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                                                                   EXHIBIT 99.1

             CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR
      PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

  Investment in the securities of Neuromedical Systems, Inc. (the "Company")
involves a high degree of risk. In evaluating an investment in the Company's
securities, Company stockholders and prospective investors should carefully
consider the risk factors discussed in this Exhibit 99.1 and the information
detailed in the Company's 1997 Annual Report on Form 10-K under Item 1
Business and Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as information contained in the
Company's other filings with the Securities and Exchange Commission.

  The Company's Form 10-K and its Annual Report to Stockholders, any Form 10-Q
or any Form 8-K of the Company or any other written or oral statements made by
or on behalf of the Company may include forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 which reflect
the Company's current views with respect to further events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. For information regarding these risks
and uncertainties, see the Cautionary Statements set forth below and Item 1
Business and Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's 1997 Annual
Report on Form 10-K. The words "believe", "expect", "anticipate", and similar
expressions identify forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

EARLY COMMERCIAL STAGE COMPANY; HISTORY OF LOSSES; PROFITABILITY UNCERTAIN

  The Company is in its early commercial stage and has generated limited
operating revenue to date and has incurred, from incorporation through
December 31, 1997, net losses aggregating $131,089,000. The Company does not
expect to generate a positive internal cash flow in the foreseeable future due
to ongoing losses during the next year and expected working capital
requirements. The likelihood of the success of the Company must be considered
in light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the formation of a new business, the
development of new products and the competitive environment in which the
Company operates. Although the Company is deriving limited operating revenue
from its current operations, there can be no assurance that it will be able to
develop significant additional sources of revenue or that its operations will
become profitable. Results of operations may fluctuate significantly and will
depend upon numerous factors, including regulatory actions, market acceptance
of the Company's products, efficient manufacturing and slide processing
operations, new product introductions and competition.

NEED FOR MARKET ACCEPTANCE OF THE PAPNET TESTING SYSTEM

  The Company's future performance will depend to a substantial degree upon
market acceptance of the PAPNET Testing System. The extent of, and rate at
which, market acceptance and penetration are achieved by the PAPNET Testing
System are functions of many variables including, but not limited to, price,
effectiveness, acceptance by patients, physicians and laboratories (including
the ability of laboratories to hire additional cytotechnologists),
manufacturing and training capacity, reimbursement practice and marketing and
sales efforts. The Company believes that significant revenue growth in the
United States depends upon effective marketing to the entire channel of
distribution: clinical laboratories, clinicians, payers and women.

  The Company believes that its sales and marketing efforts to date in the
United States have generated considerable awareness about PAPNET(R) testing
among pathologists, cytotechnologists, gynecologists and women. The Company
believes support and interest has been highest among women. Medical
specialties, however, are often reluctant to change clinical practice methods
and procedures, and early stage resistance is being experienced in the
adoption of PAPNET(R) testing. Among gynecologists and pathologists there has
been, in general, a slow adoption of the PAPNET technology and some reluctance
to use it even if a woman inquires

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about or requests the test. The Company believes that this is due to several
factors, including controversy within the medical profession about the public
health consequences of Pap smear false negatives, the relative cost of
PAPNET(R) testing to the Pap smear, limited reimbursement by third party
payers and the impact of alternative technologies for cervical cancer
screening. In response to these circumstances, the Company has initiated a
change of its marketing and sales strategy to address these and additional
considerations, however there can be no assurance that the PAPNET Testing
System will achieve or maintain acceptance in its target markets. Similar
risks may confront other products developed by the Company in the future.

  In addition, the Company originally expected that its business would develop
primarily as a service to laboratories, and that most of its laboratory
customers would elect to send smears on a patient-by-patient basis for
scanning at the Company's centralized Scanning Centers. This strategy turned
out to be expensive to support, and for a number of reasons it was only
moderately successful at generating sales. Accordingly, the Company is
refocusing its strategy toward selling and leasing the PAPNET Testing System
directly to laboratories; however, there can be no assurance that the Company
will achieve or maintain acceptance for such sales in its target markets.

NEED TO VALIDATE PAPNET-ON-CYTE AS A PRIMARY SCREENING TOOL

  The Company's PAPNET-on-Cyte strategy is dependent on the ability of the
PAPNET system to perform effectively as a primary screening tool and receive
government approvals where required. The Company believes that the medical
literature to date supports the use of PAPNET system in this indication, but
that additional clinical studies are necessary to support sales of PAPNET for
primary screening even outside the United States. The Company is aware of
several ongoing research projects, notably a large multi-site primary
screening study co-funded by the National Health Service in the United
Kingdom, the results of which the Company expects to be announced at an
international conference in Tokyo in May 1998. In addition, a study has also
been initiated in the Royal Liverpool Hospital in England with a PAPNET
scanner on site and a prospective primary screening project. This latter study
is expected to be replicated in other European countries during 1998, which
the Company believes may lead to further documentation of the PAPNET role in
primary screening. There can be no assurance that the outcome of such studies
will validate and support the use of PAPNET-on-Cyte as a primary screening
tool. See "Government Regulation."

