selected five-year financial data
 
 
 IN THOUSANDS, EXCEPT PER SHARE DATA
 YEAR ENDED DECEMBER 31,         1996      1995      1994      1993      1992
                              ---------  --------  --------  --------  ------- 
 STATEMENT OF OPERATIONS DATA
 Revenues                     $  3,062   $     -   $     -   $    -    $    -
 Gross margin                    1,157         -         -        -         -
 Operating expenses:
  Research and development      11,202     9,384     9,183    4,792     3,877
  Selling, general and
    administrative              11,295     6,626     3,320    1,413     1,565
 Net loss                      (17,655)  (14,365)  (12,324)  (6,264)   (5,380)
 Net loss per share 1, 2         (1.36)    (1.53)    (1.94)
 
 BALANCE SHEET DATA
 Cash, cash equivalents,
  and securities
  available-for-sale          $ 58,488  $ 23,430   $ 2,295  $ 1,001   $ 1,588
 Working capital                60,821    22,876     2,316       82     1,061
 Total assets                   76,132    28,016     5,193    1,662     2,146
 Obligations under capital leases,
  less current portion             183       258       176      216       170
 Total shareholders' equity     71,602    25,133     3,602      489     1,399
 
 The  comparability of the above data is affected  by  the
 Company's  initial public offering completed in  February
 1995  and  second  public offering completed  in  January
 1996.  See Note 8 of Notes to Financial Statements.
 
 1 Amounts presented for 1995 and 1994  are pro forma
   (unaudited).  The basis for determining the number of
   shares used in computing pro forma (unaudited) net loss
    per share is described in Note 1 of Notes to Financial
   Statements.
 
 2 Net loss per share for 1993 and 1992 is not considered
   meaningful.

 nineteen     NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
           management's discussion and analysis of
        financial condition and results of operations
                              
                              
                          overview
                              
 NeoPath,  Inc. (the "Company" or "NeoPath") develops  and
 markets  products  that  automate the  interpretation  of
 medical  images.  The Company's initial products are  two
 automated  screening  systems that integrate  proprietary
 high-speed  image  processing  computers,  video  imaging
 technology   and   sophisticated   image   interpretation
 software  to capture and analyze thousands of microscopic
 images  from  a  Papanicolaou ("Pap")  smear  slide.   In
 September   1995,  the  United  States  Food   and   Drug
 Administration  (the "FDA") cleared  for  commercial  use
 the   Company's  first  product,  the  AutoPap   300   QC
 Automatic   Pap  Screener  System  (the "AutoPap   QC").
 During  the  first  quarter  of  1996,  the  Health  Care
 Financing  Administration  officially  allowed   clinical
 laboratories  to  use  the  AutoPap  QC  in  the  quality
 control  review  of  Pap  smear  slides  that  have  been
 initially   screened  by  cytologists  as  normal.    The
 decision  allows  AutoPap QCs to  replace  the  federally
 mandated  rescreening requirement.  As a result of  these
 approvals,   NeoPath  transitioned  from  a  "development
 stage"   company  to  a  commercial  entity,   with   the
 Company's first product revenues recognized in 1996.
     NeoPath  is  seeking FDA approval for  the  Company's
 second   product,  the  AutoPap  Automatic  Pap  Screener
 System  (the "AutoPap Screener" and, in combination  with
 the  AutoPap QC, the "AutoPap System").  On September 27,
 1996  a  Hematology and Pathology Devices Advisory  Panel
 recommended that the FDA not approve, at that  time,  the
 supplement  to  the Company's premarket approval  ("PMA")
 submission for the use of  the AutoPap Screener as a primary
 screener  of  Pap
 smear   slides  pending  the  completion  of   additional
 premarket  studies.   The FDA subsequently  followed  the
 Panel's   recommendation.   The  Company  is   performing
 additional  clinical studies, as requested  by  the  FDA,
 and plans to resubmit this matter to the FDA in 1997.
     The  Company is compensated on either a sale or  fee-
 per-use basis (subject to certain license agreements  and
 minimum  payments).  Under its fee-per-use  program,  the
 Company  retains ownership of AutoPap Systems  placed  at
 customer  sites and assesses customers a charge for  each
 Pap   smear  slide  analyzed.   The  fee-per-use  program
 entails  a  significant  capital  commitment  since   the
 Company  retains ownership of the AutoPap  Systems.   The
 cost   of  each  AutoPap  System  is  reclassified   from
 inventories to depreciable equipment upon shipment  to  a
 fee-per-use customer site.  Such equipment, reflected  on
 the  balance sheet under "fee-per-use systems,  net,"  is
 depreciated  on  a straight-line basis over  a  four-year
 period,   commencing  upon  commercial  operation.    The
 Company's product placements have primarily consisted  of
 fee-per-use  contracts  in the United  States  and  sales
 contracts internationally.  The Company anticipates  that
 future product placements will continue to consist  of  a
 mixture of fee-per-use and sale contracts.
     During  1996,  the Company developed commercial-scale
 manufacturing capability and expanded its
 sales,  marketing,  and  administrative  functions.   The
 Company  expects spending to increase as it supports  its
 fee-per-use  program,  continues  to  expand  its  sales,
 marketing,    and    customer   service    and    support
 capabilities, and continues its research and  development
 activities   (including  additional  clinical   studies).
 Accordingly,  the Company expects to incur negative  cash
 flows  and  additional losses in 1997.  However,  NeoPath
 anticipates increased domestic and international  AutoPap
 System  revenues  in 1997 as the Company  builds  on  its
 established base of fee-per-use customers in  the  United
 States  and  places AutoPap Systems worldwide  through  a
 mixture of fee-per-use and sale contracts.

twenty  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     Cost of revenues includes depreciation on the AutoPap
 System   used  in  the  fee-per-use  program,   allocated
 service  and support costs, and, with regard  to  AutoPap
 Systems  sold,  the related manufacturing cost  of  those
 devices.    The   Company's  research   and   development
 expenses  include  salaries and benefits  of  scientific,
 engineering,    and    regulatory   personnel,    testing
 equipment,  components  used  in  prototypes,  consulting
 services   and   the  costs  of  preparing   and   filing
 applications  for  patent protection  for  the  Company's
 technologies.    General   and  administrative   expenses
 include    salaries    and   benefits    of    financial,
 administrative,  sales  and  marketing  personnel,   non-
 patent legal expenses, and facility-related costs.
     
