PAGE> 81

CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF

ROCHE IMAGE ANALYSIS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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-26
<PAGE> 82

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 appearing
in this prospectus and those of NeoPath appearing in its annual report on Form
10-K and other reports filed with the SEC.

F-27
<PAGE> 83

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-28
<PAGE> 84

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-29
<PAGE> 85

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-30
<PAGE> 86

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-31
<PAGE> 87

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the expenses of issuance and distribution of the common
stock registered hereunder on Form S-1, all of which are to be borne by the
registrant, other than underwriting discounts and commissions:

<TABLE>
<S> <C>
SEC registration fee........................................ $ 2,240
Nasdaq filing fee........................................... $ 17,500
Printing and engraving expenses............................. $ 10,000
Accounting fees and expenses................................ $ 30,000
Legal fees and expenses..................................... $ 60,000
Miscellaneous expenses...................................... $ 10,260
Total.................................................. $130,000
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law grants the Registrant
the power to indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the Registrant, or
is or was serving at the request of the Registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with any such action, suit or proceeding if (i) he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant and (ii) with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful,
provided, however, no indemnification shall be made in connection with any
proceeding brought by or in the right of the Registrant where the person
involved is adjudged to be liable to the Registrant to the amendment except to
the extent approved by a court.

Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the elimination or limitation of liability is not
permitted under the Delaware General Corporation Law as in effect when such
liability is determined.

Article TENTH of the Registrant's Restated Certificate of Incorporation
provides that the Registrant shall, to the fullest extent permitted by the
Delaware General Corporation Law, as amended from time to time, indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was, or has agreed to become a director or officer of the
Registrant, or is or was serving, or has agreed to serve, at the request of the
Registrant, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided for in Article TENTH is expressly not exclusive of any
other rights to which those seeking indemnification may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and shall inure to the benefit of the heirs, executors and administrators of
such persons. Article TENTH further permits the board of directors to authorize
the grant of indemnification rights to other employees and agents of the
Registrant and such rights may be equivalent to, or greater or less than, those
set forth in Article TENTH.

Article V, Section 1 of the Registrant's Amended and Restated By-laws
provides that the Registrant shall, to the full extent permitted by the Delaware
General Corporation Law, as amended from time to time, and the certificate of
incorporation, indemnify each person whom it may indemnify pursuant thereto.

Article V, Section 2 of the Registrant's By-Laws provides that the
Registrant shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of

II-1
<PAGE> 88

the Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such whether or not the Registrant would have the power to
indemnify such person against such liability under the provisions of the General
Corporation Law of the State of Delaware.

The Registrant's Restated Certificate of Incorporation provides that
directors of the Registrant will not be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, whether or not an individual continues to be a director at the time
such liability is asserted, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derives an
improper personal benefit.

The Registrant has entered into agreements with all of its directors and
all of its executive officers affirming the Registrant's obligation to indemnify
them to the fullest extent permitted by law and providing various other
protections.

The Registrant carries directors' and Officers' insurance covering its
directors and officers against certain liabilities they may incur when acting in
their capacity as directors or officers of the Registrant.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since 1996, the Registrant has sold and issued the following unregistered
securities:

On November 22, 1996, the Registrant sold an aggregate of 3,689,129
shares of Common Stock to Roche Image Analysis Systems in exchange for
substantially all of the assets of Roche Image Analysis Systems used in
connection with the cytology and pathology automation business.
Simultaneously therewith, the Registrant also sold: (i) an aggregate of
834,813 shares of Series A Preferred Stock at an aggregate price of
$1,710,000 to certain purchasers affiliated with the Registrant; (ii) an
aggregate of 43,938 shares of Series A Preferred Stock at an aggregate
price of $90,000 to certain purchasers affiliated with Roche Image Analysis
Systems or its affiliates; (iii) an aggregate of 1,952,779 shares of Series
A Preferred Stock at an aggregate price of $4,000,000 to Ampersand
Specialty Materials and Chemicals III Limited Partnership and Laboratory
Partners I Limited Partnership (collectively, with their companion funds,
the "Ampersand Funds"); and (iv) an aggregate of 1,952,779 shares of Series
A Preferred Stock at an aggregate price of $4,000,000 to Sprout Capital
VII, L.P., DLJ First ESC L.L.C., DLJ Capital Corporation and the Sprout CEO
Fund, L.P. (the "Sprout Funds").

The transaction on November 22, 1996 also included the issuance and
sale of 590,261 shares of Common Stock at an aggregate price of $120,000 to
Dr. Powell.

On December 19, 1996, the Registrant sold an aggregate of 48,819
shares of Series A Preferred Stock at an aggregate price of $100,000 to Dr.
Powell.

On May 19, 1997, the Registrant sold an aggregate of 48,819 shares of
Series A Preferred Stock at an aggregate price of $100,000 to certain
purchasers affiliated with the Registrant.

On June 27, 1997, the Registrant issued warrants to purchase an
aggregate of 207,294 shares of Common Stock at an exercise price of $1.00
per share to certain principal stockholders as a commitment fee in
connection with the establishment of a credit agreement.

No underwriter was engaged in connection with the foregoing issuance of
securities. The above described issuances of Common Stock, Series A Preferred
Stock, options to purchase Common Stock and warrants to purchase Common Stock
were made in reliance upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), as transactions not involving any public offering and Rule
701 promulgated thereunder. We have reason to believe that all of the foregoing
purchasers were familiar with or had access to information concerning our
operations and financial conditions, and all of those individuals were acquiring
the shares for investment and not with a view to the distribution thereof. At
the time of issuance, all of the foregoing shares

II-2
<PAGE> 89

of common stock and Series A Preferred Stock were deemed to be restricted
securities for purposes of the Act and the certificates representing such
securities bore legends to that effect.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated June 4, 1999 among
AutoCyte, Trilogy Acquisition Corp. and NeoPath, Inc. Filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K
(File No. 333-30227) filed on June 23, 1999 and incorporated
herein by reference.
3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 3.5 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
5.1* Opinion of Palmer & Dodge LLP as to the legality of the
securities registered hereunder.
10.1 Amended and Restated 1996 Equity Incentive Plan, as amended
(including forms of incentive stock option certificate and
nonstatutory stock option certificate). Filed herewith.
10.2 1997 Director Stock Option Plan (including form of director
nonstatutory stock option certificate). Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
(File No. 333-30227) and incorporated herein by reference.
10.3 Lease Agreement dated as of March 10, 1993 by and between
Carolina Hosiery Mills, Inc. and Roche Biomedical
Laboratories, Inc. ("RBL"), the predecessor of the Company's
predecessor (including notices of renewal thereof dated
December 27, 1995 and March 24, 1997). Filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.4 Lease Agreement dated as of April 25, 1995 by and between
RBL, the predecessor of the Company's predecessor, and Roche
Image Analysis Systems, the Company's predecessor (including
notices of renewal thereof dated January 10, 1996 and March
18, 1997). Filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.5+ Original equipment manufacturer Supply Agreement dated
January 13, 1995 between Tecan AG and Roche Image Analysis
Systems, the Company's predecessor. Filed as Exhibit 10.6 to
the Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.
10.6+ Amendment to the Original Equipment Manufacturer Supply
Agreement dated October 14, 1996 between Tecan AG and Roche
Image Analysis Systems, the Company's predecessor. Filed as
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.
10.7 Agreement dated July 26, 1993 by and between Technical
Precision Plastics, Inc. and Roche Image Analysis Systems,
the Company's predecessor. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.
10.8 Registration Rights Agreement dated as of November 22, 1996
by and among the Company and the individuals and entities
listed on Exhibit A thereto (including amendment thereof
dated June 26, 1997). Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.9 Contribution Agreement dated as of November 22, 1996 by and
among HLR Holdings Inc., Roche Image Analysis Systems and
the Company. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
</TABLE>

II-3
<PAGE> 90

<TABLE>
<C> <S>
10.10 Form of Indemnification Agreement between the Company and its directors and Executive Officers. Filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-30227) and incorporated
herein by reference.
10.11 Lease Agreement dated as of July 28, 1997 by and between Carolina Hosiery Mills, Inc. and the Company.
Filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.12 Renewal dated January 6, 1998 of Lease Agreement dated as of April 25, 1995 by and between RBL, the
predecessor of the Company's predecessor, and Roche Image Analysis Systems, the Company's predecessor.
Filed as Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 1997 (File No. 0-22885)
and incorporated herein by reference.
10.13 Lease Agreement dated July 8, 1998 by and between Laboratory Corporation of America Holdings and
AutoCyte, Inc. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1998
(File No. 0-22885) and incorporated herein by reference.
10.14 Lease Agreement dated June 12, 1998 by and between Carolina Hosiery Mills, Inc. and AutoCyte, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22885) and
incorporated herein by reference.
10.15+ Supply Agreement dated June 1, 1998 by and between Technical Precision Plastics, Inc. and AutoCyte, Inc.
Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22885)
and incorporated herein by reference.
10.16+ Supply Agreement dated March 5, 1998 by and between Tecan AG and AutoCyte, Inc. Filed as Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended June 30, 1998 (File No. 0-22885) and incorporated herein by
reference.
10.17 Master Loan and Security Agreement dated December 21, 1998 by and between Oxford Venture Finance, LLC and
AutoCyte, Inc. Filed as Exhibit 10.17 to the Company's Form 10-K for the year ended December 31, 1998
(File No. 0-22885) and incorporated herein by reference.
10.18 Amendment dated March 2, 1999 to Lease Agreement dated July 28, 1997 between Carolina Hosiery Mills, Inc.
and AutoCyte, Inc. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1999
(File No. 0-22885) and incorporated herein by reference.
10.19 Asset Purchase Agreement by and between AutoCyte, Inc. and Neuromedical Systems, Inc. dated as of March
25, 1999. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1999 (File No.
0-22885) and incorporated herein by reference.
10.20+ OEM Supply Agreement dated as of June 26, 1999 by and between Tecan AG and AutoCyte. Filed herewith.
10.21 Intellectual Property Purchase Agreement dated as of April 24, 1999 by and between NeoPath, Inc. and
AutoCyte. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors to the Company. Filed herewith.
23.2* Consent of Palmer & Dodge LLP (contained in Opinion of Palmer & Dodge LLP, filed as Exhibit 5.1 hereto).
24.1* Power of Attorney (included in signature page of the Registrant's Registration Statement on Form S-1
filed on July 1, 1999 (File No. 333-82121)).
24.2* Certified resolutions of the Registrant authorizing power of attorney.
27.1 Financial Data Schedule. Filed herewith. (For SEC use only)
</TABLE>

- ---------------
* Previously filed.

+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended. Omitted information is
identified with asterisks in the appropriate places in the agreement.

Exhibits 10.1 and 10.2 are management contracts and compensatory plans.

II-4
<PAGE> 91

(b) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under "Item
14 -- Indemnification of directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(b) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.

(2) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

i. To include any prospectus required by section 10(a)3 of the
Securities Act of 1933;

ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

(3) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(5) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 92

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to its Registration Statement (File No.
333-82121) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Burlington, State of North Carolina, on August 12,
1999.

AUTOCYTE, INC.

By: /s/ *JAMES B. POWELL, M.D.
------------------------------------
James B. Powell, M.D.
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to its Registration Statement (File No. 333-82121) has been signed by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ *JAMES B. POWELL, M.D. President, Chief Executive August 12, 1999
- --------------------------------------------------- Officer and Director (Principal
James B. Powell, M.D. Executive Officer)

/s/ WILLIAM O. GREEN Chief Financial Officer, and Vice August 12, 1999
- --------------------------------------------------- President, Finance (Principal
William O. Green Financial Officer and Principal
Accounting Officer)

/s/ *RICHARD A. CHARPIE Director August 12, 1999
- ---------------------------------------------------
Richard A. Charpie

/s/ *ROBERT E. CURRY Director August 12, 1999
- ---------------------------------------------------
Robert E. Curry

/s/ *THOMAS P. MAC MAHON Director August 12, 1999
- ---------------------------------------------------
Thomas P. Mac Mahon

/s/ *SUSAN E. WHITEHEAD Director August 12, 1999
- ---------------------------------------------------
Susan E. Whitehead

*By: /s/ WILLIAM O. GREEN
---------------------------------------------
William O. Green
Attorney-in-Fact
</TABLE>

II-6
<PAGE> 93

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger dated June 4, 1999 among
AutoCyte, Trilogy Acquisition Corp. and NeoPath, Inc. Filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K
(File No. 333-30227) filed on June 23, 1999 and incorporated
herein by reference.