RELIANCE ON A SINGLE PRODUCT

  The Company has concentrated its efforts primarily on the development of the
PAPNET Testing System and will be dependent upon acceptance of that product to
generate revenues. The Company has performed only limited research on other
applications of its technology. There can be no assurance that the PAPNET
Testing System will be successfully commercialized or that such other
applications will be developed.

COMPETITION

  The Company is currently aware of four principal competitors which are
engaged in efforts to automate one or more aspects of cervical smear
screening. Three competitors, Cytyc Corporation ("Cytyc"), AutoCyte Inc.
("AutoCyte", formerly a unit of Hoffman-La Roche's Roche Image Analysis
Systems) and Morphometrix Technologies Inc. ("Morphometrix") are focused on
the development of devices for the production, and, in the case of AutoCyte
and Morphometrix, imaging and automated analysis, of monolayer slides, an
alternative to the conventional Pap smear method of specimen collection and
preparation. AutoCyte has stated that it expected to receive FDA premarket
approval of its PREP(R) monolayer slide preparation system in 1998 and that it
expected to file for premarket approval during 1998 with respect to its
AutoCyte SCREEN(R) automated interactive cervical cancer screening system.
Morphometrix has stated that its expects clinical trials to begin during the
first quarter of 1998 with respect to CYMET, its automated image analysis
system, with a view to obtain regulatory approval and product launch in the
first half of 1999. Morphometrix intends CYMET to be employed using CYPREP, a
fluid-based monolayer Pap sample system, which Morphometrix has announced that
it is developing using the ThinPrep(R) monolayer technology. Cytyc received
approval from the FDA in May 1996 to market its ThinPrep(R) preparation to
laboratories, for the purpose of filtering out blood, mucus and other material
from the specimen for cervical cancer screening as a replacement for the
conventional Pap smear method. In addition, Cytyc

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received FDA approval in November 1996 to expand its product labeling to
include the claim that the ThinPrep(R) System is significantly more effective
in detecting Low Grade Squamous Intraepithelial Lesions and more severe
lesions in various populations than the conventional Pap smear method. Cytyc
labeling may also indicate that the specimen quality using the ThinPrep(R)
System is significantly improved over that of the conventional Pap smear
method.

  The Company estimates that conventionally prepared Pap smears account for
approximately 90% of the Pap smears analyzed in the United States and
Australia, and virtually all of the Pap smears screened in Europe and greater
China, the Company's other major markets. However, liquid-based preparations
(including particularly the ThinPrep(R) Pap Test) are rapidly gaining in
popularity in the United States and Australia, and the Company expects that
such preparations could account for a significant portion of the market in the
United States within two years. The leading manufacturer of such preparations,
Cytyc, has announced the formation of a European business unit for the purpose
of selling its ThinPrep(R) Pap Test(TM) in that market, but the Company is not
aware of material sales to date in Europe.

  The PAPNET system is not currently indicated under its FDA label for the
rescreening of ThinPrep(R) Pap Test(TM) slides or other liquid-based
preparations, so a decision by a clinician or laboratory to use the
ThinPrep(R) preparation for a particular patient precludes PAPNET assisted
rescreening for that patient. However, the Company has announced its intention
to include liquid-based preparations in its clinical trial designed to
establish the safety and effectiveness of the PAPNET system for the primary
screening of Pap smears.

  The other competitor of which the Company is aware, NeoPath, has developed a
device for automated primary screening of conventional Pap smears, for which
it submitted to the FDA a pre-market approval supplemental application. The
FDA Hematology and Pathology Devices Panel (the "Panel") held a public meeting
on January 28, 1998 to consider recommending approval of such supplement. The
Panel voted to recommend approval of such supplement, subject to certain
enumerated conditions. NeoPath has stated that it expects FDA approval within
the next few months. In addition, on September 29, 1995, the FDA granted
approval to NeoPath for the AutoPap(R) QC System to be used as part of a
laboratory's quality control procedures.

  According to NeoPath, the AutoPap(R) QC System is designed to sort Pap smear
slides into two groups, one classified as "negative" and one classified for
"review." The group of slides classified for review, which constitutes a
specified percentage of the whole, is again reviewed manually by the
cytotechnologist through a conventional microscope. In contrast,
cytotechnologists trained in the use of the PAPNET Testing System evaluate the
128 color images from each slide on the PAPNET Review Station. If all of the
images appear normal, the cytotechnologist classifies the slide as "negative,"
and no further examination is required. If any one of the 128 images appears
to the cytotechnologist to be abnormal, the cytotechnologist classifies the
slide as "review" and then re-examines the slide manually under the
microscope. Every slide screened using the PAPNET system receives a directed,
professional human analysis, either of the PAPNET images or of both the images
and the slide.

