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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the fiscal year ended December 31, 1999

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

                         Commission file number 0-20652

                           AccuMed International, Inc.
                           ---------------------------
             (Exact Name of Registrant as Specified in its Charter)

          Delaware                                      36-4054899
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(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

              920 N. Franklin Street, Suite 402, Chicago, IL 60610
              ----------------------------------------------------
              (Address of principal                      (Zip Code)
               executive offices)

                  Registrant's telephone number: (312) 642-9200
                                                 --------------

       Securities registered under Section 12(b) of the Exchange Act: None
                                                                      ----

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                (Title of Class)


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

        Indicate by checkmark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

        The aggregate market value of the common stock held by non-affiliates of
the registrant on April 11, 2000 was: $7,411,119. Number of shares of common
stock outstanding on April 11, 2000: 5,673,149.

        The information required by Part III, Items 10, 11, 12 and 13 are
incorporated by reference to the definitive proxy statement dealing with the
election of directors to be filed within 120 days of the last fiscal year end.



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ITEM 1 OF THIS FORM 10-K ENTITLED "BUSINESS" AND ITEM 7 OF THIS FORM 10-K
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27a OF THE SECURITIES ACT OF 1933 AND SECTION 21e OF THE SECURITIES
EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AND
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS.


                                     PART I

ITEM 1. BUSINESS

   (a)           General Development of Business

               AccuMed International, Inc. is a Delaware corporation.  AccuMed's
predecessor was incorporated in California in June 1988 under the name Alamar
Biosciences, Inc. and was engaged in developing, manufacturing and marketing
microbiology products.

               AccuMed has a wholly owned subsidiary, Oncometrics Imaging Corp.,
a company continuing under the laws of the Yukon Territory, Canada. Oncometrics
was formed in 1995 to complete the development of an automated instrument
designed to be used in the detection, diagnosis and prognosis of early-stage
lung cancer by measuring the DNA in the nuclei of cells on microscope slides.
AccuMed acquired a two-thirds interest in Oncometrics in 1996. In 1998, we
acquired the final one-third interest in Oncometrics.

               On January 29, 1999, AccuMed sold substantially all of the assets
and certain liabilities related to our microbiology business, including Alamar,
Sensititre and the ESP product line. AccuMed received gross proceeds of $
15,150,000 in cash at the closing. The proceeds were used to retire $8,498,000
in debt, and the balance was retained for general corporate and working capital
purposes.

               AccuMed and Ventana Medical Systems, Inc. entered into a License
and Development Agreement dated March 24, 2000. Under this license agreement
Ventana has paid AccuMed an initial license fee, a prepayment on royalties and a
partial payment for certain development obligations that AccuMed will perform.
AccuMed has granted Ventana license to use AccuMed's core technology, including
patents, in the field of surgical pathology, which involves analyzing tissue
samples ordered by physicians to be taken from surgical patients to determine
the presence or absence of disease. This license agreement has an initial
three-year term which will be extended for additional three-year terms unless
either party gives the other notice of non-renewal within 180 days prior to the
end of the current term.

               On March 29, 2000, AccuMed and BCAM International, Inc. entered
into a Patent and Technology License and Registration Rights Agreement. Through
this agreement, we have licensed to BCAM our core technology for use in a
specific field. BCAM has paid AccuMed an initial licensing fee and is required
to pay AccuMed additional licensing fees and royalties in the future.


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               (b)    Financial Information About Industry Segments

               AccuMed's operations were in two laboratory market segments: (1)
Cytopathology - systems made up of multiple instruments networked via
proprietary software that support the review and analysis of Pap smears and
other microscope slide-based cellular preparations, and (2) Microbiology -
proprietary disposable products and automated instruments used to identify
infectious microorganisms and determine susceptibility to antimicrobial agents.
On January 29, 1999, AccuMed sold substantially all assets and certain
liabilities of our former microbiology business. Accordingly, this division is
reported as a discontinued operation in the accompanying financial statements.

   (c)           Narrative Description of Business


GENERAL
            AccuMed designs, builds and supplies two product lines. We build
these product lines with either our own microscopes or with commercially
available microscopes which we modify.

               The first product line consists of "AcCells(TM)" computer-aided
microscopes, which help medical experts to examine and diagnose specimens of
human cells. These products include:

-        robotic slide-feeding systems to load and unload slides from the
         microscope,

-        bar-code readers to ensure proper identification of samples being
         analyzed,

-        electro-mechanical scanning stages, that part of the AcCell microscope
         that allows the AcCell computer to move and focus the slide more
         accurately than a human can,

-        automatic physical dotters to mark the locations of cells of interest,
         and

-        Data Management System software to enable the medical experts to review
         the relevant medical histories and report the results of their
         examination or diagnosis directly into a medical record-keeping system
         without human transcription or repeat entries.

