<PAGE>   1

      As filed with the Securities and Exchange Commission on July 1, 1999
                                                   Registration No. 333-________

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                 AUTOCYTE, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
           DELAWARE                                   3826                           56-1995728
<S>                                      <C>                                   <C>
  (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.

     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. |_|

<TABLE>
<CAPTION>
                         CALCULATION OF REGISTRATION FEE

   Title of each class of        Amount to be       Proposed maximum aggregate         Proposed Maximum               Amount of
securities to be registered      Registered       offering price per share (1)     Aggregate Offering Price       registration fee
----------------------------      ----------       ----------------------------     ------------------------       ----------------
<S>                               <C>                       <C>                          <C>                           <C>
  Common Stock, $.01 par          1,400,000                 $5.75                        $8,050,000                    $2,240
      value per share
</TABLE>
----------
(1)   Estimated solely for the purpose of calculating the registration fee
      pursuant to Rule 457(c) under the Securities Act of 1933, based on the
      average of the high and low prices reported on the Nasdaq National Market
      on June 29, 1999.

     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.
<PAGE>   2
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.

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-


                                       8
<PAGE>   3
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.

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


                                       9
<PAGE>   4
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;

- 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


                                       10
<PAGE>   5
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; o
  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.


                                       11
<PAGE>   6
                           PRICE RANGE OF COMMON STOCK

         The common stock trades on the Nasdaq National Market under the symbol
"ACYT". The following table sets forth, 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 (January 1, 1999-March 31, 1999)                         $7.750           $3.375
         Second Quarter (April 1, 1999-June 30, 1999)                           $8.250           $5.188

Year Ended December 31, 1998
         First Quarter (January 1, 1998-March 31, 1998)                         $8.375           $4.000
         Second Quarter (April 1, 1998-June 30, 1998)                           $8.250           $4.500
         Third Quarter (July 1, 1998-September 30, 1998)                        $6.375           $2.875
         Fourth Quarter (October 1, 1998-December 31, 1998)                     $4.438           $2.250

Year Ended December 31, 1997
         Third Quarter (September 5, 1997-September 30, 1997)                   $10.125          $8.500
         Fourth Quarter (October 1, 1997-December 31, 1997)                     $13.125          $7.000
</TABLE>

         As of June 30,1999, there were approximately 119 holders of record of
our common stock. On June 30, 1999, the last sale price reported on the Nasdaq
National Market for the common stock was $6.00.

         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.


                                       12
<PAGE>   7
                      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 March 31, 1999 and for each of the three-month
periods ended March 31, 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 three months ended March
31, 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 THREE
                                                      YEARS ENDED        YEAR ENDED         YEAR ENDED            MONTHS ENDED
                                                      DECEMBER 31,      DECEMBER 31,       DECEMBER 31,             MARCH 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    $  1,077    $  1,163
  Gross profit
    (loss) ....................................        796         982      (1,032)        715       1,787         400         342
  Research and
    development ...............................      3,605       5,074       4,366       4,462       4,700       1,044       1,169
  Selling, general and
    administrative ............................      8,479       7,895      12,491       6,532       7,458       2,002       1,750
  Operating loss ..............................    (11,288)    (11,987)    (17,889)    (10,279)    (10,370)     (2,646)     (2,577)
  Net loss ....................................   $(11,288)   $(11,987)   $(17,846)   $(10,985)   $ (9,090)   $ (2,272)   $ (2,375)
                                                  ========    ========    ========    ========    ========    ========    ========
  Net loss per share (basic and diluted)(3) ..                                        $  (1.59)   $  (0.72)   $  (0.18)   $  (0.19)
                                                                                       ========    ========    ========    ========
  Weighted-average shares outstanding(3) .....                                           6,903      12,664      12,604      12,773
                                                                                       ========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                               PREDECESSOR (1)               AUTOCYTE
                                             -----------------   ---------------------------------------
                                                DECEMBER 31,             DECEMBER 31,          MARCH 31,
                                             -----------------   ---------------------------
                                              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    $17,877
  Working capital ........................     1,600     3,585    10,673    30,223    22,194     20,316
  Total assets ...........................    10,544    10,714    16,683    37,021    30,026     27,950
  Redeemable convertible preferred stock .        --        --     9,882        --        --         --
  Total stockholders' equity .............     8,966    10,002     5,235    35,027    26,847     24,700
</TABLE>


                                       13
<PAGE>   8
(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)   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.


                                       14
<PAGE>   9
- the extent to which our 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 we
  adopt.

Having received FDA approval to market PREP for gynecologic uses, we expect our
marketing and sales expenditures to increase significantly. We also anticipate
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. We additionally expect to incur
compensation expense of $1.7 million as our deferred compensation balance is
amortized.

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

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. We do 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, we expect 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 24,
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 third quarter of
1999. If this transaction is completed, we expect that we will incur substantial
expenses integrating the two businesses and


                                       16
<PAGE>   10
that certain operating expenses will increase and remain higher for the combined
companies than their current levels. This may cause us to need to raise
additional capital sooner than we might otherwise.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1999 and 1998

Net sales increased by 8% from $1.1 million in the first quarter of 1998 to $1.2
million in the first quarter of 1999. The increase was due primarily to higher
sales volume of PREP reagents and related consumables as we continue to expand
our installed base of PREP units, both domestically and internationally. Our
gross margin during the three months ended March 31, 1999 was 29%, a decrease
from 37% 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
quarter of 1999 were from the lower margin non-gynecologic applications of PREP.
With the recent FDA approval of PREP, 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 remained relatively flat during the quarter, decreasing by 4%
from $3.0 million in the first quarter of 1998 to $2.9 million in the first
quarter of 1999 as we continued to control costs while working to complete FDA
approval for PREP. Net loss increased 5% from $2.3 million in the first quarter
of 1998 to $2.4 million in the first quarter of 1999. Net loss per share was
$0.19, an increase from a net loss per share of $0.18 in the first quarter of
1998.

Interest income decreased by 40% from $378,000 in the first quarter of 1998 to
$228,000 in the first quarter 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), our product that enables the quantitative assessment of
anti-nuclear antibodies in a patient's blood specimen. Our 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
we increased our staffing levels and other expenditures to support product
commercialization.


                                       17
<PAGE>   11
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 our
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 us and some of our
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
we 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 our 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 our predecessor of $3.9 million in the fourth quarter of 1996, and
other acquisition-related one-time charges in the fourth quarter of 1996 of $1.5
million.

During 1997 we 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. We also sold to certain members of management 48,819 shares
of Series A Preferred Stock at a price of $2.048 per share. We recorded $1.7
million of deferred compensation expense and $432,000 of compensation expense
with respect to these transactions. We 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 we 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 us and some of our principal stockholders. We 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 our initial public offering.


                                       18
<PAGE>   12
INCOME TAXES

We have not generated any taxable income to date and, therefore, have not paid
any federal income taxes since our 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 March 31, 1999, we had net operating losses, for tax purposes, of
approximately $24.9 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 our 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

We have established a task force comprised of experienced personnel from all
functional areas to determine the impact the Year 2000 problem will have on our
operations. The task force's activities are designed to ensure that there is no
adverse effect on our core business operations and that transactions with
customers and suppliers are fully supported before, during and after January 1,
2000. The status of our Year 2000 readiness is reported on a regular basis to
executive management and the board of directors. We anticipate 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 we are upgrading non-compliant units in the field in conjunction
with routine preventative maintenance visits. Most of our Pathology Workstation
products are currently Year 2000 compliant, and we are determining an
appropriate course of action to deal with non-compliant products. We expect to
complete our assessment of SCREEN by September 1999. We have conducted a review
of our internal information technology systems and facilities and believe that
all of our internal information technology systems and facilities are Year 2000
compliant. We also have 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
our operations. While we believe our planning efforts are adequate to address
our Year 2000 concerns, there can be no guarantee that systems of other entities
on which we rely, 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 our operations. We are dependent on
certain sole-source suppliers. Failure on the part of those suppliers to become
Year 2000 compliant could affect our ability to obtain product from those
suppliers and could adversely affect operations and financial results. To-date,
we have not incurred material costs in addressing the Year 2000, and the
remaining costs of the Year 2000 initiatives are not expected to be material to
our results of operation or financial position.


                                       19
<PAGE>   13
RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 1998, we 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 our financial statements since we have no items of other
comprehensive income in any period presented.

Effective January 1, 1998, we 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 our financial
statements as we operate 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. We 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 our financial position or results
from operations.


LIQUIDITY AND CAPITAL RESOURCES

Since our formation on October 24, 1996, our expenses have significantly
exceeded our revenues, resulting in an accumulated deficit of $23.4 million as
of March 31, 1999. We have funded our 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 March 31, 1999,
we had cash and cash equivalents of $17.9 million.

On May 17, 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.

Cash used in our operations was $8.1 million in 1998, $8.2 million during 1997,
$10.0 million on a pro forma combined basis during 1996 and $2.2 million and
$2.1 million during the three months ended March 31, 1999 and 1998 respectively.
Negative operating cash flow was caused primarily by operating losses. Our
capital expenditures were $1.6 million in 1998, $1.0 million during 1997,
$377,000 on a pro forma combined basis during 1996, and $263,000 and $390,000
during the three month ended March 31, 1999 and 1998 respectively. A significant
portion of the capital expenditures were attributable to the purchase of PREP
units for rental and


                                       20
<PAGE>   14
demonstration purposes. We have no material commitments for capital
expenditures.

We believe that our 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 us to meet our future cash obligations
through mid 2000. Our future liquidity and capital requirements will depend upon
numerous factors, including:

- the availability of financing for our 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 our marketing and sales
  capabilities domestically and internationally;

- the resources required to expand manufacturing capacity and the extent to
  which our products generate market acceptance and demand.

In particular we anticipate 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. We
cannot guarantee that we 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 we need it or on terms we find acceptable. Our failure to obtain
funding, would have a material adverse effect on our business, financial
condition and results of operations.

The discussion included in this section as well as elsewhere in the prospectus
may contain forward-looking statements based on current expectation of our
management. Such statements are subject to risks and uncertainties that could
cause actual results to differ from those projected. See "Risk Factors." You
should not to place undue reliance on the forward looking statements, which
speak only as the date hereof. We are not obligated to publicly release 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial results and cash flows are subject to fluctuation due to changes
in interest rates, primarily from our investment of available cash balances in
highly rated institutions. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes.


                                       21
<PAGE>   15
                                    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 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 have begun sales in several foreign countries
for cervical cancer screening, and, in the United States, we have begun sales of
our products for non-gynecologic applications. 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 NeopPath, 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


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<PAGE>   16
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.

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-


                                       23
<PAGE>   17
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.

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

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


                                       24
<PAGE>   18
  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.

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,


                                       25
<PAGE>   19
  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

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.

- 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 a diagnostic system combining PREP and SCREEN can offer the
following advantages over other screening systems recently developed to enhance
or replace conventional Pap smear testing:

- By designing PREP and SCREEN to work together, we have created a system
  which we believe will operate with higher throughput and with greater
  diagnostic


                                       26
<PAGE>   20
  sensitivity than other available systems or combinations of approaches.

- Our approach to cervical cancer screening combines review of high
  resolution cell images by a cytotechnologist with SCREEN's independent
  computer classification of each sample, resulting in what we believe is a
  more sensitive detection of sample abnormalities.

- SCREEN uses an off-the-shelf computer hardware platform which is more
  flexible and requires less customization than other automated screening
  devices.

AUTOCYTE PRODUCT SYSTEMS

AutoCyte PREP System

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

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.

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;


                                       27
<PAGE>   21
- 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.

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.


                                       28
<PAGE>   22
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. We generate PREP revenue from both system sales
and rentals.

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 intend to seek
third-party financing to support rentals of PREP and fee-per-use placements of
SCREEN. We may never be able to obtain such financing and, if we do, it may not
be on favorable terms.

Our strategy is to sell Pathology Workstation products through distributors and
original equipment manufacturer vendors who will 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 the
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.


                                       29
<PAGE>   23
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

We currently have 23 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.


                                       30
<PAGE>   24
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.

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.

We believe that both suppliers have sufficient capacity to meet our present and
future requirements for plastic components.

We may seek to establish other relationships with additional suppliers or
vendors for components of our products. We cannot


                                       31
<PAGE>   25
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.

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 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


                                       32
<PAGE>   26
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 mid-1999. We
designed the SCREEN system to meet the requirements of CE certification. All
SCREEN units shipped 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.

     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.


                                       33
<PAGE>   27
As of March 31, 1999, we had 39 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
For the year                         Research &
ended December 31                    Development
--------------------                 -----------
<S>                                  <C>
1995 (predecessor).................  $5.1 million
1996 (proforma-combined)...........  $4.4 million
1997 (AutoCyte)....................  $4.5 million
1998 (AutoCyte)....................  $4.7 million

For the three months
ended March 31
--------------------
1999...............................  $1.2 million
1998...............................  $1.0 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 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


                                       34
<PAGE>   28
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 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


                                       35
<PAGE>   29
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-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


                                       36
<PAGE>   30
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 on July 2, 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. Finally, in January
1999, Cytyc announced that it was expanding its direct sales force by 75 people
to sell directly to hospitals, laboratories and doctors. 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 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 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


                                       37
<PAGE>   31
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.

