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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________

COMMISSION FILE NUMBER: 0-22885

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TRIPATH IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 56-1995728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

780 PLANTATION DRIVE, BURLINGTON, NORTH CAROLINA 27215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(336) 222-9707

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE
(TITLE OF EACH CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 30, 2001 was: $213,769,375.

There were 34,203,100 shares of the registrant's Common Stock outstanding
as of March 30, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement of the Registrant for the
Registrant's 2001 Annual Meeting of Shareholders to be held on May 24, 2001,
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of
December 31, 2000, are incorporated by reference into Part III of this Form
10-K.
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PART I

ITEM 1. BUSINESS

The discussion included in this section, as well as elsewhere in the Annual
Report on Form 10-K, may contain forward-looking statements based on current
expectations of the Company's management. Such statements are subject to risks
and uncertainties that could cause actual results to differ from those
projected. See "Factors Affecting Future Operating Results" attached hereto as
Exhibit 99.1 and incorporated by reference into this Form 10-K. Readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as the date hereof. The Company undertakes 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.

NOTE REGARDING TRADEMARKS

AutoCyte(R), AutoCyte Quic(R), AutoPap(R), CytoRich(R), ImageTiter(R),
NeoPath(R), PAPMAP(R), and PAPNET(R) are registered trademarks of, and AutoCyte
PREP(TM), Slide Wizard(TM), PREPAP(TM) and TriPath Imaging(TM) are trademarks
of, TriPath Imaging, Inc.

THE COMPANY

TriPath Imaging, Inc. ("TriPath Imaging" or "the Company") develops,
manufactures, and markets proprietary products for cancer cell diagnosis,
cytology, and histopathology. "Cytology" concerns the study of the structure and
function of cells, and "histopathology" concerns the study of microscopic
changes in diseased tissues. The Company holds in excess of 100 patents that,
cumulatively, form a body of intellectual property that spans the entire breadth
of image analysis and display in cytology and histopathology. TriPath Imaging
manufactures and sells products developed from its proprietary technologies and
intellectual property. These include U.S. Food and Drug Administration ("FDA" or
"Agency") approved products designed to automate the screening for cancer of the
uterine cervix, including the AutoCyte PREP System ("PREP") and the AutoPap
Primary Screening System ("AutoPap"). In addition, we have developed the
extended Slide Wizard line of products, the modules for which include an
FDA-approved method for automating measurement of antinuclear antibodies as well
as research applications in histopathology, LINK, a system for the transmission
and interpretation of tissue specimens via remote telecommunication, or
"telepathology," and the AutoCyte Image Management and Archiving System, or
AIMS, a software based storage and retrieval system for microscopic images.

TriPath Imaging was created in September 1999 through the merger of
AutoCyte, Inc. and NeoPath, Inc. and the acquisition of the technology and
intellectual property of Neuromedical Systems, Inc. ("NSI"). TriPath Imaging was
created to leverage the complementary nature of the products, technologies, and
intellectual property developed by its predecessor companies, all of whom were
early pioneers in the application of computerized image processing and analysis
to detect the often subtle cellular abnormalities associated with cancer and its
precursors. The three predecessor companies crafted their original business
models to meet the needs defined by the limitations of the conventional Pap
smear test for cancer of the uterine cervix:

- AutoCyte was founded in November 1996 through the acquisition of the
cytology and pathology automation business conducted by Roche Image
Analysis Systems, Inc. ("RIAS"). AutoCyte developed "PREP," a
liquid-based sample collection and slide preparation system. PREP
addresses errors in cell sample collection and slide preparation, reduces
the complexity of interpretation by providing a homogeneous, more
representative and standardized thin-layer of stained cells and provides
a liquid medium for adjunctive laboratory testing of the specimen. The
product was approved by the FDA in June 1999.

- NeoPath developed the AutoPap system to facilitate the primary
interpretation of Pap smears. Using proprietary technology, the AutoPap
is designed to distinguish between normal Pap smears and those
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that have the highest likelihood of abnormality. In May 1998, the AutoPap
was approved by the FDA as the first, and only, fully automated device
for primary screening of conventional Pap smear slides.

- Both AutoCyte and NSI developed interactive computerized screening
systems that relied upon the identification and display of cells
demonstrating a higher probability of abnormality.

TriPath Imaging generates PREP revenue from either the sale or rental of
PREP systems and from the sale of the related test kits, comprised of
proprietary reagents and other disposables. Additionally, the Company generates
revenue from service contracts on PREP systems. For system sales, customers
purchase the PREP instrument and make separate purchases of test kits. The
Company also offers an Integrated Purchase Option ("IPO") program where the PREP
instrument is placed at the customer's site, free of charge, and the customer
pays a higher "per-test" price for the reagents and disposables. Under this
program, the Company records revenue for the instrument sale, which is actually
sold to a third-party financial institution. The financial institution is repaid
with part of the proceeds of the reagents and disposables sold. For system
rentals, actually called a "reagent rental," a PREP instrument is placed at a
customer site, free of charge, and the customer commits to purchase an agreed
upon number of test kits over the life of the agreement. Each PREP system placed
typically provides a recurring revenue stream as customers process the test kits
sold by the Company. For system rentals, customers pay a fixed monthly fee for
the equipment and make separate purchases of test kits.

TriPath Imaging generates revenue from either the sale, or rental, of its
extended Slide Wizard(TM) line of products. Additionally, the Company generates
revenue from service contracts on these products. For system sales, customers
purchase the products through distributors in countries where such relationships
exist. Where distributor arrangements do not exist, the Company sells these
products directly to the customer.

TriPath Imaging markets its products to domestic and foreign clinical
laboratories through direct sales activities in the United States, and primarily
through distributors in international markets. In the fourth quarter of 2000,
the Company significantly expanded its marketing and sales activities to
accelerate the commercialization of its core business in several ways.
Additional laboratory sales representatives were hired to increase contact
potential for the laboratory customer marketplace. Through an alliance with
Nelson Professional Sales ("NPS"), the Company engaged the physician market
directly for the first time by adding physician-directed representatives, on a
contract basis, to augment TriPath Imaging's direct sales efforts. To further
educate and reinforce the benefits of TriPath Imaging products, a long-term
partnership with a third-party physician/peer selling organization was initiated
and will carry through into 2002.

TriPath Imaging believes that its proprietary technology and intellectual
property will provide a unique platform for an array of applications in cell
pathology. The Company believes that combining the AutoPap and PREP will create
a unique and integrated system that is currently not otherwise available from
any other single vendor. On September 30, 1999, the Company submitted a
supplement to the FDA for the screening of PREP slides using the AutoPap. In
December 2000, the Company submitted new clinical data to the FDA to support its
applications to expand the claims for the AutoPap and PREP to include the
screening of PREP thin-layer preparations on the AutoPap and to automate the
initial steps in the PREP laboratory slide preparation process through the
introduction of the PREPMATE accessory. PREPMATE is an automated front-end
processor that reduces the number of manual preparation steps required for the
PREP system. As a result of ongoing discussions with the FDA regarding the
Company's submissions, the Company believes that it will have various options in
connection with the pending premarket approval application supplement regarding
use of the AutoPap system to screen PREP thin-layer slides. Among these are to
accept limitations in the Company's proposed product labeling or to collect
additional data to support the current labeling proposal. The Company is
evaluating its options and considering the best course of action. The FDA
approval process is discussed further below under "Clinical Trials and
Regulatory Status--Supplement to AutoPap Primary Screening PMA." If FDA approval
is obtained, the Company will seek to achieve broad market acceptance for the
system integrating PREP and AutoPap for cervical cancer screening. There can be
no assurance, however, when, if ever, such approval will be obtained. The
Company believes that, in the long run, its proprietary technology and
intellectual property will provide a unique platform for an array of
applications in cell pathology.

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PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

Previously, the complex biologic structural, or morphologic, changes that
reflect disease were considered too subtle for identification and interpretation
by computer or other automated apparatus. The conventional wisdom was that cell
and tissue diagnosis is an intrinsically qualitative process that requires
subjective visual judgment. However, as the science of image processing and
analysis has matured, it has become increasingly accepted that these
"subjective" signals can be redefined in terms of mathematical algorithms. These
algorithms, in turn, provide the basis for computerization and an automated
solution.

The merger of AutoCyte and NeoPath and the acquisition of the intellectual
property and technology of NSI resulted in the development of a significant body
of intellectual property. The portfolio was further enhanced by TriPath
Imaging's acquisition of the intellectual property associated with Cell Analysis
Systems (CAS) from Becton Dickinson and Company in September 1999. TriPath
Imaging's current portfolio of 104 issued or allowed United States patents
comprehends each step in the image analysis process as applied to cytopathology
and histopathology, including:

- Image collection;

- Image segmentation;

- Object feature extraction and measurement;

- Object classification;

- Slide classification;

- High speed data processing and computational hardware; and

- Dynamic system quality assurance and reliability assessment.

TriPath Imaging believes that its intellectual property provides a strong
foundation for the development and defense of imaging products. The Company also
believes that recent advances in genomics, biology, and informatics are
providing new opportunities to leverage TriPath Imaging's proprietary
technology.

To date, TriPath Imaging has leveraged its technology assets through the
development of an integrated solution for cervical cancer screening and other
products for the histopathology laboratory.

OVERVIEW OF THE CERVICAL CANCER SCREENING MARKET

Cervical Cancer

Cancer of the uterine cervix, or cervical cancer, is the second most common
form of cancer among women worldwide, with approximately 500,000 new cases
reported each year. In the United States alone, it is projected that doctors
will diagnose approximately 13,000 new cases of invasive cervical cancer and
that approximately 4,500 women will die of cervical cancer in 2001.

Almost all deaths due to cervical cancer can be prevented through
early-stage detection and treatment. Cervical cancer is preceded by curable
pre-cancerous lesions that progress without symptoms over a period of years
until they become invasive, penetrating the cervical epithelium (cellular
covering) and entering the bloodstream or lymph system. Treatment of early-stage
noninvasive cervical cancer may be accomplished through various low-risk and
low-cost procedures designed to remove the abnormal cells. Once the cancer
reaches the invasive stage, however, the patient's chances for recovery are
diminished, and more radical treatment, such as a hysterectomy and chemotherapy
or radiation therapy, is typically required. These procedures are costly and may
expose the patient to substantial physical morbidity and psychological stress.

Because treatment of cervical cancer at an early stage is almost always
successful, early detection is critical to medical management of the disease.
Thus, regular cervical screening examinations are recommended in the United
States and many foreign countries. 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 55 million conventional
Pap smears annually. The Company believes that annual test volume

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outside of the United States is in excess of 80 million. Of the 55 million
annual Pap smear tests performed in the United States, industry sources estimate
that about 2.5 million, or 5%, are diagnosed with pre-cancerous conditions or
cancer.

In the United States, although widespread and regular use of the
conventional Pap smear has contributed to a greater than 70% decrease in
mortality, the mortality rate from the disease has remained fairly constant
since 1970. The Company believes that there are practical limitations to the
conventional Pap smear test which contribute to an estimated $5.0 billion of
annual costs associated with the treatment of advanced precancerous and
cancerous cervical disease. Additional costs are also incurred by third-party
payors due to repeat testing, and by clinical laboratories due to litigation
associated with inaccurate diagnoses.

The Conventional Pap Smear Test Process

The conventional Pap smear test was developed by Dr. George N. Papanicolaou
in the 1940's. The Pap smear serves as a screening procedure for the early
detection of precancerous and cancerous conditions of the uterine cervix by
identifying abnormalities that may progress to cervical cancer.

The conventional Pap smear process involves the science of cytology, which
includes the microscopic evaluation and interpretation of pre-cancerous,
malignant and morphological changes in cells. The process begins with the
collection of cervical cells during a gynecologic examination. To obtain a Pap
smear, a clinician uses a sampling device to scrape the surface of a woman's
uterine cervix to collect a sample of cervical cells. This sample is manually
smeared onto a microscope slide and the sampling device is discarded. The sample
is then sprayed with a fixative agent within a few seconds to prevent damage to
the cell specimen from air drying, creating what is known as a conventional Pap
smear.

After the Pap smear slide is made, the sample and patient information are
sent to a clinical laboratory for further processing, screening and diagnosis.
At the clinical laboratory, a technician stains the Pap smear sample to
highlight important cellular features and then seals it with a protective cover
slip. The slide containing the Pap smear sample is then given to a
cytotechnologist, a trained analyst responsible for reviewing samples at a
laboratory. Review of the Pap smear generally takes about five to ten minutes
for each Pap smear slide, which also includes completing related paper work.

The cytotechnologist reviews the Pap smear slide with a microscope to
determine whether the sample is adequate for evaluation and to assess the
presence of abnormal cells. In determining slide adequacy, cytotechnologists
classify each slide into one of three categories: (i) satisfactory for
evaluation, (ii) satisfactory but limited by certain characteristics ("SBLB") or
(iii) unsatisfactory for evaluation. The percentage of unsatisfactory and SBLB
slides varies widely among laboratories. In the United States, approximately 1%
to 2% of all conventional Pap smear slides are classified as unsatisfactory and
as many as 20% to 30% are classified as SBLB. Frequent reasons for
unsatisfactory or SBLB classifications include excess blood or mucus or the
presence of inflammatory cells, all of which obscure the diagnostic cells of
interest, or results in too few cells per slide.

After determining whether the sample is adequate for evaluation, the
cytotechnologist manually screens the slide with a microscope to differentiate
diseased or abnormal cells from normal cells based on size, shape and structural
details of the cells and their nuclei. In the United States, each conventional
Pap smear slide is then typically classified according to the Bethesda System
for Reporting Cervical/Vaginal Cytological Diagnoses (the "Bethesda System"), a
five point classification system that assigns a rating for cervical cytology
slides ranging from negative to carcinoma. The following table summarizes the
Bethesda System

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classification and other characteristics of all conventional Pap smear slides
prepared annually in the United States:

APPROXIMATE PRECANCEROUS/ CLINICAL
BETHESDA SYSTEM CLASSIFICATION INCIDENCE INTERPRETATION CANCEROUS ACTION
- ------------------------------ ----------- -------------- ------------- -----------------

Negative 92% Normal Not Cancerous Continued Regular
Testing
Atypical Squamous Cells of 5% Equivocal Undetermined Repeat Testing/
Undetermined Significance/Atypical Colposcopy/Biopsy
Glandular Cells of Undetermined
Significance ("ASCUS/AGUS")
Low-grade Squamous 2% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion ("LSIL")
High-grade Squamous G1% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion ("HSIL")
Carcinoma G1% Abnormal Cancerous Colposcopy/Biopsy

Any slide classified as other than normal under the Bethesda System is
considered abnormal and may be pre-cancerous or cancerous. Abnormalities may
indicate various conditions ranging from atypical squamous cells of undetermined
significance ("ASCUS") and atypical glandular cells of undetermined significance
("AGUS"), both commonly referred to as "atypia," and low-grade squamous
intraepithelial lesions ("LSIL") to high-grade squamous intraepithelial lesions
("HSIL") and cancer.

ASCUS/AGUS slides contain abnormal cells that cannot be fully explained on
the basis of inflammatory or reactive processes, yet lack certain criteria for a
specific abnormal diagnosis. ASCUS/AGUS slides are generally not considered
precancerous. LSIL slides represent the lowest-grade precancerous state, with
cells characterized as exhibiting mild to moderate dysplasia or evidencing signs
of Human Papilloma Virus ("HPV"). Dysplasia is a condition characterized by
abnormally differentiated cells that could either progress to a precancerous
state or regress to a normal state. HSIL slides contain precancerous cells
characterized as exhibiting more serious dysplasia. All ASCUS/AGUS and abnormal
slides are referred to a pathologist for further review and final diagnosis.
Typically, about 90% to 95% of all Pap smears are classified as normal. In the
remaining cases where the cytotechnologist detects a suspicious condition, a
senior cytotechnologist then reviews the slide. Ultimately, slides confirmed to
have signs of precancerous conditions or cancer are referred to a
cytopathologist who carefully reviews the Pap smear and makes a final diagnosis.

A woman whose Pap smear indicates the presence of high-grade lesions or
cancer will typically receive a colposcopic examination, and if necessary, a
biopsy. Treatment of early-stage noninvasive cervical cancer, which is
relatively curable, often consists of epithelial treatment in which the
cancerous tissue is removed, for example, by electrocautery. Once the cancer
reaches an invasive stage, the patient's chances for recovery decline. These
cases typically require treatment such as radiation therapy, surgery or
chemotherapy.

Limitations of the Conventional Pap Smear Test Process

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

Pap smears have a highly variable false-negative rate, which is the
percentage of abnormal smears that are misclassified as normal. False-negative
rates of the conventional Pap smear vary widely among laboratories, ranging from
5% to 55%, depending on such factors as the skill and experience of the
practitioner who collects the sample and prepares the slide, and the level of
training of the cytotechnologist and pathologist who review the slide. Studies
suggest that approximately 60% of all false negative diagnoses are the result of

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inadequacies in sample collection and slide preparation; approximately 40% are
attributable to detection and interpretation errors.

A 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 may not be transferred to the slide and remains on the discarded
collection device. In addition to the problem of cell transfer, the conventional
Pap smear slide preparation process produces inconsistent and non-uniform slides
with extreme variability in quality, often making examination difficult.
Furthermore, the batch staining done by the laboratory technicians may result in
cross-contamination among slide samples. TriPath Imaging estimates that annual
costs to the United States health care system of repeat testing due to
unsatisfactory slides and slides that are SBLB are $50 million and $750 million,
respectively.

When using the conventional Pap smear process, a physician cannot perform
additional testing using the original patient sample. If additional testing is
required, the patient must return to the physician's office to provide a second
sample. TriPath Imaging believes that the ability to access the remaining
cellular material from the original patient sample would allow more cost
effective patient management for inconclusive Pap smear tests.

