NEOPATH, INC.

Selected Five-Year Financial Data

(in thousands, except per share data)
year ended December 31,
<TABLE>
<CAPTION>
                                             1997      1996      1995      1994       1993
__________________________________________________________________________________________
<S>                                       <C>       <C>       <C>      <C>        <C>
Statement of Operations Data
Revenues                                  $10,824    $3,062       $--       $--        $--
Gross margin                                6,049     1,157        --        --         --
Operating expenses:
  Research and development                 14,249    11,202     9,384     9,183      4,792
  Selling, general and administrative      17,746    11,295     6,626     3,320      1,413
Net loss                                  (23,597)  (17,655)  (14,365)  (12,324)    (6,264)
Basic and diluted net loss per share (1)    (1.66)    (1.36)    (1.59)       --         --

Balance Sheet Data
Cash, cash equivalents, and
  securities available-for-sale           $28,719   $58,488   $23,430    $2,295     $1,001
Working capital                            34,673    60,821    22,876     2,316         82
Total assets                               58,941    76,132    28,016     5,193      1,662
Obligations under capital leases,
  less current portion                        102       183       258       176        216
Total shareholders' equity                 53,228    71,602    25,133     3,602        489
</TABLE>

  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 7 of Notes to Financial
Statements.

(1) The basis for determining the number of shares used
in computing basic and diluted net loss per share is described in Note 1
of Notes to Financial Statements. Basic and diluted net loss per share for
1994 and 1993 is not considered meaningful due to changes in
the Company's capital structure.

 Page 9
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

  NeoPath, Inc. ("NeoPath" or the "Company") develops and markets visual
intelligence technology to increase accuracy in medical testing.  NeoPath's
initial products include (i) 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 for
the early detection of cervical cancer and (ii) the Pathfinder(R) System
product-line acquired in 1997.

  In 1995, the United States Food and Drug Administration (the "FDA")
cleared for commercial use the Company's first product, the AutoPap(R) 300
QC Automatic Pap Screener System (the "AutoPap QC").  In early 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 and
classified as normal.  The decision allows AutoPap QCs to be used in
determining which slides will be rescreened under the federally mandated
rescreening requirement.

  NeoPath's second product is the AutoPap(R) Primary  Screener System (the
"AutoPap Screener" and, in combination with the AutoPap QC, the "AutoPap
System"). The AutoPap Screener utilizes the same hardware components as the
AutoPap QC; however, it uses enhanced software, including additional
cell-classification algorithms.  During 1997, NeoPath completed a
prospective intended-use clinical study to evaluate the performance of the
AutoPap Screener as a primary screening system.  This study included
analysis of more than 25,000 Pap smear slides at five clinical laboratories
in the United States and Canada.  In August 1997, NeoPath submitted the
results of the study in an amendment to its pending PreMarket Approval
("PMA") Supplement to the FDA, for use of the AutoPap Screener as a primary
screener of Pap smear slides.  In January 1998, the Hematology and
Pathology Devices Advisory Panel of the FDA unanimously recommended that
the FDA approve, with conditions, the supplement to NeoPath's PMA
submission for use of the AutoPap Screener as a primary Pap smear screener.
As of March 1998, the Company is awaiting FDA approval on this PMA application.

  NeoPath's Pathfinder System provides improved productivity and quality
assurance in the clinical cytology laboratory by computerizing the
cytotechnologists' microscopes, thereby helping to eliminate screening
errors and facilitating critical cell identification in applications such
as Pap smear screening.

Purchase of Pathfinder System Product Line

  In June 1997, NeoPath purchased the Pathfinder System product line from
CompuCyte Corporation for an initial purchase price of $4.1 million.  The
initial purchase price included cash of $2.7 million (including transaction-
related expenses), a $500,000 short-term note paid in October 1997, and
48,564 shares of NeoPath common stock.  In addition, 48,563 shares of
NeoPath common stock were issued and are held in escrow contingent upon
certain specific technology decisions to be made by the Company within one
year of closing.  In accordance with accounting rules, the value of the
contingent shares was excluded from the initial purchase price allocation,
and the 48,563 contingent shares are excluded from the calculation of
weighted average shares outstanding. Including the value of contingent
shares at the closing date, which value the Company expects to recognize as
an intangible asset if the contingency is removed, the total purchase price
approximated $5.1 million.

  As a result of the purchase, the Company recognized $3.8 million in
acquired intangible assets which are amortized over five years.  NeoPath
began selling the Pathfinder System as a stand-alone product in the third
quarter of 1997 and continues to evaluate the integration of the technology
into the AutoPap System.

Page 10
<PAGE>

Results of Operations
`
                                   Change from
(in thousands)            1997      prior year            1996
__________________________________________________________________________
Revenues               $10,824          $7,762          $3,062
                                          254%

  NeoPath began recognizing product revenues in 1996.  The Company
recognizes revenue on either a sale or fee-per-use basis (subject to
certain license agreements, lease contracts, and minimum payments on fee-
per-use contracts).  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 requires 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.