     
     
                    results of operations
        YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                              
                  REVENUES AND GROSS MARGIN
 NeoPath  began recognizing product revenues in the  first
 quarter of 1996 and ended the year with a total of
 $3.1  million  in revenues.  Total revenues consisted  of
 fee-per-use and sale revenues.
     The Company's gross margin fluctuates from period-to-
 period   as  a  result  of  the  mixture  of  fee-per-use
 revenues  and sale revenues; therefore, the gross  margin
 of  38%  in 1996 is not necessarily indicative of  future
 gross margin.
     
              RESEARCH AND DEVELOPMENT EXPENSES
 Research  and  development expenses for  the  year  ended
 December 31, 1996 increased to $11.2 million compared  to
 $9.4  million  and $9.2 million for the same  periods  in
 1995  and  1994, respectively.  The $1.8 million increase
 in  1996  was  due  primarily to increased  research  and
 development personnel.  The Company expects research  and
 development  expenses to increase in 1997 as it  conducts
 clinical  trials of the AutoPap Screener  in  the  United
 States  and elsewhere and seeks to continuously  improve
 the AutoPap Systems' performance.
     The increase for the year ended December 31, 1995 was
 primarily  due  to  a  $350,000 noncash  contribution  of
 shares  of  common stock to the University of  Washington
 in the second quarter of 1995.
     
     
        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 Selling,  general  and administrative expenses  increased
 to $11.3 million in 1996 from $6.6 million and
 $3.3  million,  respectively, for the comparable  periods
 in  1995 and 1994.  The increase in 1996 was primarily  a
 result   of  increased  personnel  and  expanded   sales,
 marketing  and  administrative  functions.   The  Company
 expects  selling, general and administrative expenses  to
 continue   to  increase  as  it  further  expands   these
 functions  to support the continued worldwide rollout  of
 the  AutoPap System.  The Company also incurred increased
 legal  fees in 1996 relating to the Neuromedical Systems,
 Inc.   lawsuit  (see  Note  10  of  Notes  to   Financial
 Statements).
 
     The  increase in 1995 was primarily a result  of  the
 expansion  of  the  Company's  manufacturing,  sales  and
 marketing,  and  customer service and support  capacities
 and  from  the relocation and expansion of the  Company's
 corporate headquarters in January 1995.

twenty one  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     During    1994,   the   Company   recorded   deferred
 compensation  for  the  difference between  the  exercise
 price  and  the deemed fair value for financial reporting
 purposes  of  the  Company's  common  stock  for  options
 granted  in  1994.  Such options were granted  at  prices
 ranging from $1.20 to $4.00 per share with a deemed  fair
 value  ranging  from  $2.40 to  $6.00  per  share.   This
 compensation  expense aggregated $774,000, and  is  being
 amortized  over  the respective vesting periods.   During
 1996,  1995  and  1994, $78,000, $278,000  and  $321,000,
 respectively,   of   such   compensation   expense    was
 recognized.
     
                       INTEREST INCOME
 Interest  income  for the year ended  December  31,  1996
 increased to $3.7 million from $1.7 million and  $252,000,
 respectively,  for  the comparable periods  in  1995  and
 1994  due  primarily  to  the  investment  of  the  $61.7
 million  net  proceeds from the Company's  second  public
 stock  offering completed in January 1996.  The  increase
 in  1995  is  due to the investment of the $34.7  million
 net  proceeds  from  the Company's initial  public  stock
 offering   completed  in  February  1995.   The   Company
 expects that its interest income will decline in 1997  as
 a result of declining cash available for investment.
 
 
 
   limitation on use of net operating loss and tax credit
                        carryforwards
                              
 As  of  December 31, 1996, the Company had net  operating
 loss  carryforwards of approximately  $62.6  million  and
 research   and   development  credit   carryforwards   of
 approximately  $1.3  million  for  federal   income   tax
 purposes,  which expire between 2004 and  2011.   Due  to
 the  issuance and sale of shares of preferred stock,  and
 the   Company's  initial  public  offering,  the  Company
 incurred   "ownership  changes"  pursuant  to  applicable
 regulations in effect under the Internal Revenue Code  of
 1986,  as  amended.   Therefore,  the  Company's  use  of
 losses  incurred  through  the date  of  these  ownership
 changes  will be limited during the carryforward  period.
 The  Company  estimates  that the  use  of  approximately
 $28.0 million of losses incurred prior to one or more  of
 the  ownership  changes would be limited to approximately
 $6.4  million per year through 1997 and to lower  amounts
 in  subsequent years.  To the extent that any single-year
 loss   is  not  utilized  to  the  full  amount  of   the
 limitation,   such  unused  loss  is  carried   over   to
 subsequent years until the earlier of its utilization  or
 the  expiration of the relevant carryforward period.  See
 Note 7 of Notes to Financial Statements.
 
 
 
               liquidity and capital resources
                              
 As  of  December 31, 1996, the Company had  approximately
 $58.5  million  in cash, cash equivalents and  securities
 available-for-sale,  representing  77%  of  total
 assets.   As  of  December  31,  1996,  the  Company  had
 capital   lease  obligations,  including   interest,   of
 $304,000   and  operating  lease  obligations   of   $1.9
 million.   Other than capitalized lease obligations,  the
 Company has no outstanding long-term debt.

twenty two  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     The  Company's cash used in operating activities  was
 $25.0  million, $12.8 million, and $13.0 million  in  the
 years   ended   December  31,  1996,  1995,   and   1994,
 respectively.   The  Company expended cash  for  property
 and   equipment  of  $3.3  million,  $1.9  million,   and
 $552,000 in the years ended December 31, 1996, 1995,  and
 1994, respectively.
     The   Company   expects  negative  cash   flow   from
 operations  to  continue  at least  through  1997  as  it
 manufactures  AutoPap  Systems  to  support   fee-per-use
 product  placements, continues to expand  its  marketing,
 sales,  and  customer  service and support  capabilities,
 continues  its  research and development  activities  and
 conducts  clinical trials of the AutoPap  Screener.   The
 Company  currently  estimates that its  existing  capital
 resources  and interest income will enable it to  sustain
 operations for approximately two years.  There can be  no
 assurance,  however,  that  the  Company  will   not   be
 required  to seek additional capital at an earlier  date.
 The Company's future capital requirements will depend  on
 many  factors, including the extent and rate of  adoption
 of   use   of  the  AutoPap  QC  and,  if  the  requisite
 regulatory approvals are obtained, the AutoPap  Screener;
 the  adoption  of the Company's fee-per-use program;  the
 mix  of  fee-per-use and sale placements; the extent  and
 rate  of  development of the Company's marketing,  sales,
 and  customer service and support capabilities;  and  the
 status of competing products.  The Company may, from  time
 to  time,  seek  additional  funding  through  public  or
 private  financing,  including equity  financing.   There
 can  be  no  assurance  that  adequate  funding  will  be
 available  as  needed  or  on  terms  acceptable  to  the
 Company.   If  additional funds  are  raised  by  issuing
 equity  securities, existing shareholders may  experience
 dilution.  Insufficient funds may require the Company  to
 delay,  scale  back  or eliminate  some  or  all  of  its
 research and development and clinical programs.
     