  The Company believes that at present it is still too early to determine the
competitive effects resulting from an FDA advisory panel's recommendation that
FDA approve Neopath's primary screening system. The Company believes that FDA
approval of NeoPath's system may lend credibility to the use of computer-
assisted screening systems generally, and such approval would not necessarily
be adverse to the Company's long term interests. The Company has placed a high
priority during 1998 on initiating clinical trials with respect to the use of
the PAPNET(R) Testing System as a primary screening device to support a
premarket approval supplemental application to the FDA, however there can be
no assurance of such approval on a timely basis, or at all.

  The Company's known competitors or other companies may develop new products
and technologies that prove to be more effective than the PAPNET Testing
System or that may be viewed by clinical laboratories as reducing operating
costs (for example, by reducing the number of cytotechnologists used in
screening). In addition, competitive products and technologies may be
manufactured and marketed more successfully than the PAPNET Testing System.
Such developments could render the PAPNET Testing System less competitive or

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possibly obsolete, and could have a material adverse effect on the Company.
The Company will be required to compete with respect to product effectiveness,
price, manufacturing and slide processing efficiency, marketing capabilities
and customer service and support, areas in which it currently has limited
experience.

  In addition to competitors attempting to develop fully automated or semi-
automated systems for the screening or rescreening of Pap smears or
alternative forms of Pap smears (such as liquid-based preparations), there may
in the future be alternate techniques or technologies for the detection or
prevention of cervical cancer, including in vivo devices and vaccines for
human papilloma virus ("HPV"), which is implicated in most cases of cervical
cancer. Although no such technique has been demonstrated to be useful as a
substitute for the Pap smear, there can be no assurance that new techniques or
technologies will not one day supplant or replace the Pap smear in medical
practice.

DEPENDENCE ON KEY PERSONNEL

  The Company's business is highly dependent on the principal members of its
management, marketing and technical staffs, and the loss of their services
might impede the achievement of the Company's business objectives. In
addition, the Company's future success will depend in part upon its ability to
retain highly qualified management, scientific, technical and marketing
personnel. There can be no assurance that the Company will be successful in
retaining such qualified personnel or hiring additional qualified personnel.
Losses of key personnel could have a material adverse effect on the Company's
business.

IMPACT OF TERRITORIAL LICENSE AGREEMENTS AND ROYALTY ARRANGEMENTS

  From 1989 through 1991, the Company sold various long-term territorial
license agreements (the "License Agreements") for the PAPNET Testing System.
Following mergers of the various entities holding the License Agreements,
there are currently two licensees. Carl Genberg, a director of the Company and
member of the Compensation Committee, has significant ownership interests in
the two licensees and is an officer and director of Cytology West, Inc.,
holder of the License Agreement relating to Arizona, Nevada, Utah and San
Diego County. The holders of the License Agreements receive royalties on an
annual basis which the Company estimates will be approximately 10% of its
United States revenues over the term of the License Agreements, however, the
actual amount of such royalties may differ from the foregoing estimated
percentage depending on variation in geographical origin of Company revenues
and there can be no assurance that the amount of such royalties will not
exceed such percentage. In 1997, the Company's royalty obligation was equal to
approximately 18.9% of the Company's United States revenues, because a
disproportionate share of revenues came from certain licensed territories. The
Company's aggregate royalty expense incurred under the License Agreements was
approximately $988,000, $286,000 and $87,000 in 1997, 1996 and 1995,
respectively. In accordance with a settlement agreement entered into in 1995
which clarified previously disputed elements of the License Agreements, the
Company is renegotiating revised licenses (the "Restated Licenses") with the
two licensees pursuant to which the rights and obligations will be clarified
but as to which the economic terms will not be materially altered except that
slides received by the Company from multistate national laboratories will be
deemed to have been received from the licensed territories pro rata with
respect to each territory's population as a percentage of the entire United
States population. The Restated Licenses will expire on December 31, 2025.