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

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.

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.

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,


                                       38
<PAGE>   32
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


                                       39
<PAGE>   33
marketed device and allow the proposed device to be marketed in the United
States. The FDA, however, may determine that the proposed device is not
"substantially equivalent" or require further information, including clinical
data, to make a determination of substantial equivalence. Such determinations or
requests for additional information could prevent or delay market introduction
of the product that is the subject of the premarket notification premarket
notification.

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

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

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


                                       40
<PAGE>   34
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.

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


                                       41
<PAGE>   35
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.

EMPLOYEES

As of June 30, 1999 we employed 80 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


                                       42
<PAGE>   36
an option to expand the leased space by 4,500 square feet.

LEGAL PROCEEDINGS

We are not a party to any legal proceedings.


                                       43
<PAGE>   37
                                   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

Steven C. McPhail                     45        Vice President of Sales and Marketing

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.


                                       44
<PAGE>   38
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
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.


                                       45
<PAGE>   39
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.

Steven C. McPhail

Steven C. McPhail has served as Vice President of Sales and Marketing of
AutoCyte since May 1997. Prior to joining AutoCyte, Mr. McPhail served as Vice
President of Sales and Marketing from January 1992 to May 1997 for DYNEX
Technologies, Inc., a division of Thermo BioAnalysis Corporation and a
manufacturer of microtiter technology products serving both clinical and
research laboratory customers. Prior to joining DYNEX, Mr. McPhail served in
sales and marketing positions from 1981 to 1992 with Abbott Laboratories
Diagnostics Division. He received a B.S.
in biology from San Diego State University.

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.

Richad 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


                                       46
<PAGE>   40
Sprout Group, a submanager of various venture capital funds within the
Donaldson, Lufkin & Jenrette organization, as a general partner in May 1991.
Prior to joining Sprout, Dr. Curry served in various capacities with Merrill
Lynch R&D Management and Merrill Lynch Venture Capital from 1984, including as
President of both organizations from January 1990 to May 1991. Previously, Dr.
Curry was a Vice President of Becton Dickinson from May 1980 to July 1984, and
General Manager of Bio-Rad Laboratory Inc.'s Diagnostics Systems Division from
August 1976 to May 1980. He currently is a director of Adeza Biomedical, Inc.,
Biometric Imaging, Inc., Instrumentation Metrics, Inc., Mycotech, Inc.,
Urosurge, Inc., Prometheus Laboratories, Inc. and Photon Technology
International, Inc. Dr. Curry received a B.S. from the University of Illinois,
and a M.S. and Ph.D. in chemistry from Purdue University.

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


                                       47
<PAGE>   41
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
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.


                                       48
<PAGE>   42
EXECUTIVE COMPENSATION

The following table sets forth 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
                                                     ANNUAL                 COMPENSATION                  ALL OTHER
                                                  COMPENSATION                 AWARDS                   COMPENSATION
                                                  ------------                 ------                   ------------
                                                                              Securities
                                                                              Underlying
Name and Principal Position                  Year       Salary (1)            Options (#)
---------------------------                  ----       ----------            -----------

<S>                                          <C>         <C>                   <C>                      <C>
James B. Powell, M.D..................       1998        $171,976                4,125                    $5,000(2)
    President and Chief Executive            1997        $145,279                   --                    $2,542(2)
    Officer(4)

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               1997        $164,287                   --                    $4,750(2)
    Science                                  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                 1997         $94,343               98,376                   $96,798(9)
Marketing (7)
</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 joined AutoCyte as Vice President of Sales and Marketing in
         May 1997.

(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.

                                       49
<PAGE>   43
The following table sets forth 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
                                    Number of      Percent of                                   Assumed Annual  Rates of
                                   Securities     Total Options                               Stock Price Appreciation  for
                                   Underlying       Granted to     Exercise                         Option Term
                Name                 Options       Employees in     or Base     Expiration  -----------------------
                                     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.


                                       50
<PAGE>   44
The following table sets forth 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-MoneyOptions
                                     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


                                       51
<PAGE>   45
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.

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 June 30, 1999, as reported by
the Nasdaq National Market, was $6.00 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
June 30, 1999, options to purchase an aggregate of 1,863,234 shares of common
stock have been granted and not cancelled unexercised under the equity plan, of
which options to purchase 406,624 shares have been exercised and options to
purchase 1,456,610 shares were outstanding. In addition, a total of 590,260
shares of restricted stock have been granted, leaving 532,831 shares available
for future grants of awards as of June 30, 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, 297,290 of which have been exercised, and
options to purchase an aggregate of 1,277,177 shares of common stock have been
granted to all our other employees and consultants, 109,334 of which had been
exercised as of June 30, 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.


                                       52
<PAGE>   46
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.


                                       53
<PAGE>   47
                       PRINCIPAL AND SELLING STOCKHOLDERS

The following table and footnotes set forth certain information regarding the
beneficial ownership of our common stock as of June 1, 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>
                                           Number of Shares of                          Shares of Common Stock
                                              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%.


                                       54
<PAGE>   48
(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 1, 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

(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 1, 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 1, 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 1, 1999 upon
the exercise of options.

(10) Includes 24,088 shares that may be acquired within 60 days of June 1, 1999
upon the exercise of options.

(11) Includes 20,286 shares that may be acquired within 60 days of June 1, 1999
upon the exercise of options.

(12) Includes 18,839 shares that may be acquired within 60 days of June 1, 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 1, 1999 upon the exercise of options.




                                       55
<PAGE>   49
                          DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock 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
June 30, 1999, there were 14,288,315 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

                                       56
<PAGE>   50
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 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.


                                       57
<PAGE>   51
                              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).

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

                                       58
<PAGE>   52
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."


                                       59
<PAGE>   53
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.



                                       60
<PAGE>   54
                          INDEX TO FINANCIAL STATEMENTS

AUTOCYTE, INC.

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
Report of Independent Auditors ..............................................................................   F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997 and March 31, 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 Three Months Ended March 31, 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 Three Months
    Ended March 31, 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 Three Months Ended March 31, 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-17

Balance Sheets as of December 31, 1995 and November 21, 1996.................................................  F-18
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-19
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-20
Notes to Financial Statements................................................................................  F-21


UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF AUTOCYTE, INC. AND NEOPATH, INC.

Introduction to Unaudited Pro Forma Combined Condensed Financial Statements..................................  F-25
Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 1999....................................  F-26
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Three Months Ended March 31, 1999........................................................................  F-27
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Three Months Ended March 31, 1998........................................................................  F-27
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1998.............................................................................  F-28
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1997.............................................................................  F-28
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1996.............................................................................  F-29
</TABLE>

                                      F-1
<PAGE>   55
                                 AUTOCYTE, INC.

                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors
AutoCyte, Inc.


We have audited the accompanying consolidated balance sheets of AutoCyte, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AutoCyte, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996 in conformity with generally accepted accounting principles.


                                                         /s/ ERNST & YOUNG LLP
                                                         ---------------------

Raleigh, North Carolina
February 5, 1999

                                      F-2
<PAGE>   56
                                 AUTOCYTE, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           DECEMBER 31,             MARCH 31,
                                                           ------------             ---------
                                                       1998           1997            1999
                                                       ----           ----            ----
                                                                                   (Unaudited)
ASSETS
Current assets:
<S>                                               <C>             <C>             <C>
   Cash and cash equivalents                      $ 19,986,107    $ 28,655,082    $ 17,876,552
   Accounts receivable                                 919,211         906,154       1,024,525
   Inventory                                         3,240,869       2,191,995       2,962,140
   Other current assets                                432,578         415,248         685,726
                                                  --------------------------------------------
Total current assets                                24,578,765      32,168,479      22,548,943

Property and equipment                               2,762,995       2,018,142       2,754,619
Goodwill                                             2,684,375       2,834,375       2,646,875
                                                  --------------------------------------------
Total assets                                      $ 30,026,135    $ 37,020,996    $ 27,950,437
                                                  ============================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                               $  1,028,788    $  1,129,016    $    875,023
                                                                                     1,028,788
   Accrued expenses                                    534,197         685,998         547,673
   Deferred revenue                                    630,185         130,000         525,883
   Current portion of long-term debt                   191,795              --         284,560
                                                  --------------------------------------------
Total current liabilities                            2,384,965       1,945,014       2,233,139

Long term debt, less current portion                   689,782              --         923,023
Other long-term liabilities                            104,514          48,768          93,793

Stockholders' equity:
Common stock, $0.01 par value;
  20,650,000 shares authorized; 12,729,925,
  12,505,412 and 12,790,800 shares issued and
  outstanding at December 31, 1998 and 1997 and        127,299         125,054         127,908
  March 31, 1999, respectively
Additional paid-in capital                          49,598,025      49,553,302      49,610,577
Deferred compensation                               (1,880,516)     (1,664,825)
                                                                                    (2,743,280)
Accumulated deficit                                (20,997,934)    (23,373,178)
                                                                                   (11,907,862)
                                                  --------------------------------------------
Total stockholders' equity                          26,846,874      35,027,214      24,700,482
                                                  --------------------------------------------
Total liabilities and stockholders' equity        $ 30,026,135    $ 37,020,996    $ 27,950,437
                                                  ============================================
</TABLE>


See accompanying notes



                                      F-3
<PAGE>   57
                               AUTOCYTE, INC.


                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          PERIOD FROM
                                                                          NOVEMBER 22,
                                                                             1996
                                                                          (INCEPTION)
                                                 YEAR ENDED                 THROUGH          THREE MONTHS ENDED
                                                 DECEMBER 31,             DECEMBER 31,           MARCH 31,
                                                 ------------             ------------           ---------
                                           1998            1997             1996           1999             1998
                                           ----            ----             ----           ----             ----
                                                                                             (Unaudited)
<S>                                   <C>             <C>             <C>              <C>            <C>
Sales                                 $  4,769,686    $  2,667,837    $    129,189     $ 1,162,803    $  1,077,078
Cost of sales                            2,982,198       1,952,691         112,022         821,062         676,913
                                     ---------------------------------------------     ---------------------------
Gross profit                             1,787,488         715,146          17,167         341,741         400,165

Operating expenses:
Research and development                 4,700,003       4,461,881         457,918       1,168,521       1,044,283
Selling, general and administrative      7,457,968       6,532,551         524,669       1,750,030       2,001,700
                                     ---------------------------------------------     ---------------------------
                                        12,157,971      10,994,432         982,587       2,918,551       3,045,983
                                     ---------------------------------------------     ---------------------------
Operating loss                         (10,370,483)    (10,279,286)       (965,420)     (2,576,810)     (2,645,818)
                                                                                                       (10,279,286)
Interest income                          1,301,078         772,563          42,431         228,209         378,132
Interest expense, including
credit agreement commitment fee            (20,667)     (1,478,150)             --         (26,643)         (4,607)
                                     ---------------------------------------------     ---------------------------
Net loss                              $ (9,090,072)   $(10,984,873)   $   (922,989)   $ (2,375,244)   $ (2,272,293)
                                     =============================================    ============================
Net loss per common share
(basic and diluted)                   $      (0.72)   $      (1.59)   $      (0.22)   $      (0.19)   $      (0.18)
                                     =============================================    ============================
Weighted-average common shares
outstanding                             12,664,223       6,903,290       4,279,389      12,772,969      12,603,993
                                     =============================================    ============================
</TABLE>



See accompanying notes


                                       F-4
<PAGE>   58
                                 AUTOCYTE, INC.

       CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                            AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          Redeemable
                                          Convertible                Additional                                      Total
                                          Preferred      Common        Paid-in       Deferred      Accumulated    Stockholders'
                                            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                       --         609         12,552             --              --          13,161
  Amortization of deferred
    compensation                                  --          --             --        215,691              --         215,691
  Net loss                                        --          --             --             --      (2,375,244)     (2,375,244)
                                         -----------    --------    -----------    -----------    ------------    ------------
Balance at March 31, 1999
  (unaudited)                            $        --    $127,908    $49,610,577    $(1,664,825)   $(23,373,178)   $ 24,700,482
                                         ===========    ========    ===========    ===========    ============    ============

</TABLE>


See accompanying notes.