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

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

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

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

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

THE TRIPATH IMAGING SOLUTION

TriPath Imaging develops sample preparation and screening systems for
cervical cancer intended to address the limitations inherent in the conventional
Pap smear process and the lack of automation in large clinical labs. PREP is a
proprietary, automated, liquid-based cytology sample collection and slide
preparation system that produces slides with a standardized thin layer of
stained cervical cells. AutoPap utilizes proprietary technology to distinguish
between normal conventional Pap smears and those that have the highest
likelihood of abnormality. The Company has applied for FDA approval for AutoPap
screening of PREP slides thereby further enhancing its application to include
both conventional and liquid-based Pap smears. The Company continues to conduct
clinical trials in support of the integration of the AutoPap system with PREP
slides. There can be no assurance, however, that such FDA approval will be
obtained or the timing of any such approval. The Company's extended Slide Wizard
product line (formerly known as Pathology Workstation), further integrates
TriPath Imaging's product offerings. The Slide Wizard product line delivers
image management, data handling, and prognostic tools for cell diagnosis,
cytopathology and histopathology.

PRODUCTS

The AutoCyte PREP System

The Company's PREP system consists of a proprietary preservative fluid and
reagents, plastic disposables and automated equipment for preparing a thin-layer
of cervical cells on a microscope slide. The PREP slide process begins with the
clinician collecting a patient's cervical sample using a conventional collection
device, in this case a cervical brush with a breakaway head. The clinician then
immediately places, and leaves, the collection device in a vial containing the
Company's proprietary CytoRich preservative fluid, thereby retaining all of the
cells from the collection device. The sample is then thoroughly mixed, resulting
in a randomized cell suspension, which is then removed from the vial and layered
onto a proprietary liquid density reagent in a

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plastic centrifuge tube using the Company's patented disaggregation syringe
device. Batch centrifugation is then conducted on the cell suspension to remove
excess blood, inflammatory cells and other debris from the sample.

Once centrifugation is completed, the lab technician places the tube
containing the separated diagnostic cells onto an automated pipetting system.
This pipetting system then distributes the cervical cells in a thin-layer on the
microscope slide and discretely stains the slide for subsequent analysis. A PREP
slide typically contains approximately 50,000 to 160,000 diagnostic cells that
are distributed uniformly over a 13-mm diameter circle. PREP is currently
capable of preparing and discretely staining approximately 48 thin-layer slides
in approximately one hour.

TriPath Imaging has also developed an automated accessory to the PREP
system called PREPMATE that reduces the number of manual preparation steps
required on the PREP system. PREPMATE is intended to reduce the time required to
prepare samples for processing on the PREP instrument. Data supporting the
PREPMATE automated accessory were submitted to the FDA in November 2000. The FDA
has not yet approved PREPMATE for use in the U.S., and there can be no assurance
that the PREPMATE will be approved by the FDA in a timely manner, or at all.

PREP Advantages vs. the Conventional Pap Smear Process

The Company believes that PREP offers the following advantages over the
conventional Pap smear process:

- More Complete Sample Collection. Because the clinician places the
collection device directly into the PREP vial, the entire patient sample
is contained in the Company's proprietary preservative fluid. As a
result, 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.

- Improved Sample Quality. By eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process, PREP virtually eliminates air-drying, generates a more complete
fixation and provides a more standardized preparation process in a
controlled, laboratory environment. The more uniform cell sample
distribution also reduces cell clumping and obscuring from debris. The
Company believes that PREP's thin-layer slides provide cytotechnologists
with samples that are clearer, more representative and easier to diagnose
than conventional Pap smear slides.

- Improved Cytotechnologist Productivity. In the Company's clinical
studies, some laboratories using PREP experienced a greater than 50%
increase in cytotechnologist screening productivity. The impact on
cytotechnologist efficiency is important to clinical laboratories because
of the growing shortage of qualified cytotechnologists in recent years
and the need to create and maintain a desirable working environment for
cytology professionals.

- Automated and Discrete Staining Function. PREP includes a discrete, or
individual, slide staining function performed by a computer-controlled
robotic pipetting station. 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. As a result, staining reagents are not shared among
slides. The Company believes this should reduce the risk of
cross-contamination among cell samples which can lead to inaccurate
diagnoses.

- Multiple Testing Capability. Because the Company's proprietary CytoRich
preservative system enables the patient sample to be preserved for
several months, it permits, if necessary, preparation of several slides
from a single sample. The Company believes that the ability to perform
additional slide-based tests using a single sample, together with the
improved quality of the slide itself, will reduce re-testing expenses
typically associated with inconclusive Pap smear tests. The residual
patient sample may also be used for other diagnostic protocols such as
HPV testing, infectious disease testing and

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application of specific tumor markers. Such testing of the residual
sample is under investigation and will require FDA approval when, and if,
determined to be viable.

PREP Advantages vs. Other Thin-Layer Sample Preparation Systems

The Company believes that PREP offers the following advantages over other
thin-layer devices:

- Improved Sample Quality. The PREP sample is processed through a series
of proprietary liquid-based reagents and centrifuge separation techniques
designed to "enrich" the sample with a high concentration of diagnostic
cells. The only other currently FDA-approved thin-layer device relies on
membrane filtration. The Company believes that its cell enrichment
process more effectively controls the incidence of infectious agents,
mucus, inflammatory cells and other debris that may reduce the
performance of membrane filtration systems. The Company believes that, in
populations with high rates of gynecological infection, PREP's cell
enrichment process will result in a more representative slide sample that
should ultimately lead to a reduction in uncertain or incorrect
diagnoses.

- Higher Throughput. PREP has the capacity to produce approximately 48
thin-layer slide preparations in approximately one hour, using a
hands-off robotic system. The Company believes the throughput capability
of the PREP to be the highest of any thin-layer product on the market
today.

- Improved Cytotechnologist Productivity. The cell circle on a PREP slide
is smaller than the cell circle on other available thin-layer devices,
yet the number of diagnostic cells is approximately equal. The Company
believes that the smaller cell circle, coupled with a lower incidence of
infectious agents, mucus, inflammatory cells and other debris, should
result in faster, more efficient screening by cytology professionals.

- Familiarity with Sample Preparation Approach. The PREP centrifugation
and robotic liquid handling techniques are similar to procedures already
in use in clinical laboratories.

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

AutoPap Primary Screening System

The FDA approved the AutoPap system in May 1998. The AutoPap uses visual
intelligence algorithms to improve accuracy in the primary screening of
conventional Pap smear slides. As approved by the FDA, the AutoPap identifies up
to 25% of slides as "within normal limits" and requiring no further review
(sometimes referred to as "sort rate" or "no further review rate").
Cytotechnologists then manually screen the remaining slides with the assistance
of the AutoPap ranked review report. This ranked review report shows the
relative scores of the processed slides. At least 15% of the highest-ranking
slides that are classified normal by manual review then undergo quality control
rescreening. Outside the United States, the Company believes that AutoPap will
be used to identify up to 50% of slides "within normal limits."

AutoPap works with a range of staining procedures used on conventionally
prepared Pap smear slides. AutoPap analyzes a Pap smear in about the same time
as a cytotechnologist. It holds 288 Pap smear slides at a time, is easy to load
and unload, and can operate continuously, with minimal intervention, for up to
24 hours per day. TriPath Imaging provides each clinical laboratory with on-site
training, system documentation, a comprehensive quality assurance program, and
ongoing customer and technical support.

On September 30, 1999, the Company submitted additional clinical study data
to supplement its existing premarket approval application, or "PMA," for the
AutoPap system to obtain approval from the FDA to use AutoPap to screen slides
prepared using PREP. Additional data was submitted to the FDA in December 2000
to address questions from the FDA. As a result of ongoing discussions with the
FDA regarding the Company's submissions, the Company believes that it will have
various options in connection with the pending PMA supplement regarding use of
the AutoPap system to screen PREP thin-layer slides. Among these are to accept
limitations in the Company's proposed product labeling or to collect additional
data to support the current labeling proposal. The Company is evaluating its
options and considering the best course of action. The FDA approval process is
discussed further below under "Clinical Trials and Regulatory Status--Supplement
to AutoPap Primary Screening PMA."

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AutoPap Advantages Over Conventional Pap Smear Screening

TriPath Imaging believes that clinical analysis of Pap smears is the
largest remaining, non-automated clinical laboratory procedure. Clinical
laboratories rely on the manual screening of Pap smear slides as performed by
cytotechnologists.

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

Clinical studies have shown that the AutoPap-assisted practice identifies
significantly more abnormal slides as compared to current practice. The Company
believes that this difference is statistically significant in favor of the
AutoPap-assisted practice. In addition, the Company believes that the
AutoPap-assisted practice is better able to correctly identify normal slides as
compared to current practice.

Laboratories face significant liability related to accurately identifying
abnormal Pap smears. TriPath Imaging believes that laboratories using of AutoPap
will substantially improve their quality of practice, and have the potential to
reduce exposure to liability resulting from false negative results.

Laboratories are seeing a significant decrease in qualified, available
cytotechnologists for screening Pap smears. By reducing the number of Pap smears
requiring cytotechnologist review, the AutoPap alleviates a significant part of
this capacity issue while increasing overall lab accuracy. Similarly, a
laboratory may utilize the AutoPap to increase its Pap screening volume while
maintaining its current work force level.

The AutoPap GS

In the fourth quarter of 2000, TriPath Imaging launched the AutoPap GS for
use outside the United States. In the U.S., clinical trials will begin in the
second quarter of 2001. Upon completion of these studies, the Company will
submit a PMA supplement to the FDA seeking domestic approval of AutoPap GS. The
AutoPap GS incorporates the Company's Slide Wizard technology and consists of an
AutoPap instrument networked to one, or several, routine microscope(s) equipped
with computer-controlled automated stages for fast relocation of "fields of
interest" on cervical slides which have been previously processed by the
AutoPap. The AutoPap is modified to determine whether a slide is "within normal
limits" and can be archived or alternatively has to be reviewed. Further, during
its review process, the AutoPap GS stores a pre-set number of the "fields" with
the highest probability of containing some abnormality. Instead of sending the
"review" slides to the more time-consuming manual relocation process, the slides
can be quickly assessed by automatically relocating the stored fields under the
networked routine microscopes for manual review. If abnormal findings can be
confirmed by the human observer, then the slides undergo full manual review.
Otherwise, the slides are archived.

The Company believes the established quality of the AutoPap algorithms,
coupled with the highly focused nature of location-guided screening, allow a
laboratory to improve quality, increase capacity by up to 200% and alleviate
backlogs and/or labor shortages.

AutoCyte SCREEN System

AutoCyte SCREEN, known as SCREEN, is an automated image analysis technology
which combines proprietary imaging technology and classification software with
off-the-shelf computer hardware to screen thin-layer slides prepared using the
PREP system. The Company filed a PMA with the FDA in July 1998 seeking approval
for its SCREEN technology. Since the merger of NeoPath and AutoCyte in September
1999, the Company has adopted the AutoPap system as the platform for its
cervical cytology business. While TriPath Imaging retains the proprietary
technology for SCREEN as a component of its core imaging technology, the Company
has elected not to pursue approval for the AutoCyte SCREEN System as submitted
to the FDA in 1998. TriPath Imaging will continue to leverage this technology in
future product applications, however.

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Extended Slide Wizard

TriPath Imaging's long-term product strategy encompasses an initiative into
the broader clinical laboratory automation market. The extended Slide Wizard
product line consists of PC-based applications focused on the quantification of
the nuclear DNA content of cells, the quantification of the amount of specific
molecules in cells or tissue sections (immunohistochemistry and
immunocytochemistry assays), the management and archiving of images and patient
information, the exchange of data via telepathology and the creation of
comprehensive reports combining color images and patient data. Applications
currently available from the Company include:

- Telepathology system -- LINK;

- Image management & archiving system -- AIMS;

- DNA quantification -- QUIC DNA;

- Immunohistochemistry/Immunocytochemistry quantification -- QUIC IMMUNO;

- Antinuclear antibody quantification -- ImageTiter;

- Electronic dotting and labeling system -- Slide Wizard.

The Company markets its extended Slide Wizard products primarily through
distributors. The base system of this product line, the Slide Wizard, is also a
component of the AutoPap GS system which is currently sold outside the United
States only. See "Marketing and Sales." The Company's strategy includes the
development of additional applications or modules in the field of tissue
diagnosis and prognosis to run on the proprietary extended Slide Wizard platform
which support and integrate a systematic approach to diagnostic cytology and
pathology.

Other Applications for TriPath Imaging's Imaging Technology

TriPath Imaging believes that its automated visual intelligence technology
can be used for other diagnostic tests that involve microscopic analysis of
biological specimens on glass slides, such as sputum, blood, urine, or other
samples. In addition, TriPath Imaging has identified several other potential
uses for its technology, including automated analysis of breast, prostate,
ovary, colon and skin tissue. To develop its systems for other applications,
TriPath Imaging will need to adapt software algorithms to analyze each of these
other tissue specimens.

Further, the Company will continue to seek alternative applications for its
other imaging technologies through internal research and development as well as
potential strategic partnerships with other companies.

CLINICAL TRIALS AND REGULATORY STATUS

Supplement to AutoPap Primary Screening PMA

In September 1999, the Company submitted a supplement to its existing PMA
for the AutoPap system to pursue FDA approval to process PREP thin-layer slides
on the AutoPap. In December 2000, TriPath Imaging submitted an amendment to the
original supplement that addressed questions raised by the FDA on the Company's
original application. As a result of ongoing discussions with the FDA regarding
the Company's submissions, the Company believes that it will have various
options in connection with the pending PMA supplement regarding use of the
AutoPap system to screen PREP thin-layer slides. Among these are to accept
limitations in the Company's proposed product labeling or to collect additional
data to support the current labeling proposal. The Company is evaluating its
options and considering the best course of action. In connection with its
submissions, the Company has voluntarily brought to the FDA's attention several
assertions recently made by a former Company employee questioning the use of the
AutoPap system to screen thin-layer preparations. The Company has conducted an
internal investigation and has determined that these assertions appear to be
without merit. The FDA has advised the Company that it will conduct an
inspection to investigate these assertions prior to completing Agency review of
the Company's PMA supplement. The Company cannot determine at this time when the
FDA proceedings will conclude or what conclusions the FDA will reach.

FDA Warning Letter

In April 2000, the Company received a warning letter from the FDA, Office
of Compliance, alleging that the Company had improperly distributed certain
promotional materials related to the PREP system. The Agency did not state that
it had any concerns with the safety and effectiveness or performance of the PREP
system. The Company worked interactively with the Agency to address and resolve
their concerns. In August

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2000, the Company received confirmation from the FDA that it had satisfactorily
resolved the issues raised in the April 2000 warning letter.

TriPath Imaging's Facilities

The Company's manufacturing process is subject to extensive regulation by
the FDA, including the FDA's Quality System Regulation ("QSR," also known as
Good Manufacturing Practice, or "GMP") requirements. In April 1999, the
Company's Redmond, Washington manufacturing facility underwent a routine
inspection by the FDA for compliance with QSR requirements. The Company was
notified in May 1999, in writing, that the facility was in substantial
compliance with the applicable requirements of the Federal Food, Drug, and
Cosmetic Act and implementing regulations. In July 2000, the Company's
Burlington, North Carolina manufacturing facility underwent a similar inspection
and the FDA notified the Company in September 2000, in writing, that the
facility was in substantial compliance with the applicable requirements of the
Federal Food, Drug, and Cosmetic Act and implementing regulations.

Extended Slide Wizard Product Line (formerly Pathology Workstation)

In November 1995, the Company received FDA clearance of a premarket
notification ("510(k)") covering ImageTiter, an application for the extended
Slide Wizard product line which TriPath Imaging is currently selling through
distributors. Some of the Company's products under this line, QUIC DNA and QUIC
IMMUNO, are presently offered "For Research Only" in the U.S. The Company may
elect to pursue regulatory clearance to market in the United States additional
Slide Wizard applications currently under development or those developed in the
future.

MARKETING AND SALES

Automated slide preparation and screening products were introduced into the
cervical cancer screening market in the mid-1990's. The Company expects to
benefit from the increased awareness and acceptance of these new technologies.
The Company began limited international commercial sales of its PREP system in
1993, and in 1999 commenced commercialization in the United States, following
FDA approval. The Company began placements of AutoPap QC systems, a predecessor
to the current AutoPap, in 1995 and of AutoPap system in 1998. AutoPap is the
only fully automated Pap smear screening device to receive regulatory clearance
for marketing in the United States.

The principal market for gynecological applications of PREP and AutoPap are
clinical laboratories worldwide. Clinical laboratories are the focal point for a
variety of constituents related to the Pap smear process including the patient,
the physician, and third party payors. In an effort to facilitate the adoption
of the Company's products, TriPath Imaging has implemented the necessary sales
professionals to educate and promote the Company's products to each of these
distinct groups. Furthermore, the Company has contractual partnerships with
organizations associated with physician education and payor/reimbursement
support. Management sees these partnerships as a necessary extension of the
Company given its position of potential growth and new technologies.

TriPath Imaging generates PREP revenue from either the sale, or rental, of
PREP systems and from the sale of the related test kits, comprised of
proprietary reagents and other disposables. Additionally, the Company generates
revenue from service contracts on PREP systems. For system sales, customers
purchase the PREP instrument and make separate purchases of test kits.

Additionally, domestic customers may elect to purchase the PREP instruments
under the IPO program where the PREP instrument is placed at the customer's
site, free of charge, and the customer pays a higher "per-test" price for the
reagents and disposables. Under the IPO program, the Company records revenue for
the instrument sale, which is actually sold to a third-party financial
institution. The Company has entered into an agreement with a financial
institution to support the placement of PREP IPO systems. The financial
institution is repaid with part of the proceeds of the reagents and disposables
sold.

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For system rentals, actually called a "reagent rental," a PREP instrument
is placed at a customer site, free of charge, and the customer commits to
purchase an agreed upon number of test kits over the life of the agreement. Each
PREP system placed typically provides a recurring revenue stream as customers
process the test kits sold by the Company.