  As part of the Company's acquisition of New System International and the
Taiwan distributor of PAPNET in 1997, the Company entered into an agreement
with Papnet (Far East) Ltd. ("PFEL"), pursuant to which PFEL paid the Company
$800,000 for the right to receive 3% to 4% of Company sales revenues in Hong
Kong, China and Taiwan over a 15 year period (the "Royalty Arrangement").
Under the terms of the Royalty Arrangement, commencing September 2001 and
ending September 2005, PFEL may, at its option, require the Company to
repurchase its rights under the Royalty Arrangement for an aggregate purchase
price equal to five times the trailing year's royalty due (the "Repurchase
Option"). The Repurchase Option is payable at the election of the Company in
either cash or in Company Common Stock. If the Repurchase Option is exercised
by PFEL and made payable by the Company in Common Stock, (i) the price of the
Common Stock will be determined based on the average publicly quoted closing
price of the most recent 30 day period prior to exercise of the Repurchase

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Option, and (ii) the Company will provide registration rights with respect to
such Common Stock. The Royalty Arrangement contains a provision providing that
in the event of cessation of the Company's Asia Pacific operations, a
termination fee shall be due and payable to PFEL in an amount equal to
US$800,000 less the sum of all royalty payments previously paid. No payments
were made during 1997 to PFEL in regard to the Royalty Arrangement. There can
be no assurance that payments made by the Company in respect of the Royalty
Arrangement will not have material consequences on the profitability of the
Company's Asia Pacific business. In addition, in the event PFEL exercises its
Repurchase Option and if the consideration is paid in Common Stock, such
payment will result in dilution of the Company's outstanding Common Stock, and
the registration and sale of such stock may adversely affect the market for
other publicly traded shares of the Company's Common Stock.

  In addition, the provisions of an agreement dated October 3, 1990 granted
certain rights to be the Company's sole licensee for distribution of the
PAPNET system in Canada. The agreement provides that such "licensee shall be
entitled to terms which are at least as favorable as those in any domestic
United States of America licenses." A license with respect to such agreement
has not been negotiated. The terms of such license when it is negotiated,
and/or the activities of the licensee thereunder may have a material affect on
the profitability of the Company's business in Canada. Joseph Salamon, a
director of the Company until June 20, 1996, is the agent of the record holder
of the rights to such license.

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY

  The Company has depended and will continue to depend substantially on its
proprietary technology. The technology underlying the PAPNET Testing System is
protected by nine United States patents and similar corresponding foreign
patents granted to the Company. The Company also has filed several additional
patent applications as to certain other aspects of the Company's technology;
however, there can be no assurance that such applications will be granted.
There can be no assurance that the Company's issued patents or other patents
issued in the future will afford protection from material competition or that
such patents will not be challenged. The Company also relies on trade secrets
and proprietary know-how, which it protects, in part, through confidentiality
agreements with employees, consultants and other parties. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade secrets will
not otherwise become known to, or independently developed by, competitors.

  The medical device industry has been the subject of extensive litigation
regarding patents and other intellectual property rights, and the Company may
institute or otherwise be involved in such litigation to enforce its patents,
protect its trade secrets or know-how, challenge the validity of proprietary
rights of others or defend against alleged infringement by the Company of
proprietary rights of others. The Company has instituted such litigation
against NeoPath, a competitor of the Company, and Neopath has instituted
litigation against the Company (see "--Competition" and "--Litigation"). An
adverse determination in this or other such litigations could limit the value
of the Company's issued patents or result in invalidation of those patents,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

GOVERNMENT REGULATION

  The Company's services, products and manufacturing activities are subject to
extensive and rigorous government regulation by the FDA and by other federal,
state and local authorities. Commercial distribution in certain foreign
countries is also subject to government regulations. The process of obtaining
required regulatory approvals can be lengthy, expensive and uncertain.
Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. The FDA
actively enforces regulations prohibiting marketing without compliance with
premarket approval provisions and conducts periodic inspections to determine
compliance with its Quality System regulations. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or

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adoption of new regulations could affect current regulatory approvals and
affect the timing of, or prevent the Company from obtaining, future regulatory
approvals. The effect of government regulation may be to delay for a
considerable period of time or to prevent the marketing and full
commercialization of future products or services that the Company may develop
and/or to impose costly requirements on the Company. There can also be no
assurance that additional regulations will not be adopted or current
regulations amended in such a manner as will materially adversely affect the
Company.

  The Company's products are subject to a variety of regulations in certain
international markets, including Europe. Some European countries have
established national regulations relating to in vitro diagnostic medical
devices, such as the PAPNET system. These regulations do not typically require
premarket approval, but may impose other requirements.

  In vitro diagnostic medical devices such as the PAPNET system are not
currently subject to medical device directives issued by the European Union
("EU"). The Company anticipates, however, that the EU will soon propose a
directive for in vitro diagnostic medical devices that would establish a basis
for harmonized regulation of such devices among EU member states. Such a
directive would likely establish a deadline for compliance. If enacted, the
directive would apply only to member states of the EU and the European
Economic Area. Other European countries, however, may enact national laws that
would conform to the directive. There can be no assurance that the PAPNET
Testing System or any other product that the Company may develop will obtain
any required regulatory clearance or approval on a timely basis, if at all.