                                      F-5
<PAGE>   59
                                 AUTOCYTE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                   Period From
                                                                                   November 22,
                                                                                      1996
                                                            Year Ended             (inception)           Three months Ended
OPERATING ACTIVITIES                                        December 31,             Through                   March 31
                                                     -------------------------    December 31,        ---------------------------
                                                     1998                 1997         1996            1999              1998

                                                                                                            (Unaudited)
<S>                                             <C>              <C>              <C>              <C>              <C>
Net loss                                        $ (9,090,072)    $(10,984,873)    $   (922,989)    $ (2,375,244)    $ (2,272,293)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation                                  857,333          477,686           39,797          270,891          171,477
       Amortization of goodwill                      150,000          150,000           15,625           37,500           37,500
       Amortization of deferred compensation         862,764          705,357           37,807          215,691          215,691
       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)        (105,314)        (279,321)
         Inventory                                (1,048,874)        (280,589)        (128,674)         278,729          176,888
         Other current assets                        (17,330)        (366,040)              65         (253,148)          36,713
         Accounts payable                           (100,228)          56,090          225,511         (153,765)         (66,499)
         Accrued expenses                           (151,801)         192,430          334,785           13,476          (82,827)
         Deferred revenue                            500,185          130,000               --         (104,302)              --
                                                  --------------------------------------------       ---------------------------
Net cash used in operating activities             (8,051,080)      (8,157,974)        (446,865)      (2,175,486)      (2,062,671)

INVESTING ACTIVITIES
Purchases of property and equipment               (1,602,186)      (1,035,896)         (47,889)        (262,515)        (389,720)
Net cash acquired in acquisition of business              --               --           10,028               --               --
                                                  --------------------------------------------       ---------------------------
Net cash used in investing activities             (1,602,186)      (1,035,896)         (37,861)        (262,515)        (389,720)

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               --           13,161           33,819
Increase (decrease) in other long-term                55,746           48,768               --          (10,721)          (2,404)
liabilities
Proceeds from long-term debt                         905,019               --               --          388,505               --
Payments on long-term debt                           (23,442)              --               --          (62,499)              --
                                                  --------------------------------------------       ---------------------------

Net cash provided by financing activities            984,291       28,331,678       10,002,000          328,446           31,415
                                                  --------------------------------------------       ---------------------------
Net increase (decrease) in cash and cash          (8,668,975)      19,137,808        9,517,274       (2,109,555)      (2,420,976)
equivalents
Cash and cash equivalents at beginning of         28,655,082        9,517,274               --       19,986,107       28,655,082
period
                                                  --------------------------------------------       ---------------------------
Cash and cash equivalents at end of period      $ 19,986,107     $ 28,655,082     $  9,517,274     $ 17,876,552     $ 26,234,106
                                                ==============================================     =============================


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest                          $     20,667     $      3,148     $         --     $     26,643     $      4,607
                                                ==============================================     =============================
</TABLE>


See accompanying notes.

                                      F-6
<PAGE>   60
                                 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 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 three month periods ended
March 31, 1999 and 1998 and the balance sheet as of March 31, 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
three month periods ended March 31, 1999 and 1998 is unaudited.

Principles of Consolidation

The consolidated financial statements include the accounts of AutoCyte, Inc. and
its subsidiaries, AutoCyte Europe b.v.b.a. and AutoCyte Australia Pty Ltd. All
significant intercompany balances and transactions have been eliminated in
consolidation.



                                      F-7
<PAGE>   61
                                 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 $270,891 and $171,477 during the three
months ended March 31, 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.

Goodwill

The excess cost over the fair value of net assets acquired ("goodwill") is being
amortized using the straight-line method over 20 years. Accumulated amortization
was $353,125, $315,625 and $165,625 at March 31, 1999, December 31, 1998 and
December 31, 1997, respectively. The Company periodically reviews the value of
its goodwill 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 goodwill will not be recoverable, as determined based
on an analysis of undiscounted cash flows over the remaining amortization
period, the Company would reduce the carrying value of its goodwill accordingly.


                                      F-8
<PAGE>   62
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Research and Development Costs

Research and development costs are charged to operations as incurred.

Deferred Revenue

Deferred revenue at March 31, 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.

Advertising Expense

The cost of advertising is expensed as incurred. Advertising and marketing
expense, including trade show expense, amounted to $158,719 during 1998,
$157,095 during 1997, $3,900 during the period from November 22, 1996
(inception) through December 31, 1996 and $21,132 and $48,024 during the three
months ended March 31, 1999 and 1998, respectively.


                                      F-9
<PAGE>   63
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassification

Certain amounts in the 1997 financial statements have been reclassified to
conform to 1998 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.

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
                                                       NOVEMBER 22, 1996
                                                      (INCEPTION) THROUGH             THREE MONTHS ENDED
                        YEAR ENDED DECEMBER 31,          DECEMBER 31,                      MARCH 31,
                    ---------------------------------                           --------------------------------
                          1998            1997               1996                    1999            1998
                    --------------------------------------------------------    --------------------------------

<S>                 <C>                  <C>                  <C>                    <C>             <C>
    Customer 1             30%               -                  -                       -             15%
    Customer 2             13%               -                  -                       -               -
    Customer 3               -             17%                  -                       -               -
    Customer 4               -               -                 70%                      -               -
    Customer 5               -               -                  -                      11%            13%
    Customer 6               -               -                  -                      23%              -
    Customer 7               -               -                  -                      19%            11%
</TABLE>

Sales by geographic region were as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED                         THREE MONTHS ENDED
                                                   DECEMBER 31,                             MARCH 31,
                                       ------------------ ------------------      -------------- ---------------
                                             1998               1997                  1999            1998
                                       ------------------ ------------------      -------------- ---------------
<S>                                    <C>                <C>                   <C>              <C>
    United States                             37%                59%                   37%            38%
    Europe                                    28%                19%                   46%            42%
    Asia and Australia                        35%                18%                   17%            20%
    Other International Sales                  -                  4%                    -               -
</TABLE>



                                      F-10
<PAGE>   64
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
                                                    YEAR ENDED                         THREE MONTHS ENDED
                                                    DECEMBER 31,                             MARCH 31,
                                       --------------------------------------         ---------------------
                                          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                 -      40,000
     Amounts written off                 (2,125)             -              -                 -           -
                                       --------------------------------------         ---------------------
     Ending balance                    $ 184,875      $  85,000      $ 17,500         $ 184,875    $125,000
                                       ======================================         =====================
</TABLE>

5. INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                     ----------------------------        MARCH 31,
                                        1998              1997             1999
                                     ----------------------------       ----------
<S>                                  <C>                   <C>         <C>

     Raw materials                   $1,685,495        $1,878,632       $1,740,636
     Finished goods                   1,555,374           313,363       $1,221,504
                                     ----------------------------       ----------
                                     $3,240,869        $2,191,995       $2,962,140
                                     ============================       ==========
</TABLE>

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                         -----------------------------          MARCH 31,
                                            1998               1997               1999
                                         -----------------------------         -----------
<S>                                     <C>                  <C>              <C>

     Demonstration equipment             $ 1,291,105        $1,236,161         $ 1,370,361
     Rental units                          1,172,575           320,607           1,235,180
     Machinery and equipment                 761,536           457,228             820,643
     Furniture, fixtures and                 160,829            87,859             160,829
     improvements
     Computer equipment and software         503,045           424,278             531,506
                                         -----------------------------         -----------
                                           3,889,090         2,526,133           4,118,519
     Less accumulated depreciation        (1,126,095)         (507,991)         (1,363,900)
                                         -----------------------------         -----------
                                         $ 2,762,995        $2,018,142         $ 2,754,619
                                         =============================         ===========
</TABLE>

7. ACCRUED EXPENSES

Accrued expenses consists of the following:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                          --------------------------              MARCH 31,
                                            1998              1997                 1999
                                          --------------------------              --------
<S>                                       <C>                  <C>                <C>

     Accrued payroll and related          $ 161,461         $213,443              $183,381
     benefits
     Accrued warranty costs                 202,664          196,709               202,664
     Other accrued expenses                 170,072          275,846               161,628
                                          --------------------------              --------
                                          $ 534,197         $685,998              $547,673
                                          ==========================              ========
</TABLE>



                                      F-11
<PAGE>   65
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. 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.

9. 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:

<TABLE>
<S>                                                                      <C>
                      1999                                               $      191,795
                      2000                                                      213,075
                      2001                                                      236,715
                      2002                                                      239,992
                                                                          --------------
                                                                          $      881,577
                                                                          ==============
</TABLE>

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.

10. 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
$108,233 and $76,551 during the three months ended March 31, 1999 and 1998,
respectively.

Future minimum lease payments under these leases as of March 31, 1999 are
$2,223,738.



                                      F-12
<PAGE>   66
                                 AUTOCYTE, INC.


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES

The Company has cumulative net operating loss carryforwards available to offset
future taxable income of approximately $24,855,000 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,
                                           -----------------------------------------        MARCH 31,
                                                   1998                  1997                 1999
                                           -----------------------------------------   ---------------
Deferred tax assets:
<S>                                            <C>                  <C>                <C>
   Inventory                                   $      735,000       $    1,174,000      $    687,000
   Property and equipment                           1,517,000            2,161,000         1,443,000
   Intangible assets                                  672,000              737,000           655,000
   Net operating loss carry forward                 8,728,000            4,429,000         9,693,000
   Other                                              176,000              189,000           173,000
                                           -----------------------------------------   ---------------
Total deferred tax asset                           11,828,000            8,690,000        12,651,000
Valuation allowance for deferred tax asset        (11,828,000)          (8,690,000)      (12,651,000)
                                           -----------------------------------------   ---------------
Net deferred taxes                             $           -        $           -       $
                                           =========================================   ===============
</TABLE>


12. 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 March
31, 1999 there were no shares of Preferred Stock outstanding.

Equity Incentive Plans

At inception, the Company adopted the 1996 Equity Incentive Plan (the "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.

A summary of activity under the Plan 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                                      459,582           4.31 -   5.88                4.57
   Options exercised                                   (136,414)          0.20 -   4.19                0.21
   Options cancelled/expired                            (19,577)          0.20 -   4.19                2.19
                                                  -------------------- --------------------- ---------------------
Outstanding at March 31, 1999 (unaudited)             1,472,072         $ 0.20 - $10.00       $        2.82
                                                  ==================== ===================== =====================
</TABLE>



                                      F-13
<PAGE>   67
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                                       -------------------                             -------------------
                                         WEIGHTED-AVERAGE
                      NUMBER OUTSTANDING    REMAINING        WEIGHTED          NUMBER EXERCISABLE
                              AT           CONTRACTUAL       -AVERAGE                  AT            WEIGHTED-AVERAGE
    PRICE RANGE       DECEMBER 31,1998     LIFE (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 - $10.50           1,168,481           8.5            $1.81               350,880             $1.76
===================== ================== ================ ================     ================= ==================
</TABLE>

The options outstanding as of March 31, 1999 had a weighted average remaining
contractual life of 8.7 years. At March 31, 1999, options to purchase 305,228
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.

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. As of March 31, 1999, no options had been granted pursuant to this
plan.

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
                                                                           NOVEMBER 22, 1996    THREE MONTHS
                                                    YEAR ENDED                (INCEPTION)          ENDED
                                                   DECEMBER 31,             THROUGH DECEMBER     MARCH 31,
                                                                                  31,
                                       -------------------------------------
                                              1998              1997              1996              1999
                                       -------------------------------------------------------------------------

<S>                                          <C>               <C>                <C>               <C>
   Risk-free interest rate                     5.29%             6.20%              5.92%             4.74%
   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             $2.69
</TABLE>



                                      F-14
<PAGE>   68
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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       THREE
                                                    YEAR ENDED             (INCEPTION)THROUGH   MONTHS ENDED
                                                   DECEMBER 31,               DECEMBER 31,        MARCH 31
                                       -------------------------------------------------------------------------
                                              1998              1997              1996              1999
                                       -------------------------------------------------------------------------
<S>                                         <C>              <C>                 <C>               <C>
  Net loss:
    As reported                             $(9,090,072)     $(10,984,873)       $ (922,989)       $(2,375,244)
    Pro forma                               $(9,517,798)     $(10,987,980)       $ (929,276)       $(2,492,106)
 Net loss per common share
    (basic & diluted):
    As reported                               $ (0.72)          $ (1.59)          $ (0.22)           $ (0.19)
    Pro forma                                 $ (0.75)          $ (1.59)          $ (0.22)           $ (0.20)
</TABLE>

Common Stock Reserved for Future Issuance

At December 31, 1998 and March 31, 1999, respectively, the Company has reserved
authorized shares of Common Stock for future issuance as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,          MARCH 31,
                                                                 1998                 1999
                                                             ------------------- --------------
<S>                                                           <C>                  <C>
    Outstanding stock options                                 1,168,481            1,472,072
    Possible future issuance under equity incentive plans       177,536              637,531
                                                             ------------------- --------------
    Total shares reserved                                     1,346,017            2,109,603
                                                             =================== ==============
</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 the period from November 22, 1996
(inception) through December 31, 1996, and $215,691 during each of the three
month periods ended March 31, 1999 and 1998.

13. 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
$5,325 and $11,339 during the three months ended March 31, 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 $3,154 and
$27,844 during the three months ended March 31, 1999 and 1998, respectively.
Additionally, the Company owed approximately $249,000, $249,000 and $348,000 at
March 31, 1999, December 31, 1998 and December 31, 1997, respectively, to Roche
or its affiliates for services provided.



                                      F-15
<PAGE>   69
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. 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 $27,841 and $37,608
during the three months ended March 31, 1999 and 1998, respectively.