     
     
                 forward-looking statements
                              
 The  preceding  Management's Discussion and  Analysis  of
 Financial  Condition  and Results of Operations  contains
 "forward-looking statements" which reflect the  Company's
 current   views  with  respect  to  future   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.   The  words
 "plan,"  "expect," "anticipate," and similar  expressions
 identify   forward-looking   statements.    Readers   are
 cautioned  not to place undue reliance on these  forward-
 looking   statements.    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.  Factors  that
 could  cause  actual  results to differ  materially  from
 historical results or those anticipated include,  without
 limitation,   the   following:   the  Company's   limited
 operating   history   and  history  of   losses;   market
 acceptance  of the Company's products; the acceptance  of
 the  Company's fee-per-use or sale programs; product  and
 manufacturing   regulatory  approvals;    the   Company's
 limited  marketing, sales, customer service  and  support
 capabilities;  uncertainties  relating  to  international
 transactions;  the  Company's sole or limited  source  of
 supply  of  certain components;  the status of  competing
 products;  dependence  on  reimbursement;  dependence  on
 single  product  line; product liability;  dependence  on
 patents  and  proprietary rights; the risk of third-party
 claims  of infringement; and dependence on key personnel.
 For  a  more  detailed discussion of these  factors,  see
 "Factors  Affecting  Future Results  and  Forward-Looking
 Statements"  of  the Company's Form 10-K for  the  fiscal
 year ended December 31, 1996.

twenty three  NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION> 
                       balance sheets

 DECEMBER 31,                                                      1996                1995
 <S>                                                       <C>                 <C>
 ASSETS
 Current assets:
  Cash and cash equivalents                                $  7,871,401        $  4,150,923
  Securities available-for-sale                              50,616,477          19,278,839
  Accounts receivable, net of allowance of $175,000             840,256                   -
  Inventories                                                 5,641,914           1,841,560
  Other current assets                                          197,726             229,555
                                                             ----------          ----------
 Total current assets                                        65,167,774          25,500,877
 
 Fee-per-use systems, net                                     5,994,137                   -
 Property and equipment, net                                  4,813,745           2,192,984
 Deposits and other assets                                      155,899             322,295
                                                            ------------       ------------ 
  Total assets                                              $ 76,131,555       $ 28,016,156
                                                            ============       ============
 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
  Accounts payable                                          $ 1,496,630        $    803,649
  Salaries and wages payable                                  2,208,454           1,443,131
  Customer deposits                                             164,330              35,000
  Other accrued liabilities                                     401,609             149,328
  Current portion of obligations under capital leases            75,861             193,442
                                                             ----------         -----------
 Total current liabilities                                    4,346,884           2,624,550
 
 Obligations under capital leases, less current portion         182,535             258,395
 
 Commitments and contingencies
 
 Shareholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares
    authorized; none issued and outstanding                           -                   -
  Common stock, $.01 par value; 40,000,000 shares
    authorized; 13,652,156 and 9,819,487 shares
    issued and outstanding at December 31, 1996
    and 1995, respectively                                  136,255,746          71,649,971
 
  Deferred compensation                                         (74,246)           (175,782)
  Accumulated deficit                                       (64,579,364)        (46,340,978)
                                                            -----------         -----------            
 Total shareholders' equity                                  71,602,136          25,133,211
                                                            -----------         -----------
 Total liabilities and shareholders' equity                $ 76,131,555        $ 28,016,156
                                                            ===========         ===========
 See accompanying notes.
</TABLE>

twenty four  NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
 
                  statements of operations
                              
 YEAR ENDED DECEMBER 31,                                       1996            1995           1994
 <S>                                                  <C>             <C>            <C>      
 Revenues                                             $   3,061,849   $           -  $           -
 Cost of revenues                                         1,904,559               -              -
                                                      -------------   -------------   ------------
  Gross margin                                            1,157,290               -              -
 
 Operating expenses:
  Research and development                               11,202,375       9,384,177      9,183,484
  Selling, general and administrative                    11,295,228       6,626,317      3,320,025
                                                      -------------    ------------   ------------
                                                         22,497,603      16,010,494     12,503,509
 
 Loss from operations                                   (21,340,313)    (16,010,494)   (12,503,509)
 
 Interest income                                          3,741,843       1,730,094        252,245
 Interest expense                                           (56,813)        (84,986)       (72,424)
                                                      -------------    ------------   ------------
 Net loss                                             $ (17,655,283)  $ (14,365,386) $ (12,323,688)
                                                      =============    ============   ============
 
 Net loss per share                                   $       (1.36)  $       (1.59) $       (6.67)
                                                      =============    ============   ============ 
 Shares used in computation
  of net loss per share                                  13,029,314       9,007,570      1,846,275
 
 Pro forma (unaudited) net loss per share,
  reflecting assumed conversion of
  convertible preferred stock                                         $       (1.53) $       (1.94)
                                                                       ============   ============
 Shares used in computation of pro forma net
  loss per share                                                          9,412,683      6,343,451
 