TriPath Imaging currently generates AutoPap-related revenue from the direct
sale of AutoPap systems and from placing AutoPap systems under fee-per-use
contracts. In the latter cases, fee-per-use revenue commences in the month a
system is initially placed in commercial use at a customer site and consists of
per-slide monthly billings, fixed rental billings or certain fee-per-use
contracts that require minimum payments for the duration of the agreement,
normally three-to-five years. Additionally, domestic customers may elect to
purchase the AutoPap instrument under the IPO program. Recently, the Company
has also converted fee-per-use contracts to direct sale arrangements. Under the
direct sale option, recurring revenue comes from annual service contracts that
may be sold to the customer. As product development efforts improve the
performance of the AutoPap System, TriPath Imaging intends, subject to obtaining
applicable regulatory approvals, to offer upgraded products to its customers.
The first such development, the AutoPap GS System, was introduced in October
2000 outside of the US. The Company has begun preclinical feasibility studies in
the U.S. and plans to begin U.S. clinical trials in the second quarter of 2001.
As these, and other, product enhancements come to market, TriPath Imaging
anticipates that upgrades will increase its fee-per-use and sale pricing.

The principal market for non-gynecological applications of PREP is also
clinical laboratories worldwide, although these applications are performed in
significantly lower quantities than cervical cancer screening applications.
Non-gynecological applications for the detection of cancer are performed on body
fluids, including urine samples, respiratory specimens and a variety of
fine-needle aspirates of specific organs.

Marketing Strategy

TriPath Imaging markets its products to domestic and foreign clinical
laboratories through direct sales activities in the United States and primarily
through distributors in international markets. The Company significantly
expanded its marketing and sales activities to accelerate the commercialization
of its core business in several ways. Additional laboratory sales
representatives were hired to increase contact potential for the laboratory
customer marketplace. Through an alliance with NPS, the Company engaged the
physician market directly for the first time by adding physician directed
representatives, on a contract basis, to augment TriPath Imaging's direct sales
efforts. An additional element of the Company's marketing strategy is to achieve
broad market acceptance for the system integrating PREP and AutoPap for cervical
cancer screening if FDA approval is achieved. There can be no assurance when, if
ever, such approval will be received. In implementing this strategy, the Company
will address the needs of the constituencies described below.

Clinician/OB-GYN. The clinician requires a simple collection technique
which results in an accurate and adequate sample from the patient. TriPath
Imaging believes that PREP's patented cell enrichment process and single
collection device facilitate high quality results using a simple collection
technique.

Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. The Company believes that
approximately 50% of cervical cancer test volume is concentrated among a
relatively small number of large laboratories. The Company estimates that two
major clinical laboratories, Quest Diagnostics, Inc. ("Quest") and Laboratory
Corporation of America Holdings ("LabCorp"), account for almost 18 million
conventional Pap smears annually. In January 2000, Quest announced an exclusive
supplier agreement for thin-layer preparations with a competitor of the Company
(see "Competition"). TriPath Imaging believes the following factors will enable
the Company to market PREP and AutoPap successfully to this concentrated market
segment:

- PREP's high throughput and cost-effectiveness;

- AutoPap's ability to identify more abnormal slides than conventional
methods; and

- AutoPap's ability to show improved specificity over current practice,
coupled with the Company's recently expanded resources dedicated to
marketing and selling activities.

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Moreover, the pressures associated with rising health care costs, rising
litigation costs, and the limited supply of qualified cytotechnologists should
further facilitate adoption of PREP and AutoPap by the large laboratory market.

Medium and small clinical laboratories. The Company also intends to
continue to devote a substantial portion of its marketing and sales resources to
targeting medium-sized and small clinical laboratories. Hospital consolidation,
and particularly the consolidation of laboratories of larger hospitals, is
creating a new medium-sized customer for the Company's products. The Company
expects that the medium-sized and small clinical laboratory segment of the
market generally will utilize the Company's IPO, or equipment rental program.

Third-party payors. While the Company has made great strides in gaining
market acceptance of its products by third party payors, by devoting additional
resources in the area of reimbursement, the Company will continue to promote the
clinical and economic benefits of its PREP and AutoPap systems to nationally
managed care providers, major private insurers and other third-party payors. The
Company has demonstrated that the overall cost savings to the health care
system, resulting from earlier detection of cervical cancer, reduced ASCUS
diagnoses and the resulting reduction of unnecessary biopsies and colposcopies,
and improved specimen adequacy and resulting reduction of unnecessary repeat Pap
smears, more than offset the cost of the Company's products. See also
"Third-Party Reimbursement" below.

Marketing and Sales Organization

The Company currently employs in excess of 40 full-time personnel
worldwide, and engages another 28 people through its arrangement with NPS, to
market, sell and provide after-sale support of its products. The Company expects
to increase its worldwide base of sales and marketing employees to over 100
full-time personnel by the end of 2001.

In the United States, the Company has expanded its efforts to market its
cervical cancer screening products through a direct sales force. This direct
sales organization is focused on both the physician, primarily OB-GYN and
primary care physicians, and the laboratory markets to achieve market
penetration and availability of the Company's products. Further, TriPath
Imaging's marketing organization will expand the Company's presence in the
marketplace through activities including advertising and promotion, Company-
sponsored seminars and trade shows, and peer selling activities. The Company
will also continue to expand its reimbursement specialists with an emphasis on
managed care organizations and other third-party payors to achieve maximum
reimbursement levels and to further stimulate demand for its products. TriPath
Imaging will seek co-marketing agreements with sales organizations of major
reference laboratories to market its products directly to health care providers.

In international markets, the Company markets and sells its products
primarily through a distribution network. To support these efforts, the Company
employs five full-time personnel, consisting of sales professionals, product
managers and after-sales support personnel located in Europe. The Company
anticipates that these distributor organizations will ultimately assume
responsibility for all sales and after sales support activities as well as a
portion of the Company's marketing activities. Both large distribution
organizations with products focused on the clinical diagnostic market, and
smaller distribution organizations with products focused specifically on the
anatomic pathology market have been employed to distribute TriPath Imaging
products worldwide.

After-sale support services, including customer training, product
installation, telephone technical support and repair service is offered directly
to customers in the United States. Personnel providing these services are
located both at the Company's headquarters and in select major metropolitan
areas. Internationally, the Company provides these services through Company
employees and distributor organizations.

MANUFACTURING

AutoPap

Final assembly, integration and testing of the electronic, mechanical and
optical components and modules of AutoPap take place in the Company's Redmond,
Washington facility. TriPath Imaging's

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manufacturing operations have produced sufficient AutoPap systems to meet
customer demand since it began commercial operations in 1996. The Company
believes it has sufficient capacity to meet anticipated customer needs for its
AutoPap product.

TriPath Imaging purchases all components for the AutoPap system from
outside vendors. Several components of the AutoPap are supplied by sole-source
vendors. If any of these sole-source suppliers are unable or choose not to do
business with the Company, TriPath Imaging would need to modify any components
provided by additional or replacement suppliers for use in AutoPap. The Company
would be unable to quickly establish additional or replacement sources of supply
for several AutoPap components. In addition, TriPath Imaging may need to obtain
regulatory approval to substitute certain components. There can be no assurance
that the Company would be able to obtain the necessary approvals. If one of its
vendors becomes unable to supply acceptable components in a timely manner and in
the quantity required, TriPath Imaging may need to delay or halt its
manufacturing process. Any delay or cessation of manufacturing could adversely
affect its business.

In its manufacturing process, TriPath Imaging must meet and adhere to all
applicable requirements of U.S. and foreign regulatory agencies, including
Quality Systems Regulations issued by the FDA. As part of the FDA regulatory
process, TriPath Imaging faces periodic FDA inspections and other periodic
inspections by U.S. and foreign regulatory agencies. See "Governmental
Regulation."

PREP

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

The Company purchases certain of the PREP instrument components from a
single supplier in Europe. The consumable items used with PREP are purchased
from a variety of third-party vendors, some of which are sole-source suppliers.
In 1998, the Company agreed to a new multi-year exclusive contract with the
supplier of manufactured plastic components that are incorporated into its
products. The contract began in June 1998 and will terminate in June 2002.
Pricing is fixed, but is subject to adjustment based upon changes in raw
material costs. The Company's obligation to use this supplier exclusively for
the components is contingent upon this supplier supplying the Company at prices
competitive with those offered by third parties on similar terms, and upon this
supplier meeting the Company's quality and production requirements. The Company
believes that the supplier has sufficient capacity to meet its present and
future requirements for plastic components.

Extended Slide Wizard Products

The Company currently manufactures most of its extended Slide Wizard
product line at its Burlington, North Carolina facility and believes it has
sufficient capacity to meet anticipated customer demand for this product. The
Company also manufactures the Slide Wizard instrument and integrates it into the
AutoPap GS at its Redmond, Washington facility and believes it has sufficient
capacity to meet anticipated customer demand for this product.

The Company's extended Slide Wizard products consist primarily of
off-the-shelf components and proprietary software. The components are supplied
by a variety of vendors, some of which are sole-source suppliers. The Company
has been integrating and selling extended Slide Wizard products since 1993.

The Company's Suppliers

Several components of the Company's products are supplied by sole-source
vendors. Subject to any contractual limitations upon its ability to do so, the
Company may seek to establish other relationships with additional suppliers or
vendors for components of its products, although there can be no assurance that
it will

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be successful in doing so. If any of the Company's current or future sole-source
suppliers are unable or choose not to do business with the Company, TriPath
Imaging would need to modify any components provided by additional or
replacement suppliers for use in its products. The Company would be unable to
quickly establish additional or replacement sources of supply for several of
these components. The incorporation of new components, or replacement components
from alternative suppliers into the Company's products may require the Company
to submit PMA supplements to, and obtain further regulatory approvals from, the
FDA before marketing the products with the new or replacement components. There
can be no assurance that the Company would be able to obtain the necessary
approvals. If one of its vendors becomes unable to supply acceptable components
in a timely manner and in the quantity required, TriPath Imaging may need to
delay or halt its manufacturing process. Any delay or cessation of manufacturing
could adversely affect its business.

Manufacturing Standards

Both the Burlington, North Carolina and Redmond, Washington facilities are
subject to periodic FDA inspections. In April 1999, the Company's Redmond,
Washington manufacturing facility was inspected by the FDA for compliance with
QSR requirements. The Company was notified in May 1999, in writing, that the
facility was in substantial compliance with the applicable requirements of the
federal Food, Drug, and Cosmetic Act (the "FDC Act") and implementing
regulations. In July 2000, the Company's Burlington, North Carolina
manufacturing facility was inspected by the FDA for compliance with the FDA's
QSR requirements. The Company was notified in September 2000, in writing, that
the facility was in substantial compliance with the applicable requirements of
the FDC Act and implementing regulations. Failure to comply with the FDA's QSR
requirements would materially impair the Company's ability to achieve or
maintain commercial-scale production. In addition, if the Company is unable to
maintain full-scale production capability, acceptance by the market of PREP and
AutoPap would be impaired, which in turn would have a material adverse effect on
the Company.

In addition to QSR requirements, the Company is required to meet
requirements relating to ISO 9001 certification and other European regulatory
requirements. A European "CE" certification is required to successfully sell
PREP and AutoPap in Europe according to certain directives of the European
Union. The addition of other European directives may require TriPath Imaging to
further demonstrate compliance with new or modified requirements in order to
apply the CE mark specific to those directives. The OEM supplier of the PREP
instrument components has ISO 9001 certification and has obtained CE
certification for the main PREP component. CE compliance for the entire AutoCyte
PREP system has been obtained by the Company. The AutoPap System is certified to
EN55022:94/CISPR 22, Class A, EN 50082-1 92, AS/NZS2064/CISPR 11, Class A.

The Company obtained ISO 9001 certification in 1999. Compliance audits were
conducted on the Company's Burlington, North Carolina facility by a certified
ISO auditor in May 2000 and in January 2001, and the Company was subsequently
notified in each case that the facility had no outstanding deficiencies and had
successfully passed the audit inspection.

The Company has initiated its efforts to obtain ISO 9001 certification at
its Redmond, Washington facility in 2001.

Failure to maintain compliance with the applicable manufacturing
requirements of regulatory agencies would have a material adverse effect on the
Company.

RESEARCH AND DEVELOPMENT

The Company's research and development programs are currently focused on
three major goals: (1) continued improvement and streamlining of the
AutoPap/AutoPap GS product, (2) continued enhancement of PREP, including, but
not limited to adjunctive testing using the PREP CytoRich preservative solution,
improvement of related reagents and disposables, and further streamlining and
automating the PREP slide preparation and handling process, and (3) continued
product development of additional extended Slide Wizard applications with
scalable automation capabilities to address the needs of the broader pathology

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automation market, as well as the needs of potential strategic partnerships as
they continue to be a Company focus.

Enhancements to both AutoPap and PREP are particularly designed to increase
the instruments' efficiency, ease of use, reliability and cost-effectiveness.
This also includes initiatives directed at extending the shelf life of the
CytoRich line of reagents and preservatives used with the PREP system. Further,
the Company plans to explore alternative uses for adjunctive testing using the
Company's CytoRich preservative fluid and to seek approval for the use of
alternative collection devices in connection with the specimen collection
process related to the PREP system.

PREPMATE, an automated front-end processor for PREP, is designed to reduce
the number of manual pre-preparation steps required for use of the PREP system.
PREPMATE functions as a robotic mixer of the cell suspension in the preservative
vial. It automatically layers the cell sample before centrifugation. PREPMATE is
designed to further enhance the throughput of the PREP system and to streamline
the front-end processing. PREPMATE is not currently approved for use in the U.S.
by the FDA, but the Company submitted a PMA to the FDA in December 2000 for
approval of PREPMATE in the U.S.

The Company continues to enhance its extended Slide Wizard platform. This
platform has been expanded to a modular concept which allows rapid prototyping
and product development. The degree of automation for the resulting applications
can be adjusted to the needs of the corresponding market, from interaction to
complete automation. This technology takes advantage of TriPath Imaging's
intellectual property and will be applied primarily to complement the existing
portfolio of applications with new developments focused on gene or protein based
cancer staging and prognostic testing.

The Company will continue to seek alternative applications for its
technologies through internal research and development, as well as, potential
strategic partnerships with other companies.

There can be no assurance that any product enhancement or development
project undertaken by the Company either currently or in the future will be
successfully completed, receive regulatory approvals or be successfully
commercialized. The failure of any such enhancement or project to be completed,
approved or commercialized could prevent the Company from successfully competing
in its targeted markets and could have a material adverse effect on the Company.

As of December 31, 2000, the Company had approximately 50 employees engaged
in research and development activities. The Company's expenditures for research
and development were approximately $16.0 million, $12.3 million, and $9.4
million for the years ended December 31, 1998, 1999 and 2000, respectively.

THIRD-PARTY REIMBURSEMENT

Some private third-party medical insurance providers and governmental
agencies offer reimbursement for laboratory testing associated with routine
medical examinations, including Pap smears. In the United States, the level of
reimbursement by those third-party payors varies considerably, often resulting
in payments by patients for Pap smears. Third-party healthcare payors in the
United States are increasingly sensitive to containing healthcare costs and
heavily scrutinize new technology. Third-party payors may also influence the
pricing or perceived attractiveness of TriPath Imaging's products and services
by regulating the maximum amount of reimbursement they provide, or by not
providing any reimbursement at all. Successful commercialization of PREP and
AutoPap for cervical cancer screening in the United States and some other
countries will depend on the availability of reimbursement from such third-party
payors. Because the up-front costs of using the Company's products are typically
greater than the cost of the conventional Pap smear, the Company has worked to
convince third-party payors that the overall cost savings to the health care
system, resulting from earlier detection of cervical cancer and its precursors
will more than offset the cost of the Company's products.

Restrictions on reimbursement may limit the price TriPath Imaging can
charge for the PREP and AutoPap systems or reduce the demand for its products.
If these third-party payors do not reimburse for the PREP and AutoPap systems,
or if they provide reimbursement significantly below the amounts laboratories
charge patients to perform PREP preparations and AutoPap screening, TriPath
Imaging's potential market will be reduced. The Company has focused on obtaining
coverage and reimbursement from major national and

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regional managed care organizations and insurance carriers throughout the United
States. In early 1998, TriPath Imaging established a reimbursement team to work
with third-party insurers and managed care organizations to establish and
improve third-party reimbursement rates for its products. Most third-party payor
organizations independently evaluate new diagnostic procedures by reviewing the
published literature and the Medicare coverage and reimbursement policies on the
specific diagnostic procedures. To assist third-party payors in their respective
evaluations of PREP and AutoPap, the Company provides scientific and clinical
data to support its claims of the safety and efficacy of the Company's products.
The Company focuses on improved disease detection and long-term cost savings
benefits in obtaining reimbursement for PREP and AutoPap for cervical cancer
screening.

A critical component in the reimbursement decision by most private insurers
and the United States Health Care Financing Administration ("HCFA"), which
administers Medicare, is the assignment of a Current Procedural Terminology
("CPT") code which is used in the submission of claims to insurers for
reimbursement for medical services. CPT codes 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
CPT reimbursement codes (88142 and 88143) for liquid-based cervical cytology
specimens automatically prepared and manually screened. In January 1999, CPT
reimbursement codes became effective for the AutoPap system (88147 and 88148).
In a Program Memorandum to Regional Intermediaries/Carriers dated March 14,
2001, HCFA announced it had established National Limitation Amounts for the CPT
reimbursement codes that relate to TriPath Imaging products. HCFA set the
national reimbursement limit at $28.00 for the manual screening (CPT code 88142)
and re-screening (CPT code 88143) of each sample prepared using the PREP system.
For slides screened by the AutoPap system, the national limit is $14.60 for each
sample which falls within the category of slides classified as "within normal
limits" and requiring no further review, or 25% of all slides screened (CPT code
88147). The national limit for the remaining 75% of the slides screened using
the AutoPap system and requiring further review (CPT code 88148) is $20.30. The
Company does not believe these limits will adversely impact the Company's
current pricing strategy or reduce the demand for its products. There is
currently no separate CPT code in place for the archiving of thin-layer
specimens after being processed on the AutoPap. New codes will not be available
until January 2003 at the earliest.