15. 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     YEAR ENDED
                               THROUGH          THROUGH           DECEMBER 31, 1996
                          NOVEMBER 21, 1996   DECEMBER 31, 1996  (PRO FORMA COMBINED)
                            (PREDECESSOR)       (AUTOCYTE)
                            ---------------------------------------------------------
<S>                         <C>              <C>                    <C>
Sales                       $  1,747,209     $    129,189           $  1,876,398

Cost of goods sold             2,796,802          112,022              2,908,824
                            ----------------------------------------------------
Gross profit (loss)           (1,049,593)          17,167             (1,032,426)

Operating expenses:
Research and development       3,907,682          457,918              4,365,600
Selling, general and
administrative                11,965,813          524,669             12,490,482
                            ----------------------------------------------------
                              15,873,495          982,587             16,856,082
                            ----------------------------------------------------
Operating loss               (16,923,088)        (965,420)           (17,888,508)
Interest income                       --           42,431                 42,431
                            ----------------------------------------------------
Net loss
                            $(16,923,088)    $   (922,989)          $(17,846,077)
                            ====================================================
</TABLE>

Net loss per share is not disclosed for 1996 since RIAS operated as a wholly
owned subsidiary of Roche Holding Ltd. prior to the formation of AutoCyte on
November 22, 1996.

16.      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
data 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. AutoCyte acquired these NSI assets for $4.0 million in
cash and the issuance of 1.4 million shares of AutoCyte's common stock valued at
$9.5 million, representing a total purchase price of $13.5 million.

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 24, 1999, AutoCyte would issue approximately 13,783,000
shares of AutoCyte common stock. This transaction is expected to be completed in
the third quarter of 1999.



                                      F-16
<PAGE>   70
                                 AUTOCYTE, INC.

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AutoCyte, Inc.

     We have audited the accompanying balance sheets of the Cytology and
Pathology Automation Business of Roche Image Analysis Systems, Inc. (the
"Business") as of December 31, 1995 and November 21, 1996, and the related
statements of operations and cash flows for the years ended December 31, 1994
and 1995 and for the period from January 1, 1996 to November 21, 1996. These
financial statements are the responsibility of the Business's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     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 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-17
<PAGE>   71

                   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-18
<PAGE>   72

                   CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
                     OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                   PERIOD FROM
                                                                                    JANUARY 1,
                                                     YEAR ENDED DECEMBER 31,         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-19
<PAGE>   73

                   CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
                     OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   PERIOD FROM
                                                                                    JANUARY 1,
                                                     YEAR ENDED DECEMBER 31,         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-20
<PAGE>   74

                   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

     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.

  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-21
<PAGE>   75
                   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-22
<PAGE>   76
                   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>
                                                                           PERIOD FROM
                                                           YEARS ENDED      JANUARY 1,
                                                           DECEMBER 31,      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-23
<PAGE>   77
                   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-24
<PAGE>   78

                              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 24, 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 March 31, 1999. The
unaudited pro forma combined condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and for the three months ended March 31,
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 reflects 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 past or 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 on the dates indicated. 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-25
<PAGE>   79

                              AUTOCYTE AND NEOPATH
              UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
                                 MARCH 31, 1999


<TABLE>
<CAPTION>
                                                          Historical
                                                                                     Pro Forma        AutoCyte and NeoPath
ASSETS                                               AutoCyte        NeoPath         Adjustments            Pro Forma
                                               -------------------------------------------------------------------------
<S>                                            <C>               <C>              <C>                 <C>
Current assets:
  Cash and cash equivalents                    $    17,876,552     $14,$86,962     $          -       $       32,763,514
  Accounts receivable                                1,024,525       3,434,920                                 4,459,445
  Inventory                                          2,962,140       7,946,880                -               10,909,020
  Other current assets                                 685,726         503,702                -                1,189,428
                                               -------------------------------------------------------------------------
     Total current assets                           22,548,943      26,772,464                -               49,321,407
  Customer use assets                                  883,516      15,551,411                -               16,434,927
  Property and equipment                             1,871,103       2,986,875                -                4,857,978
  Deposits and other assets                                  -         833,176                -                  833,176
  Goodwill                                           2,646,875               -                -                2,646,875
                                               =========================================================================
     Total current assets                        $  27,950,437   $  46,143,926    $          -        $       74,094,363
                                               =========================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                               $     875,023   $   5,004,045    $   4,000,000(1)    $       10,195,308
  Accrued expenses                                     547,673         316,240               -                   547,673
  Deferred revenue                                     525,883               -               -                   525,883
  Current portion of long-term debt                    284,560       2,540,402               -                 2,824,962
                                               -------------------------------------------------------------------------
     Total current liabilities                       2,233,139       7,860,687        4,000,000               14,093,826
Long-term debt, less current portion                   923,023         629,189               -                 1,552,212
Other long-term liabilities                             93,793               -               -                    93,793

Stockholders' equity:
Common stock                                           127,908     156,558,668     (156,420,838)(2)              265,738
Additional paid-in capital                          49,610,577               -      156,420,838(2)           206,031,415
Deferred compensation                               (1,664,825)              -                                (1,664,825)
Accumulated deficit                                (23,373,178)   (118,904,618)      (4,000,000)(1)         (146,277,796)
                                               -------------------------------------------------------------------------
     Total stockholders' equity                     24,700,482      37,654,050       (4,000,000)              58,354,532
                                               =========================================================================
     Total liabilities and stockholders'
     equity                                      $  27,950,437   $  46,143,926    $          -         $      74,094,363
                                               =========================================================================
</TABLE>


(1)  To accrue 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
     24, 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-26
<PAGE>   80

                              AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                        THREE MONTHS ENDED MARCH 31, 1999


<TABLE>
<CAPTION>
                                                           Historical
                                                                                      Pro Forma       AutoCyte and NeoPath
                                                  AutoCyte          NeoPath        Adjustments(1)          Pro Forma
                                               ---------------- ----------------- ------------------ -----------------------
<S>                                            <C>                <C>               <C>                 <C>
Sales                                               $1,162,803    $   2,025,858     $            -      $        3,188,661
Cost of sales                                          821,062        1,164,390                  -               1,985,452
                                               ---------------------------------------------------------------------------
Gross profit                                           341,741          861,468                  -               1,203,209

Operating Expenses
  Research and development                           1,168,521        2,418,037                  -               3,586,558
  Selling, general, and administrative               1,750,030        3,558,706                  -               5,308,736
                                               ---------------------------------------------------------------------------
                                                     2,918,551        5,976,743                  -               8,895,294
                                               ---------------------------------------------------------------------------
  Operating loss                                    (2,576,810)      (5,115,275)                 -              (7,692,085)
  Interest income                                      228,209          137,244                  -                 365,453
  Interest expense                                     (26,643)         (89,985)                 -                (116,628)
                                               ---------------------------------------------------------------------------
  Net loss                                       $  (2,375,244)   $  (5,068,016)     $           -      $       (7,443,260)
                                               ===========================================================================

Net loss per common share (basic and diluted)    $       (0.19)                                         $            (0.28)
                                               ================                                      =====================

Weighted-average common shares outstanding          12,772,969                                                  26,555,969
                                               ================                                      =====================
</TABLE>

(1)  Non-recurring direct transaction costs of approximately $4,000,000 (as
     currently estimated by management), are anticipated to be incurred in
     connection with the NeoPath transaction. Such costs will be expensed upon
     closing of the business combination with NeoPath. Such costs 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
                        THREE MONTHS ENDED MARCH 31, 1998


<TABLE>
<CAPTION>
                                                        Historical
                                                                                  Pro Forma       AutoCyte and NeoPath
                                                  AutoCyte        NeoPath        Adjustments           Pro Forma
                                               --------------- --------------- ----------------- -----------------------
<S>                                              <C>              <C>             <C>               <C>
Sales                                            $   1,077,078    $  3,562,691    $           -     $        4,639,769

Cost of sales                                          676,913       2,040,760                -              2,717,673
                                                 ---------------------------------------------------------------------
Gross profit                                           400,165       1,521,931                -              1,922,096

Operating Expenses
  Research and development                           1,044,283       3,045,816                -              4,090,099
  Selling, general, and administrative               2,001,700       4,506,243                -              6,507,943
                                                 ---------------------------------------------------------------------
                                                     3,045,983       7,552,059                -             10,598,042
                                                 ---------------------------------------------------------------------
  Operating loss                                    (2,645,818)     (6,030,128)               -             (8,675,946)
  Interest income                                      378,132         365,774                -                743,906
  Interest expense                                      (4,607)         (9,279)               -                (13,886)
                                                 ---------------------------------------------------------------------
  Net loss                                       $  (2,272,293)  $  (5,673,633)   $           -     $       (7,945,926)
                                                 =====================================================================

Net loss per common share (basic and diluted)    $       (0.18)                                     $            (0.30)
                                                 =============                                      ==================

Weighted-average common shares outstanding          12,603,993                                              26,386,993
                                                 =============                                      ==================
</TABLE>


                                      F-27
<PAGE>   81

                              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>
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)                                        $            (1.33)
                                                 ============                                         ==================
Weighted-average common shares outstanding         12,664,223                                                 26,447,223
                                                 ============                                         ==================
</TABLE>

                              AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                          Historical
                                                                                       Pro Forma          AutoCyte and
                                                     AutoCyte          NeoPath        Adjustments      NeoPath 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)                                        $            (1.67)
                                                 ============                                         ==================
Weighted-average common shares outstanding          6,903,290                                                 20,686,290
                                                =============                                         ==================
</TABLE>


                                      F-28
<PAGE>   82

                              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-29
<PAGE>   83

                                     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


                                      II-1
<PAGE>   84

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 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.


                                      II-2
<PAGE>   85

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.

As of August 28, 1997, the Registrant had issued options to purchase an
aggregate of 2,016,500 shares of Common Stock under the AutoCyte, Inc. 1996
Equity Incentive Plan exercisable at a weighted average price of $0.10 per
share. On that date, no options had been exercised. All option exercises after
August 28, 1997 were registered under the Securities Act of 1933.

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 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.


                                      II-3
<PAGE>   86

Item 16. Exhibits and Financial Statement Schedules

(a)      Exhibits

         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. Filed herewith.

         10.1*    Amended and Restated 1996 Equity Incentive Plan (including
                  forms of incentive stock option certificate and nonstatutory
                  stock option certificate). Filed as Exhibit 10.1 to the
                  Company's Registration Statement on Form S-1 (File No.
                  333-30227) and incorporated herein by reference.

         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


                                      II-4
<PAGE>   87

                  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.

         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.


                                      II-5
<PAGE>   88

         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.

         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 (set forth on signature page to this
                  Registration Statement).

         __________

         *        Indicates a management contract or compensatory plan.

         +        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


                                      II-6
<PAGE>   89

         Securities Act of 1933, as amended. Omitted information is identified
         with asterisks in the appropriate places in the agreement.


(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


                                      II-7
<PAGE>   90

                  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-8
<PAGE>   91

SIGNATURES


Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burlington, State of
North Carolina, on June 30, 1999.

                                     AUTOCYTE, INC.



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

                                POWER OF ATTORNEY

We, the undersigned officers and directors of AutoCyte, Inc., hereby severally
constitute and appoint James B. Powell, William O. Green and Marc A. Rubenstein,
and each of them singly, our true and lawful attorneys, with full power to them
in any and all capacities, to sign any amendments to this Registration Statement
on Form S-1 (including Pre-and Post-Effective Amendments), and any related Rule
462(b) registration statement or amendment thereto, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.


<TABLE>
<CAPTION>

Signature                                         Title                         Date
---------                                         -----                         ----
<S>                                         <C>                                      <C>

/s/ James B. Powell, M.D.          President, Chief Executive Officer       June 30, 1999
-------------------------------    and Director (Principal Executive
James B. Powell, M.D.              Officer)


/s/ William O. Green               Chief Financial Officer,                 June 30, 1999
-------------------------------    and Vice President, Finance
William O. Green                   (Principal Financial
                                   Officer and Principal Accounting
                                   Officer)


/s/ Richard A. Charpie             Director                                 June 30, 1999
-------------------------------
Richard A. Charpie


/s/ Robert E. Curry                Director                                 June 30, 1999
-------------------------------
Robert E. Curry

</TABLE>


                                      II-9
<PAGE>   92


                                 Director                     _______, 1999
----------------------------
Thomas P. Mac Mahon


/s/ Susan E. Whitehead           Director                     June 30, 1999
----------------------------
Susan E. Whitehead



                                     II-10
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{"company-data": {"conformed-name": "AUTOCYTE INC", "cik": "0001041426", "assigned-sic": "3826", "irs-number": "561995728", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-82121", "film-number": "99658205"}, "business-address": {"street1": "780 PLANTATION DRIVE", "city": "BURLINGTON", "state": "NC", "zip": "27215", "phone": "3362229707"}, "mail-address": {"street1": "PO BOX 1029", "city": "BURLINGTON", "state": "NC", "zip": "27216-1029"}}
1

      As filed with the Securities and Exchange Commission on July 1, 1999
                                                   Registration No. 333-________

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                 AUTOCYTE, INC.
             (Exact name of registrant as specified in its charter)
DELAWARE                                   3826                           56-1995728
(State or other jurisdiction            (Primary Standard Industrial            (I.R.S. Employer
of incorporation or organization)         Classification Code Number)           Identification Number)
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.