3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 3.5 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.

3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.

4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.

5.1* Opinion of Palmer & Dodge LLP as to the legality of the
securities registered hereunder.

10.1 Amended and Restated 1996 Equity Incentive Plan, as amended
(including forms of incentive stock option certificate and
nonstatutory stock option certificate). Filed herewith.

10.2 1997 Director Stock Option Plan (including form of director
nonstatutory stock option certificate). Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
(File No. 333-30227) and incorporated herein by reference.

10.3 Lease Agreement dated as of March 10, 1993 by and between
Carolina Hosiery Mills, Inc. and Roche Biomedical
Laboratories, Inc. ("RBL"), the predecessor of the Company's
predecessor (including notices of renewal thereof dated
December 27, 1995 and March 24, 1997). Filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.

10.4 Lease Agreement dated as of April 25, 1995 by and between
RBL, the predecessor of the Company's predecessor, and Roche
Image Analysis Systems, the Company's predecessor (including
notices of renewal thereof dated January 10, 1996 and March
18, 1997). Filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.

10.5+ Original equipment manufacturer Supply Agreement dated
January 13, 1995 between Tecan AG and Roche Image Analysis
Systems, the Company's predecessor. Filed as Exhibit 10.6 to
the Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.

10.6+ Amendment to the Original Equipment Manufacturer Supply
Agreement dated October 14, 1996 between Tecan AG and Roche
Image Analysis Systems, the Company's predecessor. Filed as
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.

10.7 Agreement dated July 26, 1993 by and between Technical
Precision Plastics, Inc. and Roche Image Analysis Systems,
the Company's predecessor. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.

10.8 Registration Rights Agreement dated as of November 22, 1996
by and among the Company and the individuals and entities
listed on Exhibit A thereto (including amendment thereof
dated June 26, 1997). Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.

10.9 Contribution Agreement dated as of November 22, 1996 by and
among HLR Holdings Inc., Roche Image Analysis Systems and
the Company. Filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.

10.10 Form of Indemnification Agreement between the Company and
its directors and Executive Officers. Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
</TABLE>

<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.11 Lease Agreement dated as of July 28, 1997 by and between
Carolina Hosiery Mills, Inc. and the Company. Filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.

10.12 Renewal dated January 6, 1998 of Lease Agreement dated as of
April 25, 1995 by and between RBL, the predecessor of the
Company's predecessor, and Roche Image Analysis Systems, the
Company's predecessor. Filed as Exhibit 10.12 to the
Company's Form 10-K for the year ended December 31, 1997
(File No. 0-22885) and incorporated herein by reference.

10.13 Lease Agreement dated July 8, 1998 by and between Laboratory
Corporation of America Holdings and AutoCyte, Inc. Filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (File No. 0-22885) and incorporated
herein by reference.

10.14 Lease Agreement dated June 12, 1998 by and between Carolina
Hosiery Mills, Inc. and AutoCyte, Inc. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended June 30,
1998 (File No. 0-22885) and incorporated herein by
reference.

10.15+ Supply Agreement dated June 1, 1998 by and between Technical
Precision Plastics, Inc. and AutoCyte, Inc. Filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June
30, 1998 (File No. 0-22885) and incorporated herein by
reference.

10.16+ Supply Agreement dated March 5, 1998 by and between Tecan AG
and AutoCyte, Inc. Filed as Exhibit 10.3 to the Company's
Form 10-Q for the quarter ended June 30, 1998 (File No.
0-22885) and incorporated herein by reference.

10.17 Master Loan and Security Agreement dated December 21, 1998
by and between Oxford Venture Finance, LLC and AutoCyte,
Inc. Filed as Exhibit 10.17 to the Company's Form 10-K for
the year ended December 31, 1998 (File No. 0-22885) and
incorporated herein by reference.

10.18 Amendment dated March 2, 1999 to Lease Agreement dated July
28, 1997 between Carolina Hosiery Mills, Inc. and AutoCyte,
Inc. Filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended March 31, 1999 (File No. 0-22885) and
incorporated herein by reference.

10.19 Asset Purchase Agreement by and between AutoCyte, Inc. and
Neuromedical Systems, Inc. dated as of March 25, 1999. Filed
as Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended March 31, 1999 (File No. 0-22885) and incorporated
herein by reference.

10.20+ OEM Supply Agreement dated as of June 26, 1999 by and
between Tecan AG and AutoCyte. Filed herewith.

10.21 Intellectual Property Purchase Agreement dated as of April
24, 1999 by and between NeoPath, Inc. and AutoCyte. Filed
herewith.

23.1 Consent of Ernst & Young LLP, independent auditors to the
Company. Filed herewith.

23.2* Consent of Palmer & Dodge LLP (contained in Opinion of
Palmer & Dodge LLP, filed as Exhibit 5.1 hereto).

24.1* Power of Attorney (included in signature page of the
Registrant's Registration Statement on Form S-1 filed on
July 1, 1999 (File No. 333-82121)).

24.2* Certified resolutions of the Registrant authorizing power of
attorney.

27.1 Financial Data Schedule. Filed herewith. (For SEC use only)
</TABLE>

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

* Previously filed.

Exhibits 10.1 and 10.2 are management contracts and compensatory plans.

<PAGE> 1

EXHIBIT 10.1

This Plan was approved by the Board of Directors on November 22, 1996.
This Plan was amended by the Board of Directors on May 19, 1997.
This Plan, as amended, was approved by the stockholders on June 26, 1997.
This Plan was amended and restated by the Board of Directors on June 24, 1997.
This Plan, as amended and restated, was approved by the stockholders on June 26,
1997.
This Plan was amended by the Board of Directors on February 2, 1999.
This Plan, as amended, was approved by the stockholders on May 26, 1999.

AUTOCYTE, INC.

AMENDED AND RESTATED

1996 EQUITY INCENTIVE PLAN

1. PURPOSE

The purpose of the Autocyte, Inc. 1996 Amended and Restated Equity
Incentive Plan (the "Plan") is to attract and retain key personnel of the
Company and its Affiliates, to provide an incentive for them to achieve
long-range performance goals, and to enable them to participate in the long-term
growth of the Company by granting Awards with respect to the Company's Common
Stock.

2. ADMINISTRATION

The Plan shall be administered by the Committee, provided that the
Board may in any instance perform any of the functions delegated to the
Committee hereunder. The Committee shall select the Participants to receive
Awards and shall determine the terms and conditions of the Awards. The Committee
shall have authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing the operation of the Plan as it shall from
time to time consider advisable, and to interpret the provisions of the Plan.
The Committee's decisions shall be final and binding. To the extent permitted by
applicable law, the Committee may delegate to one or more executive officers of
the Company the power to make Awards to Participants who are not Reporting
Persons or Covered Employees and all determinations under the Plan with respect
thereto, provided that the Committee shall fix the maximum amount of such Awards
for all such Participants and a maximum for any one Participant.
<PAGE> 2

3. ELIGIBILITY

All employees, directors and consultants of the Company or any
Affiliate capable of contributing significantly to the successful performance of
the Company, other than a person who has irrevocably elected not to be eligible,
are eligible to be Participants in the Plan. Incentive Stock Options may be
granted only to persons eligible to receive such Options under the Code.

4. STOCK AVAILABLE FOR AWARDS

(a) AMOUNT. Subject to adjustment under subsection (b), Awards may be
made under the Plan for up to 2,986,325 shares of Common Stock. If any Award
expires or is terminated unexercised or is forfeited or settled in a manner that
results in fewer shares outstanding than were awarded, the shares subject to
such Award, to the extent of such expiration, termination, forfeiture or
decrease, shall again be available for award under the Plan. Common Stock issued
through the assumption or substitution of outstanding grants from an acquired
company shall not reduce the shares available for Awards under the Plan. Shares
issued under the Plan may consist in whole or in part of authorized but unissued
shares or treasury shares.

(b) ADJUSTMENT. In the event that the Committee determines that any
stock dividend, extraordinary cash dividend, recapitalization, reorganization,
merger, consolidation, split-up, spin-off, combination, exchange of shares or
other transaction affects the Common Stock such that an adjustment is required
in order to preserve the benefits intended to be provided by the Plan, then the
Committee (subject in the case of Incentive Stock Options to any limitation
required under the Code) shall equitably adjust any or all of (i) the number and
kind of shares in respect of which Awards may be made under the Plan, (ii) the
number and kind of shares subject to outstanding Awards, (iii) the exercise
price with respect to any of the foregoing, and (iv) if considered appropriate,
the Committee may make provision for a cash payment with respect to an
outstanding Award; provided that in the case (i) or (ii) above the number of
shares subject to any Award shall always be a whole number.

(c) LIMIT ON INDIVIDUAL GRANTS. The maximum number of shares of Common
Stock subject to Options and Stock Appreciation Rights that may be granted to
any Participant in the aggregate in any calendar year shall not exceed 1,000,000
shares, subject to adjustment under subsection (b).

5. STOCK OPTIONS

(a) GRANT OF OPTIONS. Subject to the provisions of the Plan, the
Committee may grant options ("Options") to purchase shares of Common Stock
complying with the requirements of Section 422 of the Code or any successor
provision and any regulations thereunder ("Incentive Stock Options") and (ii)
not intended to comply with such requirements ("Nonstatutory Stock Options").
The Committee shall determine the number of shares subject to each Option and
the exercise price therefor, which in the case of Incentive Stock Options shall
not be less than 100% of the Fair Market Value of the Common Stock on the date
of grant. No Incentive Stock Option may be granted hereunder more than ten years
after the effective date of the Plan.

2
<PAGE> 3

(b) TERMS AND CONDITIONS. Each Option shall be exercisable at such
times and subject to such terms and conditions as the Committee may specify in
the applicable grant or thereafter. The Committee may impose such conditions
with respect to the exercise of Options, including conditions relating to
applicable federal or state securities laws, as it considers necessary or
advisable.

(c) PAYMENT. Payment for shares to be delivered pursuant to any
exercise of an Option may be made in whole or in part in cash or, to the extent
permitted by the Committee at or after the grant of the Option, by delivery of a
note or other commitment satisfactory to the Committee or shares of Common Stock
owned by the optionee, including Restricted Stock, or by retaining shares
otherwise issuable pursuant to the Option, in each case valued at their Fair
Market Value on the date of delivery or retention, or such other lawful
consideration as the Committee may determine.

6. STOCK APPRECIATION RIGHTS

(a) GRANT OF SARs. Subject to the provisions of the Plan, the Committee
may grant rights to receive any excess in value of shares of Common Stock over
the exercise price ("Stock Appreciation Rights" or "SARs") in tandem with an
Option (at or after the award of the Option), or alone and unrelated to an
Option. SARs in tandem with an Option shall terminate to the extent that the
related Option is exercised, and the related Option shall terminate to the
extent that the tandem SARs are exercised. The Committee shall determine at the
time of grant or thereafter whether SARs are settled in cash, Common Stock or
other securities of the Company, Awards or other property, and may define the
manner of determining the excess in value of the shares of Common Stock.

(b) EXERCISE PRICE. The Committee shall fix the exercise price of each
SAR or specify the manner in which the price shall be determined. An SAR granted
in tandem with an Option shall have an exercise price not less than the exercise
price of the related Option. An SAR granted alone and unrelated to an Option may
not have an exercise price less than 100% of the Fair Market Value of the Common
Stock on the date of the grant, provided that such an SAR granted to a new
employee or consultant within 90 days of the date of employment may have a lower
exercise price so long as it is not less than 100% of Fair Market Value on the
date of employment.

7. RESTRICTED STOCK

(a) GRANT OF RESTRICTED STOCK. Subject to the provisions of the Plan,
the Committee may grant shares of Common Stock subject to forfeiture
("Restricted Stock") and determine the duration of the period (the "Restricted
Period") during which, and the conditions under which, the shares may be
forfeited to the Company and the other terms and conditions of such Awards.
Shares of Restricted Stock may be issued for no cash consideration, such minimum
consideration as may be required by applicable law or such other consideration
as the Committee may determine.