INTERNATIONAL SALES AND OPERATIONAL RISKS

  The Company markets the PAPNET Testing System to customers outside of the
United States. In addition, the Company manufactures its PAPNET Scanning
Stations in Israel and operates Scanning Centers in Amsterdam and Hong Kong. A
number of risks are inherent in international transactions. International
sales and operations may be limited or disrupted by the regulatory approval
process, governmental controls, export license requirements, political
instability, price controls, trade restrictions, changes in tariffs or
difficulties in staffing and managing international operations. Foreign
regulatory agencies have established, or may establish, product standards
different from those in the United States, and any inability to obtain foreign
regulatory approvals on a timely basis could have an adverse effect on the
Company's international business and its financial condition and results of
operations. In addition, the Company's business, financial condition and
results of operations may be adversely affected by limitations on its ability
to repatriate funds, increases in duty rates and difficulties in obtaining
export licenses.

  The Company's Asia Pacific operations are headquartered in Hong Kong which
reverted to the sovereignty of the People's Republic of China in July 1997 and
is now a Special Administrative Region. At present, Hong Kong is generally
viewed as an open and thriving economic area with a high degree of autonomy,
however, there can be no assurance as to the continuation of political
stability and economic free markets in Hong Kong, or of the affects any change
in this regard would have on the Company's sales and/or operations in the Asia
Pacific region.

  At present, the recent downturns in various Asia Pacific economies have not
had a material impact on the Company's financial condition in the region;
however, there can be no assurance that Asian economic difficulties will not
adversely affect the Company's Asia Pacific sales and operations.

  There can be no assurance that the Company will be able to successfully
commercialize the PAPNET Testing System or any future product in any foreign
market.

FOREIGN EXCHANGE FLUCTUATIONS

  The Company anticipates that international sales will continue to represent
a significant portion of its net sales as it executes its plan to establish
commercial use of the PAPNET Testing System on a worldwide basis, including in
the United States. Neuromedical Systems, Inc., the United States parent
company, has provided a

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significant portion of the financing required for its Netherlands and Hong
Kong Scanning Centers through United States dollar-denominated intercompany
loans. The Company also maintains its PAPNET Testing System manufacturing
facility in Israel. As a result of its international operations and its
current financing practices, the Company's operating results are subject to
the impact of fluctuations in exchange rates of the currencies in which its
foreign operations conduct business versus the United States dollar. Future
currency fluctuations, to the extent not adequately hedged, could have an
adverse effect on the Company's business, financial condition and results of
operations.

LIMITED SLIDE PROCESSING AND MANUFACTURING HISTORY;DEPENDENCE ON SOLE SOURCE
SUPPLIERS

  The Company has had limited experience with slide processing in commercial-
scale quantities and the manufacture and assembly of PAPNET Scanning Stations
in the volumes that will be necessary for the Company to generate significant
revenues from the processing of slides on the PAPNET Testing System and
installation of PAPNET-on-Cyte Scanning Stations in customer laboratories. The
Company may encounter difficulties in scaling up its slide processing
operations or production or in hiring and training additional personnel to
operate its PAPNET-on-Cyte Scanning Stations, or to manufacture its products.
Future interruptions in supply or other production problems could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company has qualified only single
sources for certain essential components. Interruptions in the supply of such
components might result in production delays and create the need for
modifications of the design of the various components of the PAPNET Testing
System and PAPNET-on-Cyte, either of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.

IMPACT OF MEDICARE, MEDICAID AND OTHER THIRD-PARTY REIMBURSEMENT

  In the United States, many Pap smears are currently paid for by the patient,
and the level of reimbursement by third-party payers that do provide
reimbursement varies considerably. Third-party payers (Medicare/Medicaid,
private health insurance, health administration authorities in foreign
countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products and services by regulating the
maximum amount of reimbursement for PAPNET testing provided by such payers or
by not providing any reimbursement at all. Restrictions on reimbursement may
limit the price which the Company can charge for its services or reduce the
demand for PAPNET testing. In addition, if Medicare and Medicaid do not
provide for reimbursement of PAPNET testing, or, if the level of such
reimbursement is significantly below the amount laboratories charge patients
to perform PAPNET testing, the size of the potential market available to the
Company may be reduced. By early 1998, the Company was aware of only one state
Medicaid payer that reimbursed for PAPNET-assisted rescreening, and Medicare
reimbursement was significantly below the amount that laboratories charge for
performing PAPNET-assisted rescreening. In addition, the technology evaluation
committee of the Blue Cross Blue Shield Association recently questioned the
cost-effectiveness of several of the new cervical screening products,
including PAPNET, AutoPap, and the ThinPrep Pap test. There can be no
assurance that costs associated with PAPNET testing will ever become
reimbursable or that the level of reimbursement to laboratories for PAPNET
testing will achieve or be maintained at levels necessary to permit the
Company to generate substantial revenues. In the international market,
reimbursement by private third-party medical insurance providers, including
governmental insurers and payers, varies from country to country. In certain
countries, the Company's ability to achieve significant market penetration may
depend upon the availability of third-party or governmental reimbursement.

