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                                                                    Exhibit 99.1

                      CAUTIONARY STATEMENT 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
common stock, par value $.0001 per share (the "Common Stock"), 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 1996 Annual Report on Form 10-K including, without limitation, Item 1
Business and Item 6 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 the
Company's 1996 Annual Report on Form 10-K, including, without limitation, Item 1
Business and Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations. The words "believe", "expect", "anticipate",
"estimate", "project" 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, 1996, net losses aggregating approximately $94.5 million.  The Company does
not expect to generate a positive internal cash flow in the foreseeable future
due to the expected increases in capital expenditures, working capital
requirements and ongoing losses during the next year, including the expected
cost of commercializing the PAPNET(R) Testing System.  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.

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NEED FOR MARKET ACCEPTANCE OF THE PAPNET(R) TESTING SYSTEM

     The Company's future performance will depend to a substantial degree upon
market acceptance of the PAPNET(R) Testing System.  The extent of, and rate at
which, market acceptance and penetration are achieved by the PAPNET(R) 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, slide processing 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 three target
audiences: clinical laboratories, clinicians and women. The Company has also
begun discussions with insurers, managed care organizations and other third-
party payers concerning reimbursement for PAPNET(R) testing.

     The Company's 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(R) technology and some reluctance to use it even if a woman inquires
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
confusion in the marketplace about alternative technologies for cervical cancer
screening.  In late 1996 and the first quarter of 1997, the Company initiated
medical and other communications designed to address each of these
considerations.

     There can be no assurance that the PAPNET(R) Testing System will achieve or
maintain acceptance in its target markets.  Similar risks may confront other
products developed by the Company in the future.

RELIANCE ON A SINGLE PRODUCT

     The Company has concentrated its efforts primarily on the development of
the PAPNET(R) 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(R) Testing System will be successfully commercialized or that such other
applications will be developed.

COMPETITION

     The Company is currently aware of three principal competitors which are
engaged in efforts to automate one or more aspects of cervical smear screening.
Two competitors, Cytyc Corporation ("Cytyc") and AutoCyte Inc. ("AutoCyte",
formerly a unit of Hoffman-La Roche's Roche Image Analysis Systems), are focused
on the development of devices for the production, and, in the case of AutoCyte,
imaging and automated analysis, of monolayer slides, a potential

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alternative to the conventional Pap smear method of specimen collection and
preparation. AutoCyte has stated that it expects to file for United States Food
and Drug Administration ("FDA") pre-market approval in 1997 of its slide
preparation and imaging system. Cytyc received approval from the FDA in May 1996
to market its ThinPrep(R) System to laboratories, for the purpose of filtering
out blood, mucus and other material from Pap smears for cervical cancer
screening as a replacement for the conventional Pap smear method. In addition,
Cytyc 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 Intraepithelal Lesions and more severe lesions 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. PAPNET(R) is not currently indicated
under its FDA label for the scanning of ThinPrep(R) System slides. With
monolayer techniques, clinicians are required to prepare special slides, and
only a fraction of the cells and background information displayed on the
conventional slide may be observed by the cytotechnologist or clinician for
analysis. Because the PAPNET(R) Testing System uses the well-established methods
of sample collection, it does not reduce the diagnostic sample size or require
clinicians to deviate from standard practice.

     The other competitor of which the Company is aware, NeoPath, has stated
that it is developing a device for the fully 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 September 27, 1996 to consider recommending
approval of such supplement.  The Panel voted not to approve such supplement and
enumerated certain conditions that the Panel would want satisfied prior to
approval of such supplement.  NeoPath has stated that it expects to meet such
conditions within the next several months.

     On September 29, 1995, the FDA granted approval to NeoPath for the
AutoPap(R) System to be used as part of a laboratory's quality control
procedures. According to NeoPath, the AutoPap(R) System is designed to sort
purportedly "negative" 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(R) Testing System evaluate
the 128 color images from each purportedly negative slide on the PAPNET(R)
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." The cytotechnologist then
refers to the "x, y" coordinates provided with each PAPNET(R) image and uses the
coordinates as a reference point to re-examine the slide directly through the
microscope. Every slide rescreened using the PAPNET(R) system must receive a
directed, professional human analysis, either of the PAPNET(R) images or of both
the images and the slide.