  NeoPath's AutoPap System placements have primarily consisted of fee-per-
use contracts in the United States and sale contracts internationally.
Approximately 65 percent of total revenues in 1997 and 1996, respectively,
consisted of AutoPap System sales worldwide and other revenues associated
with upgrades of previous international product placements.  The remaining
35 percent of total revenues consisted of fee-per-use contract billings
and, in 1997, Pathfinder System sales.  Pathfinder System sales accounted
for less than three percent of total 1997 revenues.  The Company
anticipates that future AutoPap System placements will continue to consist
of both fee-per-use and sale contracts; however, the Company expects that
revenues for the next several quarters will continue to consist of greater
sales of AutoPap Systems than revenues generated from NeoPath's fee-per-
use program.  The revenue mix may vary as product features and markets
mature, and as third-party reimbursement policies change.

  Approximately 51 percent of NeoPath's revenues in 1997 represented sales
to customers outside of the United States, compared to approximately 45
percent in 1996.  NeoPath's international revenues have included AutoPap
Systems placed in Japan, Korea, Hong Kong, Europe, and Australia.  All of
the Company's international product placements have been denominated in
U.S. dollars; however, future product revenues may include customer
contracts subject to foreign exchange rate changes.  In 1997, NeoPath
established NeoPath Europe, located in Belgium, as its first international
branch.

  NeoPath believes that increased third-party reimbursement of Pap smears
in general, and increased reimbursement for screening utilizing the
AutoPap System in particular, will significantly increase the Company's
potential for revenues in 1998 and beyond.  In October 1997, the American
Medical Association published its revised Physicians' Current Procedural
Terminology (CPT-4) codes which included a code that applies to the
AutoPap QC for automated cervical cancer rescreening.  CPT codes are a
universal system used by physicians and clinical laboratories to identify
specific procedures when billing insurers for their services.  In early
1998, NeoPath formed a five-person team to work with third-party insurers
and managed care organizations to establish or review and improve third-
party reimbursement levels for Pap smear screening with the AutoPap
System.  These managed care specialists will work closely with NeoPath's
field sales personnel throughout the United States.

Page 11
<PAGE>

                                 Percentage of              Percentage of
(in thousands)           1997         revenues      1996         revenues
___________________________________________________________________________

Cost of revenues       $4,775              44%    $1,905              62%

Gross margin            6,049              56%     1,157              38%

  The primary components of cost of revenues for fee-per-use systems
include depreciation and allocated service and support costs.  For
AutoPap Systems sold, cost of revenues includes the related manufacturing
cost and estimated one-year warranty expense. Gross margin is expected to
continue to fluctuate depending on the mix of fee-per-use revenues,
AutoPap System sales, and other revenues, which in 1997 included revenues
recognized under an agreement with Nikon Corporation to upgrade AutoPap
Systems previously shipped.  The continued development of the Company's
manufacturing, service and support functions, as well as its overall
production levels, are also expected to contribute to fluctuations in
gross margin.  Therefore, the Company's historic gross margins are not
necessarily indicative of future gross margins.

<TABLE>
<CAPTION>
                                     Change from                Change from
(in thousands)               1997     prior year         1996    prior year       1995
_______________________________________________________________________________________
<S>                       <C>             <C>         <C>           <C>         <C>
Research and development
  expenses                $14,249         $3,047      $11,202       $1,818      $9,384
                                             27%                       19%
</TABLE>

  NeoPath's research and development expenses include salaries and
benefits of scientific, engineering, and regulatory personnel; costs
relating to clinical studies and submission of applications to the FDA;
testing equipment; components used in prototypes; relevant consulting
services; and the costs of preparing and filing applications for patent
protection for the Company's technologies.

  The increase in research and development expenses in 1997 resulted
primarily from NeoPath's completion of its clinical study and submission
of the data to the FDA in support of NeoPath's AutoPap Screener.  The
increase is also attributable to increased costs incurred to prepare and
file applications for patent protection for the Company's technologies.

  Increased research and development expenditures in 1996 were due
primarily to increased research and development personnel, project
development costs, and increased costs incurred to prepare and file for
patent protection for NeoPath technologies.

                              Change from              Change from
(in thousands)         1997    prior year       1996    prior year       1995
_____________________________________________________________________________

Sales, general and
  administrative
  expenses          $17,746        $6,451    $11,295       $4,669      $6,626
                                      57%                     70%

  Sales, general and administrative expenses include salaries and
benefits of financial, administrative, sales and marketing personnel; non-
patent legal expenses; amortization of intangible assets; and certain
facility-related costs.

  The increased spending in 1997 was due primarily to significant new
sales and marketing initiatives, costs related to the purchase and
integration of the Pathfinder System product line (including amortization
of approximately $190,000 per quarter), increased personnel-related
expenses, and increased legal expenses relating primarily to the
Neuromedical Systems, Inc. lawsuits (see Note 9 of Notes to Financial
Statements). The Company expects sales, general and administrative
expenses to increase in 1998 due primarily to sales and marketing
initiatives associated with the market launch of the AutoPap Screener, as
well as continued spending to market the Pathfinder System product line.