               The second product line consists of "AcCell-Savant(R)." The
AcCell-Savant includes all the AcCell components described above, as well as an
electronic imaging system and our image analysis software. The electronic
imaging system consists of a camera, electronics, optics and software which
together produce digital images of specimens on the microscope slide. The image
analysis software measures properties of the specimen from the digital images.
These AcCell-Savant(R) measurements are objective, as opposed to the subjective
analyses of specimens by human visual examination.

               Medical experts can examine and diagnose human medical specimens
more easily and accurately using our products. For example, a clinical

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laboratory can eliminate paper requisitions and paper medical reports by using
AcCells which include our Data Management System. Laboratories that use paper
requisitions and medical reports risk misdiagnosing specimens because of
transcription and other clerical errors. Laboratory staff using our electronic
Data Management System do not need to reenter data manually, thus saving time
and reducing the risk of clerical error which can lead to misdiagnoses.

               Research scientists use the AcCell-Savant(R) research system,
which we began marketing in 1999, to measure cellular DNA and other properties
of medical specimens. We have sold modest numbers of the AcCell-Savant(R)
research system to academic and medical research laboratories. These
laboratories use our AcCell-Savant research system to more easily and accurately
conduct experiments for a wide range of research applications in biology and
pathology. Under FDA regulations, we are permitted to sell the AcCell-Savant(R)
research system for these uses. The research and academic market is a small
market compared to the commercial, clinical laboratory market which processes
and diagnosis human medical specimens for patient care.

               Research scientists use the AcCell-Savant(R) research system in
the following manner. In a lung cancer experiment, patients provide sputum
specimens. Laboratory technicians prepare these specimens on microscope slides
with a bar code label identifying the patient. The scientist inserts these
slides into the AcCell-Savant(R) research system. The robotic slide-feeding
system loads the slide into the microscope. The bar code reader identifies the
patient and specimen information and stores this information in the computer.
Digital images are produced using the electronic imaging system and scanning
stage which moves the slide under the microscope. The image analysis software
measures DNA and other properties of the cells in the digital images. The
research scientist uses the statistical image analysis software to analyze these
measurements objectively. Scientists use these statistical analyses to determine
the presence and severity of lung cancer. AcCell-Savant(R) research systems
record the digital images, measurements of cellular properties and statistical
information in computer files which are the records of the scientist's
experiment. The AcCell-Savant(R) then unloads the microscope slide.

               In addition to research applications, we believe we can adapt the
AcCell-Savant(R) for many clinical, commercial laboratory applications, like
early cancer detection. We are adapting the AcCell-Savant(R) for early lung
cancer detection and several other clinical applications. In our attempt to
enter the clinical laboratory market, we are pursuing partnerships with other
technology and product/service distribution companies. We are exploring
arrangements with partners to combine AcCell-Savant(R) and/or AcCell technology
with the partner's intellectual property. In these arrangements, we would sell
our products for use in combination with the partner's intellectual property and
products.

               For example, on March 27, 2000 AccuMed announced that it signed a
multi-year agreement with Ventana Medical Systems, Inc. (Nasdaq: VMSI) to
provide an Automated Cellular Image Analysis System to assist pathologists in
analyzing cancer and infectious diseases. The system will be used to quantitate
immunohistochemistry (IHC) and in-situ hybridization (ISH) stained samples. The
combination of AccuMed's automated and quantitative imaging systems technology
and Ventana's sales and marketing strengths to surgical pathology laboratories,
will enable both companies to participate in the

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potentially attractive market for quantitative IHC and ISH image analysis. Built
from AccuMed's core technology and products, Ventana expects to launch the sale
of its first IHC products built upon custom-modified AcCell automated imaging
platforms and imaging software in late 2000. That product will aid pathologists
who evaluate breast cancer specimens, including the use of Ventana's stain for
measuring Her-2/neu receptor overexpression. Physicians order tests to measure
Her-2/neu receptor levels in tissue samples from cancer patients to decide
whether breast cancer patients with metastatic disease will respond to
Genentech's anti-cancer drug, Herceptin.

               Furthermore, AccuMed's automated and quantitative imaging
instruments, software, systems, and supplies are not only well suited for tests
on tissue samples from patients with cancer, but they are also ideal analytical
instrument platforms for numerous clinical applications in early disease
detection and medical follow-up. On March 29, 2000, AccuMed signed a multi-year
agreement with BCAM International, Inc. (Nasdaq: BCAM) to license its core
technology in computer-aided microscopy, quantitative microscopy, and image
cytometry and histometry in the field of morphological, cytochemical,
cytogenetic, and quantitative sputum cytology, including without limitation DNA,
malignancy-associated changes, and any other genetic or molecular diagnostic
analyses for early lung cancer detection, screening, diagnosis, prognosis, and
patient monitoring. Through this agreement, which provides BCAM with access to
contract research and development services and manufactured products from
AccuMed, BCAM can build an early lung cancer detection and diagnostic business
using unique and patented cytopathology and molecular pathology-related
technology from AccuMed.