HEALTHCARE REFORM

  Recent proposals before Congress have included plans to restructure the
delivery and financing of healthcare services in the United States. Such
proposals focus on the control and reduction of public and private spending on
healthcare, including Medicare and Medicaid, the reform of the methods of
payment for healthcare goods and services by both the public and private
sectors, and the provision of universal access to healthcare. The Company

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cannot predict what form such legislation, if any, may take or the effect of
such legislation on its business. It is possible that legislation enacted by
Congress will contain provisions resulting in limitations which may adversely
affect the business, financial position and results of operations of the
Company. It is also possible that future legislation either could result in
modifications to the nation's public and private healthcare insurance systems,
which could affect reimbursement policies in a manner adverse to the Company,
or could encourage integration or reorganization of the healthcare delivery
system in a manner that could adversely affect the Company. The Company cannot
predict what other legislation, if any, relating to its business or to the
healthcare industry may be enacted, including legislation relating to third-
party reimbursement, or what effect any such legislation may have on its
business, financial position and results of operations.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING

  There can be no assurance that the Company will not be required to seek
additional equity or debt capital to finance its operations in the future. In
addition, there can be no assurance that any such financings, if needed, will
be available to the Company or that adequate funds for the Company's
operations, whether from the Company's revenues, financial markets,
collaborative or other arrangements with corporate partners or from other
sources, will be available when needed or on terms attractive to the Company.
The inability to obtain sufficient funds may require the Company to delay,
scale back or eliminate some or all of its research and product development
programs, sales and marketing efforts, manufacturing and slide processing
operations, clinical studies and/or regulatory activities or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to market and sell itself.

LITIGATION; POTENTIAL UNAVAILABILITY OF INSURANCE

  The commercial screening of Pap smears has been characterized by significant
malpractice litigation. As a result, the Company faces a risk of exposure to
product liability, errors and omissions or other claims in the event that the
use of its PAPNET Testing System or other future potential products is alleged
to have resulted in a false negative diagnosis. While PAPNET is a supplemental
test and does not purport to diagnose any slide, there can be no assurance
that the Company will avoid significant liability. There also can be no
assurance that the Company will be able to obtain adequate insurance coverage
or that, if obtained, such coverage will continue to be available at an
acceptable cost, if at all. Consequently, such claims could have a material
adverse effect on the business or financial condition of the Company.

  On December 4, 1995, the Company was served with a Summons and Complaint in
an action entitled Herbst et al. v. Neuromedical Systems, Inc. et al., in the
Supreme Court of the State of New York. The plaintiffs in this suit allege,
among other things, that pursuant to written contracts, which they claim the
Company has breached, they were entitled to be issued warrants exercisable for
the purchase of approximately 128,000 shares of common stock at various
prices. They further allege that the Company and certain of its officers and
directors made fraudulent misrepresentations and took other allegedly improper
actions that diminished the value of the warrants they claim they are entitled
to under these contracts. On January 31, 1996, the plaintiffs served the
Company with an Amended Complaint alleging legal claims similar to those in
the original Summons and Complaint served on the Company, but adding one of
the Company's former directors as a defendant and specifying that the
plaintiffs are seeking compensatory damages from the Company and one of its
officers and a former director totaling $114 million and punitive damages
totaling $175 million. On February 23, 1996, the defendants moved to dismiss
the Amended Complaint and on November 27, 1996, the New York State Supreme
Court issued an opinion dismissing all of the plaintiff's claims that the
Company and certain officers and directors committed fraud and other improper
actions that allegedly diminished the value of the warrants plaintiffs claim
they are entitled to receive. The Court denied the Company's motion to dismiss
plaintiffs' breach of contract claim, and plaintiffs continue to seek $39
million in compensatory damages and $75 million in punitive damages. The
Company intends to continue to vigorously defend this action. The Company
believes that, in any event, the damages claimed bear no relation to the harm
alleged and believes an adverse judgment in this case would not have a
material adverse effect on the Company's operations, financial position or
cash flows.