  Increased expenditures in 1996 were primarily a result of increased
personnel and expanded sales, marketing and administrative functions.

Page 12
<PAGE>


                               Change from             Change from
(in thousands)         1997     prior year      1996    prior year       1995
_____________________________________________________________________________

Interest income      $2,399       $(1,343)    $3,742        $2,012     $1,730
                                     (36%)                    116%

  The decrease in interest income in 1997 is due to decreased cash
equivalents and securities available-for-sale resulting from NeoPath's
negative operating cash flow during the year.  The Company expects that
its interest income will decline further in 1998 as a result of declining
cash available for investment purposes.

  Interest income in 1996 increased due primarily to the investment of the
$61.7 million net proceeds from the Company's second public stock offering
completed in January 1996.

Limitation on Use of Net Operating Loss and Tax Credit Carryforwards

  As of  December 31, 1997, the Company had net operating loss
carryforwards of approximately $86.5 million and research and development
credit carryforwards of approximately $2.4 million for federal income tax
purposes, which expire between 2004 and 2012.  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 1998 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 6 of Notes to Financial
Statements.

Liquidity and Capital Resources

  As of December 31, 1997, the Company had approximately $28.7 million in
cash, cash equivalents, and securities available-for-sale, representing 49
percent of total assets.  As of  December 31, 1997, the Company had
capital lease obligations, including interest, of $204,000 and operating
lease obligations of  $1.7 million.  Other than capitalized lease
obligations, the Company has no outstanding long-term debt.

  The Company's cash used in operating activities was $28.7 million, $25.0
million, and $12.8 million, in the years ended December 31, 1997, 1996,
and 1995, respectively, including $6.6 million, $7.3 million, and $-0- for
inventories subsequently reclassified as either fee-per-use systems or
reclassified to property and equipment. The Company expended cash for
property and equipment of $1.0 million, $3.3 million, and $1.9 million in
the three years ended December 31, 1997, 1996, and 1995, respectively.

  The Company expects negative cash flow from operations to continue at
least through the majority of 1998 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 and analyzes data from
clinical trials.  The Company currently estimates that its existing cash
resources and interest income will enable it to sustain operations for at
least the next 12 months.  There can be no assurance, however, that the
Company will not be required to seek additional cash in the form of either
debt or equity 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 approved by the FDA, the AutoPap
Screener; the increase in the Company's fee-per-use program; the mix of
fee-per-use and sale placements; the market acceptance of the Pathfinder
System; the availability of third-party reimbursement; 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

Page 13
<PAGE>

equity securities, existing shareholders will experience dilution.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its manufacturing, sales and marketing, research and
development or clinical programs.

  The Company is currently negotiating a bank financing facility to borrow
up to $10 million based on current and future fee-per-use AutoPap Systems
placed at customer sites.  This facility is expected to be in place during
1998.

Impact of Year 2000

  Some of the Company's internal and product software programs were
written using two digits rather than four to define the applicable year.
As a result, those computer programs have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year 2000.
The Company has completed a preliminary assessment of its computer
systems and will have to modify or replace portions of its internal and
product software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter.  The project is
estimated to be completed not later than December 31, 1998, and the total
Year 2000 project cost is not expected to be material.

  The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its internal and product computer
systems.  However, if such modifications and conversions are not made, or
are not completed timely, the Year 2000 Issue could have a material
impact on NeoPath's operations.

Forward-Looking Statements

  The preceding Management's Discussion and Analysis of Financial
Condition and Results of Operations contains "forward-looking statements"
that 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," "believe," and similar expressions
identify forward-looking statements.  Readers are cautioned not to place
undue reliance on these 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.  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 third-party reimbursement; dependence
on single product line; product liability; dependence on patents and
property 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" in the Company's Form 10-K for the fiscal year ended December
31, 1997.

 Page 14
<PAGE>

Balance Sheets

December 31,
                                         1997                1996
_________________________________________________________________

Assets
Current assets:
  Cash and cash equivalents        $3,308,970          $7,871,401
  Securities available-for-sale    25,409,633          50,616,477
  Accounts receivable, net          3,863,818             840,256
  Inventories                       7,514,001           5,641,914
  Other current assets                187,147             197,726
                                  _______________________________
Total current assets               40,283,569          65,167,774

Fee-per-use systems, net            8,564,189           5,994,137
Property and equipment, net         5,979,849           4,813,745
Intangible assets, net              3,383,925                  --
Deposits and other assets             729,280             155,899
                                  _______________________________
Total assets                      $58,940,812         $76,131,555
                                  ===============================


Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable                 $2,173,179          $1,496,630
  Salaries and wages payable        2,357,045           2,208,454
  Customer deposits                   431,877             164,330
  Other accrued liabilities           567,759             401,609
  Current portion of obligations
    under capital leases               80,966              75,861
                                  _______________________________
Total current liabilities           5,610,826           4,346,884

Obligations under capital leases,
  less current portion                101,872             182,535

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;
    14,389,378 and 13,652,156 shares
    issued and outstanding at
    December 31, 1997 and 1996,
    respectively                  141,057,881         136,255,746

  Deferred compensation                    --             (74,246)
  Accumulated deficit             (87,829,767)        (64,579,364)
                                  _______________________________
Total shareholders' equity         53,228,114          71,602,136
                                  _______________________________
Total liabilities and
  shareholders' equity            $58,940,812         $76,131,555
                                  ===============================

See accompanying notes.