(b) RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted

3
<PAGE> 4

Period. Notwithstanding the foregoing, in the Committee's discretion, Awards in
the form of Restricted Stock may be made transferable to a limited liability
corporation controlled solely by the Participant. Shares of Restricted Stock
shall be evidenced in such manner as the Committee may determine. Any
certificates issued in respect of shares of Restricted Stock shall be registered
in the name of the Participant and unless otherwise determined by the Committee,
deposited by the Participant, together with a stock power endorsed in blank,
with the Company. At the expiration of the Restricted Period, the Company shall
deliver such certificates to the Participant or if the Participant has died, to
the Participant's Designated Beneficiary.

8. GENERAL PROVISIONS APPLICABLE TO AWARDS

(a) REPORTING PERSON LIMITATIONS. Notwithstanding any other provision
of the Plan, Awards made to a Reporting Person shall not be transferable by such
person other than by will or the laws of descent and distribution and are
exercisable during such person's lifetime only by such person or by such
person's guardian or legal representative. Awards, unless Incentive Stock
Options, may also be made transferable pursuant to a domestic relations order as
defined in the Code or Title I of the Employee Retirement Income Security Act or
the rules thereunder.

(b) DOCUMENTATION. Each Award under the Plan shall be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable tax and regulatory
laws and accounting principles.

(c) COMMITTEE DISCRETION. Each type of Award may be made alone, in
addition to or in relation to any other Award. The terms of each type of Award
need not be identical, and the Committee need not treat Participants uniformly.
Except as otherwise provided by the Plan or a particular Award, any
determination with respect to an Award may be made by the Committee at the time
of grant or at any time thereafter.

(d) DIVIDENDS AND CASH AWARDS. In the discretion of the Committee, any
Award under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest and (ii) cash
payments in lieu of or in addition to an Award.

(e) TERMINATION OF EMPLOYMENT. The Committee shall determine the effect
on an Award of the disability, death, retirement or other termination of
employment of a Participant and the extent to which, and the period during
which, the Participant's legal representative, guardian or Designated
Beneficiary may receive payment of an Award or exercise rights thereunder.

(f) CHANGE IN CONTROL. In order to preserve a Participant's rights
under an Award in the event of a "change in control" (as defined by the
Committee) of the Company, the Committee in its discretion may, at the time an
Award is made or at any time thereafter, take one or more of the following
actions: (i) provide for the acceleration of any time period relating to the
exercise or payment of the Award, (ii) provide for payment to the Participant of
cash or other property with a Fair Market Value equal to the amount that would
have been received upon the

4
<PAGE> 5

exercise or payment of the Award had the Award been exercised or paid upon the
change in control, (iii) adjust the terms of the Award in a manner determined by
the Committee to reflect the change in control, (iv) cause the Award to be
assumed, or new rights substituted therefor, by another entity, or (v) make such
other provision as the Committee may consider equitable to Participants and in
the best interests of the Company.

(g) LOANS. The Committee may authorize the making of loans or cash
payments to Participants in connection with the grant or exercise of any Award
under the Plan, which loans may be secured by any security, including Common
Stock, underlying or related to such Award (provided that the loan shall not
exceed the Fair Market Value of the security subject to such Award), and which
may be forgiven upon such terms and conditions as the Committee may establish at
the time of such loan or at any time thereafter.

(h) WITHHOLDING TAXES. The Participant shall pay to the Company, or
make provision satisfactory to the Committee for payment of, any taxes required
by law to be withheld in respect of Awards under the Plan no later than the date
of the event creating the tax liability. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value on the date of delivery. The Company and its Affiliates may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to the Participant.

(i) FOREIGN NATIONALS. Awards may be made to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or to comply with
applicable laws.

(j) AMENDMENT OF AWARD. The Committee may amend, modify or terminate
any outstanding Award, including substituting therefor another Award of the same
or a different type, changing the date of exercise or realization and converting
an Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required if the action, taking
into account any related action, would adversely affect the Participant.

9. CERTAIN DEFINITIONS

"Affiliate" means any business entity in which the Company owns
directly or indirectly 50% or more of the total voting power or has a
significant financial interest as determined by the Committee.

"Award" means any Option, Stock Appreciation Right or Restricted Stock
granted under the Plan.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor law.

5
<PAGE> 6

"Committee" means one or more committees each comprised of not less
than two members of the Board appointed by the Board to administer the Plan or a
specified portion thereof. If the Committee is authorized to grant Options to a
Reporting Person or a Covered Employee, each member shall be a "Non-Employee
Director" or the equivalent within the meaning of Rule 16b-3 under the Exchange
Act or an "outside director" or the equivalent within the meaning of Section
162(m) of the Code, respectively. In the event no such Committee is appointed,
then "Committee" means the Board.

"Common Stock" means the Common Stock, $0.01 par value, of the Company.

"Company" means AutoCyte, Inc., a Delaware corporation.

"Covered Employee" means a person whose income is subject to Section
162(m) of the Code.

"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Committee, to receive amounts due or
exercise rights of the Participant in the event of the Participant's death. In
the absence of an effective designation by a Participant, "Designated
Beneficiary" means the Participant's estate.

"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor law.

"Fair Market Value" means, with respect to the Common Stock or any
other property, the fair market value of such property as determined by the
Committee in good faith or in the manner established by the Committee from time
to time.

"Participant" means a person selected by the Committee to receive an
Award under the Plan.

"Reporting Person" means a person subject to Section 16 of the Exchange
Act.

10. MISCELLANEOUS

(a) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to
be granted an Award. Neither the Plan nor any Award hereunder shall be deemed to
give any employee the right to continued employment or to limit the right of the
Company to discharge any employee at any time.

(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the holder thereof. A Participant to whom
Common Stock is awarded shall be considered the holder of the Stock at the time
of the Award except as otherwise provided in the applicable Award.

(c) EFFECTIVE DATE. The 1996 Equity Incentive Plan became effective on
November 22, 1996. Subject to the approval of the stockholders of the Company,
this Amended and

6
<PAGE> 7

Restated 1996 Equity Incentive Plan will be effective on June 26, 1997. Prior to
such approval, awards may be made under the Plan expressly subject to such
approval.

(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, subject to such stockholder approval as
the Board determines to be necessary or advisable to comply with any tax or
regulatory requirement.

(e) GOVERNING LAW. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of Delaware.

7
<PAGE> 8

No. __________ _________ Shares

AUTOCYTE, INC.
Amended and Restated 1996 Equity Incentive Plan

Incentive Stock Option Certificate

AutoCyte, Inc. (the "Company"), a Delaware corporation, hereby grants
to the person named below an option to purchase shares of Common Stock, $0.01
par value, of the Company (the "Option") under and subject to the Company's
Amended and Restated 1996 Equity Incentive Plan (the "Plan") exercisable on the
following terms and conditions and those set forth on the reverse side of this
certificate:

Name of Optionholder: ____________________________
Address: ____________________________
____________________________
Social Security No. ____________________________

Number of Shares: __________________
Option Price: __________________
Date of Grant: __________________

Exercisability Schedule: [to be set at the time of Grant]

Expiration Date: [ten years from the Date of Grant as stated above]

This Option is intended to be treated as an Incentive Stock Option
under section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

By acceptance of this Option, the Optionholder agrees to the terms and
conditions hereof.

AUTOCYTE, INC.

By: ____________________________

8
<PAGE> 9
AUTOCYTE, INC. AMENDED AND RESTATED 1996 EQUITY INCENTIVE PLAN

INCENTIVE STOCK OPTION TERMS AND CONDITIONS

1. Plan Incorporated by Reference. This Option is issued pursuant to
the terms of the Plan and may be amended as provided in the Plan. Capitalized
terms used and not otherwise defined in this certificate have the meanings given
to them in the Plan. This certificate does not set forth all of the terms and
conditions of the Plan, which are incorporated herein by reference. The
Committee administers the Plan and its determinations regarding the operation of
the Plan are final and binding. Copies of the Plan may be obtained upon written
request without charge from the Corporate Counsel of the Company.

2. Option Price. The price to be paid for each share of Common Stock
issued upon exercise of the whole or any part of this Option is the Option Price
set forth on the face of this certificate.

3. Exercisability Schedule. This Option may be exercised at any time
and from time to time for the number of shares and in accordance with the
exercisability schedule set forth on the face of this certificate, but only for
the purchase of whole shares. This Option may not be exercised as to any shares
after the Expiration Date.

4. Method of Exercise. To exercise this Option, the Optionholder shall
deliver written notice of exercise to the Company specifying the number of
shares with respect to which the Option is being exercised accompanied by
payment of the Option Price for such shares in cash, by certified check or in
such other form, including shares of Common Stock of the Company valued at their
Fair Market Value on the date of delivery or a payment commitment of a financial
or brokerage institution. Promptly following such notice, the Company will
deliver to the Optionholder a certificate representing the number of shares with
respect to which the Option is being exercised.

5. Rights as a Stockholder or Employee. The Optionholder shall not have
any rights in respect of shares as to which the Option shall not have been
exercised and payment made as provided above. The Optionholder is an
employee-at-will unless, and only to the extent, provided in a separate written
agreement executed by the chief executive officer of the Company or his duly
authorized designee, and neither the Plan nor the grant of this Option shall be
deemed to give the Optionholder the right to continued employment or to limit
the right of the Company to discharge the Optionholder at any time.

6. Recapitalization, Mergers, Etc. As provided in the Plan, in the
event of corporate transactions affecting the Company's outstanding Common
Stock, the Committee shall equitably adjust the number and kind of shares
subject to this Option and the exercise price hereunder or make provision for a
cash payment. If such transaction involves a consolidation or merger of the
Company with another entity, the sale, lease or exchange of all or substantially
all of the assets of the Company or a reorganization or liquidation of the
Company, then in lieu of the foregoing, the Committee shall upon written notice
to the Optionholder provide that this Option shall terminate on a date not less
than 20 days after the date of such notice unless theretofore exercised. In
connection with such notice, the Committee shall accelerate or waive any
deferred exercise period.

7. Option Not Transferable. This Option is not transferable by the
Optionholder otherwise than by will or the laws of descent and distribution, and
is exercisable, during the Optionholder's lifetime, only by the Optionholder.
The naming of a Designated Beneficiary does not constitute a transfer.

8. Exercise of Option After Termination of Employment. If the
Optionholder's status as an employee or consultant of (a) the Company, (b) an
Affiliate, or (c) a corporation (or parent or subsidiary corporation of such
corporation) issuing or assuming a stock option in a transaction to which
section 424(a) of the Code applies, is terminated for cause the Optionholder may
exercise the rights that were available to the Optionholder at the time of such
termination only within 10 days from the date of termination. If such status is
terminated for reason other than for cause, by retirement at normal retirement
age, or by disability (within the meaning of the section 22(e)(3) of the Code),
the Optionholder's rights hereunder may be exercised within 12 months from the
date of termination. Upon the death of the Optionholder, his or her Designated
Beneficiary shall have the right, at any time within 12 months after the date of
death, to exercise in whole or in part any rights that were available to the
Optionholder at the time of death. Notwithstanding the foregoing, no rights
under this Option may be exercised after the Expiration Date. For purposes of
this paragraph, if the Optionholder is on military leave, approved sick leave,
or other bona fide leave of absence, his or her employment will be treated as
continuing throughout the period of absence if (a) such period does not exceed
90 days or (b), if longer, so long as the Optionholder's right to reemployment
is guaranteed either by statute or by written agreement with the Company;
otherwise, the Optionholder's employment will be deemed to have terminated for
cause on the 91st day of such absence.

9. Compliance with Securities Laws. It shall be a condition to the
Optionholder's right to purchase shares of Common Stock hereunder that the
Company may, in its discretion, require (a) that the shares of Common Stock
reserved for issue upon the exercise of this Option shall have been duly listed,
upon official notice of issuance, upon any national securities exchange or
automated quotation system on which the Company's Common Stock may then be
listed or quoted, (b) that either (i) a registration statement under the
Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in
the opinion of counsel for the Company, the proposed purchase shall be exempt
from registration under that Act and the Optionholder shall have made such
undertakings and agreements with the Company as the Company may reasonably
require, and (c) that such other steps, if any, as counsel for the Company shall
consider necessary to comply with any law applicable to the issue of such shares
by the Company shall have been taken by the Company or the Optionholder, or
both. The certificates representing the shares purchased under this Option may
contain such legends as counsel for the Company shall consider necessary to
comply with any applicable law.