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<PAGE>

  On July 15, 1996, the Company filed a lawsuit against NeoPath Inc., a
competitor of the Company, in the United States District Court for the
Southern District of New York, seeking damages and injunctive relief for
patent infringement, false advertising, unfair competition, intentional
interference with business relations and damage to business reputation. In the
lawsuit, the Company alleges that NeoPath willfully misappropriated the
Company's patented technology and used such technology in NeoPath's AutoPap(R)
300 QC System. The Company also alleges that NeoPath falsely characterized and
made misleading comparisons to consumers and securities analysts of the
AutoPap(R) 300 QC System and the Company's PAPNET Testing System. NeoPath has
denied all allegations and, in addition, it has filed counterclaims against
the Company seeking damages and injunctive relief for false advertising and
unfair competition. In the counterclaims, NeoPath alleges that statements made
by the Company characterizing the performance of the PAPNET Testing System,
and its effectiveness relative to NeoPath's AutoPap(R) 300 QC System, as well
as other statements, are false and misleading and constitute
misrepresentations. The Company believes that NeoPath's assertions are without
merit. In the second half of 1997, the Company filed, briefed and argued a
motion for a preliminary injunction against further manufacture of the AutoPap
300 QC System. That motion is still pending. Although the duration, costs and
ultimate outcome of this lawsuit are unknown, the Company expects that the
costs of pursuing this lawsuit will be significant during 1998.

  On March 28, 1997, Neopath, Inc. filed a patent infringement lawsuit against
the Company in the United States District Court for the Western District of
Washington. The lawsuit seeks to enjoin the Company from allegedly infringing
three of Neopath's patents. Neopath is seeking preliminary and permanent
injunctive relief as well as compensatory damages, including treble damages.
On March 18, 1998, NeoPath and the Company filed a stipulated dismissal of two
of the three NeoPath patents asserted against the Company in this case. Also
on March 18, 1998, the Company filed a motion for summary judgment of non-
infringement on the remaining NeoPath patent. NeoPath has yet to respond to
the Company's motion for summary judgment and the Court has not yet decided
whether to grant or deny the Company's motion. Also on March 18, 1998, NeoPath
filed a motion for leave to amend its Complaint to add an allegation of
infringement of a further NeoPath patent. The Company has yet to respond to
NeoPath's motion for leave to amend and the Court has not yet decided whether
to grant or deny NeoPath leave to amend its complaint. The Company believes
that it has valid legal and factual defenses to NeoPath's allegations of
infringement of the patent currently in the lawsuit as well as to NeoPath's
allegations of infringement of the patent it seeks to add to the lawsuit
through amendment of the Complaint. The Company intends to continue to
vigorously defend this action. The Company also believes that an adverse
judgment in this case would not have a material effect on the Company's
operations, financial position or cash flow.

  On March 18, 1998, NeoPath also filed an additional patent infringement
lawsuit against the Company in the United States District Court for the
Western District of Washington. The lawsuit seeks to enjoin the Company from
allegedly infringing two additional NeoPath patents. NeoPath is seeking
preliminary and permanent injunctive relief as well as compensatory damages,
including treble damages. The Company has not yet filed an answer to the
Complaint in the lawsuit and is still evaluating NeoPath's allegations. Based
on its initial review, however, the Company believes that it has valid legal
and factual defenses and intends to vigorously defend this action.

  On April 15, 1997, the Company was served with a lawsuit filed by Cytyc
Corporation in the United States District Court for the District of
Massachusetts against the Company, certain of its officers and others,
alleging false and misleading advertising, unfair and deceptive trade
practices, theft of trade secrets, unfair competition, interference with
relationships and defamation. On June 23, 1997, the court dismissed the
Massachusetts lawsuit on the basis of lack of jurisdiction. On June 24, 1997,
Cytyc filed suit against the Company, Mark Rutenberg and Dr. Mango in the
United States District Court for the Southern District of New York, alleging
causes of action for (1) violation of the Lanham Act, (2) misappropriation of
trade secrets, (3) defamation, (4) violations of Sections 349 and 350 of New
York General Law and (5) unfair competition. In this action, Cytyc seeks in
excess of $11,000,000 in damages, costs and attorneys' fees, as well as
injunctive relief prohibiting the Company from making false, misleading and
defamatory statements regarding Cytyc and its ThinPrep Pap Test. The

                                       9
<PAGE>

Company moved to dismiss the complaint on the basis that it failed to state a
claim upon which relief could be granted, which motion was denied by the Court
on September 5, 1997. The Company subsequently filed a counterclaim in this
matter on October 3, 1997, alleging causes of action for (1) violation of the
Lanham Act, (2) violation of Sections 349 and 350 of New York General Law, (3)
defamation and (4) unfair competition. The Company filed an amended
counterclaim on November 10, 1997. By way of its amended counterclaim, the
Company seeks damages and injunctive relief against Cytyc. The Company is
contesting the case vigorously. The Company believes that the damages proposed
bear no relation to the harm alleged, and believes that it is probable that
this case will not have a material adverse effect on the Company's operations,
financial position or cash flows, although there can be no assurance in this
regard. Notwithstanding the foregoing, although the duration, costs and
ultimate outcome of this lawsuit are unknown, the Company expects that the
costs of defending this lawsuit will be significant during 1998.