 Page 15
<PAGE>

Statements of Operations

Year ended December 31,
                                    1997             1996           1995
________________________________________________________________________

Revenues                     $10,824,380       $3,061,849            $--
Cost of revenues               4,774,920        1,904,559             --
                            ____________________________________________
  Gross margin                 6,049,460        1,157,290             --

Operating expenses:
  Research and development    14,248,669       11,202,375      9,384,177
  Selling, general and
    administrative            17,745,936       11,295,228      6,626,317
                            ____________________________________________
                              31,994,605       22,497,603     16,010,494
                            ____________________________________________


Loss from operations         (25,945,145)     (21,340,313)   (16,010,494)

Interest income                2,399,117        3,741,843      1,730,094
Interest expense                 (50,884)         (56,813)       (84,986)
                           _____________________________________________
Net loss                    $(23,596,912)    $(17,655,283)  $(14,365,386)
                           =============================================

Basic and diluted net
  loss per share                  $(1.66)          $(1.36)        $(1.59)
                           =============================================


Shares used in
  computation of basic
  and diluted net
  loss per share              14,197,307        13,029,314     9,007,570
                           =============================================


See accompanying notes.

 Page 16
<PAGE>



Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                              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, 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

  Exercise of options
    and warrants             --            --     688,658    3,952,135          --             --    3,952,135
  Amortization of deferred
    compensation             --            --          --           --      74,246             --       74,246
  Common stock issued
    on purchase of
    Pathfinder System
    product line             --            --      48,564      850,000          --             --      850,000
  Unrealized appreciation
    on securities
    available-for-sale       --            --          --           --          --        346,509      346,509
  Net loss                   --            --          --           --          --    (23,596,912) (23,596,912)
______________________________________________________________________________________________________________

Balance at December 31, 1997 --           $--  14,389,378  $141,057,881        $--   $(87,829,767) $53,228,114

==============================================================================================================
</TABLE>
See accompanying notes.

 Page 17
<PAGE>
Statements of Cash Flows

Year ended December 31,
                                             1997           1996           1995
_______________________________________________________________________________

Operating activities
Net loss                             $(23,596,912)  $(17,655,283)  $(14,365,386)
Adjustments to reconcile net loss
  to net cash used in operating
  activities:
    Depreciation and amortization       4,326,157      1,994,064        539,217
    Deferred compensation                  74,246         77,791        277,665
    Gift of original issuance shares           --             --        350,000
    Accrued interest on securities
      available-for-sale                1,152,187        660,623       (337,098)
    Net change in operating accounts:
      Accounts receivable              (3,023,562)      (840,256)            --
      Inventories and fee-per-use
        systems                        (8,243,774)   (11,093,253)      (577,634)
      Accounts payable and accrued
        liabilities                     1,208,837      1,839,915      1,421,009
    Other                                (594,194)        40,888        (86,707)
                                      _________________________________________
Net cash used in operating activities (28,697,015)   (24,975,511)   (12,778,934)

Investing activities
Purchases of securities
  available-for-sale                   (5,349,511)   (75,750,434)   (35,663,513)
Maturities of securities
  available-for-sale                   29,750,677     43,169,070     19,073,237
Purchase of Pathfinder
  System product line                  (2,696,114)            --             --
Additions to property and equipment      (950,424)    (3,325,122)    (1,885,813)
Other                                       3,379        166,396         85,115
                                      _________________________________________
Net cash provided by (used in)
  investing activities                 20,758,007    (35,740,090)   (18,390,974)

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
Payment on short-term note payable
  issued in purchase of Pathfinder
  System product line                    (500,000)            --             --
Exercise of options and warrants        3,952,135      2,889,169        472,386
Proceeds from sale/leaseback
  transactions                                 --             --        317,594
Principal payments on obligations
  under capital leases                    (75,558)      (193,441)      (209,415)
                                      _________________________________________
Net cash provided by financing
  activities                            3,376,577     64,436,079     35,320,831
                                      _________________________________________
Net increase (decrease) in cash
  and cash equivalents                 (4,562,431)     3,720,478      4,150,923
Cash and cash equivalents:
  Beginning of year                     7,871,401      4,150,923             --
                                      _________________________________________
  End of year                          $3,308,970     $7,871,401     $4,150,923
                                      =========================================


Noncash transactions and supplemental disclosures
Inventories reclassified to
  fee-per-use systems                  $4,152,386     $6,563,537            $--
Inventories reclassified to property
  and equipment                         2,457,367        729,362             --

The purchase of the Pathfinder System product line included 48,564 shares
of NeoPath common stock (see Note 4).