The Company has limited experience in obtaining reimbursement for its
products in the United States or in 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 the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, outside of the United States, health care reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available at an adequate level, if at
all, for PREP or AutoPap under any other reimbursement system.

Although the Company's products have already received some reimbursement
approval in the U.S., there is uncertainty concerning third-party reimbursement
for the use of any medical device incorporating new technology. In July 1998,
the American College of Obstetricians and Gynecologists, or ACOG, 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. In July 1999, ACOG released an
update to their statement reiterating their position that the conventional Pap
smear is still the standard of care and resources may be better spent on
increasing the compliance rate of women obtaining an annual Pap test as opposed
to using new technologies. In February 2001, however, ACOG withdrew its opinion
favoring the conventional Pap smear over new Pap test screening techniques.
Accordingly, ACOG currently takes no position on the advisability of such new
technologies and has stated that it will not reevaluate its position until it
has reviewed data from the ASCUS-LSIL Triage Study, currently taking place, and
from the Bethesda System conference which takes place in April 2001.

Recent health care cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may effect the Company
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 AutoPap. The Company is unable to predict the outcome
or the effect on its business of the current health care reform debate. In early
2000, Congress passed a bill directing HCFA to increase reimbursement for the
conventional Pap smear from $7.15 to $14.60. In early 2001, Congress passed a
bill

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increasing the Medicare approved frequency of payment for screening type Pap
smears from every three years to every two years.

PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS

Because of the substantial length of time and expense required to bring new
products through development and regulatory approval to the marketplace, the
Company relies on a combination of patents, trade secrets, copyrights and
confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company holds 104 issued or allowed United States patents and has
four United States patent applications pending. These patents cover system
components, such as the disaggregation syringe, the PREP process, and various
aspects of its high-speed image-interpretation technology. TriPath Imaging holds
77 foreign patents and has applied for patent protection for certain aspects of
its technology in various foreign countries. TriPath Imaging intends to continue
to pursue patent protection where it is available and cost-effective, both in
the United States as well as in other countries. The Company's existing United
States and foreign patents will expire from 2012 through 2018. There can be no
assurance, however, that the claims allowed in any of the Company's existing or
future patents will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by competitors.

Under current law, patent applications in the United States and in foreign
countries are maintained in secrecy for a period after filing. The right to a
patent in the United States is attributable to the first to invent, not the
first to file a patent application. The Company cannot be sure that its products
or technologies do not infringe patents that may be granted in the future
pursuant to pending patent applications or that its products do not infringe any
patents or proprietary rights of third parties. There can be no assurance that a
court would rule that the Company's products do not infringe other third-party
patents or would invalidate such third-party patents. The Company may incur
substantial legal fees in defending against a patent infringement claim or in
asserting claims of invalidity against third parties. In the event that the
Company is determined to be infringing any claims of third-party patents and
such claims are upheld as valid and enforceable, the Company could be required
to pay damages and be prevented from selling its products or could be required
to obtain licenses from the owners of such patents or be required to redesign
its products to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be on terms acceptable to the Company
or that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. The Company's failure to obtain these
licenses or to redesign its products would have a material adverse effect on the
Company's business, financial condition and results of operations.

In September 1999, Cytyc filed suit against TriPath Imaging in the United
States District Court for the District of Delaware alleging that the Company's
CytoRich proprietary preservative fluid infringed Cytyc's patent titled "Cell
Preservative Solution." TriPath Imaging denied Cytyc's claims. In May 2000,
Cytyc filed suit against TriPath Imaging in the United States District Court for
the District of Massachusetts alleging that the Company had distributed
misleading information to current and potential purchasers of Cytyc's products.
TriPath Imaging denied Cytyc's claims and asserted counterclaims alleging that
Cytyc had made misleading statements regarding both its own product and TriPath
Imaging's product, and had violated antitrust laws. In January 2001, Cytyc and
TriPath Imaging settled all litigation between the two companies. All claims and
counterclaims against each other pending in Delaware and Massachusetts were
dismissed with prejudice.

The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors. These
agreements also require employees and consultants to disclose to TriPath Imaging
ideas, developments, discoveries or inventions they conceive during employment
or consultation. They also must assign their proprietary rights in such matters
if the matters relate to TriPath Imaging's business and technology. There can be
no assurance that the obligations of employees and consultants of the Company
and third parties with whom the Company has entered into confidentiality
agreements to maintain the confidentiality of trade secrets and proprietary
information will effectively prevent disclosure of the Company's confidential
information or provide meaningful protection for the Company's confidential
information if there is unauthorized use or disclosure, or that the Company's
trade secrets or proprietary information will not be independently developed by
the Company's competitors.

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TriPath Imaging has registered trademarks in the United States, Australia,
Japan, Canada, France, the Benelux countries, Germany, the United Kingdom, Italy
and Spain for "NeoPath" and "AutoPap." TriPath also has registered trademarks in
the United States and in several countries throughout the world for "AutoCyte,"
"AutoCyte QUIC," "CytoRich," "ImageTiter," "PAPMAP," and "PAPNET." Three
additional marks are nearing completion of the registration process in the
United States and the Company expects to have them fully registered in 2001.
Additionally, TriPath Imaging has applied for registration of its trademarks in
several other foreign countries. The Company also holds unregistered rights to
copyrights on documentation and operating software developed by it for the PREP
system. There can be no assurance that any trademarks or copyrights owned by the
Company will provide competitive advantages for the Company's products or will
not be challenged or circumvented by its competitors. Litigation may be
necessary to defend against claims of infringement, to enforce patents,
trademarks and copyrights of the Company, or to protect trade secrets and could
result in substantial cost to, and diversion of effort by, the Company. There
can be no assurance that the Company would prevail in any such litigation. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.

COMPETITION

The cervical cancer screening market is comprised of the conventional Pap
smear process and certain technologies that have been introduced in recent years
or are currently under development to provide improvements over the conventional
Pap smear process. The Company's competitors in the development and
commercialization of alternative cervical cancer screening technologies include
both publicly traded and privately held companies. The alternative technologies
known to the Company have focused on improvements in slide sample preparation,
the development of automated, computerized screening systems and adjunctive
testing technologies. Nevertheless, some competitors' products have already
received FDA approval and are being marketed in the United States. In addition,
one of the Company's competitors has greater financial, marketing, sales,
distribution and technical resources than the Company, and more experience in
research and development, clinical trials, regulatory matters, customer support,
manufacturing and marketing. The Company believes that its products will compete
on the basis of a number of factors, including slide specimen adequacy,
screening sensitivity, ease of use, efficiency, cost to customers and
performance claims. While the Company believes that its products will have
competitive advantages based on some of these factors, there can be no assurance
that various competitors' products will not have competitive advantages based on
other factors that, when coupled with the earlier market entry of some products,
will adversely effect the market acceptance of PREP and AutoPap. Moreover, there
can be no assurance that the Company 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 the Company. The Company's products could be
rendered obsolete or uneconomical by technological advances of the Company's
current or potential competitors, the introduction and market acceptance of
competing products or by other approaches.

The Company's primary competitor in thin-layer slide preparation is Cytyc.
Cytyc's systems, the ThinPrep 2000 and 3000 Processors ("ThinPrep 2000" and
"ThinPrep 3000"), are based on a membrane-filtration separation system rather
than the centrifugation approach used in the AutoCyte PREP process. The Cytyc
ThinPrep systems are presently the only other thin-layer sample preparation
systems approved by the FDA as a replacement for the conventional Pap smear.
They are also used for non-gynecological applications. The FDA has allowed Cytyc
to conclude in the discussion section of the package insert for ThinPrep 2000,
and ThinPrep 3000, that the sample preparation is "...significantly more
effective than the conventional Pap smear for the detection of Low Grade
Squamous Intraepithelial (LSIL) 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 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 HPV in precancerous cervical lesions. In September 1997, the FDA
approved PMA supplements submitted by Cytyc and Digene enabling testing for HPV
directly from Cytyc's ThinPrep process cell suspension. The Company is

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presently working with Digene on a PMA supplement for use of PREP's cell
suspension with Digene's HPV test in the United States. In Europe, the AutoCyte
PREP cell suspension is already in routine use with Digene's HPV test. In May
2000, Cytyc announced that it received FDA approval for its ThinPrep 3000
system. The PMA was submitted to the FDA in the fall of 1999. In January 1999,
Cytyc announced that it was expanding its direct sales force by 75 people to
sell directly to hospitals, laboratories and doctors. In January 2000, Cytyc and
Quest Diagnostics announced a multi-year agreement naming ThinPrep as the
exclusive liquid-based cervical cancer screening methodology for Quest. In
October 2000, Cytyc announced an exclusive U.S. strategic alliance for women's
health with Roche Diagnostics. Further, in January 2001, Cytyc announced an
exclusive co-promotion agreement with Digene Corporation surrounding the use of
Digene's HPV test using the Cytyc preservative solution. Cytyc's success with
implementation of any of the foregoing arrangements or marketing initiatives may
make it more difficult for the Company to promote PREP in markets in which it
competes with Cytyc.

The Company faces several competitors, or potential competitors, in the
imaging arena. To date, the AutoPap system is the only FDA-approved device for
the automated primary screening of conventional Pap smear slides. Cytyc has
announced its intentions to develop a device to automate the screening of
thin-layer slides prepared using their ThinPrep System. Other competitors
include ChromaVision Medical Systems, Inc., which develops, manufactures and
markets an automated cellular imaging system to assist in the detection,
diagnosis and treatment of cellular diseases such as cancer and infectious
disease, and Applied Imaging Corporation, which develops and markets automated
genetic testing systems and imaging systems used in cancer pathology and
research which are capable of sending digital images electronically for remote
review and consultation. There can be no assurance that these or other
competitors will not succeed in developing technologies and products that are
more effective, easier to use or less expensive that those which are currently
offered or are being developed by the Company or that would render the Company's
technology and products obsolete and noncompetitive. In addition, there can be
no assurance that these or other competitors will not succeed in obtaining FDA
and other regulatory clearances and approvals of their products more rapidly
than the Company.

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 AutoPap are regulated for cervical cytology applications in the United
States as medical devices by the FDA under the FDC 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 FDC Act,
the FDA regulates the clinical testing, manufacture, labeling, distribution,
sales, marketing, advertising and promotion of medical devices in the United
States. Noncompliance 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 QSR) requirements and, in some cases, premarket notification
("510(k)")). 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 devices that were not on the market before May
28, 1976 ("new medical devices") 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 that demonstrates the device is safe and
effective, and must have FDA approval prior to marketing and distribution. The
conduct of clinical studies is subject to FDA regulations, including
requirements for institutional review, board approval, informal

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consent, recordkeeping, and reporting. The Company's PREP and AutoPap products,
when intended for gynecological use, are regulated as Class III medical devices.

PREP and AutoPap and any other products manufactured or distributed by the
Company pursuant to an approved PMA application and supplements (or to 510(k)
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. TriPath Imaging will continue to be inspected on a
routine basis by the FDA for compliance with regulations with respect to
manufacturing, testing, distribution, storage and control activities. TriPath
Imaging has established and maintains a system for tracking AutoPap and PREP
systems through the chain of distribution and conducts post-market surveillance.
TriPath Imaging must provide periodic reports containing safety and
effectiveness information. 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 QSR 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 the Company and any of its distributors for their approved
indications. No assurance can be given that modifications to the labeling which
may be required by the FDA in the future will not adversely affect the Company's
ability to market or sell PREP, AutoPap or other products of the Company.

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

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

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

- refuse to allow TriPath Imaging to enter into government supply
contracts;

- withdraw approvals already granted;

- require that TriPath Imaging notify users regarding newly found risks;

- request repair, refund or replacement of faulty devices;

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

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

These actions could disrupt TriPath Imaging's operations for an indefinite
period of time.

The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
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 the Company's business, financial condition and
results of operations.

Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. The Company has been advised by various parties,
including consultants engaged by the Company and foreign distributors, that no
regulatory approvals for a device analogous to FDA approval of a PMA are
currently required by any country where the Company currently sells PREP. Such
approval requirements may be imposed in the future. In addition to regulatory
approvals in the United States, the AutoPap system is approved for primary
screening

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and quality control rescreening in Japan, Canada, Australia, New Zealand, The
Netherlands, Italy, Hong Kong, Korea, and Taiwan. TriPath Imaging intends to
pursue additional product registrations in other foreign countries. The Company
received an FDA permit to export PREP and AutoPap to all foreign countries in
which the Company is currently selling these products and where such a permit
was required. There can be no assurance that the Company 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. Failure of the Company 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 the Company's
business, financial condition and results of operations.

TriPath Imaging's products are subject to a variety of regulations in
Europe, including the European Union. In vitro medical devices, including the
AutoPap System, must now comply with the EU's In-Vitro Diagnostic Medical
Devices Directive. The Directive was published in the Official Journal of
European Communities in December 1998. The EU member states were required to
implement the Directive into national law by December 1999. A transition period,
which begins from the date of publication of the Directive and ends December
2003, applies to all devices placed on the market in the EU. During this
transition period, both Directive CE-marked and non-CE-marked devices may be
placed on the market. In other words, companies may choose to follow either the
CE mark or the national legislation, if any. If no such national legislation
exists, the devices can be freely placed on the market. By the conclusion of
this transition period, TriPath Imaging's products must comply with the
requirements of the Directive and member-state local language requirements. At
such time, products not bearing the CE mark may not be commercially distributed
in European Union member countries. In addition, member states may continue to
restrict or prohibit the marketing of CE-marked devices pursuant to the
safeguard clause of the Directive if the member state determines a particular
device may compromise the health and/or safety of patients or users. The Company
intends to comply with the Directive and other applicable regulations in
accordance with the requirements of the countries in which it markets and sells
its products.

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

Congress has directed the Department of Health and Human Services to issue
regulations designed to improve the quality of biomedical analytic services,
particularly the examination of Pap smears. These regulations require clinical
laboratories to re-screen at least 10% of the Pap smears classified on initial
manual screen as normal. This 10% must include normal cases selected from the
laboratory's total caseload, and from patients or groups of patients that have a
high probability of developing cervical cancer based on available patient
information. The laboratories that would purchase the Company's PREP and AutoPap
products are subject to extensive regulation under the Clinical Laboratory
Improvement Act ("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. The Company believes that its PREP and
AutoPap products operate in a manner that will allow laboratories using the
products to comply with CLIA requirements. However, there can be no assurance
that interpretations of current CLIA regulations or future changes in CLIA
regulations would not make compliance by the laboratory difficult or impossible
and therefore have an adverse effect on sales of the Company's products.

In addition, laboratories often must comply with state regulations,
inspection, and licensing. In recent years, a few states, including New York and
California, have adopted regulations that limit the number of slides that may be
manually examined by a cytotechnologist within a given period of time. TriPath
Imaging

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cannot guarantee that states will not directly regulate AutoPap in the future.
TriPath Imaging cannot predict the effect, if any, regulation may have on its
business or operations.

PRODUCT LIABILITY

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

On January 29, 2001, the Company was added as a defendant to an action
commenced on September 12, 2000 in California Superior Court in Los Angeles
County against several other defendants. The complaint alleges that certain
defendants, including the Company, incorrectly analyzed the product of a Pap
smear procedure performed on one of the plaintiffs. The Company believes the
alleged equipment involved was the AutoPap QC instrument, a product no longer
marketed by the Company. The plaintiffs seek general damages against all
defendants in the aggregate amount of $3 million and special damages in an
unspecified amount. The Company intends to defend itself vigorously and has
denied all claims asserted against it in this action. The action is in an early
stage and its ultimate outcome cannot be predicted with certainty; however the
Company believes that the disposition of the matter should not have a material
adverse effect on its financial position.

EMPLOYEES

As of December 31, 2000 the Company employed approximately 170 people on a
full-time basis. The Company believes that its relations with its employees are
good. None of the Company's employees are party to a collective bargaining
agreement.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of the Company are as follows:

NAME AGE POSITION
- ---- --- --------

Paul R. Sohmer, M.D....................... 52 President, Chief Executive Officer and
Chairman of the Board
Thomas Gahm, Ph.D......................... 44 Vice President of Research and Development
Roger W. Martin........................... 53 Vice President of Sales and Marketing
Mary K. Norton............................ 38 Vice President of Regulatory/Government
Affairs and Quality Assurance
David H. Robison,......................... 51 Vice President of Operations

Paul R. Sohmer, M.D. has served as Chairman of the Board of Directors of
the Company since November 2000, and as its President and Chief Executive
Officer since June 2000. Prior to joining TriPath Imaging, Dr. Sohmer served as
the President and Chief Executive Officer of Neuromedical Systems, Inc. ("NSI")
from 1997 through 1999. From 1996 until 1997, Dr. Sohmer served as President of
a consulting firm which he founded. From 1993 to 1996, he served as President
and Chief Executive Officer of Genetrix, Inc., a genetic services company based
in Scottsdale, Arizona. From 1991 through 1993, Dr. Sohmer was the Corporate
Vice-President of Professional Services and President of the Professional
Services Organization for Nichols Institute, a clinical laboratory company,
where he was responsible for sales, marketing, information

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systems, logistics, and clinical studies. From 1985 until 1991, Dr. Sohmer
served as the President and Chief Executive Officer of Pathology Institute in
Berkeley, California, during which time he founded and served as Medical
Director of the Chiron Reference Laboratory. Dr. Sohmer received a B.A. degree
from Northwestern University and an M.D. from Chicago Medical School.

Thomas Gahm, Ph.D. has served as Vice-President of Research and Development
since June 2000. He served as Vice President of Computer Science of the Company
from November 1996 through May 2000. Previously, he served RIAS and RBL 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.

Roger W. Martin has served as Vice President of Sales and Marketing since
December 1999. From November, 1998 until he joined TriPath Imaging, Mr. Martin
provided sales and marketing consultation for several development stage
companies. From 1994 to October 1998, he was employed by Roche Diagnostic
Systems, a division of Hoffmann-La Roche as the Western Area Sales Manager.
Additionally, Mr. Martin was responsible for National Account Management. Mr.
Martin was employed by Becton Dickinson Primary Care, a division of Becton
Dickinson and Company, from 1979 to 1994. He held various sales management and
sales positions with Becton Dickinson and Company.