 See accompanying notes.
</TABLE>

twenty five  NEOPATH 1966 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
 
                              
             statements of shareholders' equity
                              
                                        PREFERRED STOCK             COMMON STOCK
                                    -----------------------   ------------------------
                                   NUMBER OF                  NUMBER OF                    DEFERRED     ACCUMULATED
                                      SHARES        AMOUNT       SHARES        AMOUNT  COMPENSATION         DEFICIT         TOTAL
<S>                                <C>         <C>          <C>           <C>           <C>            <C>            <C>
Balance at December 31, 1993       3,134,892  $ 18,014,091      331,020  $  2,166,571  $          -   $ (19,691,849)  $   488,813
  Series G preferred stock 
   issued for cash, net of
   issuance costs of $85,027       2,307,699    14,914,971            -             -             -              -     14,914,971
  Exercise of stock options                -             -      197,354       217,686             -              -        217,686
  Deferred compensation
   related to stock option grants          -             -            -       774,000      (774,000)             -              -
  Amortization of deferred 
   compensation                            -             -            -             -       320,553              -        320,553
  Unrealized loss on securities
    available-for-sale                     -             -            -             -             -        (16,425)       (16,425)
  Net loss                                 -             -            -             -             -    (12,323,688)   (12,323,688)
                                  ----------   -----------     --------     ---------      --------    -----------    -----------
 Balance at December 31, 1994      5,442,591    32,929,062      528,374     3,158,257      (453,447)   (32,031,962)     3,601,910
  Preferred stock converted
   to common stock                (5,442,591)  (32,929,062)   5,609,257    32,929,062             -              -              -
  Initial public offering 
   - common stock, net of 
   issuance costs of $3,209,734            -             -    3,450,000    34,740,266             -              -     34,740,266
  Exercise of options and warrants         -             -      206,856       472,386             -              -        472,386
  Amortization of deferred
   compensation                            -             -            -             -       277,665              -        277,665
  Gift of original issuance shares         -             -       25,000       350,000             -              -        350,000
  Unrealized appreciation on securities
    available-for-sale                     -             -            -             -             -         56,370         56,370
  Net loss                                 -             -            -             -             -    (14,365,386)   (14,365,386)
                                  ----------   -----------    ---------    ----------     ---------   ------------    -----------
 Balance at December 31, 1995              -             -    9,819,487    71,649,971      (175,782)   (46,340,978)    25,133,211
  Second public offering - common
    stock, net of issuance costs
    of $4,384,649                          -             -    2,875,000    61,740,351             -              -     61,740,351
  Exercise of options and warrants         -             -      957,669     2,889,169             -              -      2,889,169
  Amortization of deferred
    compensation                           -             -            -       (23,745)      101,536              -         77,791
  Unrealized loss on securities
    available-for-sale                     -             -            -             -             -       (583,103)      (583,103)
  Net loss                                 -             -            -             -             -    (17,655,283)   (17,655,283)
                                  ----------   -----------  -----------    ----------      ---------   -----------    ----------- 
 Balance at December 31, 1996              -  $          -   13,652,156  $136,255,746     $ (74,246)  $(64,579,364)  $ 71,602,136
                                  ==========   ===========  ===========   ===========      =========   ===========    ===========
</TABLE>
 
 See accompanying notes.

twenty six and twenty seven  NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
 
                  statements of cash flows
                              
 YEAR ENDED DECEMBER 31,                        1996           1995           1994
<S>                                     <C>            <C>            <C>  
 OPERATING ACTIVITIES
 Net loss                               $(17,655,283)  $(14,365,386)  $(12,323,688)
 Adjustments to reconcile
  net loss to net cash used
  in operating activities:
    Depreciation and amortization          1,994,064        539,217        248,110
    Deferred compensation                     77,791        277,665        320,553
    Gift of original issuance shares               -        350,000              -
    Accrued interest on securities
     available-for-sale                      660,623       (337,098)       (59,140)
    Net change in operating accounts:
     Accounts receivable                    (840,256)             -              -
     Inventories and
       fee-per-use systems               (11,093,253)      (577,634)    (1,263,926)
     Accounts payable and
       accrued liabilities                 1,839,915      1,421,009        183,528
    Other                                     40,888        (86,707)      (134,147)
                                         -----------    -----------    -----------    
 Net cash used in operating activities   (24,975,511)   (12,778,934)   (13,028,710)
 
 INVESTING ACTIVITIES
 Purchases of securities
  available-for-sale                     (75,750,434)   (35,663,513)    (9,145,429)
 Maturities of securities
  available-for-sale                      43,169,070     19,073,237      6,893,049
 Additions to property and equipment      (3,325,122)    (1,885,813)      (552,156)
 Other                                       166,396         85,115       (297,127)
                                         -----------    -----------     ---------- 
 Net cash used in investing activities   (35,740,090)   (18,390,974)    (3,101,663)
 
 FINANCING ACTIVITIES
 Proceeds from bank note                           -        500,000              -
 Payments on bank note                             -       (500,000)             -
 Issuance of common stock, net            61,740,351     34,740,266              -
 Issuance of preferred stock, net                  -              -     14,914,971
 Exercise of stock options
  and warrants                             2,889,169        472,386        217,686
 Proceeds from sale/
  leaseback transactions                           -        317,594        152,468
 Principal payments on obligations
  under capital leases                      (193,441)      (209,415)      (155,789)
                                          ----------     ----------     ----------  
 Net cash provided by
  financing activities                    64,436,079     35,320,831     15,129,336
 Net increase (decrease) in cash
  and cash equivalents                     3,720,478      4,150,923     (1,001,037)
 Cash and cash equivalents:
  Beginning of period                      4,150,923              -      1,001,037
                                          ----------    -----------    -----------
  End of period                          $ 7,871,401   $  4,150,923   $          -
                                          ==========    ===========    ===========
 NONCASH TRANSACTIONS
 AND SUPPLEMENTAL DISCLOSURES
 Cash paid for interest                  $    56,813   $     84,986   $     76,090
 Inventories transferred to
  fee-per-use systems                      6,563,537              -              -
 Inventories transferred to property
  and equipment                              729,362              -              -
 Deferred compensation
  on stock option grants                           -              -        774,000
 
 See accompanying notes.
</TABLE>

twenty eight and twenty nine  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
                notes to financial statements
                      DECEMBER 31, 1996
                              
                             one
     description of business and summary of significant
                     accounting policies
                              
                          BUSINESS
 NeoPath,  Inc.  (the  "Company")  develops  and   markets
 products  that  automate  the interpretation  of  medical
 images.   The  Company's  AutoPap  System  is  a  medical
 device  that  integrates  proprietary  high-speed   image
 processing   computers,  video  imaging  technology   and
 sophisticated  image interpretation software  to  capture
 and  analyze  thousands  of  microscopic  images  from  a
 Papanicolaou  ("Pap")  smear slide.   The  Company  began
 recognizing    product   revenues   in   1996,    thereby
 transitioning  from a "development stage"  company  to  a
 commercial entity.