                These deals were possible because of the generic and proprietary
advanced imaging systems that have been designed and built by AccuMed. These
deals are also commercially viable today because of the recent advances in
cellular genetics and molecular pathology including, in particular, the initial
and encouraging results stemming from human genomics research and development
projects.

               We are at the forefront of significant changes in disease
management. Molecular diagnostics and quantitative analyses of molecular
profiles resulting from gene expression will be used to optimize therapeutic
choices that ultimately improve patient outcomes. AccuMed's instrument and
system platforms are well-suited for numerous emerging tests for a wide variety
of diseases including cancer (e.g., breast, prostate, colon, lung, bladder,
lymphoma, and leukemia).

               We need FDA clearance to market the AcCell-Savant in the United
States for clinical as opposed to research uses. We are gearing our research and
development efforts toward developing the lung detection product which, through
a license can be used in clinical trials in 2001.

               AccuMed has generated limited revenues from the sale of our
products to our original target market, clinical laboratories that examine or
diagnose medical specimens including Pap smears. Currently, we do not actively
market the AcCell as a stand-alone product.

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               We believe that AccuMed is the only company competing in the
computer-aided cytology screening cytodiagnostic market with a modular,
expandable product, (our AcCell) that allows customers to upgrade to more fully
automated versions and with a product line that support both gynecological and
non-gynecological specimen analysis using both conventional Pap smears as well
as liquid-based preparations. Given the present healthcare and regulatory
environment, we believe our products will be more readily accepted than higher
priced, non-modular, non-interactive products that attempt to eliminate human
experts from the diagnostic process, and that are restricted to the analysis of
cervical Pap tests only.

               Certain developments in the diagnostic markets we serve have
created growth opportunities. Cost containment pressures and demand for
preventative, early detection and diagnosis, and

therapeutic monitoring medical technology are likely to create demand for
labor-saving laboratory products that improve the quality and efficiency of
laboratory-based patient specimen interpretations and diagnoses.

               AccuMed's goal is to develop cost-effective, accurate, sensitive,
easy-to-use, and innovative cytopathology products that improve patient outcomes
and healthcare provider performance, with competitive advantages in the markets
in which it operates. AccuMed's growth and profitability will depend, to a great
extent, upon its ability to complete development of and successfully introduce
new products through distribution channels of strategic partners. To achieve
this, AccuMed will need to continue research and development activities and
obtain regulatory approval or cooperate with strategic partners in their efforts
to obtain regulatory approval for such products with the U.S. Food and Drug
Administration.


EARLY LUNG CANCER SCREENING

               AccuMed has also developed and assembled technologies and systems
that could lead to a much more effective, sensitive, reliable, and commercially
viable early lung cancer testing program to identify individuals with early more
curable lung cancer.

               Lung cancer is a major cause of cancer-related deaths for both
men and women, accounting for more than one-third of all cancer-related deaths
and costs the U.S. healthcare system more than $50 billion in direct medical
expenses annually. Last year in the United States approximately 180,000 patients
were diagnosed with lung cancer. Most of the patients who will die from this
disease will lose their battle approximately within the first two years.
Worldwide estimates indicate that there are in excess of 900,000 new lung cancer
cases annually, and that the number of new cases expected to double within five
years.

               Currently, AccuMed estimates only 7.5 million sputum cytology
diagnostic tests are performed annually, two-thirds of which are used for lung
cancer screening in Japan. Today, the remaining 2.5 million tests are performed
primarily on symptomatic patients. However, AccuMed estimates the worldwide
market for early lung cancer screening of high-risk and asymptomatic


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individuals to be between 50 and 175 million tests per year, with at least 23.5
million potential tests per year in the United States.

               Lung cancer survival strongly depends upon early disease
detection and diagnosis. However, conventional sputum cytopathology tests are
not widely used because they fail to detect early curable lung cancer reliably.
AccuMed believes that approximately 90% of patients who are diagnosed with Stage
0 and between 45% to 80% of patients who are diagnosed with State I lung cancer
have at least a 5-year survival following their initial diagnosis. Contrasting
this, the survival rate is less than 9% for patients who are diagnosed with
State III or Stage IV lung cancer. Unfortunately, more than two-thirds of lung
cancer patients today are diagnosed at Stage III and IV because no widespread
early lung cancer-screening program has been developed similar to the
gynecological Pap test worldwide screening programs that have dramatically
reduced mortality from cervical cancer during the past 50 years.