Mary K. Norton has served as Vice President of Regulatory/Government
Affairs and Quality Assurance since May 1998. Ms. Norton joined TriPath Imaging
in August 1996 and served as the Company's Director of Regulatory and Clinical
Affairs. In May 1998, Ms. Norton was named Vice President, Regulatory Affairs
and Quality Assurance, and in January 1999, was named Vice President,
Regulatory/Government Affairs & Quality Assurance. Prior to joining TriPath
Imaging, Ms. Norton directed Regulatory Affairs and Quality Assurance from July
1994 through May 1996 at Bioject, Inc., a company that develops, manufactures
and markets advanced needle-free drug delivery systems. Ms. Norton was employed
by Siemens Medical Systems, Ultrasound Group, as Senior Biomedical Engineer from
August 1992 to June 1994. From September 1987 to October 1990, Ms. Norton was
employed by Advanced Technology Laboratories.

David H. Robison has served as Vice President of Operations since May 1996.
Prior to his employment with TriPath Imaging, Mr. Robison was employed by Abbott
Laboratories in various positions from February 1978 through May 1996. From
February 1995 to May 1996, Mr. Robison was Research and Development Director for
Abbott's Diagnostic Division, and from May 1990 to February 1995 he was
Director, Customer Satisfaction.

ITEM 2. PROPERTIES

The Company currently leases a total of 43,000 square feet of space devoted
to manufacturing, warehousing, administrative, research and development and
engineering functions, at 780 Plantation Drive, Burlington, North Carolina under
a seven-year lease expiring in July 2005. The lease is renewable for five
additional one-year terms. TriPath Imaging leases approximately 72,000 square
feet of office and manufacturing space in Redmond, Washington under operating
leases expiring in December 2004. Of this space in Redmond, the Company
subleases approximately 30,000 square feet as sublessor. TriPath Imaging
believes that its facilities and other available office space are adequate for
its current needs. The Company also currently leases a 5,000 square foot
education facility at 1111 Huffman Mill Road in Burlington, North Carolina under
a three-year lease expiring in June 2001. The education facility lease is
renewable for one additional three-year term, and also contains an option to
expand the leased space by 4,500 square feet. TriPath Imaging also leases office
space in Brussels, Belgium, under an operating lease expiring in August 2007.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, the Company is subject to various legal
proceedings and claims. The Company has recently settled one such claim as
further described below and believes that the ultimate

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outcome of the other claims described below should not have a material adverse
effect on the Company's financial position.

In September 1999, Cytyc filed suit against TriPath Imaging in the United
States District Court for the District of Delaware alleging that the Company's
CytoRich proprietary preservative fluid infringed Cytyc's patent titled "Cell
Preservative Solution." TriPath Imaging denied Cytyc's claims. In May 2000,
Cytyc filed suit against TriPath Imaging in the United States District Court for
the District of Massachusetts alleging that the Company had distributed
misleading information to current and potential purchasers of Cytyc's products.
TriPath Imaging denied Cytyc's claims and asserted counterclaims alleging that
Cytyc had made misleading statements regarding both its own product and TriPath
Imaging's product and had violated antitrust laws. In January 2001, Cytyc and
TriPath Imaging settled all litigation between the two companies. All claims and
counterclaims against each other pending in Delaware and Massachusetts were
dismissed with prejudice.

On August 4, 2000, the Company and several other parties were named as
defendants to a civil action commenced in the District Court of Tarrant County,
Texas. The petition alleges that the defendants, including the Company,
fraudulently induced the plaintiffs to retain their investment in NeoPath. The
plaintiffs seek to recover an unspecified amount of damages. On October 27,
2000, the action was removed to the United States District Court for the
Northern District of Texas. The plaintiffs' complaint was dismissed with
prejudice on February 5, 2001, and the plaintiffs have appealed this dismissal
to the United States Court of Appeals for the Fifth Circuit. Although the
ultimate outcome cannot be predicted with certainty, the Company believes that
the disposition of the matter should not have a material adverse effect on its
financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, $0.01 par value per share (the "Common Stock"),
is traded on the Nasdaq National Market under the symbol "TPTH". The following
table sets forth, for the calendar periods indicated, the range of high and low
bid and ask prices for the Common Stock of the Company on the Nasdaq National
Market. These prices do not include retail mark-up, mark-down or commissions and
may not represent actual transactions.

HIGH LOW
------- -------

YEAR ENDED DECEMBER 30, 1999:
First Quarter............................................. $ 7.750 $ 3.188
Second Quarter............................................ $ 8.250 $ 5.188
Third Quarter............................................. $ 7.125 $ 3.500
Fourth Quarter............................................ $ 6.625 $ 3.500
YEAR ENDED DECEMBER 30, 2000:
First Quarter............................................. $14.125 $ 3.750
Second Quarter............................................ $ 9.125 $ 4.500
Third Quarter............................................. $11.125 $ 4.563
Fourth Quarter............................................ $10.000 $ 7.500

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On March 30, 2001, the last reported sales price of the Common Stock on the
Nasdaq National Market was $6.25 per share. As of March 30, 2001, there were
approximately 300 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain its future earnings, if any, for use in
its business and therefore does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included in this Form 10-K.

YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 (1) 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA (3):
Net sales................................. $ 4,938 $ 13,492 $ 16,849 $ 18,466 $ 32,652
Gross profit (loss)....................... 125 6,765 7,155 8,098 16,646
Research and development.................. 15,568 18,711 15,969 12,258 9,351
Selling, general and administrative....... 23,786 24,278 25,408 17,724 24,263
Operating loss............................ (39,229) (36,224) (37,307) (33,251) (16,968)
Net loss.................................. $(35,501) $(34,582) $(35,271) $(32,557) $(17,369)
======== ======== ======== ======== ========
Net loss per Share (basic and diluted)
(2).................................... $ (1.91) $ (1.46) $ (1.17) $ (0.60)
======== ======== ======== ======== ========
Weighted-average shares outstanding (2)... 18,123 24,098 27,819 29,137
======== ======== ======== ======== ========

YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 (1) 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)

BALANCE SHEET DATA (3):
Cash, cash equivalents and securities
available for sale..................... $ 68,005 $ 57,374 $ 28,941 $ 13,962 $ 54,340
Working capital........................... 71,493 64,881 32,553 17,338 62,316
Total assets...................... 92,815 95,962 68,176 58,874 97,471
Long term obligations..................... 183 151 2,051 1,117 3,760
Redeemable convertible preferred stock.... 9,882 -- -- -- --
Total stockholders' equity........ $ 76,837 $ 88,255 $ 55,075 $ 47,025 $ 80,774

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

(1) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS from January 1, 1996 through November 21, 1996, the
operations of TriPath Imaging, as conducted by AutoCyte, Inc., from November
22, 1996 through December 31, 1996 and the operations of TriPath Imaging, as
conducted by NeoPath for the year ended December 31, 1996.
(2) See Note 2 of Notes to the Company's Financial Statements for information
concerning the computation of net loss per share and shares used in
computing net loss per share. Net loss per share is not disclosed for
periods prior to November 22, 1996 since RIAS operated as a wholly owned
subsidiary of Roche Holding Ltd. prior to the formation of AutoCyte.
(3) The selected consolidated financial data has been restated to reflect the
pooling transaction that occurred on September 30, 1999.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Background

TriPath Imaging develops, manufactures, and markets proprietary products
for cancer cell diagnosis, cytology and histopathology. The Company holds in
excess of 100 patents that, cumulatively, form a body of intellectual property
that spans the entire breadth of image analysis and display in cytology and
histopathology. TriPath Imaging manufactures and sells products developed from
its proprietary technologies and intellectual property. These include
FDA-approved products designed to automate the screening for cancer of the
uterine cervix, including the PREP system and the AutoPap system. In addition,
the Company has developed the extended Slide Wizard line of products, whose
modules include an FDA-approved method for automating measurement of antinuclear
antibodies as well as research applications in histopathology, LINK, a
telepathology system, and the AutoCyte Image Management and Archiving System or
AIMS, a software based image storage and retrieval system for microscopic
images.

TriPath Imaging was created to leverage the complementary nature of the
products, technologies, and intellectual property developed by its predecessor
companies, all of whom were early pioneers in the application of computerized
image processing and analysis to detect the often subtle cellular abnormalities
associated with cancer and its precursors. The Company believes that its
intellectual property provides a strong foundation for the development and
defense of imaging products. The Company also believes that recent advances in
genomics, biology, and informatics are providing new opportunities to leverage
TriPath Imaging's proprietary technology. To date, the Company has leveraged its
technology assets through the development of an integrated solution for cervical
cancer screening and other products for the histopathology laboratory.

TriPath Imaging generates PREP revenue from either the sale or rental of
PREP systems and from the sale of the related test kits, comprised of
proprietary reagents and other disposables. Additionally, the Company generates
revenue from service contracts on the PREP systems. For system sales, customers
purchase the PREP instrument and make separate purchases of test kits. For
system rentals, customers pay a fixed monthly fee for the equipment and make
separate purchases of test kits. The Company also offers an Integrated Purchase
Option, or "IPO," program where PREP systems are placed at the customer's site
free of charge, and the customer pays a higher per-test price for the reagents
and disposables. Under this program, the Company records revenue for the
instrument sale which is actually sold to a third-party financial institution.
The Company has entered into an agreement with a financial institution to
support the placement of PREP IPO systems. The financial institution is repaid
with part of the proceeds of the reagents and disposables sold. Each PREP system
placed typically provides a recurring revenue stream as customers process the
test kits sold by the Company.

Successful commercialization of PREP and AutoPap for cervical cancer
screening in the United States and some other countries will depend on the
availability of reimbursement from third-party payors. Third-party payors may
limit the price TriPath Imaging can charge for the PREP and AutoPap systems or
reduce the demand for its products by regulating the maximum amount of
reimbursement they provide, or by not providing any reimbursement at all. The
Company does not believe the national limits for reimbursement of cervical
cancer screening using PREP or AutoPap recently established by HCFA, the
organization which administers Medicare, will adversely impact the Company's
current pricing strategy or reduce the demand for its products.

TriPath Imaging generates revenue from either the sale, or rental, of its
extended Slide Wizard line of products. Additionally, the Company generates
revenue from service contracts on these products. For system sales, customers
purchase the products through distributors in countries where such relationships
exist. Where distributor arrangements do not exist, the Company sells these
products directly to the customer.

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quarter of 2000, the Company significantly expanded its marketing and sales
activities to accelerate the commercialization of its core business in several
ways. Additional laboratory sales representatives were hired to increase contact
potential for the laboratory customer marketplace. Through an alliance with NPS,
the Company engaged the physician market directly for the first time by adding
physician directed representatives, on a contract basis, to augment TriPath
Imaging's direct sales efforts. To further educate and reinforce the benefits of
TriPath Imaging products, a long-term partnership with a third party
physician/peer selling organization was initiated and will carry through into
2002.

TriPath Imaging believes that its proprietary technology and intellectual
property will provide a unique platform for an array of applications in cell
pathology. The Company believes that combining AutoPap and PREP will create a
unique and integrated system that is otherwise currently not available from any
other single vendor. In October of 1999, the Company announced the initial
submission of a supplement to the FDA for the screening of PREP slides using the
AutoPap. In December 2000, the Company announced the submission of new clinical
data to the FDA to support applications to expand the claims for the AutoPap and
PREP to include the screening of PREP thin-layer preparations on the AutoPap. As
a result of ongoing discussions with the FDA regarding the Company's
submissions, the Company believes that it will have various options in
connection with the pending premarket approval application supplement regarding
use of the AutoPap system to screen PREP thin-layer slides. Among these are to
accept limitations in the Company's proposed product labeling or to collect
additional data to support the current labeling proposal. The Company is
evaluating its options and considering the best course of action. If FDA
approval is obtained, the Company will seek to achieve broad market acceptance
for the system integrating PREP and AutoPap for cervical cancer screening. There
can be no assurance, however, when, if ever, such approval will be obtained.

TriPath Imaging launched the AutoPap GS, the next generation of AutoPap
system, for use outside of the U.S. in the fourth quarter of 2000. The AutoPap
GS system, which screens both conventional Pap smears and AutoCyte Prep
thin-layer preparations, incorporates the Company's Slide Wizard user interface
and motorized microscopic stage to direct the cytologist to fields of view
determined by the AutoPap to most likely contain abnormal cells. The Company
anticipates initiating clinical trials in the second quarter of 2001 to obtain
data to support an application for U.S. approval of AutoPap GS by the FDA.

In November 2000, TriPath Imaging completed a private placement of
securities under Regulation D of the Securities Act with a subsidiary of
Hoffmann-La Roche ("Roche") pursuant to which Roche acquired five million shares
of the Company's common stock for $8.00 per share. Additionally, Roche
simultaneously acquired, for an aggregate purchase price of $3.0 million,
warrants to purchase up to an additional five million shares with exercise
prices ranging from $10.00 to $15.00 per share. These warrants are immediately
exercisable by Roche. This transaction provided the Company with an additional
$43.0 million in cash.

In September 1999, Cytyc filed suit against TriPath Imaging in the United
States District Court for the District of Delaware alleging that the Company's
CytoRich proprietary preservative fluid infringed Cytyc's patent titled "Cell
Preservative Solution." TriPath Imaging denied Cytyc's claims. In May 2000,
Cytyc filed suit against TriPath Imaging in the United States District Court for
the District of Massachusetts alleging that the Company had distributed
misleading information to current and potential purchasers of Cytyc's products.
TriPath Imaging denied Cytyc's claims and asserted counterclaims alleging that
Cytyc had made misleading statements regarding both its own product and TriPath
Imaging's product and had violated antitrust laws. In January 2001, Cytyc and
TriPath Imaging settled all litigation between the two companies. All claims and
counterclaims against each other pending in Delaware and Massachusetts were
dismissed with prejudice.

In March 2000, the Company announced a restructuring of its agreement with
Quest. As a result of this arrangement, the Company received from Quest payments
comprising a substantial portion of the Company's total revenue for the year
2000. As Quest has substantially performed its obligations under the agreement,
the Company does not expect to receive significant revenue under this agreement
in the year 2001.

The Company's strategy is to maximize the number of instruments placed with
customers and thereby increase its ongoing, higher margin reagent and
fee-per-use revenue streams. As an important element of this strategy, the
Company has entered into an agreement with a third-party financial institution
to support the placement of PREP IPO systems and AutoPap fee-per-use systems.

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

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

- the timing and volume of system placements;

- pricing of competitive products;

- the cost and effect of promotional discounts, sales, and marketing
programs and strategies;

- introduction of alternative technologies by competitors;

- regulatory and reimbursement matters;

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

- research and development activities; and

- the extent to which the Company is successful in developing research and
marketing alliances.

During the fourth quarter of 2000, the Company enhanced and augmented its
sales and marketing efforts through additional hiring and its arrangement with
NPS, resulting in total sales and marketing forces in excess of 70 individuals.
These forces include individuals engaged directly with the OB-GYN and primary
care physician market to detail the PREP product. Additionally, the Company has
expanded its laboratory sales forces under geographically established divisional
lines to better address potential customers around the country. The Company has
also established a focus on Marketing, and has focused resources on various
marketing related initiatives designed to increase awareness and market
acceptance of its products and services. TriPath Imaging anticipates that
manufacturing expenses will increase to the extent that market acceptance of our
products increases.

The Company has not generated any taxable income to date and, therefore,
has not paid any federal income taxes since its inception. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred tax assets as of December 31, 2000 and 1999, have been
established in each period to reflect these uncertainties.

At December 31, 2000, the Company had net tax losses of approximately
$181.4 million that may be carried forward to offset future taxable income. In
addition, the Company had research credits available for carryforward of $3.5
million. These amounts expire beginning in 2003. Utilization of net tax losses
and any tax credit carryforwards are subject to complex treatment under the
Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to Section 382
of the Code, the change in ownership resulting from the Company's initial public
offering in September 1997 and any other future sale of stock may limit
utilization of future losses in any one year. The Company believes that the sale
of Common Stock in the offering did not create any immediate limitations on the
Company's utilization of net operating losses.

RESULTS OF OPERATIONS

Years ended December 31, 2000 and 1999

Revenues -- Revenues for the year ended December 31, 2000 were $32.7
million, a 77% increase from revenues of $18.5 million for 1999. The increase in
revenues is attributable to increases of $2.8 million in AutoPap fee-per-use
revenue, and related revenue, and $5.2 million in AutoPap product sales. PREP
revenue increased $5.8 million while Slide Wizard products revenue increased
$400,000.

Gross Margin -- Gross margin increased from 44% in 1999 to 51% in 2000.
Contributing substantially to the increase in 2000 was increased PREP
disposables revenue for gynecological purposes.

Research and Development -- Research and development expenses for 2000 were
$9.4 million, a 24% decrease from $12.3 million in 1999. This decrease was
primarily attributable to the elimination redundant research and development
efforts after the merger.

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31

Selling, General and Administrative -- Selling, general and administrative
expenses for 2000 were $24.3 million, a 37% increase from $17.7 million in 1999.
This increase resulted from the Company's expanded sales and marketing programs,
to activities related to FDA submissions, to certain stock option related
compensation expense, and to expenses associated with defending and settling
litigation with a competitor.

Net Loss from Operations -- Net loss from operations during 2000 was $17.0
million, a 49% improvement from $33.3 million in 1999. This improvement is due
to improved gross profit resulting in large part from the 77% increase in
revenues that was partially offset by an increase in selling, general and
administrative expenses. A reduction in research and development expenses of
$2.9 million, as well as approximately $11.4 million in costs related to the
AutoCyte/NeoPath merger, also contributed to the improvement.

Interest Income and Expense -- Interest income for 2000 was $1.3 million, a
13% increase from $1.1 million during 1999, primarily attributable to increased
average cash balances during 2000 coupled with higher average rates of return on
funds invested. The higher average cash balances resulted from cash received
from an investment by Roche during the fourth quarter of 2000 and from a term
loan the Company acquired in the first quarter of 2000. Interest expense for
2000 was $1.7 million compared to $416,000 during 1999. This increase is due to
a term loan facility entered into during 2000.