     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. |_|
CALCULATION OF REGISTRATION FEE

   Title of each class of        Amount to be       Proposed maximum aggregate         Proposed Maximum               Amount of
securities to be registered      Registered       offering price per share (1)     Aggregate Offering Price       registration fee
----------------------------      ----------       ----------------------------     ------------------------       ----------------
Common Stock, $.01 par          1,400,000                 $5.75                        $8,050,000                    $2,240
      value per share
----------
(1)   Estimated solely for the purpose of calculating the registration fee
      pursuant to Rule 457(c) under the Securities Act of 1933, based on the
      average of the high and low prices reported on the Nasdaq National Market
      on June 29, 1999.

     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.
2
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.

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-

                                       8
3
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.

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

                                       9
4
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;

- 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

                                       10
5
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; o
  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.

                                       11
6
                           PRICE RANGE OF COMMON STOCK

         The common stock trades on the Nasdaq National Market under the symbol
"ACYT". The following table sets forth, for the periods indicated, the high and
low closing sales prices per share for the common stock.
PRICE RANGE
                                                                                     -----------
                                                                                HIGH             LOW
                                                                                ----             ---
Six Months Ended June 30, 1999
         First Quarter (January 1, 1999-March 31, 1999)                         $7.750           $3.375
         Second Quarter (April 1, 1999-June 30, 1999)                           $8.250           $5.188

Year Ended December 31, 1998
         First Quarter (January 1, 1998-March 31, 1998)                         $8.375           $4.000
         Second Quarter (April 1, 1998-June 30, 1998)                           $8.250           $4.500
         Third Quarter (July 1, 1998-September 30, 1998)                        $6.375           $2.875
         Fourth Quarter (October 1, 1998-December 31, 1998)                     $4.438           $2.250

Year Ended December 31, 1997
         Third Quarter (September 5, 1997-September 30, 1997)                   $10.125          $8.500
         Fourth Quarter (October 1, 1997-December 31, 1997)                     $13.125          $7.000
As of June 30,1999, there were approximately 119 holders of record of
our common stock. On June 30, 1999, the last sale price reported on the Nasdaq
National Market for the common stock was $6.00.

         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.

                                       12
7
                      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 March 31, 1999 and for each of the three-month
periods ended March 31, 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 three months ended March
31, 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.
PRO FORMA
                                                                          COMBINED
                                                                        PREDECESSOR
                                                     PREDECESSOR (1)        AND
                                                  --------------------    AUTOCYTE           AUTOCYTE            AUTOCYTE THREE
                                                      YEARS ENDED        YEAR ENDED         YEAR ENDED            MONTHS ENDED
                                                      DECEMBER 31,      DECEMBER 31,       DECEMBER 31,             MARCH 31,
                                                  --------------------  ----------    ---------------------    -------------------
                                                    1994        1995      1996 (2)      1997        1998        1998        1999
                                                  --------    --------    --------    --------    --------    --------    --------
                                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
  OPERATIONS DATA:
  Net sales ...................................   $  3,396    $  3,396    $  1,876    $  2,668    $  4,770    $  1,077    $  1,163
  Gross profit
    (loss) ....................................        796         982      (1,032)        715       1,787         400         342
  Research and
    development ...............................      3,605       5,074       4,366       4,462       4,700       1,044       1,169
  Selling, general and
    administrative ............................      8,479       7,895      12,491       6,532       7,458       2,002       1,750
  Operating loss ..............................    (11,288)    (11,987)    (17,889)    (10,279)    (10,370)     (2,646)     (2,577)
  Net loss ....................................   $(11,288)   $(11,987)   $(17,846)   $(10,985)   $ (9,090)   $ (2,272)   $ (2,375)
                                                  ========    ========    ========    ========    ========    ========    ========
  Net loss per share (basic and diluted)(3) ..                                        $  (1.59)   $  (0.72)   $  (0.18)   $  (0.19)
                                                                                       ========    ========    ========    ========
  Weighted-average shares outstanding(3) .....                                           6,903      12,664      12,604      12,773
                                                                                       ========    ========    ========    ========
PREDECESSOR (1)               AUTOCYTE
                                             -----------------   ---------------------------------------
                                                DECEMBER 31,             DECEMBER 31,          MARCH 31,
                                             -----------------   ---------------------------
                                              1994       1995     1996       1997      1998      1999
                                             -------   -------   -------   -------   -------   ---------
                                                                         (IN THOUSANDS)
BALANCE SHEET DATA:
  Cash and cash equivalents ..............   $     8   $    10   $ 9,517   $28,655   $19,986    $17,877
  Working capital ........................     1,600     3,585    10,673    30,223    22,194     20,316
  Total assets ...........................    10,544    10,714    16,683    37,021    30,026     27,950
  Redeemable convertible preferred stock .        --        --     9,882        --        --         --
  Total stockholders' equity .............     8,966    10,002     5,235    35,027    26,847     24,700
13
8
(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)   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.

                                       14
9
- the extent to which our 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 we
  adopt.

Having received FDA approval to market PREP for gynecologic uses, we expect our
marketing and sales expenditures to increase significantly. We also anticipate
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. We additionally expect to incur
compensation expense of $1.7 million as our deferred compensation balance is
amortized.

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

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. We do 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, we expect 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 24,
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 third quarter of
1999. If this transaction is completed, we expect that we will incur substantial
expenses integrating the two businesses and

                                       16
10
that certain operating expenses will increase and remain higher for the combined
companies than their current levels. This may cause us to need to raise
additional capital sooner than we might otherwise.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1999 and 1998

Net sales increased by 8% from $1.1 million in the first quarter of 1998 to $1.2
million in the first quarter of 1999. The increase was due primarily to higher
sales volume of PREP reagents and related consumables as we continue to expand
our installed base of PREP units, both domestically and internationally. Our
gross margin during the three months ended March 31, 1999 was 29%, a decrease
from 37% 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
quarter of 1999 were from the lower margin non-gynecologic applications of PREP.
With the recent FDA approval of PREP, 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 remained relatively flat during the quarter, decreasing by 4%
from $3.0 million in the first quarter of 1998 to $2.9 million in the first
quarter of 1999 as we continued to control costs while working to complete FDA
approval for PREP. Net loss increased 5% from $2.3 million in the first quarter
of 1998 to $2.4 million in the first quarter of 1999. Net loss per share was
$0.19, an increase from a net loss per share of $0.18 in the first quarter of
1998.

Interest income decreased by 40% from $378,000 in the first quarter of 1998 to
$228,000 in the first quarter 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), our product that enables the quantitative assessment of
anti-nuclear antibodies in a patient's blood specimen. Our 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
we increased our staffing levels and other expenditures to support product
commercialization.

                                       17
11
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 our
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 us and some of our
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
we 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 our 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 our predecessor of $3.9 million in the fourth quarter of 1996, and
other acquisition-related one-time charges in the fourth quarter of 1996 of $1.5
million.

During 1997 we 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. We also sold to certain members of management 48,819 shares
of Series A Preferred Stock at a price of $2.048 per share. We recorded $1.7
million of deferred compensation expense and $432,000 of compensation expense
with respect to these transactions. We 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 we 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 us and some of our principal stockholders. We 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 our initial public offering.

                                       18
12
INCOME TAXES

We have not generated any taxable income to date and, therefore, have not paid
any federal income taxes since our 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 March 31, 1999, we had net operating losses, for tax purposes, of
approximately $24.9 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 our 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

We have established a task force comprised of experienced personnel from all
functional areas to determine the impact the Year 2000 problem will have on our
operations. The task force's activities are designed to ensure that there is no
adverse effect on our core business operations and that transactions with
customers and suppliers are fully supported before, during and after January 1,
2000. The status of our Year 2000 readiness is reported on a regular basis to
executive management and the board of directors. We anticipate 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 we are upgrading non-compliant units in the field in conjunction
with routine preventative maintenance visits. Most of our Pathology Workstation
products are currently Year 2000 compliant, and we are determining an
appropriate course of action to deal with non-compliant products. We expect to
complete our assessment of SCREEN by September 1999. We have conducted a review
of our internal information technology systems and facilities and believe that
all of our internal information technology systems and facilities are Year 2000
compliant. We also have 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
our operations. While we believe our planning efforts are adequate to address
our Year 2000 concerns, there can be no guarantee that systems of other entities
on which we rely, 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 our operations. We are dependent on
certain sole-source suppliers. Failure on the part of those suppliers to become
Year 2000 compliant could affect our ability to obtain product from those
suppliers and could adversely affect operations and financial results. To-date,
we have not incurred material costs in addressing the Year 2000, and the
remaining costs of the Year 2000 initiatives are not expected to be material to
our results of operation or financial position.

                                       19
13
RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 1998, we 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 our financial statements since we have no items of other
comprehensive income in any period presented.

Effective January 1, 1998, we 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 our financial
statements as we operate 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. We 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 our financial position or results
from operations.

LIQUIDITY AND CAPITAL RESOURCES

Since our formation on October 24, 1996, our expenses have significantly
exceeded our revenues, resulting in an accumulated deficit of $23.4 million as
of March 31, 1999. We have funded our 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 March 31, 1999,
we had cash and cash equivalents of $17.9 million.

On May 17, 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.

Cash used in our operations was $8.1 million in 1998, $8.2 million during 1997,
$10.0 million on a pro forma combined basis during 1996 and $2.2 million and
$2.1 million during the three months ended March 31, 1999 and 1998 respectively.
Negative operating cash flow was caused primarily by operating losses. Our
capital expenditures were $1.6 million in 1998, $1.0 million during 1997,
$377,000 on a pro forma combined basis during 1996, and $263,000 and $390,000
during the three month ended March 31, 1999 and 1998 respectively. A significant
portion of the capital expenditures were attributable to the purchase of PREP
units for rental and

                                       20
14
demonstration purposes. We have no material commitments for capital
expenditures.

We believe that our 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 us to meet our future cash obligations
through mid 2000. Our future liquidity and capital requirements will depend upon
numerous factors, including:

- the availability of financing for our 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 our marketing and sales
  capabilities domestically and internationally;

- the resources required to expand manufacturing capacity and the extent to
  which our products generate market acceptance and demand.

In particular we anticipate 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. We
cannot guarantee that we 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 we need it or on terms we find acceptable. Our failure to obtain
funding, would have a material adverse effect on our business, financial
condition and results of operations.

The discussion included in this section as well as elsewhere in the prospectus
may contain forward-looking statements based on current expectation of our
management. Such statements are subject to risks and uncertainties that could
cause actual results to differ from those projected. See "Risk Factors." You
should not to place undue reliance on the forward looking statements, which
speak only as the date hereof. We are not obligated to publicly release 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial results and cash flows are subject to fluctuation due to changes
in interest rates, primarily from our investment of available cash balances in
highly rated institutions. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes.

                                       21
15
                                    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 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 have begun sales in several foreign countries
for cervical cancer screening, and, in the United States, we have begun sales of
our products for non-gynecologic applications. 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 NeopPath, 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

                                       22
16
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.

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-

                                       23
17
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.

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

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

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18
  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.

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,

                                       25
19
  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

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.

- 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 a diagnostic system combining PREP and SCREEN can offer the
following advantages over other screening systems recently developed to enhance
or replace conventional Pap smear testing:

- By designing PREP and SCREEN to work together, we have created a system
  which we believe will operate with higher throughput and with greater
  diagnostic

                                       26
20
  sensitivity than other available systems or combinations of approaches.

- Our approach to cervical cancer screening combines review of high
  resolution cell images by a cytotechnologist with SCREEN's independent
  computer classification of each sample, resulting in what we believe is a
  more sensitive detection of sample abnormalities.

- SCREEN uses an off-the-shelf computer hardware platform which is more
  flexible and requires less customization than other automated screening
  devices.

AUTOCYTE PRODUCT SYSTEMS

AutoCyte PREP System

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

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.

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;

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21
- 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.

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.

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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. We generate PREP revenue from both system sales
and rentals.

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 intend to seek
third-party financing to support rentals of PREP and fee-per-use placements of
SCREEN. We may never be able to obtain such financing and, if we do, it may not
be on favorable terms.

Our strategy is to sell Pathology Workstation products through distributors and
original equipment manufacturer vendors who will 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 the
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

We currently have 23 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.

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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.

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.

We believe that both suppliers have sufficient capacity to meet our present and
future requirements for plastic components.

We may seek to establish other relationships with additional suppliers or
vendors for components of our products. We cannot

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25
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.

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 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

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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 mid-1999. We
designed the SCREEN system to meet the requirements of CE certification. All
SCREEN units shipped 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.

     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.

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As of March 31, 1999, we had 39 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:
Approximate
                                     Expenditure on
For the year                         Research &
ended December 31                    Development
--------------------                 -----------
1995 (predecessor).................  $5.1 million
1996 (proforma-combined)...........  $4.4 million
1997 (AutoCyte)....................  $4.5 million
1998 (AutoCyte)....................  $4.7 million

For the three months
ended March 31
--------------------
1999...............................  $1.2 million
1998...............................  $1.0 million
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 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

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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 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

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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-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

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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 on July 2, 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. Finally, in January
1999, Cytyc announced that it was expanding its direct sales force by 75 people
to sell directly to hospitals, laboratories and doctors. 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 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 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

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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.