                    REVENUES AND MARKETS
 NeoPath's  primary market includes domestic  and  foreign
 clinical  laboratories.  Domestic revenues are  generated
 primarily   through   NeoPath's   direct   sales   force;
 international   revenues  in  1996  were   derived   from
 distributors.   The  Company's  four  largest   customers
 accounted  for  86%   of total 1996  revenues,  and
 export  product placements accounted for  45%  of
 total  1996 revenues.  The Company recognizes fee-per-use
 revenue   based   on  the  number  of   customer   slides
 processed,  subject  to  agreed-upon  minimum  processing
 levels,  beginning  in  the month an  AutoPap  System  is
 initially  placed in commercial use at the customer  site
 and  is  accepted  by  the customer.   Sales  of  AutoPap
 Systems are recognized at date of shipment.

                      CASH EQUIVALENTS
 Short-term  investments  with  a  purchased  maturity  of
 three   months  or  less  are  considered  to   be   cash
 equivalents.   Cash  equivalents  are  carried  at  cost,
 which approximates market value.

                SECURITIES AVAILABLE-FOR-SALE
 The  Company's  investment  portfolio  is  classified  as
 available-for-sale,  and such securities  are  stated  at
 fair   value,  with  the  unrealized  gains  and   losses
 adjusted  through accumulated deficit.   Interest  earned
 on  securities available-for-sale is included in interest
 income.   The  amortized  cost  of  investments  in  this
 category  is  adjusted for amortization of  premiums  and
 accretion  of  discounts to maturity.  Such  amortization
 and  accretion are included in interest income.  The cost
 of  securities  sold  is calculated  using  the  specific
 identification method.

                         INVENTORIES
 Inventories  are valued at the lower of  cost  or  market
 (first in, first out basis).

                     FEE-PER-USE SYSTEMS
 AutoPap  Systems manufactured for fee-per-use  placements
 are  carried in inventories until the AutoPap Systems are
 placed  in  commercial  use,  at  which  time  they   are
 reclassified    to   fee-per-use   systems   (non-current
 assets).   Fee-per-use  systems  are  depreciated  on   a
 straight-line  basis  over an estimated  useful  life  of
 four years.
     The  Company purchases all components for the AutoPap
 Systems   from   outside   vendors,   including   certain
 components  from  sole-source  or  single  vendors.   The
 establishment of additional or replacement sources of
 supply  could require regulatory approval.  In  addition,
 a  vendor's inability to supply acceptable components  in
 a  timely manner and in the quantity required could delay
 the  Company's  manufacture of, or cause the  Company  to
 cease manufacturing, its products.

thirty  NEOPATH 1996 ANNUAL REPORT
<PAGE>
                   PROPERTY AND EQUIPMENT
 Property   and  equipment  are  recorded  at  cost   less
 accumulated  depreciation and amortization.  Depreciation
 is   calculated  on  a  straight-line  basis   over   the
 estimated  useful  lives of the related  assets,  ranging
 from  three  to seven years.  Leasehold improvements  are
 amortized  over  the  lesser of  their  estimated  useful
 lives or the term of the lease.

                   DEFERRED OFFERING COSTS
 The  Company  capitalizes deferred offering costs.   Upon
 completion  of an offering, the costs are netted  against
 the proceeds of the offering.

                  STOCK-BASED COMPENSATION
 The  Company  has  elected to follow the intrinsic  value
 method prescribed by Accounting Principles Board
 Opinion   No.  25,  "Accounting  for  Stock   Issued   to
 Employees" and related Interpretations in accounting  for
 its  stock  options  because the alternative  fair  value
 accounting   provided  for  under  Financial   Accounting
 Standards Board Statement No. 123, "Accounting for Stock-
 Based  Compensation" ("FASB 123") requires use of  option
 valuation  models  that were not  developed  for  use  in
 valuing  employee  stock options.  Because  the  exercise
 price  of  the  Company's stock options generally  equals
 the  market price of the underlying stock on the date  of
 grant, no compensation expense has been recognized  since
 the Company's initial public stock offering.  See Note  8
 for FASB 123 pro forma disclosures.

                     NET LOSS PER SHARE
 Net  loss  per  share is computed based on  the  weighted
 average  number  of  shares of common stock  outstanding.
 Common  equivalent  shares are not included  in  the  per
 share  calculation  when the effect  of  their  inclusion
 would  be  antidilutive, except that, in accordance  with
 Securities  and Exchange Commission requirements,  common
 and  common equivalent shares issued during the  twelve-month
 period   immediately  preceding  the  Company's   initial
 public offering have been included in the calculation  as
 if  they  were outstanding for all periods prior  to  the
 initial public offering using the treasury stock method.
     Unaudited  pro forma net loss per share is  based  on
 the  number of shares determined above adjusted  for  the
 assumed   conversion   of  all  outstanding   shares   of
 convertible  preferred stock into  common  stock  at  the
 time of issuance.

                CONCENTRATIONS OF CREDIT RISK
 The  Company  invests its excess cash in accordance  with
 guidelines  which limit the credit exposure  to  any  one
 financial  institution and to any one type of investment,
 other   than  securities  issued  by  the  United  States
 Government.   The  guidelines  also  specify   that   the
 financial  instruments are issued  by  institutions  with
 strong credit ratings.  The securities are generally  not
 collateralized and mature within five years.

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

                      RECLASSIFICATIONS
 Certain  reclassifications  have  been  made  to  conform
 prior   year  financial  information  to  classifications
 presented in the current year.

thirty one  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
 
                             two
                securities available-for-sale
                              
 Securities available-for-sale consist of the following:
 
                                    GROSS       GROSS
                               UNREALIZED  UNREALIZED
 DECEMBER 31, 1996        COST      GAINS      LOSSES     FAIR VALUE
 
 Corporate bonds   $41,495,498   $  2,130   $(373,817)   $41,123,811
 Government  bonds   9,664,137        543    (172,014)     9,492,666
                   -----------    -------    --------     ----------
                   $51,159,635   $  2,673   $(545,831)   $50,616,477
                   ===========    =======    ========     ==========
 
                                    GROSS       GROSS
                               UNREALIZED  UNREALIZED
 DECEMBER 31, 1995        COST      GAINS      LOSSES     FAIR VALUE
 
 Corporate bonds   $19,086,934   $100,546   $ (60,980)   $19,126,500
 Government bonds      151,960        379           -        152,339
                    ----------    -------     -------     ----------
                   $19,238,894   $100,925   $ (60,980)   $19,278,839
                    ==========    =======     =======     ========== 

     There  were no realized gains or losses on  sales  of
 securities available-for-sale for the years ended
 December  31,  1996  and 1995.  The  net  adjustment  for
 unrealized holding gains and losses on securities
 available-for-sale,   included   as   a   component    of
 shareholders'  equity, was a loss  of  $583,103  for  the
 year  ended  December 31, 1996 and a gain of $56,370  for
 the  year  ended December 31, 1995.  The  fair  value  of
 securities  available-for-sale maturing within  one  year
 totals   $22,757,631.   The  fair  value  of   securities
 available-for-sale maturing between one  and  five  years
 totals   $27,858,846.    The   Company   considers    all
 securities  available-for-sale as available  for  use  in
 current operations.
     