Years ended December 31, 1999 and 1998

Revenues -- Revenues for the year ended December 31, 1999 were $18.5
million, a 10% increase from revenues of $16.8 million for 1998. The increase in
revenues is attributable to a $4.7 million increase in AutoPap fee-per-use
revenue, offset by a $4.1 million decrease in AutoPap product sales, and a $2.4
million increase in PREP revenue offset by a $1.4 million decrease in Slide
Wizard products revenue.

Gross Margin -- Gross margin increased from 42% in 1998 to 44% in 1999.
Contributing to the increase in 1999 was an increase in PREP revenue for
gynecological purposes, partially offset by a decrease in foreign sales of
AutoPap units.

Research and Development -- Research and development expenses for 1999 were
$12.3 million, a 23% decrease from $16.0 million in 1998. This decrease was
primarily attributable to decreased net development costs on additional AutoPap
applications, elimination of Pathfinder development expenses and the elimination
of redundant research and development efforts after the merger.

Selling, General and Administrative -- Selling, general and administrative
expenses for 1999 were $17.7 million, a 30% decrease from $25.4 million in 1998.
This decrease is due to headcount reduction occurring during 1999 and the
elimination of redundant functions after the merger.

Transaction, Integration and Restructuring Costs -- In connection with its
merger with NeoPath, the Company incurred approximately $8.4 million of
nonrecurring transaction, integration and restructuring costs. These costs
consisted primarily of $2.9 million in write-offs of assets, primarily property
and equipment, $2.6 million of professional and transaction fees, a $1.3 million
write-off of intangible assets, $1.1 million of severance costs and $500,000 in
other costs.

Net Loss from Operations -- Net loss from operations during 1999 was $33.3
million, an 11% improvement from $37.3 million in 1998. This improvement is due
to the 10% increase in revenues and the reduction of research and development
expenses in 1999, partially offset by the $8.4 million in non-recurring expenses
related to the merger.

Interest Income and Expense -- Interest income for 1999 was $1.1 million, a
52% decrease from $2.3 million during 1998, primarily attributable to the lower
average cash balances during 1999. Interest expense for 1999 was $416,000
compared to $274,000 during 1998. This increase is due to additional equipment
financing entered into in 1999.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1999, the FASB approved the Exposure Draft to defer for one year
the effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which is now

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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
will not have a significant impact on the Company's consolidated financial
position or results from operations. During the year ended December 31, 2000,
the Company adopted the SEC's newly issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statement" ("SAB 101"), under which revenue is
recorded upon the "material completion" of the sales transaction, as defined by
the Bulletin. The effect of the accounting change did not have a significant
impact on the consolidated statement of operations for the year ended December
31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

Since its formation on October 24, 1996, the Company's expenses have
significantly exceeded its revenues, resulting in an accumulated deficit of
$184.7 million as of December 31, 2000. The Company has funded its operations
primarily through the private placement and public sale of equity securities,
resulting in net proceeds of $191.6 million, debt facilities and limited product
sales. As of December 31, 2000, the Company had cash and cash equivalents of
$54.3 million.

Cash used in the Company's operations was $8.2 million in 2000, $23.0
million during 1999 and $30.5 million during 1998. Negative operating cash flow
during 2000, 1999, and 1998 was caused primarily by operating losses. The
Company's capital expenditures were $217,000 in 2000, $516,000 during 1999 and
$2.3 million during 1998, with the expenditures primarily attributable to the
purchase of machinery and equipment. The Company has no material commitments for
capital expenditures.

The Company has accrued a long-term contingent liability in the amount of
$1.3 million in accordance with the provisions of SFAS No. 5, "Accounting for
Contingencies," relating to the Company's obligation to pay a third party an
amount based on the difference between the market price of the Common Stock on a
specified date in the future and a predetermined target price.

In November 2000, TriPath Imaging completed a private placement of
securities under Regulation D of the Securities Act with a subsidiary of Roche
pursuant to which Roche acquired five million shares of the Company's common
stock for $8.00 per share. Additionally, Roche simultaneously acquired, for an
aggregate purchase price of $3.0 million, warrants to purchase up to an
additional five million shares with exercise prices ranging from $10.00 to
$15.00 per share. These warrants are immediately exercisable by Roche. This
transaction provided the Company with an additional $43.0 million in cash.

In February 2000 the Company closed on an agreement for a $7.0 million
subordinated debt facility. The facility was fully drawn at December 31, 2000.
The agreement called for interest payments for the first six months of the
agreement, after which principal amortization began. The loan balance, adjusted
for a debt discount of $1.6 million, established in connection with warrants
issued to the lenders was $4.7 million.

In February 2000, the Company obtained a $5.0 million, one-year working
capital facility from a bank. The Company had no balance drawn under this line
at December 31, 2000. The line of credit was renewed on February 1, 2001 for an
additional one year with substantially similar terms as in the preceding year.

The Company believes that its existing cash and anticipated additional debt
and lease financing for internal use assets, rental placements of PREP and
fee-per-use placements of AutoPap, will be sufficient to enable the Company to
meet its future cash obligations through 2001. The Company's future liquidity
and capital requirements will depend upon numerous factors, including the level
of placements of both PREP and AutoPap systems, the resources required, to
further develop, and actual success of, its marketing and sales capabilities and
efforts domestically and internationally, the resources required to expand
manufacturing capacity and the extent to which the Company's products generate
market acceptance and demand. In particular, the Company anticipates that
marketing and sales expenditures for the continued PREP commercial rollout for
gynecological uses in the United States, capital expenditures associated with
placements of PREP IPO and rental units and AutoPap fee-per-use instruments, and
expenditures related to manufacturing and other administrative costs will
increase significantly. There can be no assurance that the

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Company 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 needed or
on terms acceptable to the Company, which would have a material adverse effect
on the Company's liquidity and capital resources, business, financial condition
and results of operations.

The discussion included in this section, as well as elsewhere in the Annual
Report on Form 10-K, may contain forward-looking statements based on current
expectations of the Company's management. Such statements are subject to risks
and uncertainties that could cause actual results to differ from those
projected. See "Factors Affecting Future Operating Results" attached hereto as
Exhibit 99.1 and incorporated by reference into this Form 10-K. Readers are
cautioned not to place undue reliance on the forward looking statements, which
speak only as the date hereof. The Company undertakes 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's financial results and cash flows are subject to fluctuation
due to changes in interest rates, primarily from its investment of available
cash balances in highly rated institutions. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item may be found on pages F-1 through
F-20 of this Form 10-K.

ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters in the last fiscal year.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the captions "Election of Directors" and "Section 16(a) Beneficial Reporting
Compliance" in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders scheduled for May 24, 2001 (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions "Election of Directors,"
"Director Compensation," "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Proxy Statement.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) 1.Financial Statements

The consolidated financial statements are listed under Part II, Item 8 of
this report.

2.Financial Statement Schedule

Reference is hereby made to Schedule II -- Valuation and Qualifying
Accounts which is listed under Part II, Item 8 of this report.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements.

3.Exhibits

The exhibits are listed under Part IV, Item 14(c) of this report.

(b)Reports on Form 8-K

On October 24, 2000, the Company filed on Form 8-K to include financial
information related to the financial investment by Roche.

On February 2, 2001, the Company filed on Form 8-K to include information
of its settlement of litigation with Cytyc Corporation.

(c)Exhibits

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

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35

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.5+ OEM Supply Agreement dated January 13, 1995 between Tecan AG
and RIAS, 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 OEM Supply Agreement dated October 14, 1996
between Tecan AG and RIAS, 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 RIAS, 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., RIAS 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 RIAS, the Company's predecessor.
Filed as Exhibit 10.12 to the Company's Form 10-K for the
year ended December 31, 1997 (File No. 0-22885) and
incorporated herein by reference.
10.13 Lease Agreement dated July 8, 1998 by and between Laboratory
Corporation of America, TM 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.

34
36

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.20+ OEM Supply Agreement dated as of June 26, 1999 by and
between Tecan AG and AutoCyte, Inc. Filed as Exhibit 10.20
to the Amendment No. 2 to the Company's S-1 (File No.
333-82121) and incorporated herein by reference.
10.21 Intellectual Property Purchase Agreement dated as of April
24, 1999 by and between NeoPath, Inc. and AutoCyte, Inc.
Filed as Exhibit 10.20 to the Amendment No. 2 to the
Company's S-1 (File No. 333-82121) and incorporated herein
by reference.
10.22+ Master Agreement dated as of November 18, 1999 by and
between TriPath Imaging, Inc. and Laboratory Corporation of
America Holdings. Filed as Exhibit 10.22 to the Company's Form 10-K
for the year ended December 31, 1999 (File No. 0-22885) and
incorporated herein by reference.
10.23 Loan and Security Agreement dated as of January 19, 2000 by
and between MMC/GATX Partnership No. I, Transamerica
Business Credit Corporation and TriPath Imaging, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended March 31, 2000 (File No. 0-22885) and incorporated
herein by reference.
10.24 Loan and Security Agreement dated as of January 31, 2000 by
and between Silicon Valley Bank and TriPath Imaging, Inc.
Filed as Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 2000 (File No. 0-22885) and
incorporated herein by reference.
10.25* Severance Agreement between the Company and Ernest Knesel,
dated May 11, 2000. Filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 2000 (File No.
0-22885) and incorporated herein by reference.
10.26* Option Repricing Agreement between the Company and Alan C.
Nelson, dated June 29, 2000. Filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 30, 2000
(File No. 0-22885) and incorporated herein by reference.
10.27 Securities Purchase Agreement, dated September 26, 2000, by
and among TriPath Imaging, Inc., Roche International Ltd.
and Certain Stockholders of TriPath Imaging. Filed as
Exhibit 99.2 to the Company's Form 8-K as filed with the
commission on October 24, 2000 (File No. 0-232885) and
incorporated herein by reference.
23.1 Consent of Ernst & Young LLP, independent auditors to the
Company. Filed herewith.
99.1 Factors Affecting Future Operating Results. Filed herewith.

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

* 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 both
Rule 406 of the Securities Act of 1933, as amended, and Rule 24b-2 of the
Securities Exchange Act of 1934, as amended, as applicable. Omitted
information is identified with asterisks in the appropriate places in the
agreement.

35
37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Burlington, State of North Carolina, on March 30, 2001.

TRIPATH IMAGING, INC.

By: /s/ Paul R. Sohmer
------------------------------------
Paul R. Sohmer, M.D.
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 30th day of March, 2001.

SIGNATURE TITLE
--------- -----

/s/ Paul R. Sohmer President, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
PAUL R. SOHMER, M. D.

/s/ James D. Everhart Director of Finance and Treasurer (Principal
- ----------------------------------------------------- Financial Officer and Principal Accounting
JAMES D. EVERHART Officer)

/s/ Thomas A. Bonfiglio Director
- -----------------------------------------------------
THOMAS A. BONFIGLIO, M.D.

/s/ Richard A. Charpie Director
- -----------------------------------------------------
RICHARD A. CHARPIE

/s/ Haywood D. Cochrane, Jr. Director
- -----------------------------------------------------
HAYWOOD D. COCHRANE, JR.

/s/ Robert E. Curry Director
- -----------------------------------------------------
ROBERT E. CURRY

/s/ David A. Thompson Director
- -----------------------------------------------------
DAVID A. THOMPSON

36
38

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

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 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.
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, Inc. ("RIAS"), the Company's
predecessor (including notices of renewal thereof dated
January 10, 1996 and March 18, 1997). Filed as Exhibit 10.4
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.5+ OEM Supply Agreement dated January 13, 1995 between Tecan AG
and RIAS, 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 OEM Supply Agreement dated October 14, 1996
between Tecan AG and RIAS, 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 RIAS, 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., RIAS 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.

37
39

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

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 RIAS, the Company's predecessor.
Filed as Exhibit 10.12 to the Company's Form 10-K for the
year ended December 31, 1997 (File No. 0-22885) and
incorporated herein by reference.
10.13 Lease Agreement dated July 8, 1998 by and between Laboratory
Corporation of America, TM Holdings and AutoCyte, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (File No. 0-22885) and incorporated
herein by reference.
10.14 Lease Agreement dated June 12, 1998 by and between Carolina
Hosiery Mills, Inc. and AutoCyte, Inc. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended June 30,
1998 (File No. 0-22885) and incorporated herein by
reference.
10.15+ Supply Agreement dated June 1, 1998 by and between Technical
Precision Plastics, Inc. and AutoCyte, Inc. Filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June
30, 1998 (File No. 0-22885) and incorporated herein by
reference.
10.16+ Supply Agreement dated March 5, 1998 by and between Tecan AG
and AutoCyte, Inc. Filed as Exhibit 10.3 to the Company's
Form 10-Q for the quarter ended June 30, 1998 (File No.
0-22885) and incorporated herein by reference.
10.17 Master Loan and Security Agreement dated December 21, 1998
by and between Oxford Venture Finance, LLC and AutoCyte,
Inc. Filed as Exhibit 10.17 to the Company's Form 10-K for
the year ended December 31, 1998 (File No. 0-22885) and
incorporated herein by reference.
10.18 Amendment dated March 2, 1999 to Lease Agreement dated July
28, 1997 between Carolina Hosiery Mills, Inc. and AutoCyte,
Inc. Filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended March 31, 1999 (File No. 0-22885) and
incorporated herein by reference.
10.19 Asset Purchase Agreement by and between AutoCyte, Inc. and
Neuromedical Systems, Inc. dated as of March 25, 1999. Filed
as Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended March 31, 1999 (File No. 0-22885) and incorporated
herein by reference.
10.20+ OEM Supply Agreement dated as of June 26, 1999 by and
between Tecan AG and AutoCyte, Inc. Filed as Exhibit 10.20
to the Amendment No. 2 to the Company's S-1 (File No.
333-82121) and incorporated herein by reference.
10.21 Intellectual Property Purchase Agreement dated as of April
24, 1999 by and between NeoPath, Inc. and AutoCyte, Inc.
Filed as Exhibit 10.20 to the Amendment No. 2 to the
Company's S-1 (File No. 333-82121) and incorporated herein
by reference.
10.22+ Master Agreement dated as of November 18, 1999 by and
between TriPath Imaging, Inc. and Laboratory Corporation of
America Holdings. Filed as Exhibit 10.22 to the Company's Form 10-K
for the year ended December 31, 1999 (File No. 0-22885) and
incorporated herein by reference.
10.23 Loan and Security Agreement dated as of January 19, 2000 by
and between MMC/GATX Partnership No. I, Transamerica
Business Credit Corporation and TriPath Imaging, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended March 31, 2000 (File No. 0-22885) and incorporated
herein by reference.
10.24 Loan and Security Agreement dated as of January 31, 2000 by
and between Silicon Valley Bank and TriPath Imaging, Inc.
Filed as Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 2000 (File No. 0-22885) and
incorporated herein by reference.
10.25* Severance Agreement between the Company and Ernest Knesel,
dated May 11, 2000. Filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 2000 (File No.
0-22885) and incorporated herein by reference.

38
40

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.26* Option Repricing Agreement between the Company and Alan C.
Nelson, dated June 29, 2000. Filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 30, 2000
(File No. 0-22885) and incorporated herein by reference.
10.27 Securities Purchase Agreement, dated September 26, 2000, by
and among TriPath Imaging, Inc., Roche International Ltd.
and Certain Stockholders of TriPath Imaging. Filed as
Exhibit 99.2 to the Company's Form 8-K as filed with the
commission on October 24, 2000 (File No. 0-232885) and
incorporated herein by reference.
23.1 Consent of Ernst & Young LLP, independent auditors to the
Company. Filed herewith.
99.1 Factors Affecting Future Operating Results. Filed herewith.

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

39
41

TRIPATH IMAGING, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999, and 1998......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999, and 1998............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998......................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1
42

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
TriPath Imaging, Inc.