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

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.

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.

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,

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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

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33
marketed device and allow the proposed device to be marketed in the United
States. The FDA, however, may determine that the proposed device is not
"substantially equivalent" or require further information, including clinical
data, to make a determination of substantial equivalence. Such determinations or
requests for additional information could prevent or delay market introduction
of the product that is the subject of the premarket notification premarket
notification.

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

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

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

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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.

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

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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.

EMPLOYEES

As of June 30, 1999 we employed 80 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

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an option to expand the leased space by 4,500 square feet.

LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

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                                   MANAGEMENT

The following table provides information about our directors and executive
officers:
Name and Address                  Age                    Position
    ----------------                  ---                    --------
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

Steven C. McPhail                     45        Vice President of Sales and Marketing

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
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.

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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
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.

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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.

Steven C. McPhail

Steven C. McPhail has served as Vice President of Sales and Marketing of
AutoCyte since May 1997. Prior to joining AutoCyte, Mr. McPhail served as Vice
President of Sales and Marketing from January 1992 to May 1997 for DYNEX
Technologies, Inc., a division of Thermo BioAnalysis Corporation and a
manufacturer of microtiter technology products serving both clinical and
research laboratory customers. Prior to joining DYNEX, Mr. McPhail served in
sales and marketing positions from 1981 to 1992 with Abbott Laboratories
Diagnostics Division. He received a B.S.
in biology from San Diego State University.

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.

Richad 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

                                       46
40
Sprout Group, a submanager of various venture capital funds within the
Donaldson, Lufkin & Jenrette organization, as a general partner in May 1991.
Prior to joining Sprout, Dr. Curry served in various capacities with Merrill
Lynch R&D Management and Merrill Lynch Venture Capital from 1984, including as
President of both organizations from January 1990 to May 1991. Previously, Dr.
Curry was a Vice President of Becton Dickinson from May 1980 to July 1984, and
General Manager of Bio-Rad Laboratory Inc.'s Diagnostics Systems Division from
August 1976 to May 1980. He currently is a director of Adeza Biomedical, Inc.,
Biometric Imaging, Inc., Instrumentation Metrics, Inc., Mycotech, Inc.,
Urosurge, Inc., Prometheus Laboratories, Inc. and Photon Technology
International, Inc. Dr. Curry received a B.S. from the University of Illinois,
and a M.S. and Ph.D. in chemistry from Purdue University.

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:
NAME                            TERM EXPIRES
-----------------------------------------------------------------------------
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
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

                                       47
41
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
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.

                                       48
42
EXECUTIVE COMPENSATION

The following table sets forth 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
LONG-TERM
                                                     ANNUAL                 COMPENSATION                  ALL OTHER
                                                  COMPENSATION                 AWARDS                   COMPENSATION
                                                  ------------                 ------                   ------------
                                                                              Securities
                                                                              Underlying
Name and Principal Position                  Year       Salary (1)            Options (#)
---------------------------                  ----       ----------            -----------
James B. Powell, M.D..................       1998        $171,976                4,125                    $5,000(2)
    President and Chief Executive            1997        $145,279                   --                    $2,542(2)
    Officer(4)

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               1997        $164,287                   --                    $4,750(2)
    Science                                  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                 1997         $94,343               98,376                   $96,798(9)
Marketing (7)
--------------------------

(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 joined AutoCyte as Vice President of Sales and Marketing in
         May 1997.

(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.

                                       49
43
The following table sets forth 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
Individual Grants
                                   -------------------------------------------------------   Potential Realizable Value at
                                    Number of      Percent of                                   Assumed Annual  Rates of
                                   Securities     Total Options                               Stock Price Appreciation  for
                                   Underlying       Granted to     Exercise                         Option Term
                Name                 Options       Employees in     or Base     Expiration  -----------------------
                                     Granted        Fiscal Year   Price/Share      Date       5%(1)          10%(1)
------------------------------------------------------------------------------------------------------------------
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
----------------------

(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.

                                       50
44
The following table sets forth 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
Number of Securities          Value of Unexercised
                                                                      Underlying Unexercised          In-The-MoneyOptions
                                     Shares                        Options at Fiscal Year-End       at Fiscal Year-End (2)
                                   Acquired on         Value       ----------------------------     -------------------------
NAME                                Exercise        Realized (1)     Exercisable/Unexercisable      Exercisable/Unexercisable
                                    --------        ------------     ----------- -------------      ----------- -------------
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
---------------------

(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

                                       51
45
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.

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 June 30, 1999, as reported by
the Nasdaq National Market, was $6.00 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
June 30, 1999, options to purchase an aggregate of 1,863,234 shares of common
stock have been granted and not cancelled unexercised under the equity plan, of
which options to purchase 406,624 shares have been exercised and options to
purchase 1,456,610 shares were outstanding. In addition, a total of 590,260
shares of restricted stock have been granted, leaving 532,831 shares available
for future grants of awards as of June 30, 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, 297,290 of which have been exercised, and
options to purchase an aggregate of 1,277,177 shares of common stock have been
granted to all our other employees and consultants, 109,334 of which had been
exercised as of June 30, 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.

                                       52
46
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.

                                       53
47
                       PRINCIPAL AND SELLING STOCKHOLDERS

The following table and footnotes set forth certain information regarding the
beneficial ownership of our common stock as of June 1, 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:
Number of Shares of                          Shares of Common Stock
                                              Common Stock                                Beneficially Owned
                                              Beneficially                                 After Offering (1)
                                              Owned Prior         Number of Shares      ----------------------
Beneficial Owner                              to Offering          Being Offered        Shares         Percent
----------------                           -------------------    -----------------     ------         -------
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%
------------------------
   *  Indicates less than 1%.

                                       54
48
(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 1, 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

(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 1, 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 1, 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 1, 1999 upon
the exercise of options.

(10) Includes 24,088 shares that may be acquired within 60 days of June 1, 1999
upon the exercise of options.

(11) Includes 20,286 shares that may be acquired within 60 days of June 1, 1999
upon the exercise of options.

(12) Includes 18,839 shares that may be acquired within 60 days of June 1, 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 1, 1999 upon the exercise of options.

                                       55
49
                          DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock 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
June 30, 1999, there were 14,288,315 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

                                       56
50
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 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.

                                       57
51
                              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).

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

                                       58
52
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."

                                       59
53
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.

                                       60
54
                          INDEX TO FINANCIAL STATEMENTS

AUTOCYTE, INC.
PAGE
                                                                                                               ----
Report of Independent Auditors ..............................................................................   F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997 and March 31, 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 Three Months Ended March 31, 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 Three Months
    Ended March 31, 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 Three Months Ended March 31, 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-17

Balance Sheets as of December 31, 1995 and November 21, 1996.................................................  F-18
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-19
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-20
Notes to Financial Statements................................................................................  F-21

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF AUTOCYTE, INC. AND NEOPATH, INC.

Introduction to Unaudited Pro Forma Combined Condensed Financial Statements..................................  F-25
Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31, 1999....................................  F-26
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Three Months Ended March 31, 1999........................................................................  F-27
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Three Months Ended March 31, 1998........................................................................  F-27
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1998.............................................................................  F-28
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1997.............................................................................  F-28
Unaudited Pro Forma Combined Condensed Statement of Operations for the
    Year Ended December 31, 1996.............................................................................  F-29
F-1
55
                                 AUTOCYTE, INC.

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AutoCyte, Inc.

We have audited the accompanying consolidated balance sheets of AutoCyte, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AutoCyte, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996 in conformity with generally accepted accounting principles.

                                                         /s/ ERNST & YOUNG LLP
                                                         ---------------------

Raleigh, North Carolina
February 5, 1999

                                      F-2
56
                                 AUTOCYTE, INC.

                           CONSOLIDATED BALANCE SHEETS
DECEMBER 31,             MARCH 31,
                                                           ------------             ---------
                                                       1998           1997            1999
                                                       ----           ----            ----
                                                                                   (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents                      $ 19,986,107    $ 28,655,082    $ 17,876,552
   Accounts receivable                                 919,211         906,154       1,024,525
   Inventory                                         3,240,869       2,191,995       2,962,140
   Other current assets                                432,578         415,248         685,726
                                                  --------------------------------------------
Total current assets                                24,578,765      32,168,479      22,548,943

Property and equipment                               2,762,995       2,018,142       2,754,619
Goodwill                                             2,684,375       2,834,375       2,646,875
                                                  --------------------------------------------
Total assets                                      $ 30,026,135    $ 37,020,996    $ 27,950,437
                                                  ============================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                               $  1,028,788    $  1,129,016    $    875,023
                                                                                     1,028,788
   Accrued expenses                                    534,197         685,998         547,673
   Deferred revenue                                    630,185         130,000         525,883
   Current portion of long-term debt                   191,795              --         284,560
                                                  --------------------------------------------
Total current liabilities                            2,384,965       1,945,014       2,233,139

Long term debt, less current portion                   689,782              --         923,023
Other long-term liabilities                            104,514          48,768          93,793

Stockholders' equity:
Common stock, $0.01 par value;
  20,650,000 shares authorized; 12,729,925,
  12,505,412 and 12,790,800 shares issued and
  outstanding at December 31, 1998 and 1997 and        127,299         125,054         127,908
  March 31, 1999, respectively
Additional paid-in capital                          49,598,025      49,553,302      49,610,577
Deferred compensation                               (1,880,516)     (1,664,825)
                                                                                    (2,743,280)
Accumulated deficit                                (20,997,934)    (23,373,178)
                                                                                   (11,907,862)
                                                  --------------------------------------------
Total stockholders' equity                          26,846,874      35,027,214      24,700,482
                                                  --------------------------------------------
Total liabilities and stockholders' equity        $ 30,026,135    $ 37,020,996    $ 27,950,437
                                                  ============================================
See accompanying notes

                                      F-3
57
                               AUTOCYTE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
                                                                          NOVEMBER 22,
                                                                             1996
                                                                          (INCEPTION)
                                                 YEAR ENDED                 THROUGH          THREE MONTHS ENDED
                                                 DECEMBER 31,             DECEMBER 31,           MARCH 31,
                                                 ------------             ------------           ---------
                                           1998            1997             1996           1999             1998
                                           ----            ----             ----           ----             ----
                                                                                             (Unaudited)
Sales                                 $  4,769,686    $  2,667,837    $    129,189     $ 1,162,803    $  1,077,078
Cost of sales                            2,982,198       1,952,691         112,022         821,062         676,913
                                     ---------------------------------------------     ---------------------------
Gross profit                             1,787,488         715,146          17,167         341,741         400,165

Operating expenses:
Research and development                 4,700,003       4,461,881         457,918       1,168,521       1,044,283
Selling, general and administrative      7,457,968       6,532,551         524,669       1,750,030       2,001,700
                                     ---------------------------------------------     ---------------------------
                                        12,157,971      10,994,432         982,587       2,918,551       3,045,983
                                     ---------------------------------------------     ---------------------------
Operating loss                         (10,370,483)    (10,279,286)       (965,420)     (2,576,810)     (2,645,818)
                                                                                                       (10,279,286)
Interest income                          1,301,078         772,563          42,431         228,209         378,132
Interest expense, including
credit agreement commitment fee            (20,667)     (1,478,150)             --         (26,643)         (4,607)
                                     ---------------------------------------------     ---------------------------
Net loss                              $ (9,090,072)   $(10,984,873)   $   (922,989)   $ (2,375,244)   $ (2,272,293)
                                     =============================================    ============================
Net loss per common share
(basic and diluted)                   $      (0.72)   $      (1.59)   $      (0.22)   $      (0.19)   $      (0.18)
                                     =============================================    ============================
Weighted-average common shares
outstanding                             12,664,223       6,903,290       4,279,389      12,772,969      12,603,993
                                     =============================================    ============================
See accompanying notes

                                       F-4
58
                                 AUTOCYTE, INC.

       CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                            AND STOCKHOLDERS' EQUITY
Redeemable
                                          Convertible                Additional                                      Total
                                          Preferred      Common        Paid-in       Deferred      Accumulated    Stockholders'
                                            Stock        Stock         Capital     Compensation      Deficit         Equity
                                         -----------    --------    -----------    ------------    ------------   ------------
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                       --         609         12,552             --              --          13,161
  Amortization of deferred
    compensation                                  --          --             --        215,691              --         215,691
  Net loss                                        --          --             --             --      (2,375,244)     (2,375,244)
                                         -----------    --------    -----------    -----------    ------------    ------------
Balance at March 31, 1999
  (unaudited)                            $        --    $127,908    $49,610,577    $(1,664,825)   $(23,373,178)   $ 24,700,482
                                         ===========    ========    ===========    ===========    ============    ============
See accompanying notes.