     
                            three
                         inventories
                              
 Inventories consist of the following:
 
 DECEMBER 31,                         1996         1995
 
 Raw materials                  $2,725,725   $  789,142
 Work-in-process                   166,437      343,306
 Finished goods                  2,749,752      709,112
                                 ---------    ---------
                                $5,641,914   $1,841,560
                                 =========    =========

thirty two  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
     Finished goods consist of AutoPap Systems which  will
 be   reclassified  to  fee-per-use  systems  (non-current
 assets)   when  placed  in  commercial  use  and  AutoPap
 Systems  to  be sold.  As of December 31, 1996,  finished
 goods  included  AutoPap Systems  used  internally  on  a
 temporary   basis   and   AutoPap   Systems   placed   at
 "evaluation" sites.
     
     
                            four
                     fee-per-use systems
                              
 Fee-per-use systems consist of the following:
 
 DECEMBER 31, 1996
 Fee-per-use systems                         $6,563,537
 Accumulated depreciation                      (569,400)
                                              ---------
                                             $5,994,137
                                              =========
   
                            five
                   property and equipment
                              
 Property and equipment consist of the following:
 
 DECEMBER 31,                                       1996          1995
 
 Laboratory and other equipment              $ 4,955,452   $ 2,218,000
 Furniture and fixtures                        1,133,276       542,135
 Leasehold improvements                        1,154,922       529,970
                                               ---------    ----------
   Total property and equipment                7,243,650     3,290,105
 Accumulated  depreciation  and  amortization (2,429,905)   (1,097,121)
                                              ----------    ----------
                                             $ 4,813,745   $ 2,192,984
                                              ==========    ==========

     At  December  31,  1996 and 1995,  the  Company  held
 equipment under capitalized leases with an original  cost
 of  $500,371  and  $875,660 and  a  net  book  value  of
 $255,497 and $497,238, respectively.
     
     
                             six
                      lease agreements
                              
 The  Company leases certain property and equipment  under
 capital   leases  pursuant  to  master  equipment   lease
 agreements.   Under such agreements, the Company  entered
 into  multiple capital leases for property and equipment.
 The agreements include lease terms ranging from 36 to  60
 months and purchase options at the end of each lease.

thirty three  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     The  Company  leases office and operating  facilities
 under  operating  leases expiring  in  May  1998  through
 January  2000,  with various renewal options.   Operating
 lease  expense  for  the years ended December  31,  1996,
 1995,  and  1994  was $620,895, $496,190,  and  $216,215,
 respectively.
     
   Minimum  future lease payments as of December 31,  1996
 are as follows:
   
YEAR ENDING DECEMBER, 31                  CAPITAL LEASES  OPERATING LEASES
                                                             
1997                                            $ 99,347        $  760,330
1998                                              94,827           635,546
1999                                              91,274           497,703
2000                                              19,050            21,023
2001                                                   -            11,941
                                                --------        ----------
Total minimum lease payments                     304,498        $1,926,543
Less amount representing interest                 46,102        ==========
                                                --------  
Present value of minimum lease payments          258,396                 
Current portion                                   75,861                 
                                                --------
Obligations under capital leases, less  
  current portion                               $182,535  
                                                ========
   
   Interest rates on capitalized leases range from 10% to
 19%.
   
                            seven
                        income taxes
                              
 As  of  December 31, 1996, the Company had net  operating
 loss  carryforwards of approximately  $62.6  million  and
 research   and   development  credit   carryforwards   of
 approximately  $1.3  million  for  federal   income   tax
 purposes,  which expire between 2004 and  2011.   Due  to
 the  issuance and sale of shares of preferred  stock  and
 the   Company's  initial  public  offering,  the  Company
 incurred   "ownership  changes"  pursuant  to  applicable
 regulations in effect under the Internal Revenue Code  of
 1986,  as  amended.   Therefore,  the  Company's  use  of
 losses  incurred  through  the date  of  these  ownership
 changes  will be limited during the carryforward  period.
 The  Company  estimates  that the  use  of  approximately
 $28.0 million of losses incurred prior to one or more  of
 the  ownership  changes would be limited to approximately
 $6.4  million per year through 1997 and to lower  amounts
 in  subsequent years.  To the extent that any single-year
 loss   is  not  utilized  to  the  full  amount  of   the
 limitation,   such  unused  loss  is  carried   over   to
 subsequent years until the earlier of its utilization  or
 the  expiration  of  the  relevant  carryforward  period.
 Approximately  $3.8  million of the  net  operating  loss
 carryforward  is  attributed to the deduction  for  stock
 options,  the  tax effect of which will  be  credited  to
 common stock when realized.

thirty four  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     Deferred income taxes reflect the net tax effects  of
 temporary  differences between the tax  basis  of  assets
 and   liabilities   and   the   corresponding   financial
 statement   amounts.   Significant  components   of   the
 Company's  deferred  income tax assets  at  December  31,
 1996 and 1995 are as follows:
     
 DECEMBER 31,                                 1996          1995
 
 Net operating loss carryforwards     $ 21,281,000  $ 14,789,000
 Research and development credits        1,260,000     1,066,000
 Research and development costs            759,000       971,000
 Deferred compensation                     230,000       204,000
 Accrued vacation                          184,000       128,000
 Charitable contribution carryforwards     124,000       123,000
 Allowance for doubtful accounts            60,000             -
 Property and equipment                     55,000       (12,000)
 Other                                     234,000        51,000
 Valuation allowance                   (24,187,000)  (17,320,000)
                                       -----------   -----------
                                      $          -  $          -
                                       ===========   ===========

     Due  to  the uncertainty of the Company's ability  to
 generate  taxable  income  to realize  its  deferred  tax
 assets,  a  valuation allowance has been established  for
 financial reporting purposes equal to the amount  of  the
 deferred  tax assets.  The Company's valuation  allowance
 for   deferred   tax  assets  increased  $6,867,000   and
 $6,013,000  for  the years ended December  31,  1996  and
 1995, respectively.
     