We have audited the accompanying consolidated balance sheets of TriPath
Imaging, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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 TriPath
Imaging, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Raleigh, North Carolina
February 2, 2001

F-2
43

TRIPATH IMAGING, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------------
2000 1999
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 54,340,169 $ 13,962,337
Accounts receivable, less allowance of $1,475,000 and
$1,347,142 at December 31, 2000 and 1999,
respectively........................................... 11,548,974 5,388,972
Inventory, less reserves for obsolescence of $2,338,573
and $2,444,059 at December 31, 2000 and 1999,
respectively........................................... 8,422,184 7,802,907
Other current assets...................................... 940,692 916,126
------------- -------------
Total current assets................................... 75,252,019 28,070,342
Customer use assets......................................... 9,399,739 16,111,380
Property and equipment...................................... 1,868,059 2,754,812
Other assets................................................ 107,242 294,331
Patents, less accumulated amortization of $1,085,165 and
$418,420 at December 31, 2000 and 1999, respectively...... 8,459,253 9,108,738
Goodwill, less accumulated amortization of $615,625 and
$465,625 at December 31, 2000 and 1999, respectively...... 2,384,375 2,534,375
------------- -------------
Total assets........................................... $ 97,470,687 $ 58,873,978
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,600,312 $ 2,536,180
Accrued expenses.......................................... 3,947,111 4,602,252
Deferred revenue and customer deposits.................... 1,156,541 1,676,180
Current portion of long-term debt......................... 3,232,114 1,917,345
------------- -------------
Total current liabilities.............................. 12,936,078 10,731,957
Long-term debt, less current portion........................ 2,447,594 1,020,030
Other long-term liabilities................................. 1,312,789 96,643
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding................... -- --
Common stock, $0.01 par value; 49,000,000 shares authorized;
34,125,649 and 28,107,362 shares issued and outstanding at
December 31, 2000 and 1999, respectively.................. 341,256 281,074
Additional paid-in capital.................................. 265,260,039 214,892,392
Deferred compensation....................................... (89,140) (779,645)
Accumulated deficit......................................... (184,737,929) (167,368,473)
------------- -------------
Total stockholders' equity............................. 80,774,226 47,025,348
------------- -------------
Total liabilities and stockholders' equity............. $ 97,470,687 $ 58,873,978
============= =============

See accompanying notes.
F-3
44

TRIPATH IMAGING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Revenues............................................. $ 32,651,749 $ 18,465,774 $ 16,848,622
Cost of revenues..................................... 16,006,248 10,368,173 9,693,512
------------ ------------ ------------
Gross profit......................................... 16,645,501 8,097,601 7,155,110
Operating expenses:
Research and development........................... 9,350,769 12,258,089 15,969,366
Selling, general and administrative................ 24,262,500 17,723,571 25,408,119
Transaction, integration & restructuring costs..... -- 8,445,343 --
In-process research & development.................. -- 2,922,000 --
Write-off of intangible assets..................... -- -- 3,084,289
------------ ------------ ------------
33,613,269 41,349,003 44,461,774
------------ ------------ ------------
Operating loss....................................... (16,967,768) (33,251,402) (37,306,664)
Interest income...................................... 1,256,359 1,110,627 2,309,716
Interest expense, including amortization of non-cash
debt issuance costs under term loan agreement...... (1,658,047) (416,065) (273,705)
------------ ------------ ------------
Net loss............................................. $(17,369,456) $(32,556,840) $(35,270,653)
============ ============ ============
Net loss per common share (basic and diluted)........ $ (0.60) $ (1.17) $ (1.46)
============ ============ ============
Weighted-average common shares outstanding........... 29,137,224 27,818,600 24,098,206
============ ============ ============

See accompanying notes.
F-4
45

TRIPATH IMAGING, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COMPENSATION DEFICIT INCOME(LOSS) EQUITY
-------- ------------ ------------ ------------- ------------- -------------

Balance at January 1,
1998...................... $238,773 $190,497,464 $(2,743,280) $ (99,540,980) $(196,649) $ 88,255,328
Exercise of options and
warrants................ 2,692 164,028 -- -- -- 166,720
Release of common stock
held in escrow.......... 332 548,946 -- -- -- 549,278
Issuance of common stock
under employee stock
purchase plan........... 132 130,518 -- -- -- 130,650
Issuance of stock based
compensation to
consultant.............. -- 200,000 -- -- -- 200,000
Amortization of deferred
compensation............ -- -- 862,764 -- -- 862,764
Unrealized appreciation on
securities
available-for-sale...... -- -- -- -- 180,918 180,918
Net loss.................. -- -- -- (35,270,653) -- (35,270,653)
------------
Comprehensive loss...... (35,089,735)
-------- ------------ ----------- ------------- --------- ------------
Balance at December 31,
1998...................... 241,929 191,540,956 (1,880,516) (134,811,633) (15,731) 55,075,005
Exercise of options and
warrants................ 2,146 150,125 -- -- -- 152,271
Private issuance of common
stock................... 22,919 14,098,336 -- -- -- 14,121,255
Issuance of common stock
for intellectual
property................ 14,000 9,335,917 -- -- -- 9,349,917
Issuance of common stock
under employee stock
purchase plan........... 80 46,689 -- -- -- 46,769
Issuance of stock based
compensation to
consultant.............. -- 7,100 -- -- -- 7,100
Adjustment to deferred
compensation............ -- (286,731) 286,731 -- -- --
Amortization of deferred
compensation............ -- -- 814,140 -- -- 814,140
Unrealized appreciation on
securities
available-for-sale...... -- -- -- -- 15,731 15,731
Net loss.................. -- -- -- (32,556,840) -- (32,556,840)
------------
Comprehensive loss...... (32,541,109)
-------- ------------ ----------- ------------- --------- ------------
Balance at December 31,
1999...................... 281,074 214,892,392 (779,645) (167,368,473) -- 47,025,348
Exercise of options and
warrants................ 8,382 1,542,762 -- -- -- 1,551,144
Private issuance of common
stock and warrants...... 50,000 42,950,000 -- -- -- 43,000,000
Issuance of warrants as
consideration under term
loan agreement.......... -- 1,725,041 -- -- -- 1,725,041
Re-pricing of warrants
issued as consideration
under term loan
agreement............... -- 420,042 -- -- -- 420,042
Re-pricing of stock
options................. -- 2,133,839 -- -- -- 2,133,839
Issuance of stock based
compensation............ 1,800 1,618,200 -- -- -- 1,620,000
Adjustment to deferred
compensation............ -- (22,237) 22,237 -- -- --
Amortization of deferred
compensation............ -- -- 668,268 -- -- 668,268
Net loss.................. -- -- -- (17,369,456) -- (17,369,456)
------------
Comprehensive loss...... (17,369,456)
-------- ------------ ----------- ------------- --------- ------------
Balance at December 31,
2000...................... $341,256 $265,260,039 $ (89,140) $(184,737,929) $ -- $ 80,774,226
======== ============ =========== ============= ========= ============

See accompanying notes.
F-5
46

TRIPATH IMAGING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

OPERATING ACTIVITIES
Net loss.................................................. $(17,369,456) $(32,556,840) $(35,270,653)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 5,867,594 6,894,994 5,707,956
Amortization of intangible assets..................... 816,745 604,081 998,914
Amortization of deferred compensation................. 668,268 814,140 862,764
Non-cash restructuring costs.......................... -- 4,239,489 --
Non-cash equity compensation.......................... 2,133,839 -- --
Purchased in-process research and development......... -- 2,922,000 --
Write off of intangible assets........................ -- -- 3,084,289
Accrued interest on securities available-for-sale..... -- -- 562,267
Issuance of stock options for services rendered....... -- 7,100 200,000
Issuance of stock based compensation.................. 1,620,000 -- --
Amortization of non-cash debt issuance costs.......... 506,842 -- --
Loss on disposal of fixed assets...................... 1,190 -- --
Other non-cash items.................................. 1,260,000 22,455 --
Changes in operating assets and liabilities:
Accounts receivable................................... (6,160,002) (1,836,385) 839,683
Inventory............................................. 1,327,825 (4,677,607) (7,987,234)
Other current assets.................................. (24,566) (169,833) (158,636)
Other long- term assets............................... 187,089 619,519 (184,570)
Accounts payable and accrued expenses................. 1,444,355 (547,360) 426,212
Deferred revenue and customer deposits................ (519,639) 713,510 400,793
------------ ------------ ------------
Net cash used in operating activities..................... (8,239,916) (22,950,737) (30,518,215)
INVESTING ACTIVITIES
Purchases of property and equipment....................... (217,493) (515,825) (2,320,913)
Purchases of securities available-for-sale................ -- (7,199,372) (1,743,949)
Maturities of securities available-for-sale............... -- 10,589,652 23,397,684
Additions to intellectual property........................ (17,260) (4,259,797) (63,962)
Other..................................................... -- -- (6,756)
------------ ------------ ------------
Net cash (used in) provided by investing activities....... (234,753) (1,385,342) 19,262,104
FINANCING ACTIVITIES
Net proceeds from issuance of common stock and warrants... 43,000,000 14,411,255 --
Issuance of common stock under employee stock purchase
plan.................................................... -- 46,769 130,650
Proceeds from exercise of stock options and warrants...... 1,551,144 152,271 166,720
Other..................................................... (79,218) (220,020) (34,545)
Proceeds from long-term debt.............................. 8,500,000 1,242,565 5,855,019
Payments on long-term debt................................ (4,119,425) (2,900,398) (1,259,811)
------------ ------------ ------------
Net cash provided by financing activities................. 48,852,501 12,732,442 4,858,033
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents...... 40,377,832 (11,603,637) (6,398,078)
Cash and cash equivalents at beginning of period.......... 13,962,337 25,565,974 31,964,052
------------ ------------ ------------
Cash and cash equivalents at end of period................ $ 54,340,169 $ 13,962,337 $ 25,565,974
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................... $ 1,151,205 $ 416,065 $ 273,705
============ ============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of warrants as consideration under term loan
agreement and subsequent re-pricing..................... $ 2,145,083 $ -- $ --
Common stock issued for acquisition of intellectual
property................................................ -- 9,450,000 --
------------ ------------ ------------
$ 2,145,083 $ 9,450,000 $ --
============ ============ ============

See accompanying notes.
F-6
47

TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

TriPath Imaging, Inc. ("TriPath" or the "Company"), formerly known as
AutoCyte, Inc. ("AutoCyte"), develops, manufactures and markets products to
improve cervical cancer screening. Improved slide preparation technology is
delivered through the AutoCyte PREP System(TM) ("PREP"), a proprietary automated
thin-layer cytology sample preparation system that produces representative
slides with a homogeneous, thin-layer of cervical cells, and is one of only two
sample preparation systems approved by the FDA as a replacement for the
conventional Pap smear. TriPath also delivers visual intelligence technology to
increase accuracy and productivity in medical testing through the AutoPap(R)
Primary Screening System ("AutoPap"), which utilizes proprietary technology to
distinguish between normal Pap smears and those that have the highest likelihood
of abnormality.

On September 30, 1999, AutoCyte completed its merger of NeoPath, Inc.
("NeoPath") in exchange for approximately 13.8 million shares of AutoCyte common
stock. The transaction was structured as a merger (the "Merger") of a
wholly-owned subsidiary of AutoCyte with and into NeoPath. The Merger was a
tax-free reorganization and was accounted for as a pooling of interests in
accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". NeoPath developed and marketed products to increase accuracy in
medical testing. In conjunction with the Merger, AutoCyte changed its name to
TriPath Imaging, Inc.

The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow:

NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- ------------
(UNAUDITED)

Revenues
AutoCyte.............................................. $ 3,882,442 $ 4,769,686
NeoPath............................................... 8,203,803 12,078,936
----------- -----------
Combined........................................... $12,086,245 $16,848,622
=========== ===========
Net Loss
AutoCyte.............................................. $14,419,778 $ 9,090,072
NeoPath............................................... 15,092,893 26,180,581
----------- -----------
Combined........................................... $29,512,671 $35,270,653
=========== ===========

The accompanying consolidated financial statements include operations of
the combined companies for all periods presented.

Revenues from sales of products have not generated sufficient cash to
support the Company's operations. The Company has incurred substantial losses
since inception. The Company has funded its operations primarily through the
private placement and public sale of equity securities, debt and lease
financing, and limited product sales. 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

Principles of Consolidation

The consolidated financial statements include the accounts of TriPath and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

F-7
48
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Use of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition

Revenue is recognized from product sales and fee-per-use arrangements,
including service and license agreements, rental contracts, and minimum
fee-per-use contracts. The Company recognizes product sales revenue upon
shipment if the products do not require installation at the customer's site upon
shipment (typically international distributor sales and disposable sales).
Fee-per-use, and all service-related, 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.

Securities Available-for-Sale

TriPath's investment portfolio, which was disposed of in 1999, was
classified as available-for-sale, and such securities were stated at fair value,
with unrealized gains and losses included in other comprehensive income or loss.
Interest earned on securities available-for-sale was included in interest
income. The amortized cost of investments in this category was adjusted for
accretion of premiums and amortization of discounts to maturity. Such
amortization and accretion were included in interest income. The cost of
securities sold was calculated using the specific identification method.

Inventory

Inventory is stated at the lower of cost or net realizable value (first-in
first-out basis). Net realizable value of inventory is reviewed in detail on an
on-going basis, with consideration given to deterioration, obsolescence, and
other factors.

Customer-Use Assets

PREP and AutoPap systems manufactured for rental or fee-per-use placements
are carried in inventory until the systems are shipped, at which time they are
reclassified to customer-use assets (non-current assets). Reclassifications of
$2,142,642, $4,348,709 and $7,721,515 occurred between customer-use assets and
inventory during 2000, 1999 and 1998, respectively. Customer-use assets are
depreciated on a straight-line basis over an estimated useful life of four
years. Depreciation expense of customer-use assets amounted to $4,183,849,
$4,065,233 and $2,431,152 during 2000, 1999 and 1998, respectively.

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 seven years)
of the individual assets. Depreciation expense of property and equipment
amounted to $1,488,205, $2,829,761 and $3,276,804 during 2000, 1999 and 1998,
respectively.

F-8
49
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill

The excess cost over the fair value of net assets acquired ("goodwill") is
being amortized using the straight-line method over 20 years.

Patents

Patents consist of patents and core technology acquired from Neuromedical
Systems, Inc. ("NSI"). Such assets are amortized using the straight-line method
over estimated useful lives ranging from 14 to 20 years.

Asset Impairment

The Company periodically reviews the value of its long-lived assets to
determine if an impairment has occurred. In accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ", if this review indicates that the assets 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 long-lived assets accordingly. During 1998, the Company recognized such a
loss for the write-off of intangible assets related to the Pathfinder product
line (see note 5). There were no such losses recognized in 1999 or 2000.

Deferred Revenue

Deferred revenue consists of upfront cash receipts related to AutoPap and
PREP service and equipment contracts and a worldwide exclusive international
distributor agreement for the Company's ImageTiter(R) product. Pursuant to the
terms of the agreement, the Company received a $1,000,000 non-refundable payment
for the agreement, services to be performed, and as a payment for future product
shipments. Revenue related to the worldwide exclusive international distributor
agreement is recognized ratably over four years. The balance remaining to be
recognized as revenue amounted to $150,995, $250,995 and $378,995 at December
31, 2000, 1999 and 1998, respectively. Revenue related to service and equipment
contracts is recognized as earned.

Income Taxes

The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". 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.

Research and Development Costs

Research and development costs are charged to operations as incurred.

Stock Based Compensation

The Company accounts for stock options issued to employees in accordance
with APB 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.

F-9
50
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective July 1, 2000, the FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44
provides guidance on issues regarding the application of APB 25. The Company has
adopted the guidance provided by FIN 44 with effect from July 1, 2000. The
Company recorded non-cash equity compensation expense of $2.1 million for the
2000 year in accordance with the requirements of APB 25 and FIN 44.

In October 1995, the FASB issued SFAS 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 (See Note 9).

Net Loss Per Common Share

The Company incurred losses during all periods presented. As a result, the
effect of options and warrants is anti-dilutive. Accordingly, there is no
difference between basic and diluted loss per share.

Comprehensive Income

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the
reporting and display of comprehensive income or loss and its components;
however, the adoption of this statement had no impact on the Company's
consolidated operating results or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's securities available-for-sale, which
prior to adoption were reported within stockholders' equity, to be included in
other comprehensive income or loss.

Advertising Expense

The cost of advertising is expensed as incurred. Advertising and marketing
expense, including trade show expense, amounted to $314,034, $240,662 and
$1,335,580 during 2000, 1999 and 1998, respectively.

Foreign Currency Translation

The financial statements of foreign subsidiaries and branches have been
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation". All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
immaterial. The effect on the consolidated statements of operations of
transaction gains and losses is insignificant for all years presented.

Business Segments and Markets

TriPath currently 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.

Through September 30, 2000, TriPath's domestic revenues were generated
primarily through the Company's direct sales activities. In October 2000, the
Company commenced with the planned expansion of its field sales forces, which
included the contracting of an outside sales organization. International
revenues continue to be derived primarily through distributors. International
revenues accounted for 32%, 29% and 31% of total revenues during 2000, 1999 and
1998, respectively. The Company's largest customer accounted for 20% of total
revenue in 2000. In 1999 and 1998, the Company's four largest customers
accounted for 50% and 33% of total revenues, respectively.

F-10
51
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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.

Recently Issued Accounting Standards

In June 1999, the FASB approved the Exposure Draft to defer for one year
the effective date of SFAS 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 will not have a
significant impact on the Company's consolidated financial position or results
from operations.

During the year ended December 31, 2000, the Company adopted the SEC's
newly issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statement" ("SAB 101"), under which revenue is recorded upon the
"material completion" of the sales transaction, as defined by the Bulletin. The
effect of the accounting change did not have a significant impact on the
consolidated statement of operations for the year ended December 31, 2000.

F-11
52
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. BALANCE SHEET INFORMATION

Detailed balance sheet information is as follows:

DECEMBER 31,
--------------------------
2000 1999
----------- -----------

Inventory
Raw materials........................................... $ 3,438,601 $ 2,371,531
Work-in-process......................................... 1,468,691 1,913,914
Finished goods.......................................... 3,514,892 3,517,462
----------- -----------
$ 8,422,184 $ 7,802,907
=========== ===========
Customer-use assets
Customer-use systems.................................... $18,868,025 $24,226,104
Accumulated depreciation................................ (9,468,286) (8,114,724)
----------- -----------
$ 9,399,739 $16,111,380
=========== ===========
Property and equipment
Machinery and equipment................................. $ 5,582,896 $ 5,324,491
Demonstration equipment................................. 754,470 723,678
Furniture, fixtures and improvements.................... 1,100,581 1,098,382
Leasehold Improvements.................................. 1,315,156 1,311,445
Vehicles................................................ 48,031 48,031
Computer equipment and software......................... 3,359,761 3,165,766
----------- -----------
Total property and equipment......................... 12,160,895 11,671,793
Accumulated depreciation............................. (10,292,836) (8,916,981)
----------- -----------
$ 1,868,059 $ 2,754,812
=========== ===========
Accrued expenses
Accrued payroll and related benefits.................... $ 447,072 $ 505,782
Accrued warranty costs.................................. 1,373,568 1,159,691
Other accrued expenses.................................. 2,126,471 2,936,779
----------- -----------
$ 3,947,111 $ 4,602,252
=========== ===========

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of the allowance for doubtful account activity is as follows:

DECEMBER 31,
----------------------------------
2000 1999 1998
---------- ---------- --------

Balance, beginning of year.......................... $1,347,142 $ 650,993 $585,000
Amounts charged to expense.......................... 219,634 815,832 102,000
Amounts written off................................. (91,776) (119,683) (36,007)
---------- ---------- --------
Balance, end of year................................ $1,475,000 $1,347,142 $650,993
========== ========== ========

5. PATHFINDER SYSTEM PRODUCT LINE

In the quarter ended December 31, 1998, the Company wrote off $3.1 million
of intangible assets related to the Pathfinder System product line. The Company
acquired the Pathfinder System product line in June 1997 for an initial purchase
price of $4.1 million. The initial purchase price included cash of $2.7 million
(including transaction-related expenses), a $500,000 short-term note paid in
October 1997, and the issuance

F-12
53
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of shares of common stock valued at approximately $1.4 million. As a result of
the purchase, TriPath recognized $4.3 million in intangible assets that were to
be amortized over five years. Due to continuing low sales levels of Pathfinder
systems, and related losses attributable directly to the Pathfinder product
line, the Company identified indications of impairment in the fourth quarter of
1998 and later decided to discontinue development and commercialization of this
product line. The Company compared the carrying value of these intangible assets
to expected future cash flows applicable to the Pathfinder product and, as a
result, wrote off the remaining balance of intangible assets. Pathfinder product
sales accounted for approximately 2% of total revenues in 1998.