     The Company's known competitors or other companies may develop new products
and technologies that prove to be more effective than the PAPNET(R) 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

                                       3
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be manufactured and marketed more successfully than the PAPNET(R) Testing
System. Such developments could render the PAPNET(R) Testing System less
competitive or 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 cervical samples, there
may in the future be alternate techniques or technologies for the detection or
prevention 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 (including the President and Chief Executive Officer of the Company,
Mark R. Rutenberg), 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

     From 1989 through 1991, the Company entered into various long-term
territorial license agreements (the "License Agreements") for the PAPNET(R)
Testing System, relating to certain states and metropolitan areas, which
together account for approximately 20% of the population of the United States.
Pursuant to the License Agreements, each licensee ("Licensee") thereunder is
entitled to receive the greater of (i) royalties equal to 50% of the Net Slide
Revenue (as defined below) generated from participating laboratories within its
territory, not to exceed the Licensee's share of a specified number of slides
annually or (ii) a specified percentage of the Company's annual slide processing
revenues less certain taxes, commissions and other enumerated expenses, up to
specific annual monetary limits for each Licensee.  "Net Slide Revenue" is
defined as the gross slide processing revenue minus certain costs related to
asset-based financing for PAPNET(R) Scanning Stations and related equipment (not
to exceed $1.00 per slide) and transportation costs.  The Company estimates that
the License Agreements will result in royalty expense to the Company of
approximately 10% of its United States revenues over the term of the License
Agreements, but there can be no assurance that the amount of such royalties will
not be more or less than such percentage. In December 1995, the Company and the
Licensees entered into a settlement agreement (the "Settlement Agreement") and a
warrant exercise agreement, the effect of which included the clarification of
previously disputed elements of prior license agreements, the requirement for
the Company to make payments of stock having a fair market value equivalent to
approximately $1,652,000 and the

                                       4
<PAGE>

irrevocable election by the Licensees and acceptance by the Company for the
cashless exercise of 826,032 outstanding warrants into 715,894 shares of Common
Stock in connection with the closing of the Company's initial public offering.
Pursuant to the Settlement Agreement, the Company has consented to the merger of
the Licensees and related parties.  Following such merger, the Licensees and the
Company have agreed to enter into a new license pursuant to which the rights and
obligations of the parties will be clarified but, with respect to which, the
economic terms of the License Agreements will not be materially altered.  The
Company and the Licensees have also executed mutual general releases, which
include, among other things, the release of claims previously made by the
Licensees. The new licenses will expire on December 31, 2025.

     In addition, the provisions of a promissory note dated October 3, 1990
(which was later converted to Series A Convertible Preferred Stock and
subsequently automatically converted into Common Stock upon consummation of the
Company's initial public offering in December 1995) granted the holder of the
note certain rights to an agreement to be the Company's sole licensee for
distribution of the PAPNET(R) system in Canada.  The promissory note 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." An agreement has
not been negotiated.  There can be no assurance that the terms of such agreement
when it is negotiated, or the activities of the licensee thereunder, will not
have a material adverse effect 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 the Canadian 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(R) Testing System
is protected by five 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 infringement 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 (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

                                       5
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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, including the provisions of the
Medical Device Amendments to the Federal Food, Drug and Cosmetic Act.
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 the premarket approval provisions of products
and conducts periodic inspections to determine compliance with its Good
Manufacturing Practice 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 adoption of new
regulations could 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.

LIMITED MARKETING AND SALES HISTORY

     Until it received United States Food and Drug Administration ("FDA")
approval on November 8, 1995, the Company was prohibited from marketing the
PAPNET(R) Testing System in the United States.  Although the Company has begun
marketing the PAPNET(R) Testing System, the Company is still in the process of
establishing commercial scale customer service, training and support
capabilities.  The Company intends to market, sell, service and support
PAPNET(R) Testing System services through recruitment of its own direct sales
force and through cooperation with the existing sales personnel of client
clinical laboratories.  There can be no assurance that the Company will be able
to recruit and retain skilled sales, marketing, service or support personnel or
establish satisfactory relationships with client laboratories, or that the
Company's marketing and sales efforts will be successful.

INTERNATIONAL SALES AND OPERATIONAL RISKS

     The Company markets the PAPNET(R) Testing System to customers outside of
the United States.  In addition, the Company manufactures its PAPNET(R) 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

                                       6
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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.  Finally, certain
of the Company's operations are located in Hong Kong.  Pursuant to the existing
treaty between the Government of the United Kingdom and the People's Republic of
China, Hong Kong will revert to and become part of China in July 1997.  The
Company is uncertain as to the impact that such a change in government will have
on its business operations in Hong Kong.  There can be no assurance that the
Company will be able to successfully commercialize the PAPNET(R) 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(R) Testing System on a worldwide basis, including
in the United States.  Neuromedical Systems, Inc., the United States parent
company, has provided a 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(R)
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.