10. Payment of Taxes. The Optionholder shall pay to the Company, or
make provision satisfactory to the Company for payment of, any taxes required by
law to be withheld with respect to the exercise of this Option. The Committee
may, in its discretion, require any other Federal or state taxes imposed on the
sale of the shares to be paid by the Optionholder. In the Committee's
discretion, such tax obligations may be paid in whole or in part in shares of
Common Stock, including shares retained from the exercise of this Option, valued
at their Fair Market Value on the date of delivery. The Company and its
Affiliates may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to the Optionholder.

11. Notice of Sale of Shares Required. The Optionholder agrees to
notify the Company in writing within 30 days of the disposition of any shares
purchased upon exercise of this Option if such disposition occurs within two
years of the date of the grant of this Option or within one year after such
purchase.

Adopted 6/97

9
<PAGE> 10

No._________ _________ Shares

AUTOCYTE, INC.
Amended and Restated 1996 Equity Incentive Plan

Nonstatutory Stock Option Certificate

AutoCyte, Inc. (the "Company"), a Delaware corporation, hereby grants
to the person named below an option to purchase shares of Common Stock, $0.01
par value, of the Company (the "Option") under and subject to the Company's
Amended and Restated 1996 Incentive Stock Option Plan (the "Plan") exercisable
on the following terms and conditions and those set forth on the reverse side of
this certificate:

Name of Optionholder: ____________________________
Address: ____________________________
____________________________
Social Security No. ____________________________

Number of Shares: __________________
Option Price: __________________
Date of Grant: __________________

Exercisability Schedule: [to be set at the time of Grant]

Expiration Date: [ten years from the Date of Grant as stated above]

This Option shall not be treated as an Incentive Stock Option under
section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

By acceptance of this Option, the Optionholder agrees to the terms and
conditions hereof.

AUTOCYTE, INC.

By: ____________________________

10
<PAGE> 11
AUTOCYTE, INC. AMENDED AND RESTATED 1996 EQUITY INCENTIVE PLAN

NONSTATUTORY STOCK OPTION TERMS AND CONDITIONS

2. Option Price. The price to be paid for each share of Common Stock
issued upon exercise of the whole or any part of this Option is the Option Price
set forth on the face of this certificate.

6. Recapitalization, Mergers, Etc. As provided in the Plan, in the
event of corporate transactions affecting the Company's outstanding Common
Stock, the number and kind of shares subject to this Option and the exercise
price hereunder shall be equitably adjusted. If such transaction involves a
consolidation or merger of the Company with another entity, the sale, lease or
exchange of all or substantially all of the assets of the Company or a
reorganization or liquidation of the Company, then in lieu of the foregoing, the
Committee shall upon written notice to the Optionholder provide that this Option
shall terminate on a date not less than 20 days after the date of such notice
unless theretofore exercised. In connection with such notice, the Committee
shall accelerate or waive any deferred exercise period.

7. Option Not Transferable. This Option is not transferable by the
Optionholder otherwise than to the extent permitted by the Plan, and is
exercisable, during the Optionholder's lifetime, only by the Optionholder or the
Optionholder's immediate transferee as permitted by the Plan. The naming of a
Designated Beneficiary does not constitute a transfer.

8. Exercise of Option After Termination of Employment. If the
Optionholder's status as an employee or consultant of (a) the Company, (b) an
Affiliate, or (c) a corporation (or parent or subsidiary corporation of such
corporation) issuing or assuming a stock option in a transaction to which
section 424(a) of the Code applies, is terminated for cause the Optionholder may
exercise the rights that were available to the Optionholder at the time of such
termination only within 10 days from the date of termination. If such status is
terminated for reason other than for cause, by retirement at normal retirement
age, or by disability (within the meaning of section 22(e)(3) of the Code), the
Optionholder's rights hereunder may be exercised within 12 months from the date
of termination. Upon the death of the Optionholder, his or her Designated
Beneficiary shall have the right, at any time within 12 months after the date of
death, to exercise in whole or in part any rights that were available to the
Optionholder at the time of death. Notwithstanding the foregoing, no rights
under this Option may be exercised after the Expiration Date. For purposes of
this paragraph, if the Optionholder is on military leave, approved sick leave,
or other bona fide leave of absence, his or her employment will be treated as
continuing throughout the period of absence if (a) such period does not exceed
90 days or (b), if longer, so long as the Optionholder's right to reemployment
is guaranteed either by statute or by written agreement with the Company;
otherwise, the Optionholder's employment will be deemed to have terminated for
cause on the 91st day of such absence.

Adopted 6/9

<PAGE> 1
EXHIBIT 10.20

OEM SUPPLY AGREEMENT

This agreement, made and entered into June, 1999

between

TECAN AG
Feldbachstrasse 80
CH-8634 Hombrechtikon
SWITZERLAND

(hereinafter referred to as "TECAN")

and

AUTOCYTE INC.
780 Plantation Drive
Burlington, North Carolina 27215
USA

(hereinafter referred to as "AUTOCYTE")

Whereas, TECAN has developed a RSP (Robotic Sample Processor) which is
manufactured and sold to AUTOCYTE as "AUTOCYTE PREP"(TM) PREPARATION SYSTEM,
hereinafter called "Product".

Whereas, AUTOCYTE will sell the Product worldwide under its name and its
Trademark with its sales force and through its distributors, but will sell
Product solely in combination with reagents.

Now, therefore, in consideration of the mutual covenants hereinafter expressed,
the parties agree as follows:

<PAGE> 2
1. DEFINITIONS

1.1 "Contract Year" shall mean a period of twelve (12) successive calendar
months during the term of this agreement or any extension thereof, the
first Contract Year to commence as of January 1st, 1999.

1.2 "Product" means the "AUTOCYTE PREP"(TM) PREPARATION SYSTEM, as
described in Exhibit A and the Project Book V. 2.1

1.3 "Application" means the use of the Product, in particular the QUAD-Arm
(or direct derivatives), for the preparation of cytology or histology
samples for diagnostic purposes.

2. MINIMAL QUANTATIES TO MAINTAIN EXCLUSIVITY

2.1 TECAN agrees not to offer directly on the basis of an Original
Equipment Manufacturing (OEM-) or Private Label (PL) Agreement to any
third party any device similar to the Product and intended for the
Application, provided that AUTOCYTE buys from TECAN at least the
following numbers of units of the Product:

YEAR UNITS
1999 tbd
2000 tbd
2001 tbd
2002 tbd

The applicable number of units shall be determined within 30 days of
FDA approval, however no later then by end of 1999.
The minimal quantities of units set forth above shall not be
cumulative; i.e. a surplus purchase in one Contract Year will not be
rolled over or applied to a subsequent Contract Year. If the minimal
quantities are not met, TECAN is free to offer the Product to any third
party also on the basis of an OEM or Private Label agreement.

AUTOCYTE understands that TECAN might sell individual units of the
Product to end-users that may be used for purpose similar to the
Application, provided the units do not have the AUTOCYTE labeling.

TECAN acknowledges that it has no authority to and will not sell slide
racks or any other AUTOCYTE specific components to any other party.

2.2 In case of the termination of this Agreement TECAN retains the right to
sell to AUTOCYTE all AUTOCYTE specific parts in stock at cost plus 10%
handling fee, but at a maximum of CHF 250'000.--.

2.3 TECAN will supply AUTOCYTE with the most current release of the system
software ("Integrator Software").

If TECAN discontinues the support of the system software, TECAN shall
hand-over to AUTOCYTE the system software development tools and the
source code. AUTOCYTE shall not have any further rights against TECAN
with respect to the system software.
Any changes in the system software will be treated like product changes
(see chapter 5: Product changes).

2.4 AUTOCYTE assumes all responsibility for the application software
development, documentation (including operating manual), installation
and after sales support.

2/13
<PAGE> 3

3. PURCHASE OF PRODUCT, QUANTITIES AND PRICING

3.1 Subject to the terms and conditions of this Agreement, AUTOCYTE shall
purchase, and TECAN shall sell to AUTOCYTE the Product. AUTOCYTE shall
purchase the Product hereunder in accordance with the price schedule in
Exhibit B. A Product is considered to be purchased during the Contract
Year in which the Product is shipped from TECAN. Upgraded or repaired
units shipped ex TECAN of Product do not count as purchased during the
Contract Year under this Agreement.

3.2 For the Contract Year starting on January 1, 1999 and ending on
December 31, 1999, AUTOCYTE is deemed to be in the ***-*** units price
bracket, at CHF ******.--. If AUTOCYTE is overachieving the target of
*** units, AUTOCYTE is reimbursed according to the following scheme
(example):

Over-achievement: e.g. Purchase of *** units per year: TECAN
shall credit AUTOCYTE *** x (CHF
*****.-- - *****.--) = CHF ******.--

If, to the contrary, AUTOCYTE will purchase less than *** units in the
Contract Year starting on January 1, 1999 and ending on December 31,
1999, AUTOCYTE will be invoiced the difference according to the
following scheme (example):

Under-achievement: e.g. Purchase of ** units per year: TECAN
shall invoice AUTOCYTE ** x (CHF
*****.-- - *****.--) = CHF ******.--

3.3 For each Contract Year AUTOCYTE and TECAN agree on the quantity of
units to be purchased by AUTOCYTE. The new minimum quantity has to be
negotiated 60 days before the expiration date of Contract Year. If
AUTOCYTE and TECAN fail to agree on the quantity for the new Contract
Year, the number of units sold during the preceding Contract Year shall
determine the applicable price bracket.

3.4 The prices of the Product as stated in Exhibit B are valid for a
Contract Year.

Prices for the following Contract Year change pursuant to the increase
in production costs for TECAN. TECAN shall consult with AUTOCYTE on
suggested new prices 60 days before the expiration date of each
contract year. If the parties fail to reach an agreement on the new
prices, TECAN shall have the right to unilaterally change the prices to
reflect the increase in production costs, if any. A price increase
shall not exceed increase of the official Swiss consumer price index.

3.5 For standard TECAN RSP 5000 Spare Parts TECAN will grant AUTOCYTE a
discount of **% on International List Prices (ILP) (as revised by TECAN
at its sole discretion from time to time). No discount is applicable
for OEM specific Spare Parts (see Exhibit C).

3.6 On single orders for Spare Parts exceeding a total of CHF ******.--
TECAN will grant to AUTOCYTE an additional discount of **%, on the ILP
of both standard TECAN and OEM specific Spare Parts.

4. ORDERS AND DELIVERY, PAYMENT AND SHIPMENT

4.1 In the first month of each quarter, AUTOCYTE will forecast orders of
the Product for the following 12-month period (the Production
Forecast). The Production Forecast is to be used for planning purposes
only, and summarizes the next 12 months forecast activity.

Products shall be ordered by means of a binding, non-cancelable
purchase order.

3/13
<PAGE> 4

Each purchase order shall contain a description of the Products
purchased, quantity purchased, routing instructions, destination,
delivery date and confirmation price. TECAN agrees to accept
telegraphic or telefaxed purchase orders.

The minimal order quantity of Product per purchase order is ** units.
The ** units can be shipped in lots of ** units, whereas the second lot
will be shipped 2 - 4 weeks after the first.

4.2 The payment shall be in CHF. Payment shall be net in Swiss Francs (CHF)
within 60 days from the date of invoice. Delays in payment will result
in the usual and applicable interest rates.

4.3 The exchange rate for deliveries is set to CHF 1.42 / USD for 1999.
Exchange rate fluctuations between the CHF and USD will be checked
twice annually on July 1 and December 31 of each Contract Year and the
exchange-risk is split 50:50 by AUTOCYTE and TECAN. TECAN shall
invoice/issue credit note to AUTOCYTE of 50 % of the exchange rage
fluctuation influence on the ordered and paid instruments
semi-annually. For the calculation basis the average exchange rate of
the previous 6 months as published by a leading Swiss bank is used.

4.4 Product prices are quoted ex works. Shipping costs are quoted as DDU
(Delivered duty unpaid).

4.5 Delivery times:
6 - 8 weeks after receipt of AUTOCYTE's purchasing order and
availability of forecast figures. 10 - 12 weeks after receipt of
AUTOCYTE's purchasing order, when no forecast figures are available.