                                      F-5
59
                                 AUTOCYTE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
Period From
                                                                                   November 22,
                                                                                      1996
                                                            Year Ended             (inception)           Three months Ended
OPERATING ACTIVITIES                                        December 31,             Through                   March 31
                                                     -------------------------    December 31,        ---------------------------
                                                     1998                 1997         1996            1999              1998

                                                                                                            (Unaudited)
Net loss                                        $ (9,090,072)    $(10,984,873)    $   (922,989)    $ (2,375,244)    $ (2,272,293)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation                                  857,333          477,686           39,797          270,891          171,477
       Amortization of goodwill                      150,000          150,000           15,625           37,500           37,500
       Amortization of deferred compensation         862,764          705,357           37,807          215,691          215,691
       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)        (105,314)        (279,321)
         Inventory                                (1,048,874)        (280,589)        (128,674)         278,729          176,888
         Other current assets                        (17,330)        (366,040)              65         (253,148)          36,713
         Accounts payable                           (100,228)          56,090          225,511         (153,765)         (66,499)
         Accrued expenses                           (151,801)         192,430          334,785           13,476          (82,827)
         Deferred revenue                            500,185          130,000               --         (104,302)              --
                                                  --------------------------------------------       ---------------------------
Net cash used in operating activities             (8,051,080)      (8,157,974)        (446,865)      (2,175,486)      (2,062,671)

INVESTING ACTIVITIES
Purchases of property and equipment               (1,602,186)      (1,035,896)         (47,889)        (262,515)        (389,720)
Net cash acquired in acquisition of business              --               --           10,028               --               --
                                                  --------------------------------------------       ---------------------------
Net cash used in investing activities             (1,602,186)      (1,035,896)         (37,861)        (262,515)        (389,720)

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               --           13,161           33,819
Increase (decrease) in other long-term                55,746           48,768               --          (10,721)          (2,404)
liabilities
Proceeds from long-term debt                         905,019               --               --          388,505               --
Payments on long-term debt                           (23,442)              --               --          (62,499)              --
                                                  --------------------------------------------       ---------------------------

Net cash provided by financing activities            984,291       28,331,678       10,002,000          328,446           31,415
                                                  --------------------------------------------       ---------------------------
Net increase (decrease) in cash and cash          (8,668,975)      19,137,808        9,517,274       (2,109,555)      (2,420,976)
equivalents
Cash and cash equivalents at beginning of         28,655,082        9,517,274               --       19,986,107       28,655,082
period
                                                  --------------------------------------------       ---------------------------
Cash and cash equivalents at end of period      $ 19,986,107     $ 28,655,082     $  9,517,274     $ 17,876,552     $ 26,234,106
                                                ==============================================     =============================

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest                          $     20,667     $      3,148     $         --     $     26,643     $      4,607
                                                ==============================================     =============================
See accompanying notes.

                                      F-6
60
                                 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 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 three month periods ended
March 31, 1999 and 1998 and the balance sheet as of March 31, 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
three month periods ended March 31, 1999 and 1998 is unaudited.

Principles of Consolidation

The consolidated financial statements include the accounts of AutoCyte, Inc. and
its subsidiaries, AutoCyte Europe b.v.b.a. and AutoCyte Australia Pty Ltd. All
significant intercompany balances and transactions have been eliminated in
consolidation.

                                      F-7
61
                                 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 $270,891 and $171,477 during the three
months ended March 31, 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.

Goodwill

The excess cost over the fair value of net assets acquired ("goodwill") is being
amortized using the straight-line method over 20 years. Accumulated amortization
was $353,125, $315,625 and $165,625 at March 31, 1999, December 31, 1998 and
December 31, 1997, respectively. The Company periodically reviews the value of
its goodwill 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 goodwill will not be recoverable, as determined based
on an analysis of undiscounted cash flows over the remaining amortization
period, the Company would reduce the carrying value of its goodwill accordingly.

                                      F-8
62
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Research and Development Costs

Research and development costs are charged to operations as incurred.

Deferred Revenue

Deferred revenue at March 31, 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.

Advertising Expense

The cost of advertising is expensed as incurred. Advertising and marketing
expense, including trade show expense, amounted to $158,719 during 1998,
$157,095 during 1997, $3,900 during the period from November 22, 1996
(inception) through December 31, 1996 and $21,132 and $48,024 during the three
months ended March 31, 1999 and 1998, respectively.

                                      F-9
63
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassification

Certain amounts in the 1997 financial statements have been reclassified to
conform to 1998 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.

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:
PERIOD FROM
                                                       NOVEMBER 22, 1996
                                                      (INCEPTION) THROUGH             THREE MONTHS ENDED
                        YEAR ENDED DECEMBER 31,          DECEMBER 31,                      MARCH 31,
                    ---------------------------------                           --------------------------------
                          1998            1997               1996                    1999            1998
                    --------------------------------------------------------    --------------------------------
Customer 1             30%               -                  -                       -             15%
    Customer 2             13%               -                  -                       -               -
    Customer 3               -             17%                  -                       -               -
    Customer 4               -               -                 70%                      -               -
    Customer 5               -               -                  -                      11%            13%
    Customer 6               -               -                  -                      23%              -
    Customer 7               -               -                  -                      19%            11%
Sales by geographic region were as follows:
YEAR ENDED                         THREE MONTHS ENDED
                                                   DECEMBER 31,                             MARCH 31,
                                       ------------------ ------------------      -------------- ---------------
                                             1998               1997                  1999            1998
                                       ------------------ ------------------      -------------- ---------------
United States                             37%                59%                   37%            38%
    Europe                                    28%                19%                   46%            42%
    Asia and Australia                        35%                18%                   17%            20%
    Other International Sales                  -                  4%                    -               -
F-10
64
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:
YEAR ENDED                         THREE MONTHS ENDED
                                                    DECEMBER 31,                             MARCH 31,
                                       --------------------------------------         ---------------------
                                          1998          1997             1996           1999         1998
                                       --------------------------------------         ---------------------
Beginning balance                 $  85,000      $  17,500      $  7,500         $ 184,875   $  85,000
     Amounts charged to expense          102,000         67,500        10,000                 -      40,000
     Amounts written off                 (2,125)             -              -                 -           -
                                       --------------------------------------         ---------------------
     Ending balance                    $ 184,875      $  85,000      $ 17,500         $ 184,875    $125,000
                                       ======================================         =====================
5. INVENTORY

Inventory consists of the following:
DECEMBER 31,
                                     ----------------------------        MARCH 31,
                                        1998              1997             1999
                                     ----------------------------       ----------
Raw materials                   $1,685,495        $1,878,632       $1,740,636
     Finished goods                   1,555,374           313,363       $1,221,504
                                     ----------------------------       ----------
                                     $3,240,869        $2,191,995       $2,962,140
                                     ============================       ==========
6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
DECEMBER 31,
                                         -----------------------------          MARCH 31,
                                            1998               1997               1999
                                         -----------------------------         -----------
Demonstration equipment             $ 1,291,105        $1,236,161         $ 1,370,361
     Rental units                          1,172,575           320,607           1,235,180
     Machinery and equipment                 761,536           457,228             820,643
     Furniture, fixtures and                 160,829            87,859             160,829
     improvements
     Computer equipment and software         503,045           424,278             531,506
                                         -----------------------------         -----------
                                           3,889,090         2,526,133           4,118,519
     Less accumulated depreciation        (1,126,095)         (507,991)         (1,363,900)
                                         -----------------------------         -----------
                                         $ 2,762,995        $2,018,142         $ 2,754,619
                                         =============================         ===========
7. ACCRUED EXPENSES

Accrued expenses consists of the following:
DECEMBER 31,
                                          --------------------------              MARCH 31,
                                            1998              1997                 1999
                                          --------------------------              --------
Accrued payroll and related          $ 161,461         $213,443              $183,381
     benefits
     Accrued warranty costs                 202,664          196,709               202,664
     Other accrued expenses                 170,072          275,846               161,628
                                          --------------------------              --------
                                          $ 534,197         $685,998              $547,673
                                          ==========================              ========
F-11
65
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. 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.

9. 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:
1999                                               $      191,795
                      2000                                                      213,075
                      2001                                                      236,715
                      2002                                                      239,992
                                                                          --------------
                                                                          $      881,577
                                                                          ==============
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.

10. 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:
1999                                                $      394,026
                      2000                                                       394,183
                      2001                                                       361,183
                      2002                                                       326,863
                      2003                                                       326,863
                      Thereafter                                                 519,008
                                                                        -----------------
                                                                             $  2,322,126
                                                                        =================
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
$108,233 and $76,551 during the three months ended March 31, 1999 and 1998,
respectively.

Future minimum lease payments under these leases as of March 31, 1999 are
$2,223,738.

                                      F-12
66
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES

The Company has cumulative net operating loss carryforwards available to offset
future taxable income of approximately $24,855,000 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:
DECEMBER 31,
                                           -----------------------------------------        MARCH 31,
                                                   1998                  1997                 1999
                                           -----------------------------------------   ---------------
Deferred tax assets:
Inventory                                   $      735,000       $    1,174,000      $    687,000
   Property and equipment                           1,517,000            2,161,000         1,443,000
   Intangible assets                                  672,000              737,000           655,000
   Net operating loss carry forward                 8,728,000            4,429,000         9,693,000
   Other                                              176,000              189,000           173,000
                                           -----------------------------------------   ---------------
Total deferred tax asset                           11,828,000            8,690,000        12,651,000
Valuation allowance for deferred tax asset        (11,828,000)          (8,690,000)      (12,651,000)
                                           -----------------------------------------   ---------------
Net deferred taxes                             $           -        $           -       $
                                           =========================================   ===============
12. 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 March
31, 1999 there were no shares of Preferred Stock outstanding.

Equity Incentive Plans

At inception, the Company adopted the 1996 Equity Incentive Plan (the "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.

A summary of activity under the Plan is as follows:
OPTIONS OUTSTANDING
                                                  ----------------------------------------------------------------
                                                       NUMBER OF          EXERCISE PRICE      WEIGHTED -AVERAGE
                                                        SHARES                RANGE             EXERCISE PRICE
                                                  -------------------- --------------------- ---------------------
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                                      459,582           4.31 -   5.88                4.57
   Options exercised                                   (136,414)          0.20 -   4.19                0.21
   Options cancelled/expired                            (19,577)          0.20 -   4.19                2.19
                                                  -------------------- --------------------- ---------------------
Outstanding at March 31, 1999 (unaudited)             1,472,072         $ 0.20 - $10.00       $        2.82
                                                  ==================== ===================== =====================
F-13
67
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                                       -------------------                             -------------------
                                         WEIGHTED-AVERAGE
                      NUMBER OUTSTANDING    REMAINING        WEIGHTED          NUMBER EXERCISABLE
                              AT           CONTRACTUAL       -AVERAGE                  AT            WEIGHTED-AVERAGE
    PRICE RANGE       DECEMBER 31,1998     LIFE (YEARS)   EXERCISE PRICE       DECEMBER 31, 1998     EXERCISE PRICE
--------------------- ------------------ ---------------- ----------------     -----------------   ------------------
$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 - $10.50           1,168,481           8.5            $1.81               350,880             $1.76
===================== ================== ================ ================     ================= ==================
The options outstanding as of March 31, 1999 had a weighted average remaining
contractual life of 8.7 years. At March 31, 1999, options to purchase 305,228
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.

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. As of March 31, 1999, no options had been granted pursuant to this
plan.

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:
PERIOD FROM
                                                                           NOVEMBER 22, 1996    THREE MONTHS
                                                    YEAR ENDED                (INCEPTION)          ENDED
                                                   DECEMBER 31,             THROUGH DECEMBER     MARCH 31,
                                                                                  31,
                                       -------------------------------------
                                              1998              1997              1996              1999
                                       -------------------------------------------------------------------------
Risk-free interest rate                     5.29%             6.20%              5.92%             4.74%
   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             $2.69
F-14
68
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:
PERIOD FROM
                                                                           NOVEMBER 22, 1996       THREE
                                                    YEAR ENDED             (INCEPTION)THROUGH   MONTHS ENDED
                                                   DECEMBER 31,               DECEMBER 31,        MARCH 31
                                       -------------------------------------------------------------------------
                                              1998              1997              1996              1999
                                       -------------------------------------------------------------------------
Net loss:
    As reported                             $(9,090,072)     $(10,984,873)       $ (922,989)       $(2,375,244)
    Pro forma                               $(9,517,798)     $(10,987,980)       $ (929,276)       $(2,492,106)
 Net loss per common share
    (basic & diluted):
    As reported                               $ (0.72)          $ (1.59)          $ (0.22)           $ (0.19)
    Pro forma                                 $ (0.75)          $ (1.59)          $ (0.22)           $ (0.20)
Common Stock Reserved for Future Issuance

At December 31, 1998 and March 31, 1999, respectively, the Company has reserved
authorized shares of Common Stock for future issuance as follows:
DECEMBER 31,          MARCH 31,
                                                                 1998                 1999
                                                             ------------------- --------------
Outstanding stock options                                 1,168,481            1,472,072
    Possible future issuance under equity incentive plans       177,536              637,531
                                                             ------------------- --------------
    Total shares reserved                                     1,346,017            2,109,603
                                                             =================== ==============
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 the period from November 22, 1996
(inception) through December 31, 1996, and $215,691 during each of the three
month periods ended March 31, 1999 and 1998.

13. 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
$5,325 and $11,339 during the three months ended March 31, 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 $3,154 and
$27,844 during the three months ended March 31, 1999 and 1998, respectively.
Additionally, the Company owed approximately $249,000, $249,000 and $348,000 at
March 31, 1999, December 31, 1998 and December 31, 1997, respectively, to Roche
or its affiliates for services provided.