     
                            eight
                    shareholders' equity
                              
                        COMMON STOCK
 In  February  1995,  the  Company completed  its  initial
 public  offering  for  the sale of  3,450,000  shares  of
 common  stock  at  $11.00 per share.  The  net  proceeds,
 after underwriting discounts and offering expenses,  from
 the  sale  of  the  common stock was  $34,740,266.   Upon
 closing,  all  outstanding  shares  of  preferred   stock
 converted into 5,609,257 shares of common stock, and  all
 preferred  stock  warrants converted  into  common  stock
 warrants.
     In  April 1995, the Company donated 25,000 shares  of
 common stock to a university.
     In  January  1996, the Company completed  its  second
 public  offering  for  the sale of  2,875,000  shares  of
 common  stock  at  $23.00 per share.  The  net  proceeds,
 after underwriting discounts and offering expenses,  from
 the sale of the common stock was $61,740,351.
     
                     STOCK OPTION PLANS
 The  Company has two stock option plans that provide  for
 option grants to employees, directors, and others.
 The  options  generally  vest  over  four  years  or   as
 otherwise determined by the plan administrator.   Options
 to  purchase shares expire no later than ten years  after
 the date of grant.
 
thirty five  NEOPATH 1996 ANNUAL REPORT 
<PAGE>
     A  summary  of  the  Company's  option  activity  and
 related information follows:
     
                                             SHARES    EXERCISE PRICE PER SHARE
 
 Balance outstanding, January 1, 1994       678,711           $0.60 - $ 1.20
  Granted                                   481,938            1.20 -   4.00
  Exercised                                (197,354)           0.60 -   1.20
  Cancelled                                 (79,783)           0.60 -   1.80
                                          ---------       
 Balance outstanding, December 31, 1994     883,512            0.60 -  4.00
  Granted                                   365,675            1.20 -  24.00
  Exercised                                (153,268)           0.60 -   7.20
  Cancelled                                 (68,677)           0.60 -  16.25
                                          ---------    
 Balance outstanding, December 31, 1995   1,027,242           $0.60 - $24.00
                                          =========

                                             SHARES     WEIGHTED  AVERAGE
                                                           EXERCISE PRICE
                                                                         
 Balance outstanding, January 1, 1996     1,027,242             $ 6.59
   Granted                                  838,218              22.91
   Exercised                               (195,429)              2.60
   Cancelled                                (65,811)             10.66
                                          ---------              -----
 Ending outstanding                       1,604,220              15.39
                                          =========              =====
 Exercisable as of December 31, 1996        524,318             $ 5.12
                                          =========              =====
 Available for grant at December 31, 1996   881,035                   
                                          =========
 
 
 
 
     Outstanding and exercisable options by price range as
 of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
 
                                 OPTIONS OUTSTANDING           OPTIONS  EXERCISABLE
                       -------------------------------------   ---------------------
                           OPTIONS     WEIGHTED     WEIGHTED       OPTIONS  WEIGHTED
        RANGE OF       OUTSTANDING      AVERAGE      AVERAGE   EXERCISABLE   AVERAGE
  EXERCISE PRICE             AS OF    REMAINING     EXERCISE         AS OF  EXERCISE
       PER SHARE     DEC. 31, 1996  TERM (YEARS)       PRICE  DEC. 31,1996     PRICE
<S>                  <C>            <C>          <C>          <C>           <C>
 $ 0.60 - $ 1.20           257,465         6.28       $ 1.14       220,439    $ 1.13
   1.80 -   2.40           204,272         7.50         2.30       165,138      2.32
   4.00 -   6.00            12,021         7.82         4.13         6,391      4.09
   7.20 -   9.00             6,467         8.16         8.19         2,953      8.10
  11.25 -  16.50           303,997         8.78        15.22       105,426     14.18
  18.25 -  27.38           769,448         9.39        23.03        23,971     20.96
  27.50 -  30.25            50,550         9.73        29.42             0      0.00
                         ---------         ----       ------       -------    ------
$  0.60 - $30.25         1,604,220         8.53       $15.39       524,318    $ 5.12
                         =========         ====       ======       =======    ======
</TABLE>

thirty six  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
     Pro forma information regarding net loss and net loss
 per   share  is  required  by  FASB  123,  and  has  been
 determined  as  if  the  Company had  accounted  for  its
 employee  stock  options under the fair value  method  of
 that  Statement.   The fair value for these  options  was
 estimated  at  the  date of grant using  a  Black-Scholes
 multiple   option  pricing  model  with   the   following
 weighted-average   assumptions   for   1996   and   1995,
 respectively:   risk-free interest  rates  of  6.01%  and
 6.27%;  dividend yields of 0%; volatility factors of  the
 expected  market price of the Company's common  stock  of
 0.5512;  and  a  weighted-average expected  life  of  the
 option of 1.46 years from vest date.
     The  Black-Scholes option value model  was  developed
 for  use  in estimating the fair value of traded  options
 which   have  no  vesting  restrictions  and  are   fully
 transferable.   In  addition,  option  valuation   models
 require  the  input  of  highly  subjective  assumptions,
 including  the expected stock price volatility.   Because
 the   Company's   stock   options  have   characteristics
 significantly  different from those  of  traded  options,
 and  because  changes in the subjective input assumptions
 can  materially  affect  the  fair  value  estimate,   in
 management's opinion,the   existing  models  do  not
 necessarily  provide a reliable single measure of the fair
 value of its stock options.
     For  purposes of pro forma disclosures, the estimated
 fair  value  of the options is amortized to expense  over
 the  options'  vesting period.  The Company's  pro  forma
 information follows:
     
 YEAR ENDED DECEMBER 31,                       1996          1995
 
 Pro forma net loss                     $20,717,024   $15,126,112
 Pro forma net loss per share           $      1.59   $      1.61
  Shares used in computation             13,029,314     9,412,683
 
    The FASB 123 pro forma disclosures above are not
 necessarily indicative of future pro forma disclosures
 because of the manner in which FASB 123 calculations are
 phased in over time.
     The  weighted average fair value for options  granted
 during  1996  using  the  Black-Scholes  multiple  option
 pricing model is $10.86.
     During    1994,   the   Company   recorded   deferred
 compensation  for  the  difference between  the  exercise
 price  and  the deemed fair value for financial reporting
 purposes  of  the  Company's  common  stock  for  options
 granted  in  1994.  Such options were granted  at  prices
 ranging  from  $1.20 to $4.00 per share,  with  a  deemed
 fair  value ranging from $2.40 to $6.00 per share.   This
 compensation  expense aggregated $774,000, and  is  being
 amortized over the respective vesting periods.