See accompanying notes.

 Page 18
<PAGE>

Notes to Financial Statements

December 31, 1997

Note 1         Description of Business and Summary of Significant
Accounting Policies

Business

  NeoPath, Inc. ("NeoPath" or the "Company") develops and markets visual
intelligence technology to increase accuracy in medical testing.  The
Company's AutoPap(R) 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 for
the early detection of cervical cancer.  The Company's Pathfinder(R) System
provides improved quality assurance in the clinical cytology laboratory by
computerizing the cytotechnologists' microscopes, thereby helping to
eliminate screening errors and facilitating critical-cell identification in
applications such as Pap smear screening.

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 are derived
primarily through distributors.  International product placements
accounted for 51% and 45% of total 1997 and 1996 revenues, respectively.
The Company's four largest customers accounted for 65% and 86% of total
1997 and 1996 revenues, respectively.  The Company recognizes AutoPap
System fee-per-use revenue based on the number of customer slides
processed, subject to agreed-upon minimum processing levels or minimum
rental payments, beginning in the month an AutoPap System is initially
placed in commercial use at the customer site.  Sales of AutoPap Systems
are recognized at date of shipment.  Pathfinder System sales accounted
for less than three percent of total revenues in 1997 (see Note 4).

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

  NeoPath'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.

  NeoPath purchases all components for the AutoPap and Pathfinder Systems
from outside vendors, including certain components from sole-source or
single vendors.  The establishment of additional or replacement sources
of supply for the AutoPap System 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 or halt the Company's
manufacture of its products.

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.

 Page 19
<PAGE>

Intangible Assets

  Intangible assets include patents, trademarks, non-competition
agreements, and goodwill associated with NeoPath's purchase in 1997 of
the Pathfinder System product line from CompuCyte Corporation
("CompuCyte") (see Note 4).  These intangible assets are amortized on a
straight-line basis over five years.

  The Company periodically reviews the carrying value of its intangible
assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.  To the extent the estimated
future cash inflows attributable to the asset, less estimated future cash
outflows, are less than the carrying amount, an impairment loss would be
recognized.

Stock-Based Compensation

  NeoPath 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 ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation," 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 NeoPath's
initial public stock offering.  (See Note 7 for Statement 123 pro forma
disclosures.)

Basic and Diluted Net Loss Per Share

  Basic and diluted net loss per share is computed based on the weighted
average number of shares of common stock outstanding.

  In 1997, the FASB issued Statement No. 128, "Earnings per Share."
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share.  Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously designated
fully diluted earnings per share.  Because NeoPath's stock options and
warrants are not dilutive (due to net losses) there is no difference
between basic net loss per share and diluted net loss per share, and no
restatement of prior-year amounts is required.

New Accounting Standards

  In 1997,  the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is required to be adopted for fiscal years beginning after
December 15, 1997.  The new Statement requires that companies report and
display comprehensive income and its components, as defined in Statement
130, for all periods presented.  Under the new requirements,
comprehensive income must be displayed with the same prominence as other
financial statements.  NeoPath plans to adopt the new Statement in 1998.

  In 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is required to be
adopted for periods beginning after December 15, 1997.  The new Statement
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise."  Companies will be required to report each
operating segment and related information, as defined in Statement 131,
in the company's notes to financial statements.  NeoPath plans to adopt
the new Statement in 1998.

Concentrations of Credit Risk

  The Company invests its excess cash in accordance with guidelines that
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.

 Page 20
<PAGE>

Note 2         Securities Available-For-Sale

Securities available-for-sale consist of the following:

                                       Gross          Gross
                       Amortized  Unrealized     Unrealized
December 31, 1997           Cost       Gains         Losses       Fair Value
____________________________________________________________________________

Corporate bonds      $17,888,047        $835      $(112,479)     $17,776,403
Government bonds       7,718,235          --        (85,005)       7,633,230
                     _______________________________________________________

                     $25,606,282        $835      $(197,484)     $25,409,633
                     =======================================================



                                       Gross           Gross
                       Amortized  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
                     =======================================================

  There were no realized gains or losses on sales of securities available-
for-sale for the years ended December 31, 1997 and 1996.  The net
adjustment for unrealized holding gains and losses on securities
available-for-sale, included as a component of shareholders' equity, was
a gain of $346,509 for the year ended December 31, 1997 and a loss of
$583,103 for the year ended December 31, 1996.  The fair value of
securities available-for-sale maturing within one year totals $6,557,721.
The fair value of securities available-for-sale maturing between one and
three years totals $18,851,912.  The Company considers all securities
available-for-sale as available for use in current operations.