                                      F-15
69
                                 AUTOCYTE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. 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 $27,841 and $37,608
during the three months ended March 31, 1999 and 1998, respectively.

15. 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:
PERIOD FROM      PERIOD FROM
                           JANUARY 1, 1996    NOVEMBER 22, 1996     YEAR ENDED
                               THROUGH          THROUGH           DECEMBER 31, 1996
                          NOVEMBER 21, 1996   DECEMBER 31, 1996  (PRO FORMA COMBINED)
                            (PREDECESSOR)       (AUTOCYTE)
                            ---------------------------------------------------------
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)
                            ====================================================
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.

16.      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
data 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. AutoCyte acquired these NSI assets for $4.0 million in
cash and the issuance of 1.4 million shares of AutoCyte's common stock valued at
$9.5 million, representing a total purchase price of $13.5 million.

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 24, 1999, AutoCyte would issue approximately 13,783,000
shares of AutoCyte common stock. This transaction is expected to be completed in
the third quarter of 1999.

                                      F-16
70
                                 AUTOCYTE, INC.

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
AutoCyte, Inc.

     We have audited the accompanying balance sheets of the Cytology and
Pathology Automation Business of Roche Image Analysis Systems, Inc. (the
"Business") as of December 31, 1995 and November 21, 1996, and the related
statements of operations and cash flows for the years ended December 31, 1994
and 1995 and for the period from January 1, 1996 to November 21, 1996. These
financial statements are the responsibility of the Business's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     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 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-17
71

                   CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
                     OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

                                 BALANCE SHEETS
DECEMBER 31,      NOVEMBER 21,
                                                                  1995              1996
                                                              ------------      ------------
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
                                                              ===========        ==========
See accompanying notes.
                                      F-18
72

                   CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
                     OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

                            STATEMENTS OF OPERATIONS
PERIOD FROM
                                                                                    JANUARY 1,
                                                     YEAR ENDED DECEMBER 31,         1996 TO
                                                   ----------------------------    NOVEMBER 21,
                                                       1994            1995            1996
                                                   ------------    ------------    ------------
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)
                                                   ============    ============    ============
See accompanying notes.
                                      F-19
73

                   CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
                     OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.

                            STATEMENTS OF CASH FLOWS
PERIOD FROM
                                                                                    JANUARY 1,
                                                     YEAR ENDED DECEMBER 31,         1996 TO
                                                   ----------------------------    NOVEMBER 21,
                                                       1994            1995            1996
                                                   ------------    ------------    ------------
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
                                                   ============    ============    ============
See accompanying notes.
                                      F-20
74

                   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

     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.

  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-21
75
                   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-22
76
                   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:
PERIOD FROM
                                                           YEARS ENDED      JANUARY 1,
                                                           DECEMBER 31,      1996 TO
                                                           ------------    NOVEMBER 21,
                                                           1994    1995        1996
                                                           ----    ----    ------------
Customer 1...............................................  24.9%   17.6%       17.0%
Customer 2...............................................  19.5      --          --
Customer 3...............................................    --      --        13.7
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:
DECEMBER 31,   NOVEMBER 21,
                                                                  1995           1996
                                                              ------------   ------------
Raw materials...............................................   $1,119,173     $  802,580
Finished goods..............................................    2,389,583        980,152
                                                               ----------     ----------
                                                               $3,508,756     $1,782,732
                                                               ==========     ==========
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-23
77
                   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:
ADVANCES     ACCUMULATED
                                                FROM ROCHE      DEFICIT         TOTAL
                                                -----------   ------------   ------------
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
                                                ===========   ============   ============
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-24
78

                              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 24, 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 March 31, 1999. The
unaudited pro forma combined condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and for the three months ended March 31,
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 reflects 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 past or 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 on the dates indicated. 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-25
79

                              AUTOCYTE AND NEOPATH
              UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
                                 MARCH 31, 1999
Historical
                                                                                     Pro Forma        AutoCyte and NeoPath
ASSETS                                               AutoCyte        NeoPath         Adjustments            Pro Forma
                                               -------------------------------------------------------------------------
Current assets:
  Cash and cash equivalents                    $    17,876,552     $14,$86,962     $          -       $       32,763,514
  Accounts receivable                                1,024,525       3,434,920                                 4,459,445
  Inventory                                          2,962,140       7,946,880                -               10,909,020
  Other current assets                                 685,726         503,702                -                1,189,428
                                               -------------------------------------------------------------------------
     Total current assets                           22,548,943      26,772,464                -               49,321,407
  Customer use assets                                  883,516      15,551,411                -               16,434,927
  Property and equipment                             1,871,103       2,986,875                -                4,857,978
  Deposits and other assets                                  -         833,176                -                  833,176
  Goodwill                                           2,646,875               -                -                2,646,875
                                               =========================================================================
     Total current assets                        $  27,950,437   $  46,143,926    $          -        $       74,094,363
                                               =========================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                               $     875,023   $   5,004,045    $   4,000,000(1)    $       10,195,308
  Accrued expenses                                     547,673         316,240               -                   547,673
  Deferred revenue                                     525,883               -               -                   525,883
  Current portion of long-term debt                    284,560       2,540,402               -                 2,824,962
                                               -------------------------------------------------------------------------
     Total current liabilities                       2,233,139       7,860,687        4,000,000               14,093,826
Long-term debt, less current portion                   923,023         629,189               -                 1,552,212
Other long-term liabilities                             93,793               -               -                    93,793

Stockholders' equity:
Common stock                                           127,908     156,558,668     (156,420,838)(2)              265,738
Additional paid-in capital                          49,610,577               -      156,420,838(2)           206,031,415
Deferred compensation                               (1,664,825)              -                                (1,664,825)
Accumulated deficit                                (23,373,178)   (118,904,618)      (4,000,000)(1)         (146,277,796)
                                               -------------------------------------------------------------------------
     Total stockholders' equity                     24,700,482      37,654,050       (4,000,000)              58,354,532
                                               =========================================================================
     Total liabilities and stockholders'
     equity                                      $  27,950,437   $  46,143,926    $          -         $      74,094,363
                                               =========================================================================
(1)  To accrue 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
     24, 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-26
80

                              AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                        THREE MONTHS ENDED MARCH 31, 1999
Historical
                                                                                      Pro Forma       AutoCyte and NeoPath
                                                  AutoCyte          NeoPath        Adjustments(1)          Pro Forma
                                               ---------------- ----------------- ------------------ -----------------------
Sales                                               $1,162,803    $   2,025,858     $            -      $        3,188,661
Cost of sales                                          821,062        1,164,390                  -               1,985,452
                                               ---------------------------------------------------------------------------
Gross profit                                           341,741          861,468                  -               1,203,209

Operating Expenses
  Research and development                           1,168,521        2,418,037                  -               3,586,558
  Selling, general, and administrative               1,750,030        3,558,706                  -               5,308,736
                                               ---------------------------------------------------------------------------
                                                     2,918,551        5,976,743                  -               8,895,294
                                               ---------------------------------------------------------------------------
  Operating loss                                    (2,576,810)      (5,115,275)                 -              (7,692,085)
  Interest income                                      228,209          137,244                  -                 365,453
  Interest expense                                     (26,643)         (89,985)                 -                (116,628)
                                               ---------------------------------------------------------------------------
  Net loss                                       $  (2,375,244)   $  (5,068,016)     $           -      $       (7,443,260)
                                               ===========================================================================

Net loss per common share (basic and diluted)    $       (0.19)                                         $            (0.28)
                                               ================                                      =====================

Weighted-average common shares outstanding          12,772,969                                                  26,555,969
                                               ================                                      =====================
(1)  Non-recurring direct transaction costs of approximately $4,000,000 (as
     currently estimated by management), are anticipated to be incurred in
     connection with the NeoPath transaction. Such costs will be expensed upon
     closing of the business combination with NeoPath. Such costs 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
                        THREE MONTHS ENDED MARCH 31, 1998
Historical
                                                                                  Pro Forma       AutoCyte and NeoPath
                                                  AutoCyte        NeoPath        Adjustments           Pro Forma
                                               --------------- --------------- ----------------- -----------------------
Sales                                            $   1,077,078    $  3,562,691    $           -     $        4,639,769

Cost of sales                                          676,913       2,040,760                -              2,717,673
                                                 ---------------------------------------------------------------------
Gross profit                                           400,165       1,521,931                -              1,922,096

Operating Expenses
  Research and development                           1,044,283       3,045,816                -              4,090,099
  Selling, general, and administrative               2,001,700       4,506,243                -              6,507,943
                                                 ---------------------------------------------------------------------
                                                     3,045,983       7,552,059                -             10,598,042
                                                 ---------------------------------------------------------------------
  Operating loss                                    (2,645,818)     (6,030,128)               -             (8,675,946)
  Interest income                                      378,132         365,774                -                743,906
  Interest expense                                      (4,607)         (9,279)               -                (13,886)
                                                 ---------------------------------------------------------------------
  Net loss                                       $  (2,272,293)  $  (5,673,633)   $           -     $       (7,945,926)
                                                 =====================================================================

Net loss per common share (basic and diluted)    $       (0.18)                                     $            (0.30)
                                                 =============                                      ==================

Weighted-average common shares outstanding          12,603,993                                              26,386,993
                                                 =============                                      ==================
F-27
81

                              AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1998
Historical
                                                                                       Pro Forma     AutoCyte and NeoPath
                                                     AutoCyte          NeoPath         Adjustments          Pro Forma
                                               -------------------------------------------------------------------------
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)                                        $            (1.33)
                                                 ============                                         ==================
Weighted-average common shares outstanding         12,664,223                                                 26,447,223
                                                 ============                                         ==================
AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
Historical
                                                                                       Pro Forma          AutoCyte and
                                                     AutoCyte          NeoPath        Adjustments      NeoPath Pro Forma
                                               -------------------------------------------------------------------------
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)                                        $            (1.67)
                                                 ============                                         ==================
Weighted-average common shares outstanding          6,903,290                                                 20,686,290
                                                =============                                         ==================
F-28
82

                              AUTOCYTE AND NEOPATH
         UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                           YEAR ENDED DECEMBER 31,1996
Historical
                                                                                     Pro Forma     AutoCyte and NeoPath
                                                   AutoCyte(1)      NeoPath         Adjustments          Pro Forma
                                              --------------------------------------------------------------------------
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)
                                                ========================================================================
(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-29
83

                                     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:
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
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

                                      II-1
84

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 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.

                                      II-2
85

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.

As of August 28, 1997, the Registrant had issued options to purchase an
aggregate of 2,016,500 shares of Common Stock under the AutoCyte, Inc. 1996
Equity Incentive Plan exercisable at a weighted average price of $0.10 per
share. On that date, no options had been exercised. All option exercises after
August 28, 1997 were registered under the Securities Act of 1933.

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 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.

                                      II-3
86

Item 16. Exhibits and Financial Statement Schedules

(a)      Exhibits

         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. Filed herewith.

         10.1*    Amended and Restated 1996 Equity Incentive Plan (including
                  forms of incentive stock option certificate and nonstatutory
                  stock option certificate). Filed as Exhibit 10.1 to the
                  Company's Registration Statement on Form S-1 (File No.
                  333-30227) and incorporated herein by reference.

         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

                                      II-4
87

                  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.

         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.

                                      II-5
88

         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.

         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 (set forth on signature page to this
                  Registration Statement).

         __________

         *        Indicates a management contract or compensatory plan.

         +        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

                                      II-6
89

         Securities Act of 1933, as amended. Omitted information is identified
         with asterisks in the appropriate places in the agreement.

(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

                                      II-7
90

                  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-8
91

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burlington, State of
North Carolina, on June 30, 1999.

                                     AUTOCYTE, INC.

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

                                POWER OF ATTORNEY

We, the undersigned officers and directors of AutoCyte, Inc., hereby severally
constitute and appoint James B. Powell, William O. Green and Marc A. Rubenstein,
and each of them singly, our true and lawful attorneys, with full power to them
in any and all capacities, to sign any amendments to this Registration Statement
on Form S-1 (including Pre-and Post-Effective Amendments), and any related Rule
462(b) registration statement or amendment thereto, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature                                         Title                         Date
---------                                         -----                         ----
/s/ James B. Powell, M.D.          President, Chief Executive Officer       June 30, 1999
-------------------------------    and Director (Principal Executive
James B. Powell, M.D.              Officer)

/s/ William O. Green               Chief Financial Officer,                 June 30, 1999
-------------------------------    and Vice President, Finance
William O. Green                   (Principal Financial
                                   Officer and Principal Accounting
                                   Officer)

/s/ Richard A. Charpie             Director                                 June 30, 1999
-------------------------------
Richard A. Charpie

/s/ Robert E. Curry                Director                                 June 30, 1999
-------------------------------
Robert E. Curry
II-9
92

                                 Director                     _______, 1999
----------------------------
Thomas P. Mac Mahon

/s/ Susan E. Whitehead           Director                     June 30, 1999
----------------------------
Susan E. Whitehead

                                     II-10