4.6 Shipment of Product to AUTOCYTE, North Carolina is done via the same
carrier selected by TECAN for any delivery to AUTOCYTE as quoted in
EXHIBIT B.

4.7 Freight charges of any other delivery to AUTOCYTE or any drop shipment
will be paid by AUTOCYTE. Title and risk of loss or damage of any items
delivered hereunder shall pass to AUTOCYTE upon delivery to the common
carrier pursuant to the INCOTERM rules (1990).

4/13
<PAGE> 5

5. PRODUCT CHANGES

5.1 TECAN may, from time to time, modify or update the Product, spare parts
or accessory material. All changes, having an effect on the
functionality of the Product shall be announced in writing to the
Purchasing Manager at AUTOCYTE. In these cases, AUTOCYTE shall have the
right to reject the changes within 30 days, in writing, with the
exception of changes that are required by law. All changes should be
announced in advance.

TECAN will provide a listing of all new changes incorporated to the
Product on a semi-annual basis as per July 1 and December 31 of each
calendar year.

5.2 Only changes accepted in writing by the Purchasing Manager or any other
competent manager of AUTOCYTE shall be added as an amendment to the
specification in Exhibit A.

5.3 Enhancements in the Product, spare parts and accessory materials
requested by AUTOCYTE are subject to TECAN's discretion and price
policy.

5.4 Any major changes in the application software or the documentation
governing control of the Product shall be forwarded to the responsible
product manager/sales engineer at TECAN to guarantee the compliance
of the Product with the specifications in Exhibit A and the Project
Book V. 2.1. This Project Book V. 2.1. will be frozen. All future
changes shall be implemented according to applicable procedures (e.g.
ISO9000, engineering change procedures).

6. QUALITY CONTROL

Every Product and spare part(s) shall be subject to a quality control
inspection by TECAN, which conforms to AUTOCYTE manufacturing QC
specifications, and non-conforming products shall not be shipped by
TECAN. With each instrument supplied the full quality control report
shall be shipped.

7. INSTALLATION AND TRAINING

7.1 AUTOCYTE will install the Product and train customers of AUTOCYTE with
regard to the Product.

7.2 TECAN will provide upon request training for AUTOCYTE and/or its
distributors against payment of CHF 2'000.-- per trainee and week. The
minimal number of participants per training is 3 nos. The training will
cover the following subjects:

- Installation

- Service

- Preventive Maintenance

- Trouble Shooting

for the Product. This training will not cover the application software
nor any aspects of the application. Solely AUTOCYTE can offer such
training. The duration of the training is one week; location of this
training is at TECAN's Headquarters in Switzerland, travel and
accommodation cost to be borne by the trainees.

8. WARRANTY AND SERVICE

8.1 Any Product and spare parts and all documents or other items relating
hereto supplied by TECAN under this Agreement shall be manufactured
(or, as applicable, prepared) in accordance with the specifications and
manufacturing practices generally accepted in its business domain.

5/13
<PAGE> 6

8.2. TECAN is an ISO 9001 certified Company.

8.3 TECAN warrants each Product for a period of fifteen (15) months from
the date of shipment or twelve (12) months from the date of
installation at a customer site, whichever period expires first. TECAN
shall warrant that each Product is free from defects in workmanship and
materials and is manufactured in conformity with the specifications
under this Agreement.

Disposable parts of the Product, i.e. valves, tips, fittings, tubing's
and syringes, and all parts in contact with liquids are excluded from
any warranty.

If a Product or part of a Product covered by the aforementioned
warranty is found defective, TECAN shall, at its option, repair or
replace the defective Product or part of Product. AUTOCYTE shall not
have any further remedies. In particular, TECAN shall not be liable for
any consequential damages. Not withstanding the forgoing, TECAN's
liability shall in any event be limited to the amount of the purchase
price of the respective Product.

8.4 TECAN represents and warrants that Product, spare parts and accessory
materials shall be delivered free of any rights of any third party.
TECAN has good title to and has full power to sell Product, spare parts
and accessory materials to AUTOCYTE hereunder.

8.5 For a period of seven (7) years from the date of delivery of the last
Product unit shipped hereunder, TECAN agrees to maintain the ability to
deliver spare parts.

8.6 AUTOCYTE shall provide for sufficient insurance coverage against third
party claims and liabilities (including, but not limited, to product
liability and consequential damages).

8.7 Transportation costs for goods under warranty to and from TECAN will be
taken by TECAN. Transportation costs for repair goods to and from TECAN
will be taken by AUTOCYTE.

9. INDEMNIFICATION

9.1 TECAN shall defend, indemnify and hold harmless AUTOCYTE from and
against all loss, liability and expense, including legal fees and
disbursements, court costs, and settlement payments actually incurred
by AUTOCYTE as a results of, arising out of or related to TECAN's
breach of their respective representations, warranties and covenants
set forth in this Agreement. Notwithstanding the foregoing, TECAN's
obligation under this clause 9.1 shall in any event be limited to the
amount of the purchase price of the respective Product as long as the
product functions properly according to AUTOCYTES intended use of such
product.

9.2 AUTOCYTE shall defend, indemnify and hold harmless TECAN from and
against all loss, liability and expense, including legal fees and
disbursements, court costs, and settlement payments actually incurred
by TECAN as a result of, arising out of or related to AUTOCYTE's breach
of its representations, warranties and covenants set forth in this
Agreement. AUTOCYTE'S obligation under this clause 9.2 shall in any
event be limited to the amount of the purchase price of the respective
Product.

9.3 In no event shall either party be liable to the other party hereunder
for any consequential, indirect or special damages.

9.4 TECAN does not assume any liability for damages resulting from improper
handling or installation or from disregard of operating requirements.

6/13
<PAGE> 7

10. TERM OF AGREEMENT AND TERMINATION

This Agreement shall commence on January 1, 1999, and shall be
effective until December 31, 1999. This Agreement shall automatically
be renewed for additional one-year terms subject to either party's
right to terminate this Agreement by giving the other party at least
hundred-twenty (120) days written notice subject to article 13.1 prior
to the expiration date of the current term and thereafter to the
anniversary date.

11. SETTLEMENTS OF DISPUTES

Both parties agree to do their best to settle any dispute arising from
this Agreement amicably. The right to pursue the proceeding set forth
in article 15.2 remains reserved.

12. CONFIDENTIAL INFORMATION

Each party understands that during the execution of this Agreement, it
may acquire or have access to information that is confidential and of
great value to the other ("confidential information").

Therefore, each party ("receiving party") agrees that during the term
of this Agreement and for a period of three (3) years after termination
of this agreement, it shall not use (except for the purposes set forth
in this Agreement) or disclose the confidential information of the
other party ("the disclosing party") without the disclosing party's
prior written consent and each party agrees that it will impose the
same obligations on its employees who have access to such confidential
information.

7/13
<PAGE> 8
13. MISCELLANEOUS PROVISIONS

13.1 All written notices and demands required or permitted to be given or
made pursuant to this Agreement shall be in English and shall
conclusively be presumed for all purposes of this agreement to be given
or made at the time the notice or demand is personally given or made,
or at the time it is sent by registered mail, or fax or courier
addressed as follows:

If to AUTOCYTE: If to TECAN:

AUTOCYTE Inc. TECAN AG
780 Plantation Drive Feldbachstrasse 80
Burlington, North Carolina 27215 8634 Hombrechtikon
USA SWITZERLAND

Or to such other address as to which either party may advise the other
in writing that notices should be sent.

13.2 This Agreement shall be binding upon and relate to the benefit of the
parties hereto, their successors and assignees. This Agreement shall be
assignable by either party only with the prior written consent of the
other, except that either party may assign this Agreement without the
consent of the other to a wholly owned subsidiary or to the purchaser
of all its stock or assets of its business to which this Agreement
relates.

13.3 Within reasonable limits TECAN will assist AutoCyte Inc. in approval
and certification matters. Such assistance would include but is not
limited to:

- Copies of drawings and QC procedures for the "AUTOCYTE
PREP"(TM) System

- Allowing audits announced latest two weeks in advanced on
TECAN premises once a year (2 days max.)

13.4 This Agreement supersedes earlier agreements between TECAN or it's
subsidiaries and AUTOCYTE or any of its predecessors regarding the
Product.

14. YEAR 2000 READINESS

TECAN is firmly committed to ensuring that RSP5000 as the base product
and Integrator as the base software are Millenium-compliant. This
certification is contingent on proper operation of the computer
hardware and operating system.

8/13
<PAGE> 9
15. GOVERNING LAW AND ARBITRATION CLAUSE

15.1 This Agreement shall be governed by, and construed in accordance with,
the laws of Switzerland, to the exclusion of the Swiss rules on
conflicts of laws and to the exclusion of the 1980 UN Convention on
Contracts for the International Sale of Goods.

15.2 Any disputes or controversies arising out of or in connection with this
Agreement, including disputes on its conclusion, binding effect,
amendment and termination, shall be resolved to the exclusion of the
ordinary courts by a sole arbitrator in accordance with the
International Arbitration Rules of the Zurich Chamber of Commerce.
Arbitration shall be conducted in the English language.

Hombrechtikon, June 26, 1999 Burlington, June 26, 1999

TECAN AG AUTOCYTE INC.

/s/ Joe Kaelin /s/ Franz Rutzer /s/ William O. Green
- --------------------- --------------------- --------------------------
Joe Kaelin Franz Rutzer William O. Green
S&M Manager F&A Manager Chief Financial Officer

9/13
<PAGE> 10

EXHIBIT A

"AUTOCYTE PREP"(TM) PREPARATION SYSTEM Part. No. 505 107 includes:

DESCRIPTION: PART NUMBER:
1 Specimen tray 505250
1 RSP 5051 including: 505100
1 1000 ul DiTi C option 505215
1 Additional 465 Dilutor 445003
4 5 ml syringes 300206
1 QUAD Arm complete 505225
1 Vacuum set including:
1 Waste bottle 505255
1 Tubing Kit 505246
1 Tube evacuator 505248
1 Tubing kit 505251
1 Solenoid Valve Kit 520100
1 Operating manual 390350
1 Misc. hardware set including:
1 1 - 4 distribution block (Vacuum) 505254
1 Special tubing guide 505249
1 Waste bottle 505255

Following parts are in responsibility of AUTOCYTE and are therefore excluded
from "AUTOCYTE PREP"(TM)

PREPARATION SYSTEM Part. No. 505 107:

1 Waste station including: 505220
1 Tip rack ......
1 Waste / wash station 505222
1 Tip loading rack 505221
1Base Plate 0552542.P0
4 Slide racks 505235

The "AUTOCYTE PREP"(TM) system does not include the controlling PC, nor the
application software written in Integrator.

The "AUTOCYTE PREP"(TM) PREPARATION SYSTEM is white including the safety guard
and instead of the TECAN-Logo the AUTOCYTE-Label is placed.

10/13
<PAGE> 11

EXHIBIT B

PRICE LIST OF PRODUCTS FOR 1999

- - "AUTOCYTE PREP"(TM) SYSTEM, TECAN P/N 505 107

PRODUCT PRICE BRACKET PRICE PER UNIT IN CHF

less than or equal to *** UNITS/YEAR ******
*** - *** UNITS/YEAR ******
greater than *** UNITS/YEAR ******

Prices are valid for purchase quantity within a 12 months period
starting January 1, 1999 and lasting until December 31, 1999. According
to the forecast received from AutoCyte Inc., AutoCyte plans to purchase
*** instruments in 1999. Accordingly the price bracket set for 1999 is
for *** - *** COMPLETE INSTRUMENTS.

- - "AUTOCYTE PREP"(TM) SYSTEM: UPGRADES TECAN P/N 505 210

PRICE PER UNIT IN CHF ******

- - "AUTOCYTE PREP"(TM)SYSTEM: PREVENTIVE MAINTENANCE KIT TECAN P/N 505 260

PRICE PER UNIT IN CHF: ******

- - SHIPPING COSTS

TRANSPORTED UNITS PER ORDER TRANSFER PRICE
PER UNIT IN CHF

ONE UNIT PER SHIPMENT ******
TWO UNITS PER SHIPMENT ******
THREE UNITS PER SHIPMENT ******
FOUR UNITS PER SHIPMENT ******
FIVE UNITS AND MORE PER SHIPMENT ******

Prices are valid within a 12 months period starting January 1, 1999 and lasting
until December 31, 1999.