 Page 21
<PAGE>


Note 3         Balance Sheet Information

Detailed balance sheet data is as follows:

December 31,                                1997                1996
____________________________________________________________________

Accounts receivable
  Receivables                         $4,363,818          $1,015,256
  Allowance for doubtful accounts       (500,000)           (175,000)
                                     _______________________________
                                      $3,863,818            $840,256
                                     ===============================

Inventories
  Raw materials                       $3,819,830           2,725,725
  Work-in-process                      1,061,900             166,437
  Finished goods                       2,632,271           2,749,752
                                     _______________________________
                                      $7,514,001          $5,641,914
                                     ===============================

  Finished goods consist of AutoPap Systems that will be reclassified to
fee-per-use systems (non-current assets) when placed in commercial use,
AutoPap Systems to be sold, AutoPap Systems used internally on a temporary
basis, and Pathfinder Systems.

Fee-per-use systems
  Systems                            $10,628,468          $6,563,537
  Accumulated depreciation            (2,064,279)           (569,400)
                                     _______________________________
                                      $8,564,189          $5,994,137
                                     ===============================

Property and equipment
  Laboratory and other equipment      $8,206,222          $4,955,452
  Furniture and fixtures               1,108,168           1,133,276
  Leasehold improvements               1,210,930           1,154,922
                                     _______________________________
    Total property and equipment      10,525,320           7,243,650
  Accumulated depreciation
    and amortization                  (4,545,471)         (2,429,905)
                                     _______________________________
                                      $5,979,849          $4,813,745
                                     ===============================


  At December 31, 1997 and 1996, the Company held equipment under
capitalized leases with an original cost of $373,432 and $500,371, and a
net book value of $147,219 and $255,497, respectively.

Intangible assets
  Intangible assets                   $3,759,917                 $--
  Accumulated amortization              (375,992)                 --
                                     _______________________________
                                      $3,383,925                 $--
                                     ===============================
 Page 22
<PAGE>

Note  4        Purchase of Pathfinder System Product Line

  In June 1997, NeoPath purchased the Pathfinder System product line from
CompuCyte for an initial purchase price of $4.1 million.  The initial
purchase price included cash of $2.7 million (including transaction-
related expenses), a $500,000 short-term note paid in October 1997, and
48,564 shares of NeoPath common stock.  In addition, 48,563 shares of
NeoPath common stock were issued and are held in escrow contingent upon
certain specific technology decisions to be made by the Company within
one year of closing.  In accordance with accounting rules, the value of
the contingent shares was excluded from the initial purchase price
allocation, and the 48,563 contingent shares are excluded from the
calculation of weighted average shares outstanding.  Including the value
of contingent shares at the closing date, which value the Company expects
to recognize as an intangible asset if the contingency is removed, the
total purchase price approximated $5.1 million.

  As a result of the purchase, the Company recorded approximately
$240,000 in inventories and $100,000 in property and equipment, and it
recognized $3.8 million in acquired intangible assets.

Note 5         Lease Agreements

  NeoPath 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 included lease terms ranging from 36 to 60 months and
purchase options at the end of each lease.

  The Company leases office and operating facilities under operating leases
expiring in May 1998 through January 2000, with various renewal options,
and other leased items through 2002.  Operating lease expense for the years
ended December 31, 1997, 1996, and 1995 was $831,983, $620,895, and
$496,190, respectively.

  Minimum future lease payments as of December 31, 1997 are as follows:

Year ending December 31   Capital Leases           Operating Leases
___________________________________________________________________


1998                             $96,875                   $870,123
1999                              88,522                    809,584
2000                              19,050                     34,105
2001                                  --                     21,941
2002                                  --                        705
                                ___________________________________
Total minimum lease payments     204,447                 $1,736,458
                                                         ==========
Less amount representing
  interest                        21,609
                                ________
Present value of minimum
  lease payments                 182,838
Current portion                   80,966
                                ________
Obligations under capital
  leases,less current
  portion                       $101,872
                                ========

  Interest rates on capitalized leases range from 10% to 19%.

 Page 23
<PAGE>


Note 6         Income Taxes

  As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $86.5 million and research and development
credit carryforwards  of approximately $2.4 million for federal income
tax purposes, which expire between 2004 and 2012.  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 1998 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 $4.9 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 recognized.

  Deferred income taxes reflect the net tax effects of temporary
differences between the tax basis of assets and liabilities and the
corresponding financial statement amounts.  Significant components of the
Company's deferred income tax assets at December 31, 1997 and 1996 are as
follows:

December 31,                                 1997                1996
_____________________________________________________________________

Net operating loss carryforwards      $29,416,000         $21,281,000
Research and development credits        2,374,000           1,260,000
Research and development costs            633,000             759,000
Allowance for doubtful accounts           238,000              60,000
Accrued vacation                          219,000             184,000
Deferred compensation                     168,000             230,000
Charitable contribution carryforwards     125,000             124,000
Property and equipment                     97,000              55,000
Other                                     387,000             234,000
Valuation allowance                   (33,657,000)        (24,187,000)
                                      _______________________________
                                              $--                 $--
                                      ===============================

  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 increased $9.5
million and $6.9 million for the years ended December 31, 1997 and 1996,
respectively.

Note 7         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 em-ployees, 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.