thirty seven  NEOPATH 1996 ANNUAL REPORT
<PAGE>
     
                          WARRANTS
 Warrants   to  purchase  common  stock  were  issued   in
 connection   with   several  of   the   preferred   stock
 offerings.   These  warrants  expire  at  various   dates
 through 2001.
     Total  common stock warrants outstanding at  December
 31,  1996  were  699,180 at a weighted  average  exercise
 price per share of $7.42.
     During  1996,  warrants  were exercised  to  purchase
 762,240  shares of the Company's common stock,  of  which
 346,468   shares  were  issued  through  "net   exercise"
 rights,  for  which  the  Company received  no  proceeds.
 Such  rights  allow the warrantholder  to  exercise  the
 warrant   and   "pay"  the  warrant  price  through   the
 intrinsic value of the warrants; therefore, fewer  shares
 of  common  stock are issued as a result.  The  remaining
 warrants  outstanding as of December 31,  1996  have  net
 exercise rights.
     
                    COMMON STOCK RESERVED
 At  December 31, 1996, common shares were reserved for the
 following purposes:
 Exercise of common stock warrants              699,180
 Exercise and future grants of stock options  2,485,255
                                              ---------
                                              3,184,435
                                              =========
 
                            nine
                      employee benefits
                              
 The  Company has a retirement plan covering substantially
 all   employees  which  provides  for  voluntary   salary
 deferral  contributions on a pre-tax basis in  accordance
 with  Section  401(k)  of the Internal  Revenue  Code  of
 1986,  as  amended.   To date, the Company  has  made  no
 contributions to the plan.
 
 
                             ten
                         litigation
                              
 On  July  15,  1996, Neuromedical Systems, Inc.  filed  a
 lawsuit  against  NeoPath,  Inc.  in  the  United  States
 District  Court for the Southern District  of  New  York.
 The   complaint   alleges  patent  infringement,   unfair
 competition, false advertising, and related  claims.   On
 September  5,  1996,  the Company filed  its  answer  and
 counter  claims.  The Company believes it  has  a  strong
 position   in   this  action  and  is  defending   itself
 vigorously.

thirty eight  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
                   management's statement
                 of financial responsibility
                              
                              
 The  management of NeoPath, Inc. is responsible  for  the
 fair   and   accurate  presentation  of   the   financial
 information   in  this  annual  report.   The   financial
 statements  and  related  notes  have  been  prepared  in
 accordance  with generally accepted accounting principles
 based  on  Company  records and other  sources.   Certain
 financial   information  is,  of  necessity,   based   on
 judgment and estimation.
     We  believe  that  adequate  accounting  systems  and
 financial  controls  are maintained to  ensure  that  the
 Company's  records  are  free from material  misstatement
 and  to  protect  the  Company's  assets  from  loss   or
 unauthorized  use.  In addition, the Audit  Committee  of
 the  Board  of Directors periodically meets with  Company
 management  and  with Ernst & Young  LLP,  the  Company's
 independent auditors.
     
     
     
     
 /S/ Alan C. Nelson    
 ALAN C. NELSON, PH.D.
 President and
 Chief Executive Officer
 
 
 
 
 /S/ William L. Scott
 WILLIAM L. SCOTT
 Vice President and
 Chief Financial Officer
 
 
 
 
 /S/ Robert C. Bateman
 ROBERT C. BATEMAN
 Corporate Controller
 Acting Chief Accounting Officer


thirty nine  NEOPATH 1996 ANNUAL REPORT
<PAGE> 
                report of ernst & young llp,
                    independent auditors
                              
                              
 The Board of Directors and Shareholders
 NeoPath, Inc.

 We  have  audited  the  accompanying  balance  sheets  of
 NeoPath, Inc. as of December 31, 1996 and 1995,  and  the
 related  statements of operations, shareholders'  equity,
 and  cash flows for each of the three years in the period
 ended December 31, 1996.  These financial statements  are
 the  responsibility  of  the Company's  management.   Our
 responsibility  is  to  express  an  opinion   on   these
 financial statements based on our audits.
     We  conducted our audits in accordance with generally
 accepted  auditing  standards.  Those  standards  require
 that  we  plan and perform the audit to obtain reasonable
 assurance  about  whether  the financial  statements  are
 free   of   material  misstatement.   An  audit  includes
 examining,  on  a  test  basis, evidence  supporting  the
 amounts and disclosures in the financial statements.   An
 audit  also  includes assessing the accounting principles
 used  and  significant estimates made by  management,  as
 well   as  evaluating  the  overall  financial  statement
 presentation.   We  believe that  our  audits  provide  a
 reasonable basis for our opinion.
     In  our opinion, the financial statements referred to
 above  present  fairly,  in all  material  respects,  the
 financial  position of NeoPath, Inc. as of  December  31,
 1996 and 1995, and the results of its operations and  its
 cash  flows  for each of the three years  in  the  period
 ended  December  31, 1996, in conformity  with  generally
 accepted accounting principles.
     
     
                                                /S/Ernst & Young LLP    
     
     
 Seattle, Washington
 January 24, 1997

forty  NEOPATH 1996 ANNUAL REPORT
<PAGE>
 
                  common stock information
                              
 Since  January 26, 1995, the Company's common  stock  has
 been  trading on the Nasdaq National Market tier  of  The
 Nasdaq   National  Market  ("Nasdaq")  under  the  symbol
 "NPTH."   As of January 31, 1997, there were 329  holders
 of  record  of  the  common  stock  of  the  Company  and
 13,704,895  shares  outstanding.  Since  certain  of  the
 shares  of  common stock are held in street  name,  there
 may  be  additional beneficial holders of  the  Company's
 common stock.
 
     The  following  table  sets forth,  for  the  periods
 indicated,  the high and the low closing prices  for  the
 common stock as reported by Nasdaq:
 
                         1996                             1995
                    high          low              high        low
 First Quarter    $28.00       $21.50            $15.88     $11.25
 Second  Quarter   26.00        20.50             16.50      13.50
 Third Quarter     30.25        18.50             27.75      16.50
 Fourth  Quarter   21.50        14.63             27.88      18.50
 
     The  Company has not declared or paid cash  dividends
 on  its  common stock.  The Company currently intends  to
 retain all earnings for use in its business and does  not
 anticipate  paying  cash  dividends  in  the  foreseeable
 future.

forty one  NEOPATH 1996 ANNUAL REPORT