                                       7
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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(R) Scanning Stations
in the volumes that will be necessary for the Company to generate significant
revenues from the processing of slides on the PAPNET(R) Testing System.  The
Company may encounter difficulties in scaling up its slide processing operations
or production or in hiring and training additional personnel to operate its
Scanning Centers 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(R) Testing System, 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(R) 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(R)
testing.  In addition, if Medicare and Medicaid do not provide for reimbursement
of PAPNET(R) testing, or, if the level of such reimbursement is significantly
below the amount laboratories charge patients to perform PAPNET(R) testing, the
size of the potential market available to the Company may be reduced.  There can
be no assurance that costs associated with PAPNET(R) testing will ever become
reimbursable or that the level of reimbursement to laboratories for PAPNET(R)
testing will achieve or be maintained at levels necessary to permit the Company
to generate substantial

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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
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(R) Testing System or other future potential products
is alleged to have resulted in a false negative diagnosis.  While PAPNET(R) 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


                                       9
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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 July 15, 1996, the Company filed a lawsuit against NeoPath, 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) System. The Company also alleges
that NeoPath falsely characterized and made misleading comparisons to consumers
and securities analysts of the AutoPap(R) System and the Company's PAPNET(R)
Testing System. NeoPath has denied all allegations and, in addition, it has
filed counter-claims against the Company seeking damages and injunctive relief
for false advertising and unfair competition. In the counter-claims, NeoPath
alleges that statements made by the Company characterizing the performance of
the PAPNET(R) Testing System, and its effectiveness relative to NeoPath's
AutoPap(R) System, as well as other statements, are false and misleading and
constitute misrepresentations. The Company believes that NeoPath's assertions
are without merit. 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 1997.

     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.


                                       10
<PAGE>
DILUTION; EFFECT OF OUTSTANDING OPTIONS AND WARRANTS

     The Company has outstanding options and warrants to purchase Common Stock
at prices that may be below the per share price to purchasers of the Company's
Common Stock in the market.  The exercise of such options and warrants may have
a dilutive effect on the purchaser's investment.  As of February 28, 1997, the
Company had 30,897,792 issued and outstanding shares of Common Stock and
3,905,979 outstanding options and warrants exercisable into 3,905,979 additional
shares of Common Stock.

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 28, 1997, 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 55.7% of
the Common Stock of the Company.  As of February 28, 1997, Goldman, Sachs & Co.,
and certain of its affiliates (including certain investment limited
partnerships), owned approximately 21.9 % 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 warrants and 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.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

     Sales of substantial amounts of Common Stock in the public market could
have an adverse effect on the price of the Common Stock.  As of February 28,
1997, the Company had outstanding 30,897,792 shares of Common Stock of which
22,694,619 shares of Common Stock were eligible for sale and not subject to
restriction.  The remaining 8,203,173 shares of Common Stock, issued prior to
the IPO, are eligible for sale from time to time under Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The Securities and Exchange Commission enacted certain amendments to Rule 144
which become effective April 29, 1997 which will permit the resale of limited
amounts of restricted securities by any person after a one-year, rather than a
two-year holding period, and unlimited resales of restricted securities held by
non-affiliates of the Company after a holding period of two years, rather than
three years.  Under such amendments, all of the Common Stock issued prior to the
IPO will become eligible for sale during 1997.

     In addition, 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 Company may, and it may be obligated to, register 12,535,546 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.


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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.

INVESTMENT COMPANY ACT CONSIDERATIONS

     The Investment Company Act of 1940, as amended (the "1940 Act"), requires
the registration of, and imposes various substantive restrictions on, certain
companies that engage primarily, or propose to engage primarily, in the business
of investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding the composition of assets and sources of income, and
are not primarily engaged in businesses other than investing, holding, owning or
trading securities.  The Company believes that it is, and intends to remain,
primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading in securities.  The Company has temporarily invested the net
proceeds of the IPO, pending their use, in a manner so as to avoid becoming
subject to the registration requirements of the 1940 Act.  Such investment may
result in the Company's obtaining lower yields on the funds invested than might
be available in the securities market generally.  There can be, however, no
assurance that such investments and utilization can be maintained, or that any
other exemption would be available, so as to enable the Company to avoid the
registration requirements of the 1940 Act.  If the Company were required to
register as an investment company under the 1940 Act, it would become subject to
substantial regulations with respect to its capital structure, management,
operations, transactions with affiliated persons (as defined in the 1940 Act)
and other matters.  Application of the provisions of the 1940 Act would have a
material adverse effect on the Company.

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