 Page 24
<PAGE>

  A summary of the Company's stock option activity and related information
follows:

                                         Outstanding               Exercisable
                              ______________________        _________________
                                            Weighted                 Weighted
                                             average                  average
                                            exercise                 exercise
                                 Shares        price         Shares     price
____________________________________________________        _________________

Balance, January 1, 1995        883,512        $1.69
  Granted                       365,675        15.82
  Exercised                    (153,268)        1.22
  Canceled                      (68,677)        2.81
                              ______________________
Balance, December 31, 1995    1,027,242         6.59        483,974     $1.66
                                                            =================
  Granted                       838,218        22.91
  Exercised                    (195,429)        2.60
  Canceled                      (65,811)       10.66
                              ______________________
Balance, December 31, 1996    1,604,220        15.39        524,318     $5.12
                                                            =================
  Granted                       845,025        16.46
  Exercised                    (225,165)        2.07
  Canceled                     (285,532)       20.18
                              ______________________
Balance, December 31, 1997    1,938,548       $16.68        655,156    $13.56
                              ======================        =================
Available for grant at
  December 31, 1997             321,542
                              =========


Outstanding and exercisable options by price range as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
                                             Outstanding                  Exercisable
                ________________________________________   __________________________
                                   Weighted     Weighted                     Weighted
      Range of         Shares       average      average          Shares      average
exercise price          as of     remaining     exercise           as of     exercise
     per share  Dec. 31, 1997  term (years)        price   Dec. 31, 1997        price
________________________________________________________   __________________________
<S>                 <C>               <C>         <C>           <C>           <C>
 $0.60 - $1.20         86,729          5.53        $1.18          85,140        $1.18
  1.80 -  2.40        150,380          6.52         2.35         142,416         2.35
  4.00 -  6.00          9,346          6.81         4.08           7,312         4.07
  7.20 -  9.00          5,520          7.16         8.31           3,757         8.33
 11.25 - 16.50        650,210          8.94        14.91         157,995        14.93
 17.00 - 25.50        947,538          8.83        20.73         227,555        22.74
 25.75 - 30.25         88,825          8.60        27.83          30,981        27.65
________________________________________________________   __________________________

 $0.60 -$30.25      1,938,548          8.51       $16.68         655,156       $13.56
======================================================================================
</TABLE>

  Pro forma information regarding net loss and net loss per share is
required by FASB Statement 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 1997, 1996, and 1995,
respectively:  risk-free interest rates of 6.08%, 6.01%, and 6.27%;
dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of 0.6589, 0.5512, and 0.5512; and a weighted-
average expected life of the option of 1.47, 1.46, and 1.46 years from
vest date.

  The Black-Scholes option value model was developed for use in
estimating the fair value of traded options that 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,

Page 25
<PAGE>

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,                  1997             1996            1995
______________________________________________________________________________

Pro forma net loss               $(27,930,575)    $(20,717,024)   $(15,126,112)
Pro forma basic and diluted
  net loss per share                    (1.97)           (1.59)          (1.68)

  The FASB Statement 123 pro forma disclosures above are not necessarily
indicative of future pro forma  disclosures because of the manner in which
FASB Statement 123 calculations are phased in over time.

    The weighted average fair value for options granted during 1997, 1996,
and 1995 using the Black-Scholes multiple option pricing model is $8.81,
$10.86, and $7.72, respectively.

  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 was fully
amortized over the respective vesting periods.

Warrants

  Warrants to purchase common stock were issued in connection with several
of the Company's preferred stock offerings.  Common stock warrants
outstanding at December 31, 1997 totaled 223,526 at a weighted average
exercise price per share of $7.46.  These warrants expire at various dates
through 2001.

  During 1997, warrants were exercised to purchase 463,493 shares of the
Company's common stock, of which 13,273 shares were issued through "net
exercise" rights, for which the Company received no proceeds.  Such rights
allow the warrant holder 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.  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.  The
remaining warrants outstanding as of December 31, 1997 have net exercise
rights.

Common Stock Reserved

At December 31, 1997, common stock was reserved for the following purposes:

Common stock warrants               223,526
Stock options                     2,260,090
Employee stock purchase plan        150,000
                                 __________
                                  2,633,616
                                ===========
 Page 26
<PAGE>

Note 8         Employee Benefits

  The Company has a retirement plan covering substantially all employees
that 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.

  In May 1997, NeoPath's shareholders approved the 1997 Employee Stock
Purchase Plan (the "ESPP") and authorized the issuance of up to 150,000
shares of the Company's common stock under the plan.  The ESPP permits
eligible employees of the Company to purchase common stock at not less
than 85% of fair market value as defined in the ESPP through payroll
deductions of up to 15% of their compensation, provided that no employee
may purchase common stock worth more than $25,000 in any calendar year.
Participants are required to hold ESPP stock for a minimum of six months
following the purchase date.  The ESPP will expire in 2007.