11/13
<PAGE> 12

EXHIBIT B

<TABLE>
<CAPTION>
ORDER NO. DESCRIPTION QTY. TRANSFER PRICE CHF
- --------- ----------- ---- ------------------
<S> <C> <C> <C>
SPARE PARTS:

505 250 Specimen Tray 1 *********
505 225 QUAD-Arm complete 1 *********
505 220 Waste Station (complete) 1 *********
505 221 Tip Loading Tool 1 *********
0552542.P0 Base Plate 1 *********
505 235 Slide Rack 4 *********
505 255 Waste Bottles for Vacuum System 1 *********
505 248 Tube Vac 1 *********
505 251 Tubing Kit complete 1 *********
505 227 1-4 Manifold on QUAD 1 *********
505 222 QUAD waste trough incl. elbow 1 *********
505 226 QUAD Tubing complete 1 *********
505 247 Vacuum Tubing Pump - Bottle 2 *********
505 246 Vacuum Tubing Bottle - IIII-Block 1 *********
505 249 Tubing Guide 1 *********
505 230 Tip Bundles 4 *********
0100 726 Ball Slide 1 *********
0100 740 BioHazard Disposal Bag (100 Pieces) 1 *********
0100 735 Labels (BioHazard, Contaminated, Waste) 1 *********
</TABLE>

<TABLE>
<CAPTION>
FOR FOLLOWING PARTS ILP - 30% IS APPLICABLE ILP CHF
(INTERNATIONAL LIST
PRICE)
------
<S> <C> <C> <C>
552 483 DiTi spring loaded Z-Rack 1 *********
505 215 DiTi C 1000 ul RIAS complete 1 *********
320 002 Diluter 465/87 1 *********
445 003 Diluter 465/87 EMV CE 1 *********
520 350 CPU 87 1 *********
520 353 PONI/ALID left 1 *********
503 308 PONI/ALID left EMV CE 1 *********
530 360 FLEX-Cable left 1 *********
530 304 FLEX-Cable left EMV CE 1 *********
520 450 ARM left 1 *********
520 453 ARM left EMV CE 1 *********
520 355 Motherboard 1 *********
520 310 Motherboard EMV CE 1 *********
520 100 Option 3.1: Solenoid Valve Kit complete 1 *********
240 000 Aspirating Tubing 1.5x2.5x900 4 *********
118 566 Pipetting Tubing DiTi 1.5x2.5x1200 5 *********
520 520 Connect. Tubing Valve - IIII-Block 4 *********
520 885 Connect Tubing Valve - Diluter 2 *********
800 331 Tubing Distribution Block - IIII-Block 4 *********
390 350 Operating Manual RSP 5051 1 *********
</TABLE>

ILP IS SUBJECT OF CHANGE WITHOUT NOTIFICATION.

12/13
<PAGE> 13

EXHIBIT C

<TABLE>
<CAPTION>
ORDER NO. DESCRIPTION TRANSFER PRICE CHF
- --------- ----------- ------------------
<S> <C> <C>
REPAIR PARTS:

R503308 Repair of PONI / ALID left CE version *********
R505215 Repair of DiTi RIAS Kit complete *********
R520350 Repair of CPU-87 Board *********
R520353 Repair of PONI/ALID 87 "LEFT" with cable *********
R520355 Repair of Motherboard 87 *********
R520450 Repair of arm LEFT *********
R520453 Repair of arm LEFT CE version *********
R520455 Repair of AutoCyte arm CE version *********
</TABLE>

13/13

<PAGE> 1
EXHIBIT 10.21

INTELLECTUAL PROPERTY PURCHASE AGREEMENT

BETWEEN

NEOPATH, INC.

AND

AUTOCYTE, INC.

DATED AS OF APRIL 24, 1999

<PAGE> 2

INTELLECTUAL PROPERTY PURCHASE AGREEMENT

This Agreement, dated as of April 24, 1999, is made and entered into by
and between NeoPath, Inc., located at 8271 154th Avenue N.E., Redmond,
Washington 98052 ("NeoPath"), and AutoCyte, Inc., located at 780 Plantation
Drive, Burlington, North Carolina 27215 ("AutoCyte"). NeoPath and AutoCyte are
sometimes referred to collectively as the "Parties" and individually as a
"Party."

The Parties agree as follows:

SECTION 1. DEFINITIONS

The following terms will have the following specified meanings whenever
used in this Agreement with initial letters capitalized:

"ACQUIRED ASSETS" means (a) a fifty-five percent (55%) undivided,
royalty-free and fully paid-up ownership right, title, and interest in and to
the NSI Intellectual Property Rights (including, without limitation, all rights
to perfection, registration, rights against Third Parties, and rights to defend
the NSI Intellectual Property Rights), (b) undivided rights to fifty-five (55%)
percent of the benefit of all covenants, representations and warranties made by
NSI to AutoCyte, and (c) an undivided right to all approvals and consents
acquired by NSI or AutoCyte in connection with the NSI AutoCyte Agreement.

"AFFILIATE" means any Person directly or indirectly (through any number
of successive tiers) that controls, is controlled by, or is under the common
control with a Party.

"BANKRUPTCY CASE" means Case Number 99-00703 pending before the United
States Bankruptcy Court for the District of Delaware.

"CLOSING" means the consummation of NeoPath's purchase of an undivided
ownership interest in the Acquired Assets as contemplated by Section 2.

"CONFIDENTIAL INFORMATION" means any confidential or proprietary
information of NSI that is transferred to AutoCyte, whether of a technical,
business or other nature (including, but not necessarily limited to: trade
secrets, know how, and information relating to the NSI Intellectual Property
Rights, customers, business plans, promotional and marketing activities,
finances and other business affairs of NSI.

"DOCUMENTATION" means any design, plan, drawing, schematic, flow chart,
photograph, notebook, notice, premarket approval, writing, tape or other
documentation (whether in handwritten, printed, coded, magnetic, electronic or
other form or media).

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 1
<PAGE> 3

"IMPROVEMENT" means any correction, modification, enhancement,
improvement, update, revision or derivative to or of the NSI Intellectual
Property Rights or the intellectual property covered thereby.

"LITIGATION" means the claims in the three lawsuits described on
Exhibit A and any other claims filed subsequent to the commencement of those
lawsuits that are based on the NSI Intellectual Property Rights pending against
either Party.

"MAKE" (or such conjugations thereof, as the context may require) means
manufacture, assemble, produce, reproduce, copy or make (or such conjugations
thereof, as the context may require).

"NSI" means Neuromedical Systems Inc., and each Person that is an
Affiliate of NSI.

"NSI-AUTOCYTE AGREEMENT" means that certain Asset Purchase Agreement
dated as of March 25, 1999, pending in the Bankruptcy Case by which, subsequent
to entry of any order in the Bankruptcy Case, AutoCyte will acquire the NSI
Intellectual Property Rights.

"NSI INTELLECTUAL PROPERTY RIGHTS" means "Transferred Intellectual
Property" and "Transferred Claims" as those terms are defined in the
NSI-AutoCyte Agreement, and includes, without limitation, the Patent Rights and
the Trademark Rights.

"NSI PRODUCTS" means PapNet, PR1MA, and PapNet-On-Cyte.

"PATENT RIGHTS" means the same in this Agreement as "Transferred Patent
Rights" means in the NSI-AutoCyte Agreement.

"PERSON" means any individual, corporation, partnership, limited
liability company, trust, association, organization, governmental authority or
other entity.

"RESERVED CLAIMS" means the claims of the Parties that are not based on
the NSI Intellectual Property Rights.

"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.

"SHARES" means 1,230,000 shares of NeoPath's common stock.

"THIRD PARTY" means any Person other than a named party to this
Agreement.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 2
<PAGE> 4

"TRADEMARK RIGHTS" means the same in this Agreement as "Transferred
Trademark Rights" means in the NSI-AutoCyte Agreement.

SECTION 2. PURCHASE AND SALE

2.1 PURCHASE OF ACQUIRED ASSETS

Subject to the terms and conditions of this Agreement (including,
without limitation, the limitations with respect to the Patent Rights described
in Section 5.2 of this Agreement), at the Closing, AutoCyte will sell, assign,
transfer, convey, and deliver to NeoPath, and NeoPath will purchase, acquire,
and accept the Acquired Assets from AutoCyte, free and clear of all liens,
claims, restrictions, interests, and encumbrances except for restrictions
arising because NSI's representations, warranties, and covenants to AutoCyte set
forth in the NSI-AutoCyte Agreement turn out not to be true as of either March
25, 1999 or the date of closing of the NSI-AutoCyte Agreement.

2.2 CLOSING AND DELIVERIES

2.2.1 CLOSING CONDITIONS, DATE AND PLACE

The Closing will occur after (a) NeoPath's verification, in its
reasonable discretion, that the Acquired Assets can and will be sold, assigned,
transferred, conveyed, and delivered to NeoPath at the Closing without any Third
Party, following the Closing, retaining, holding or having, based on any
licenses, distributorships, agreements, reservations, liens or other agreements
(including any of the agreements listed on Schedule 3.1(f) of the NSI-AutoCyte
Agreement) any right to claim against NeoPath for patent infringement in the
United States, Canada or Europe based on the NSI Intellectual Property Rights,
provided that such verification shall be completed or waived and NeoPath shall
notify AutoCyte whether this closing condition is satisfied as soon as
practicable after the closing of the transactions contemplated by the
NSI-AutoCyte Agreement (it being understood that this closing condition shall be
independent of the representations and warranties of AutoCyte contained in
Section 5.2 or any limitations, restrictions, reservations, claims, interests,
liens and encumbrances on the NSI Intellectual Property Rights identified or
permitted under Section 2.1 or under Section 5.2 or otherwise under this
Agreement, and such condition may be invoked by NeoPath whether or not such
representations and warranties were true and correct when made or are true and
correct at the time NeoPath notifies AutoCyte that this closing condition is
satisfied or waived and whether or not such limitations, restrictions,
reservations, claims, interests, liens and encumbrances exist or will exist at
or after such time), (b) an order has been entered in the Bankruptcy Case
approving AutoCyte's acquisition of the NSI Intellectual Property Rights, and
(c) AutoCyte has acquired all the NSI Intellectual Property Rights. If such
conditions are met, the Closing will take place on the later of September 1,
1999 (unless the Parties agree in writing to an extension of such deadline) or
three (3) business days after the closing of AutoCyte's acquisition of all the
NSI Intellectual Property Rights pursuant to the NSI-AutoCyte Agreement at 10
a.m. local time at the offices of

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 3
<PAGE> 5

Perkins Coie LLP, 411 - 108th Avenue N.E., Bellevue, Washington 98004, or such
other time or location as NeoPath and AutoCyte will agree upon.

2.2.2 INSTRUMENTS OF SALE AND TRANSFER; FURTHER ASSURANCES

At or prior to the Closing, AutoCyte will deliver to NeoPath such
instruments of sale and assignment as will vest NeoPath with the Acquired
Assets. AutoCyte will take reasonable additional steps as may be necessary by
NeoPath to record and put NeoPath in ownership of the Acquired Assets to the
extent contemplated hereby, including, without limitation, the steps described
in paragraph 4.3.1.

2.3 PURCHASE PRICE

The purchase price for the Acquired Assets will be (a) Two Million Two
Hundred Thousand Dollars ($2,200,000) and (b) the Shares. Such purchase price
will be due on the later of Closing or September 1, 1999 (unless the Parties
agree in writing to a date subsequent to September 1, 1999). The cash portion of
the purchase price will be paid by certified check or wire transfer, and the
Shares will be evidenced by a certificate registered in AutoCyte's name or in
the name of any wholly-owned Affiliate of AutoCyte, whether now-existing or
hereafter formed.

2.4 RESERVATION OF RIGHTS

As between the Parties, the Parties retain all right, title and
interest in and to their respective intellectual property that is not part of
the NSI Intellectual Property Rights.