6. ACQUISITION OF INTELLECTUAL PROPERTY

On March 25, 1999, TriPath entered into a purchase and sale agreement to
acquire the intellectual property estate of NSI, a developer of interactive,
neural net technology for the computer screening of conventional Pap smears.
Under the terms of the agreement, TriPath 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 closed on May 17,
1999. The purchase price consisted of:

Cash consideration and transaction costs.................... $ 4,201,340
Common stock (valued at $6.75 per share).................... 9,450,000
-----------
$13,651,340
===========

The purchase price was allocated as follows:

Patents..................................................... $ 9,390,000
In-process research and development......................... 2,922,000
Core technology............................................. 1,339,340
-----------
$13,651,340
===========

The Company charged to expense at the date of acquisition $2,922,000
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established. In connection with the merger, the Company wrote off
$1,339,340 relating to the core technology (Note 10).

7. LONG-TERM OBLIGATIONS AND COMMITMENTS

Subordinated Term Loan

On February 8, 2000, the Company closed a $7.0 million subordinated term
loan with a syndicate of lenders to finance operations. The Company drew $5.3
million of this facility in February 2000 and the balance of $1.7 million in
March 2000. As of December 31, 2000, the balance outstanding was $6.4 million,
including a current portion of $2.8 million and a long-term portion of $3.6
million. The loan, which is secured by substantially all of the Company's
assets, including intellectual property, accrues interest at the three year U.S.
Treasury note rate plus 8%. Accrued interest is due monthly for the first six
months of each draw, at which time the outstanding principal balance becomes
payable over a thirty month term. In connection with this term loan, the Company
issued to the lenders warrants to purchase 223,253 shares of the Company's
common stock. Using a Black-Scholes pricing model, these warrants were valued as
of December 31, 2000 at $1.6 million, which represents non-cash debt issuance
costs. These warrants, which expire in 2007, were recorded as additional paid-in
capital and the resulting debt issuance costs are being amortized to interest

F-13
54
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expense over the three-year term of the loan. These warrants have a
weighted-average exercise price of $4.70 and were exercisable upon issuance.

Note Payable to Bank

In April 1998, TriPath entered into a loan agreement with a bank pursuant
to which the Company could borrow amounts based on the manufacturing cost of
AutoPap systems placed on fee-per-use contracts. Accordingly, in June 1998, the
Company borrowed $5.0 million under the loan agreement. The Company had repaid
the outstanding borrowings by December 31, 2000. An amount of $1.2 million was
outstanding under the agreement at December 31, 1999. The bank debt was secured
by substantially all of the Company's assets, excluding intellectual property,
and amounts were repayable over 24 months from the date of each draw. In
addition, the Company had to comply with certain financial covenants. As of
December 31, 1999, the bank facility was secured by $2.0 million in restricted
cash in an interest-bearing account with the bank. The restricted cash was
included in cash and cash equivalents on the balance sheet. Borrowings under
this agreement were subject to interest at the bank's prime rate (8.75% at
December 31, 1999) plus 1 percent per annum.

Note Payable to Finance Company

In December 1998, the Company entered into an agreement with an equipment
financing company to provide the Company with a $5.0 million line of credit to
finance certain of the Company's equipment purchases. The Company had
outstanding borrowings of $851,100 and $1.3 million under the agreement at
December 31, 2000 and 1999, respectively. The agreement has a loan term of 48
months and 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
plus 6.121%.

Notes Payable to Finance Company

During 1999, the Company entered into agreements with a financing company
to finance the purchase of various insurance policies. The Company had
outstanding borrowings of $75,300 and $414,000 under the agreements at December
31, 2000 and 1999, respectively. The loan terms range from 8 to 36 months and
are secured by a security interest in the policies. Interest is calculated at a
rate of 8.37%.

Working Capital Facility

In February 2000, the Company closed a $5.0 million working capital
facility with a bank. The outstanding balance is limited to an amount equal to
80% of eligible accounts receivable. The line commitment expired on January 31,
2001 and was renewed for a further year until January 31, 2002. The line bears
interest at the bank's prime rate plus 1% and is collateralized by substantially
all of the assets of the Company. The line of credit carries customary
covenants, including the maintenance of a minimum modified current ratio and
other requirements. The Company had no outstanding borrowings under this
agreement at December 31, 2000.

F-14
55
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2000, maturities of the outstanding debt are as follows:

2001........................................................ $3,232,114
2002........................................................ 3,200,396
2003........................................................ 884,790
2004........................................................ 649
----------
7,317,949
Less: Unamortized debt issuance costs....................... 1,638,241
----------
$5,679,708
==========

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.

Leases

The Company leases its office and manufacturing facilities and certain
office equipment under operating leases, with various renewal options, expiring
at various times through 2007.

At December 31, 2000, future minimum lease payments under these leases are
as follows:

2001........................................................ $1,272,562
2002........................................................ 1,234,954
2003........................................................ 1,252,477
2004........................................................ 1,265,197
2005........................................................ 202,252
Thereafter.................................................. 19,299
----------
$5,246,741
==========

Rent expense amounted to $1,340,812, $1,239,923 and $1,211,594 during 2000,
1999 and 1998, respectively.

Other Long-Term Liabilities

Other long-term liabilities include an amount of $1.3 million, which has
been accrued in accordance with the provisions of SFAS No. 5, "Accounting for
Contingencies", on the basis that the likelihood of a future event occurring is
probable and reasonably estimable. Under the terms of the event leading up to
this liability, the future price of the Company's common stock solely impacts
the actual incurrence of the contingent liability.

8. INCOME TAXES

At December 31, 2000, the Company had net tax loss carryforwards of
approximately $181.4 million, which begin to expire in 2003 for federal income
tax purposes. The Company also has approximately $3.5 million in research and
development carryforwards that begin to expire in 2003. Due to the prior
issuance and sale of shares of preferred stock, the Company has incurred
"ownership changes" pursuant to applicable regulations in effect under the
Internal Revenue Code of 1986, as amended. Therefore, the Company's use of
losses incurred through the date of these ownership changes will be limited
during the carryforward period. The Company estimates that the use of
approximately $28.0 million of losses incurred prior to one or more of the
ownership changes would be limited in the carryforward periods. To the extent
that any single-year loss is

F-15
56
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

not utilized to the full amount of the limitation, such unused loss is carried
over to subsequent years until the earlier of its utilization or the expiration
of the relevant carryforward period.

Approximately $5.1 million of the net tax loss carryforward is attributed
to the deduction for stock options, the tax effect of which will be credited to
equity when recognized.

Deferred income taxes reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and the corresponding financial
statement amounts. Significant components of the Company's deferred income tax
assets (liabilities) are as follows:

DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)

Net tax loss carryforwards.................................. $ 69,975 $ 63,546
Research and development credits............................ 3,508 3,500
Amortization and write-off of intangible assets............. -- 1,331
Allowance for doubtful accounts............................. 569 538
Deferred compensation....................................... 443 192
Accrued vacation............................................ 79 160
Charitable contribution carryforwards....................... 15 130
Other....................................................... 609 600
Inventory................................................... 492 --
Intangible assets, net of amortization...................... 983 2,835
Property and equipment...................................... 475 616
Valuation allowance......................................... (77,148) (73,448)
-------- --------
$ -- $ --
======== ========

Due to the uncertainty of the Company's ability to generate taxable income
to realize its deferred tax assets, a valuation allowance has been established
for financial reporting purposes equal to the amount of the net deferred tax
assets. The Company's valuation allowance was $77.1 million and $73.4 million at
December 31, 2000 and 1999, respectively.

9. STOCKHOLDERS' EQUITY

Preferred Stock

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 than the rights of Common Stock. At December 31, 2000 there
were no shares of Preferred Stock outstanding.

Private Equity Transaction

On November 14, 2000, the Company completed a $43.0 million private equity
transaction with a subsidiary of Hoffmann-La Roche ("Roche") in terms of which
Roche acquired 5.0 million shares of the Company's common stock for $8.00 per
share. Additionally, Roche simultaneously acquired, for an aggregate purchase
price of $3.0 million, warrants to purchase an additional 5.0 million shares at
strike prices ranging from $10.00 to $15.00 per share. The proceeds from the
sale of these warrants were recorded as additional paid-in capital.

F-16
57
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On February 9, 1999, the Company completed a $14.5 million private equity
transaction, issuing 2.3 million shares of common stock to investors at a price
of $6.33 per share. In connection with the financing, the Company issued to a
related party five year warrants to purchase 79,030 shares of common stock at an
exercise price of $7.45 per share.

Equity Incentive Plans

The Company has stock option plans (the "Plans") under which incentive and
non-statutory stock options, stock appreciation rights and restricted stock may
be granted to employees, directors 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 Plans is as follows:

OPTIONS OUTSTANDING
-----------------------------
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------

Outstanding at December 31, 1998............................ 2,640,940 $12.57
Options granted........................................... 1,564,982 5.14
Options exercised......................................... (213,814) 0.74
Options canceled/expired.................................. (835,631) 14.14
----------
Outstanding at December 31, 1999............................ 3,156,477 7.11
Options granted........................................... 1,350,763 4.50
Options exercised......................................... (863,267) 1.90
Options canceled/expired.................................. (822,931) 10.93
----------
Outstanding at December 31, 2000............................ 2,821,042 $ 6.34
==========

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED-
DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICE RANGE 2000 LIFE (YEARS) EXERCISE PRICE 2000 EXERCISE PRICE
- ------------ -------------- ------------ -------------- -------------- --------------

$0.20-0.20 239,134 5.9 $ 0.20 224,581 $ 0.20
0.76-0.76 2,415 0.7 0.76 2,415 0.76
1.52-2.28 21,273 2.6 1.61 21,273 1.61
2.69-3.88 42,623 4.8 3.06 36,725 3.04
4.13-6.16 2,023,362 8.3 5.13 924,999 5.07
6.25-9.38 139,535 8.2 7.86 65,747 7.57
9.75-14.24 14,644 4.9 13.63 12,727 14.21
15.34-22.78 313,557 6.9 16.80 313,557 16.80
29.89-36.06 24,499 5.3 30.09 24,499 30.09
--------- ---------
$0.20-36.06 2,821,042 7.8 $ 6.34 1,626,523 $ 7.11
========= =========

In 1996, the Company sold 590,260 shares of restricted Common Stock with a
deemed fair value of $1.63 per share to a former Company Officer ("CO") at a
price of $0.20 per share. Under the terms of the restricted stock purchase
agreement, the shares vested ratably over a 48-month term and were subject to
repurchase by the Company at the issuance price if the CO ceased to be employed
by the Company. Under the terms of an amendment to the restricted stock purchase
agreement, in the event that the CO terminated employment with the Company,
other than for cause, in addition to all other shares that had already vested
pursuant to the original agreement, 50% of the unvested shares as of the date of
departure would become vested as of that

F-17
58
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

date. The CO left the employment of the Company in September 2000 and non-cash
compensation expense of $137,954 was recorded.

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:

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------

Risk-free interest rate......................... 6.37% 5.34% 5.29%
Expected dividend yield......................... 0.00% 0.00% 0.00%
Expected lives.................................. 48 months 48 months 48 months
Expected volatility............................. 0.90 0.87 0.75
Weighted-average fair value of grants........... $ 4.51 $ 5.14 $ 5.87

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 as
follows:

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Net loss:
As reported................................ $(17,369,456) $(32,556,840) $(35,270,653)
Pro forma.................................. (20,060,516) (38,274,434) (42,469,238)
Net loss per common share (basic & diluted):
As reported................................ (0.60) (1.17) (1.46)
Pro forma.................................. $ (0.69) $ (1.38) $ (1.76)

Warrants

In 1998, the Company issued a warrant to a consultant to purchase 47,418
shares of common stock at $5.45 per share, which was the closing price of the
Company's common stock on the date of the initial agreement. The Company had
also issued a comparable stock option grant to the same consultant. As a result,
in 1998 the Company recognized $200,000 in non-cash expenses related to the
consulting agreement and continued to recognize expenses during the one-year
agreement.

On February 9, 1999, the Company completed a $14.5 million private equity
transaction. In connection with the financing, the Company issued to a related
party five year warrants to purchase 79,030 shares of common stock at an
exercise price of $7.45 per share.

On February 8, 2000, the Company closed a $7.0 million subordinated term
loan with a syndicate of lenders to finance operations (Note 7). The Company
issued warrants to the lenders to purchase 223,253 shares of common stock at a
weighted-average exercise price of $4.70 per share. The warrants were
exercisable upon issuance and expire in 2007. None of these warrants had been
exercised as of December 31, 2000.

On November 14, 2000, the Company completed a $43.0 million private equity
transaction with Roche in terms of which Roche acquired, for an aggregate
purchase price of $3.0 million, warrants to purchase 5.0 million shares of
common stock at a weighted exercise price of $11.50 per share. The warrants were
immediately exercisable and expire in 2003. None of these warrants had been
exercised by December 31, 2000.

F-18
59
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2000, there were 5,302,283 warrants outstanding with a
weighted-average exercise price of $11.15. These warrants expire at various
dates through 2007.

Common Stock Reserved for Future Issuance

At December 31, 2000, the Company has reserved authorized shares of Common
Stock for future issuance as follows:

DECEMBER 31, 2000
-----------------

Outstanding stock options................................... 2,821,042
Possible future issuance under equity incentive plans....... 1,183,639
Common stock warrants....................................... 5,302,283
---------
Total shares reserved............................. 9,306,964
=========

Deferred Compensation

The Company recorded deferred compensation 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 amounted to $668,268, $814,140 and $862,764 during 2000, 1999 and
1998, respectively. In 2000, the Company adjusted the deferred compensation
amount by $22,237 to reflect the cancellation, accelerated vesting and
non-forfeiture of options granted to terminated employees.

10. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS

In connection with the Merger with NeoPath on September 30, 1999, certain
expenses of the transaction, costs to integrate the two organizations, and
expenses associated with the restructuring of the Company's business have been
accrued and recorded as an expense. The following table presents the components
of the expense:

PAYMENTS
----------------------- BALANCE
TOTAL EXPENSE 1999 2000 REMAINING
------------- ---------- ---------- ---------

Cash expenses:
Transaction and professional fees............. $2,554,314 $1,296,694 $1,257,620 $ --
Personnel separation costs.................... 1,098,540 443,987 448,785 205,768
Other costs................................... 553,000 428,822 124,178 --
---------- ---------- ---------- --------
4,205,854 $2,169,503 $1,830,583 $205,768
========== ========== ========
Non-cash expenses:
Write-off of assets........................... 4,239,489
----------
Total expenses.................................. $8,445,343
==========

Transaction costs are comprised of amounts owed to investment bankers and
advisors for services rendered in conjunction with the Merger. Personnel
separation costs reflect severance payments to be made to employees terminated
as a result of the Merger. The non-cash write-off of assets primarily relates to
property and equipment and the core technology acquired from NSI deemed to have
become redundant or obsolete as a result of the Merger. Other costs include
integration costs directly related to the Merger and other costs resulting from
actions taken to merge the operations.

F-19
60
TRIPATH IMAGING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. 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. The Company's former Chairman and Chief Executive Officer is a
Director of LabCorp. Sales to LabCorp amounted to $130,977, $397,238 and
$634,884 during 2000, 1999 and 1998, respectively.

The Company had an arrangement with LabCorp for leasing a portion of
LabCorp's facility in Elon College, North Carolina. This arrangement ended in
1999. Total rent paid to LabCorp amounted to $23,333 and $61,995 during 1999 and
1998, respectively. Additionally, the Company owed approximately $98,554 and
$249,000 at December 31, 1999 and 1998, respectively, to Roche or its affiliates
for services provided. No amounts were outstanding at December 31, 2000.

12. EMPLOYEE BENEFITS

The Company maintains qualified 401(k) Retirement Plans covering
substantially all employees that provide for voluntary salary deferral
contributions. Total expense for the plans, including employer contributions,
amounted to $248,671, $108,897 and $128,451 during 2000, 1999 and 1998,
respectively.

13. CONTINGENCIES

In the ordinary course of business, the Company is the subject of, or party
to, various pending or threatened claims and litigation. In the opinion of
management, settlement of such claims and litigation will not have a material
effect on the Company's operations or financial position.

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

PREVIOUSLY REPORTED
----------------------------------------
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- ----------- ----------- ------------ -----------

Revenues................................. $ 7,446,816 $ 8,100,608 $ 8,092,645 $ 9,011,680
Gross profit............................. 3,734,089 3,872,455 4,437,468 4,601,489
Net loss................................. (2,765,114) (5,085,310) (2,865,950) (6,653,082)
Net loss per common share (basic &
diluted)................................. $ (0.10) $ (0.18) $ (0.10) $ (0.21)

PREVIOUSLY REPORTED
----------------------------------------
1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- ----------- ----------- ------------ -----------

Revenues................................. $ 3,188,661 $ 4,126,037 $ 4,771,547 $ 6,379,529
Gross profit............................. 1,203,209 1,547,641 2,206,914 3,139,837
Net loss................................. (7,443,260) (9,681,097) (12,388,314) (3,044,169)
Net loss per common share (basic &
diluted)................................. $ (0.29) $ (0.35) $ (0.44) $ (0.11)

F-20