Note 9         Litigation

  On July 15, 1996, Neuromedical Systems, Inc. ("Neuromedical") filed a
lawsuit against NeoPath
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.  In September 1997, a motion for
preliminary injunction against the Company was heard by a judge in the
United States District Court for the Southern District of New York.  No
decision has yet been rendered.  The Company believes it has a strong
position in this action and continues to defend itself vigorously.

  On March 31, 1997, the Company filed a patent infringement lawsuit
against Neuromedical in the United States District Court for the Western
District of Washington.  The complaint alleges patent infringement and
seeks preliminary and permanent injunctions against Neuromedical.  This
suit is currently in the discovery stage.

Note 10        Subsequent Events (Unaudited)

  During 1997, NeoPath completed a prospective intended-use clinical study
that included analysis of more than 25,000 Pap smear slides at five
clinical laboratories in the United States and Canada to evaluate the
performance of the AutoPap Primary  Screener System (the "AutoPap
Screener") as a primary screening device.  Based on the results of the
study, in August 1997 NeoPath submitted an amendment to its pending
PreMarket Approval ("PMA") Supplement to the United States Food and Drug
Administration (the "FDA") for use of the AutoPap Screener as a primary
screener of Pap smear slides.  In January 1998, the Hematology and
Pathology Devices Advisory Panel of the FDA unanimously recommended that
the FDA approve, with conditions, the supplement to NeoPath's PMA
submission for use of the AutoPap Screener as a primary Pap smear
screener.  As of March 1998, the Company is awaiting FDA approval on this
PMA application.

  The Company is currently negotiating a bank financing facility to borrow
up to $10 million based on current and future fee-per-use AutoPap Systems
placed at customer sites.  This facility is expected to be in place during
1998.

 Page 27
<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 and
Treasurer

Page 28
<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, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997.  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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.

                                                   /s/ ERNST & YOUNG LLP
Seattle, Washington
January 21, 1998

 Page 29
<PAGE>

Common Stock Information

  The Company's common stock trades on The Nasdaq Stock Market under the
symbol "NPTH."  The Nasdaq Stock Market or "Nasdaq" is a highly-regulated
electronic securities market comprised of competing Market Makers whose
trading is supported by a communications network linking them to quotation
dissemination, trade reporting, and other execution systems.  As of
January 30, 1998, there were 261 holders of record of the common stock of
the Company and 14,417,741 shares outstanding.  Since shares of NeoPath's
common stock are also held in street name, there are additional beneficial
holders of the Company's common stock.

  The following table sets forth, for the periods indicated, the high and
the low trade prices for NeoPath's common stock as reported by Nasdaq:

                                    1997                     1996
                     ___________________      ___________________
                       High          Low        High          Low
                     ___________________      ___________________
First Quarter        $19.75       $13.50      $28.50       $21.50
Second Quarter        23.00        11.50       26.50        20.00
Third Quarter         20.00        15.00       30.50        16.13
Fourth Quarter        20.38        12.63       22.25        14.50

  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.

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<PAGE>

Corporate Information

Directors

Walter L. Robb, Ph.D.
Chairman of NeoPath's Board of Directors
and President, Vantage Management, Inc.

Alan C. Nelson, Ph.D.
President and Chief Executive Officer
of the Company

William L. Scott
Vice President and Chief Financial Officer
of the Company

Alan D. Frazier
President, Frazier & Company, Inc.

Cristina H. Kepner
Director and Executive Vice President,
Invemed Associates, Inc.

David A. Thompson
Retired Senior Vice President,
Abbott Laboratories

Gail R. Wilensky, Ph.D.
John M. Olin Senior Fellow, Project HOPE


Officers

Alan C. Nelson, Ph.D.
President and Chief Executive Officer

William L. Scott
Vice President and Chief Financial Officer

Shih-Jong James Lee, Ph.D.
Vice President and Chief Technical Officer

Larry A. Nelson
Vice President, Intellectual Property and New Business Development

David H. Robison
Vice President, Operations

Kumar K. Shahani
Vice President, Marketing and Business Assessment

Robert C. Bateman
Corporate Controller and Treasurer

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<PAGE>


Corporate Information

Corporate Headquarters

NeoPath, Inc.
8271 - 154th Avenue NE
Phone:  (425) 869-7284
Fax:  (425) 869-5325


Legal Counsel

Perkins Coie LLP
1201 Third Avenue
Seattle, WA  98101


Transfer Agent

American Stock Transfer & Trust Company
40 Wall Street
New York, NY  10005


Independent Auditors

Ernst & Young LLP
999 Third Avenue, Suite 3500
Seattle, WA 98104


Annual Meeting

The Annual Meeting of Shareholders will be held at 8:30 a.m. (Pacific
Daylight Time) on Thursday,
May 21, 1998 at the Hyatt Regency Bellevue at Bellevue Place, 900 Bellevue
Way NE, Bellevue, WA 98004


Shareholder Inquiries

Copies of the Company's Form 10-K as filed with the Securities and
Exchange Commission may be obtained without charge by writing:

Attn: Investor Relations
Stacie D. Byars
NeoPath, Inc.
8271 - 154th Avenue NE
Redmond, WA 98052

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