SECTION 3. COVENANTS

3.1 COVENANTS OF AUTOCYTE

3.1.1 APPROVAL AND CLOSING OF THE NSI-AUTOCYTE AGREEMENT

AutoCyte will use its best efforts to acquire the NSI Intellectual
Property Rights, including, without limitation, seeking and obtaining the entry
of an order in the Bankruptcy Case approving and authorizing the acquisition by
AutoCyte of all NSI Intellectual Property Rights and closing the purchase of the
NSI Intellectual Property Rights; provided that AutoCyte shall not be required
hereunder to pay more for the NSI Intellectual Property Rights than the
consideration contemplated by the NSI-AutoCyte Agreement.

3.1.2 DISCLOSURE TO NEOPATH OF THE NSI INTELLECTUAL PROPERTY
RIGHTS

3.1.2.1 Within thirty (30) days after the Closing,
AutoCyte will prepare and submit to NeoPath a written report setting forth in
reasonable detail a description of each of the following to the extent such have
been provided to AutoCyte by NSI and such have not been previously disclosed or
delivered to NeoPath:

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 4
<PAGE> 6

(a) any NSI Intellectual Property Rights;

(b) any material Documentation of any NSI Intellectual
Property Rights;

(c) any restrictions on the rights to any portion of the NSI
Intellectual Property Rights that NSI licensed or otherwise acquired
from any third party and a description of the applicable portion of the
NSI Intellectual Property Rights;

(d) the files of all attorneys for NSI related to the Patent
Rights (including, without limitation, patents in the Litigation or any
other action or proceeding);

(e) all software of NSI in an industry-standard, machine
readable format; and

(f) all documents supporting the U.S. clinical trial of the
PR1MA and a list of all hardware documentation;

(g) any Documentation that evidences any such restrictions of
third parties.

3.1.2.2 Upon NeoPath's request, AutoCyte will provide
to NeoPath:

(a) a copy of any Documentation described in subparagraph
3.1.2.1(b) or (d);

(b) a copy of any additional Documentation required to fully
disclose the NSI Intellectual Property Rights to NeoPath;

(c) access to AutoCyte's employees as reasonably required to
fully disclose the NSI Intellectual Property Rights to NeoPath upon
prior notice and in a manner so as not to interfere with AutoCyte's
business; and

(d) such other information as NeoPath may reasonably request
to fully disclose the NSI Intellectual Property Rights to NeoPath.

3.1.2.3 Upon NeoPath's written request, AutoCyte will
make additional reasonable
efforts to obtain from NSI and from NSI's employees information reasonably
requested by NeoPath related to the NSI Intellectual Property Rights.

3.1.3 AMENDMENT TO NSI-AUTOCYTE AGREEMENT

AutoCyte will not agree to any amendment to the NSI-AutoCyte Agreement
and will not waive any condition to closing, consent, or approval required under
the NSI-AutoCyte Agreement without the prior written consent of NeoPath, which
consent will not be unreasonably withheld.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 5
<PAGE> 7

3.1.4 RESTRICTIONS ON THE SHARES

The Shares shall not be sold or transferred by AutoCyte unless either
(A) they first shall have been registered under the Securities Act or (B)
NeoPath first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to NeoPath, to the effect that such sale or transfer is
exempt from the registration requirements of the Securities Act.

Each certificate representing the Shares shall bear a legend
substantially in the following form:

"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or applicable
state securities laws and may not be transferred or otherwise disposed
of unless and until such shares are registered under the Act and such
laws or (1) registration under applicable state securities laws is not
required and (2) an opinion of counsel satisfactory to the Company is
furnished to the Company to the effect that registration under the Act
is not required."

The foregoing legend shall be removed from the certificates
representing any Shares at the request of the holder thereof at such time as
they become registered under the Securities Act or eligible for resale pursuant
to Rule 144(k) under the Securities Act (or any successor provision).

NeoPath shall be entitled to place a stop order on the Shares to ensure
that transfers are made in accordance with the terms of this Agreement.

3.2 MUTUAL COVENANTS REGARDING LITIGATION

3.2.1 DISMISSAL OF THE LITIGATION

After the Closing, the Parties will each cause their attorneys to
stipulate to a substitution of AutoCyte for NSI in the Litigation. Each Party
will use its best efforts to cause the Litigation to be dismissed by the date
ten (10) business days after the Closing. Such dismissals will be without
prejudice and without costs to either Party but subject to the mutual release in
subparagraph 3.2.2 and the mutual covenant not to sue in subparagraph 3.2.3
hereof.

3.2.2 MUTUAL RELEASE OF CLAIMS

As of the Closing, the Parties hereby irrevocably and unconditionally
release each other from any claim pending in the Litigation and from any claim
based on the NSI Intellectual Property Rights or the NSI Products. The Parties
do not release each other from claims based on anything other than the claims
pending in the Litigation or from claims based on anything unrelated to the NSI
Intellectual Property Rights or the NSI Products.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 6
<PAGE> 8

3.2.3 MUTUAL COVENANT NOT TO SUE

As of the Closing, the Parties hereby irrevocably and unconditionally
covenant not to sue, or bring, prosecute, assist or participate in any judicial,
administrative or other action or proceeding of any kind against (i) the other
Party, or any Affiliate of the other Party, on account of the NSI Intellectual
Property Rights or NSI Products or (ii) any reseller or customer of the other
Party or its Affiliates but only with respect to such reseller's or customer's
selling or distributing (not Making, having Made, or using) products based on
the NSI Intellectual Property Rights or the NSI Products.

3.2.4 NEGOTIATE IN GOOD FAITH

The Reserved Claims are not part of the NSI Intellectual Property
Rights and will not be affected by any dismissal, release, or covenant not to
sue set forth in paragraph 3.2. The Parties will negotiate in good faith to
attempt to reach resolution of Reserved Claims before January 20, 2000. Prior to
January 20, 2000, each Party will not commence an action or proceeding against
the other Party on the Reserved Claims; provided, however, either Party may
assert the Reserved Claims as counterclaims in any action or proceeding the
other Party commences in breach of the obligation in this subparagraph.

SECTION 4. COOPERATION IN CO-OWNERSHIP OF, AND RESTRICTIONS ON TRANSFER OF, NSI
INTELLECTUAL PROPERTY RIGHTS

4.1 NO RIGHT TO IMPROVEMENTS OR ACCOUNTING

Except as otherwise provided in a separate written agreement entered
into by the Parties after the date of this Agreement, neither Party will have
any right or interest in or to any Improvement made by the other Party. Except
as otherwise provided in a separate written agreement entered into by the
Parties after the date of this Agreement, neither Party will have any right or
interest in or to any revenues, profits or other benefits derived by the other
Party from such other Party's commercial exploitation of any NSI Intellectual
Property Rights.

4.2 RESTRICTION ON LICENSING OR ASSIGNING THE NSI INTELLECTUAL PROPERTY
RIGHTS

No Party will license or assign any rights to the NSI Intellectual
Property Rights without the prior written consent of the other Party.
Notwithstanding the foregoing, each party may license the following rights in
the NSI Intellectual Property Rights without the prior written consent of the
other Party:

(a) any right to Affiliates;

(b) right to use NSI Intellectual Property Rights to end user
customers of the Party;

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 7
<PAGE> 9

(d) right to have Made any product embodying the NSI
Intellectual Property Rights; and

(e) right to market and distribute the NSI Intellectual
Property Rights to the Party's distributors and
resellers.

4.3 PERFECTION OF INTERESTS

4.3.1 After the Closing, each Party will cooperate in amending
all public filings with respect to the NSI Intellectual Property Rights to name
both Parties as being the record owners of the NSI Intellectual Property Rights
and to otherwise reflect the co-ownership of the NSI Intellectual Property
Rights. Each Party will take such further action (including, but not limited to,
the execution, acknowledgment and delivery of assignments, instruments of
transfer and conveyance, and other documents) as may be reasonably requested by
the other Party to evidence, perfect or effect such other Party's rights, titles
and interests in and to any NSI Intellectual Property Rights.

4.3.2 If a Party wishes to make an application, registration
or filing with any governmental authority to effect, perfect, evidence or
enforce any patent, copyright, trademark or other proprietary right in any of
the NSI Intellectual Property Rights, such Party will furnish the other Party
not less than fifteen (15) calendar days' advance written notice of its intent
to make such a filing. The Party receiving such notice may within fifteen (15)
calendar days elect in writing to participate and pay one-half (1/2) the cost of
such application, registration or filing with any governmental authority. Any
Party not so electing to participate with the other Party in such application,
registration, or filing will nevertheless cooperate with the other Party in such
filing. Further, upon request of such other Party, the Party making the filing,
application, registration or action will assign or otherwise transfer to such
other Party a fifty percent (50%) undivided interest in such filing,
application, registration or action and any NSI Intellectual Property Rights
evidenced, perfected or effected by the same.

4.3.3 Each Party will take appropriate steps and precautions
for the protection against any loss or diminishment of any NSI Intellectual
Property Rights. Without limiting the generality of the foregoing, each Party
will exercise at least the same degree of care against any unauthorized use or
disclosure of any trade secrets included in such NSI Intellectual Property
Rights as such Party exercises with regard to its own trade secrets.

4.4 THIRD-PARTY INFRINGEMENT

Each Party will give the other Party prompt written notice of any claim
or challenge to the NSI Intellectual Property Rights and of any infringement,
misappropriation or violation of any of the NSI Intellectual Property Rights by
any Third Party that may come to such

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 8
<PAGE> 10

Party's attention (including, without limitation, a statement of the facts which
are known by the Party giving the notice and which such Party believes might
reasonably serve as a basis for a claim of such infringement, misappropriation
or violation, supported by copies of any pertinent documentation within the
possession or control of the Party giving the notice). Each Party may, but will
not be obligated to, investigate defending or pursuing any legal action or
proceeding that it deems appropriate against any infringement, misappropriation
or violation of the NSI Intellectual Property Rights. In connection with any
defense or legal action or proceeding commenced by the Party under this
paragraph:

(a) the Party will give the other Party written notice of its
intent to defend or commence the action or proceeding a reasonable
period in advance of such defense or commencement;

(b) neither Party will use the other Party's name as a party
to an action or proceeding without such Party's prior written consent
except to the extent absolutely required to properly defend or commence
or prosecute the action or proceeding;

(c) either Party may, at its option, participate in any such
action or proceeding (e.g., as a party to the action), and will pay its
attorneys' fees and other costs to participate in such action or
proceeding;

(d) each Party will provide the other Party such information
relating to the action or proceeding as the other Party may reasonably
request; and

(e) any recovery in such action or proceeding will be applied
first to pro-rate reimbursement of the Parties' costs and expenses
incurred in connection with such action or proceeding, second to be
divided between the Parties in proportion to their respective damages
suffered on account of the infringement, misappropriation or violation,
and third to a split between the Parties, with fifty-five percent (55%)
of any amount to NeoPath and forty-five percent (45%) of any amount to
AutoCyte.

4.5 LIMITATION

Except as otherwise provided for under paragraphs 4.3 and 4.4, neither
Party will have any obligation to:

(a) sue, recover damages or obtain relief for any
infringement, misappropriation or violation of any copyright, trademark
or other proprietary right in any of the NSI Intellectual Property
Rights;

(b) make any application, registration or filing with any
governmental authority to effect, perfect, evidence or enforce any
copyright, trademark or other proprietary right in any of the NSI
Intellectual Property Rights; or

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 9
<PAGE> 11

SECTION 5. WARRANTIES

5.1 BY NEOPATH

NeoPath represents and warrants to AutoCyte that:

(a) NeoPath has the full power and authority to execute,
deliver and perform this Agreement;

(b) NeoPath's execution, delivery and performance of this
Agreement will not conflict with, result in a breach of or constitute a
default under any contract, agreement or other obligation of NeoPath;

(c) when delivered to AutoCyte, the Shares will have been duly
authorized, validly issued, and will be fully paid-up and nonassessable
shares of NeoPath's common stock;

(d) NeoPath has obtained any and all approvals, consents and
other actions required for NeoPath to execute, deliver and perform this
Agreement.