  Although the Company believes that an adverse judgment in the foregoing
lawsuits filed against the Company would not have a material adverse effect on
the Company's operations, financial position or cash flows, there can be no
assurance in this regard.

ANTI-TAKEOVER PROVISIONS; STOCKHOLDER RIGHTS PLAN

  The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and By-Laws (the "By-Laws") contain provisions that may have
the effect of discouraging a third party from making an acquisition proposal
for the Company. The Certificate and By-Laws, among other things, (i) classify
the Board of Directors of the Company (the "Board") into three classes, with
directors of each class serving for a staggered three-year period, (ii)
provide that directors may be removed only for cause and only upon the
affirmative vote of at least 66 2/3% of the voting power of all the then
outstanding shares of stock entitled to vote, (iii) prohibit action by
stockholders by written consent, (iv) require advance notice of stockholder
nominations and proposals and (v) preclude stockholders from calling a special
meeting of stockholders. Such provisions would make the removal of incumbent
directors more difficult and time-consuming and may have the effect of
discouraging a tender offer or other takeover attempt not previously approved
by the Board. The Board has the authority to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the powers, preferences and
rights of any such series without stockholder approval. In addition, the
Company has adopted a stockholder rights plan. The stockholder rights plan, as
well as the Certificate and By-Laws provisions described above, could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company and could otherwise
adversely affect the market price of the Common Stock.

CONTROL BY EXISTING STOCKHOLDERS

  As of February 27, 1998, officers and directors of the Company, and
stockholders owning more than 5.0% of the Common Stock of the Company,
together with entities affiliated with them, beneficially owned approximately
46.6% of the Common Stock of the Company. As of February 27, 1997, Goldman,
Sachs & Co., and certain of its affiliates (including certain investment
limited partnerships), owned approximately 22% of the Common Stock of the
Company (excluding shares held in managed accounts, shares acquired in the
ordinary course of business and shares issuable upon the exercise of options
to acquire Common Stock). In the event that certain entities affiliated with
Goldman, Sachs & Co. own in excess of 25% of the Common Stock of the Company
(but not including certain securities), Goldman, Sachs & Co. would be
precluded from making a market in the Common Stock. Officers and directors of
the Company and stockholders owning more than 5.0% of the Common Stock of the
Company may be able to control the election of all members of the Board and
determine corporate actions. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the
Company.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

  The Company has filed a registration statement under the Securities Act,
covering Common Stock issued pursuant to the Neuromedical Systems, Inc. 1993
Stock Incentive Plan, as amended and restated October 25, 1995 (the "Incentive
Plan").

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<PAGE>

  The Company may be obligated to register shares of Common Stock for sale
pursuant to registration rights which have been granted to certain holders of
the Company's securities. These registration rights could prevent or limit the
ability of the Company to sell shares for its own account, could adversely
affect the market price of the Common Stock and could require the Company to
incur significant expenses.

LIMITED PRIOR PUBLIC MARKET; LIQUIDITY; POSSIBLE VOLATILITY OF STOCK PRICE

  The Common Stock is quoted on the Nasdaq National Market System, under the
symbol "NSIX." There can be no assurance that an active public market for the
Common Stock can be sustained. The market price of the Common Stock could
fluctuate significantly as a result of the Company's financial results,
regulatory approval filings, clinical studies, technological innovations or
new commercial products introduced by the Company or its competitors,
developments concerning patents or proprietary rights, trends in the
healthcare industry or in healthcare generally, litigation, the adoption of
new laws or regulations or new interpretations of existing laws or regulations
and other factors. The underwriters of the Company's IPO have informed the
Company that, subject to applicable laws and regulations, they intend to
continue to make a market in the Common Stock, however, they are not obligated
to do so and any such market-making may be discontinued at any time without
notice. Moreover, because of the affiliation of Goldman, Sachs & Co. with the
Company, Goldman, Sachs & Co. is required to deliver a current prospectus and
otherwise comply with the requirements of the Securities Act in connection
with any secondary market sale of the Common Stock, which may affect their
ability to continue market-making activities.

DIVIDEND POLICY

  The Company has not paid and does not anticipate paying any cash dividends
in the foreseeable future and intends to retain future earnings for the
development and expansion of its business. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and
subject to certain limitations under the General Corporation Law of the State
of Delaware and will depend upon the Company's results of operations,
financial condition, other contractual restrictions and other factors deemed
relevant by the Board.

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