5.2 BY AUTOCYTE

AutoCyte represents and warrants to NeoPath that:

(a) AutoCyte has the full power and authority to execute,
deliver and perform this Agreement;

(b) AutoCyte's execution, delivery and performance of this
Agreement will not conflict with, result in a breach of, or constitute
a default under any contract, agreement or other obligation of
AutoCyte;

(c) upon the entry of an order in the Bankruptcy Case
approving the sale to AutoCyte of the NSI Intellectual Property Rights,
AutoCyte will have obtained any and all approvals, consents and other
actions required for AutoCyte to execute, deliver and perform this
Agreement;

(d) to the best of AutoCyte's knowledge following the limited
due diligence and investigation conducted by AutoCyte, the NSI
Intellectual Property Rights include all the tangible and intangible
intellectual property of NSI of any kind or nature;

(e) except as set forth in Schedule 3.1(f) to the NSI-AutoCyte
Agreement, as of the Closing, AutoCyte will have all right, title and
interest in and to the U.S., Canadian or European (including
Switzerland, Belgium, Germany, Denmark, Spain, Finland, France, United
Kingdom, Ireland and the Netherlands) Patent Rights free and clear of
any lien, claim, restriction, interest, or encumbrance of NSI (provided
the

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 10
<PAGE> 12

representations and warranties NSI made to AutoCyte in the NSI-AutoCyte
Agreement about the NSI Intellectual Property Rights are true) and will
have the exclusive right to dismiss all claims against NeoPath in the
Litigation and to release NeoPath, as set forth in subparagraph 3.2.2,
from such claims;

(f) as of the closing of the transactions contemplated by the
NSI-AutoCyte Agreement, AutoCyte will have paid NSI Four Million
Dollars ($4,000,000) plus 1.4 million of its shares of common stock in
AutoCyte to NSI for acquisition of the NSI Intellectual Property Rights
and is not entitled to any discount, offset, rebate, payment on an
amount scheduled by NSI or on a proof of claim, or other reduction in
such amounts; and

(g) except as set forth in Schedule 3.1(f) to the NSI-AutoCyte
Agreement, and except for a forty-five percent (45%) undivided,
royalty-free and fully paid-up ownership right, title, and interest in
and to the NSI Intellectual Property Rights retained by AutoCyte, the
right, title and interest in and to the U.S., Canadian or European
(including Switzerland, Belgium, Germany, Denmark, Spain, Finland,
France, United Kingdom, Ireland and the Netherlands) Patent Rights
transferred to NeoPath hereunder will be free and clear of any lien,
claim, restriction, interest, or encumbrance arising from NSI, its
creditors, and parties in interest (provided the representations and
warranties NSI made to AutoCyte in the NSI-AutoCyte Agreement about the
NSI Intellectual Property Rights are true) or arising from AutoCyte,
its creditors, or its parties in interest.

SECTION 6. INDEMNIFICATION

6.1 INDEMNIFICATION BY NEOPATH

NeoPath will defend and indemnify AutoCyte (including its directors,
officers, employees and agents) from and against any and all claims,
liabilities, damages, costs and expenses (including, but not limited to,
reasonable attorneys' fees) arising out of:

(a) any breach of NeoPath's warranties set forth in
paragraph 5.1;

(b) NeoPath's commercial exploitation of the NSI
Intellectual Property Rights;

(d) any claim by a Third Party based on the NSI
Intellectual Property;

provided, however, that NeoPath will not be obligated to defend, indemnify or
hold harmless AutoCyte (or its directors, officers, employees or agents) from or
against any claim, liability, damage, cost or expense if and to the extent the
same is attributable to any negligence, willful misconduct or breach of this
Agreement by AutoCyte.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 11
<PAGE> 13

6.2 INDEMNIFICATION BY AUTOCYTE

AutoCyte will defend and indemnify NeoPath (including its directors,
officers, employees and agents) from and against any and all claims,
liabilities, damages, costs and expenses (including, but not limited to,
reasonable attorneys' fees) arising out of:

(a) any breach of AutoCyte's warranties set forth in
paragraph 5.2;

(b) AutoCyte's commercial exploitation of the NSI
Intellectual Property Rights;

(d) any claim by a Third Party based on the NSI
Intellectual Property;

provided, however, that AutoCyte will not be obligated to defend, indemnify or
hold harmless NeoPath (or its directors, officers, employees or agents) from or
against any claim, liability, damage, cost or expense if and to the extent the
same is attributable to any negligence, willful misconduct or breach of this
Agreement by NeoPath.

6.3 NOTICE, COOPERATION, ETC.

The Party seeking to enforce the other Party's obligations under
paragraph 6.1 or 6.2 will:

(a) give such other Party prompt written notice of the claim;

(b) cooperate with such other Party in connection with the
defense and settlement of the claim;

(d) permit such other Party to control the defense and
settlement of the claim.

SECTION 7. MISCELLANEOUS

7.1 NOTICES

Any notice under this Agreement will be made in writing and may be
given or served by:

(a) delivering the same in person or by prepaid messenger
service to the Person to be notified;

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 12
<PAGE> 14

(b) depositing the same in the mail, postage prepaid,
registered or certified with return receipt requested, and addressed to
the Person to be notified at the address specified below; or

If notice is deposited in the United States mail pursuant to clause (b) of this
paragraph, it will be deemed to have been given upon the fifth day after the
date that it is so deposited. Notice given in any other manner will be deemed to
have been given only if and when received at the address of the Person to be
notified. For the purpose of notice, the addresses and facsimile numbers of the
Parties are as follows:

If to AutoCyte: AutoCyte Inc.
780 Plantation Drive
Burlington, North Carolina 27215
Attn: James B. Powell

With a copy to: Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attn: Steven N. Farber
Marc A. Rubenstein

If to NeoPath: NeoPath, Inc.
8271 154th Avenue N.E.
Redmond, Washington 98052
Attn: Alan C. Nelson, Ph.D

With a copy to: Perkins Coie LLP
411 -108th Avenue N.E., 18th Floor
Bellevue, Washington 98004
Attn: Richard R. Rohde

Either Party may from time to time change its address for notices under this
Agreement by giving the other Party notice of such change in accordance with
this paragraph.

7.2 INDEPENDENT CONTRACTORS

Each Party is an independent contractor and not a partner, franchisee,
or agent of the other. This Agreement will not be interpreted or construed as
creating or evidencing any partnership, franchise, or agency between the Parties
or as imposing any partnership, franchise or agency obligation or liability upon
either Party. Further, except as provided in Section 4, neither Party is
authorized to, and will not, enter into or incur any agreement,

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 13
<PAGE> 15

contract, commitment, obligation or liability in the name of or otherwise on
behalf of the other Party.

7.3 NO THIRD-PARTY BENEFICIARIES

This Agreement is for the benefit of, and will be enforceable by, the
Parties only. This Agreement is not intended to confer any right or benefit on
any Third Party (including, but not limited to, any employee of any Party). No
action may be commenced or prosecuted against a Party by any Third Party
claiming as a third-party beneficiary of this Agreement or any of the
transactions contemplated by this Agreement.

7.4 ASSIGNMENT

Neither Party will assign all or any part of this Agreement or any of
its rights under this Agreement without the prior written consent of the other
Party, provided that either Party may assign all of its right, title, and
interest in and to this Agreement, upon thirty (30) days' prior written notice
to the other Party, to a successor to the Party by way of merger, consolidation,
or other corporate reorganization, or a sale of substantially all of the Party's
assets, where such successor agrees in writing to be bound by all of the
provisions of this Agreement. No assignment, with or without the other Party's
consent, will relieve a Party from its obligations under this Agreement. Subject
to the foregoing restriction on assignment, this Agreement will be fully binding
upon, inure to the benefit of, and be enforceable by the Parties and their
respective successors and assigns.

7.5 NONWAIVER

No waiver by either Party of any provision of this Agreement, in any
one or more instances, will be deemed to be or construed as a waiver of the same
or any other provision on any future occasion. The failure of either Party to
insist upon or enforce strict performance of any of the provisions of this
Agreement or to exercise any rights or remedies under this Agreement will not be
construed as a waiver or relinquishment to any extent of such Party's right to
assert or rely upon any such provisions, rights, or remedies in that or any
other instance; rather, the same will be and remain in full force and effect.

7.6 COURT VENUE AND JURISDICTION

AutoCyte will not commence or prosecute any action, suit, proceeding or
claim arising under or by reason of this Agreement other than in the state or
federal courts located in Delaware. AutoCyte irrevocably consents to the
jurisdiction and venue of the courts identified in the preceding sentence in
connection with any action, suit, proceeding or claim arising under or by reason
of this Agreement.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 14
<PAGE> 16

7.7 ATTORNEYS' FEES AND COSTS

In any action, suit or other proceeding to enforce any right or remedy
under this Agreement or to interpret any provision of this Agreement, the
prevailing Party will be entitled to recover its costs and expenses (including,
without limitation, reasonable attorneys' fees) reasonably incurred in
connection with such proceeding or any appeal thereof.

7.8 APPLICABLE LAW

THIS AGREEMENT WILL BE INTERPRETED, CONSTRUED AND ENFORCED IN ALL
RESPECTS IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE
TO ITS CHOICE OF LAW RULES TO THE CONTRARY. THE 1980 UN CONVENTION ON CONTRACTS
FOR THE INTERNATIONAL SALE OF GOODS OR ITS SUCCESSOR WILL NOT APPLY TO THIS
AGREEMENT.

7.9 PUBLICITY

The Parties will issue a mutually agreeable joint press release
regarding this Agreement and will not make any further announcement with respect
to the transactions contemplated hereby except as required by applicable law,
without the prior written approval of the other Party, which will not be
unreasonably withheld.

7.10 HEADINGS

The list of exhibits and headings of sections, paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not intended to restrict, affect or be of any weight in the interpretation or
construction of the provisions of such sections, paragraphs or subparagraphs.

7.11 COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument.

7.12 COMPLIANCE WITH LAWS

In the performance of this Agreement or the exercise of any right
granted under this Agreement, each Party will comply with all applicable laws,
regulations, rules, orders and other requirements, now or hereafter in effect,
of any governmental authority having jurisdiction.

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 15
<PAGE> 17

7.13 ENTIRE AGREEMENT

This Agreement (including Exhibit A) constitutes the entire agreement,
and supersedes any and all prior agreements, between the Parties with regard to
the NSI Intellectual Property Rights. No amendment of any provision of this
Agreement will be valid unless set forth in a written instrument signed by both
Parties.

NEOPATH: AUTOCYTE:

NEOPATH, INC. AUTOCYTE INC.

By: /s/ Alan C. Nelson By: /s/ William O. Green

Title: Chairman Title: V.P. and C.F.O.

Date Signed: April 24, 1999 Date Signed: April 24, 1999

INTELLECTUAL PROPERTY PURCHASE AGREEMENT PAGE 16
<PAGE> 18

EXHIBIT A

LIST OF LAWSUITS (DEFINED INTO LITIGATION)

Neuromedical Systems, Inc. v. NeoPath, Inc., No. 96 Civ. 5245 (S.D.N.Y.
filed July 1996).

NeoPath, Inc. v. Neuromedical Systems, Inc., No. C97-496 WD (W.D. Wash.
filed March 1997).

NeoPath, Inc. v. Neuromedical Systems, Inc., No. C98-341C WD (W.D.
Wash. filed March 1998).

EXHIBIT A PAGE 1

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to (i) the use of our report dated February 5,
1999 with respect to the financial statements of AutoCyte, Inc. 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 through December 31, 1996, and (ii) the use of our
report dated June 13, 1997, with respect to the financial statements of the
Cytology and Pathology Automation Business of Roche Imaging Analysis Systems,
Inc., 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 through
November 21, 1996 included in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-82121) and related Prospectus of AutoCyte, Inc. for the
registration of 1,400,000 shares of its common stock.

/s/ Ernst & Young LLP
---------------------

Raleigh, North Carolina
August 12, 1999

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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,817,123
<SECURITIES> 0
<RECEIVABLES> 1,165,517
<ALLOWANCES> 184,875
<INVENTORY> 3,229,746
<CURRENT-ASSETS> 16,436,522
<PP&E> 4,215,210
<DEPRECIATION> 1,613,581
<TOTAL-ASSETS> 32,387,037
<CURRENT-LIABILITIES> 3,209,270
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0
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<COMMON> 142,864
<OTHER-SE> 28,114,363
<TOTAL-LIABILITY-AND-EQUITY> 32,387,037
<SALES> 2,349,410
<TOTAL-REVENUES> 2,349,410
<CGS> 1,811,473
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<INCOME-CONTINUING> (8,506,837)
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