               AccuMed believes a screening program for early lung cancer
detection and diagnosis is possible. It must rely upon identifying and
recruiting high-risk patient populations and/or at-risk patients into
non-invasive screening programs before they become symptomatic. A screening
program for these individuals has the potential to not only save lives, but also
be a highly cost-effective healthcare program by significantly reducing overall
healthcare costs due to earlier detection and treatment.

               To achieve this goal, AccuMed is developing the AcCell-Savant.
The AcCell-Savant, a quantitative microscopy analytical instrument, incorporates
features and benefits derived from the AccuMed proprietary AcCell(TM)
workstations and TracCell(TM) slide mapping systems. It relies on several core
technologies including cytochemistry, computer-aided microscopy, electronic
imaging, digital image processing and analysis, and medical informatics. This
cell analysis platform facilitates the direct measurement of cellular changes
(e.g., "MAC" or Malignancy-Associated Changes) associated with early disease
development and progression. AccuMed believes such cellular assays could be
performed, with the AcCell-Savant, more sensitively, accurately, and
reproducibly than is possible by the human eye-brain combination alone. The
instrument's photodetectors, electro-mechanical precision, ability to focus
selectively cell-by-cell and nucleus-by-nucleus on the most informative cell
populations, image processing and analysis algorithms, and statistical
calibration and classification methods gives the cytotechnologist,
cytopathologist, and cytologist-in-general the ability to analyze multiple lung
cancer markers and probes simultaneously for improved sensitivity, specificity
and positive predictive value. The human-machine interface allows the human
experts---the pathologists---to do the best diagnostic work possible, in
suspicious cases, by considering the objective, visual and subvisual
AcCell-Savant data in their patient diagnostic reports.

               AccuMed and the British Columbia Cancer Agency conducted a
two-year field study and analysis of approximately one thousand patient cases
qualified to be at high-risk for early lung cancer. Results from that study show
that conventional sputum cytopathology has a reduced sensitivity for early stage
lung cancer detection. Most significantly, this study also demonstrated that the
AcCell-Savant approach improves, over conventional methods, the detection of the
early, most curable, lung cancers by up to several-fold. Further significant
performance improvements are anticipated


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based upon current research and development activities in enhanced and
innovative methods of specimen collection; sample deposition, fixation, and
staining; panel test design with multiple probes; image analysis algorithms; and
computer-aided pattern recognition and classification methods.

               AccuMed intends to commercialize this early lung cancer
application through licensing our technology to a strategic partner.


LUNG CANCER SCREENING BUSINESS DEVELOPMENT

               AccuMed has set the following major near-term (i.e., 2-year)
milestones in this lung cancer screening business development program: (1)
completion of comprehensive system requirements and specifications from specimen
collection and preparation through cellular analysis, diagnosis and reporting,
(2) development of the clinical instrument ("intended use" apparatus), (3)
submission of appropriate supplemental patent protection, (4) completion of a
pre-clinical trial (i.e., pilot run) with adequate screening test sensitivity
and specificity, (5) demonstration of revenues from research instrument sales,
and (6) demonstration of revenues from per-test usage fees at Alpha and Beta
sites.


MARKETS AND PRODUCTS

           AccuMed, a leader in the field of quantitative and automated
microscopy, is a medical device company developing proprietary diagnostic
instruments for applications to early disease prevention, detection, diagnosis,
prognosis, optimized selection of therapeutic regimens and agents, and
therapeutic monitoring. Quantitative and automated microscopy is a powerful
research tool, which applies complex computer algorithms to measurements of
nuclei, cells, and tissues on a microscopy slide to derive medically significant
information. AccuMed markets its computer-aided, automated, and quantitative
microscopy workstations and systems, including analytical cytology and histology
instruments and supplies, through joint ventures, technology licensing
agreements, and research and development contracts.

               As one of AccuMed's laboratory partners stated, "Through its
systems, AccuMed is not only providing products, but it is redefining the
process of making a diagnosis." This cell and tissue-imaging science and
technology company is rapidly expanding its intellectual property portfolio and
applying its proprietary technologies to the development of cost-effective,
accurate, sensitive, easy-to-use, and innovative products that improve patient
outcomes and healthcare provider performance.

               As a result of AccuMed's modular instrument platforms for
cytology and histology applications, AccuMed has focused its efforts to
commercialize its technology through partnerships with companies and
institutions with a business focus in the following markets, among others:

                  -        Early lung cancer and other pulmonary disease
                           detection and follow-up


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               -      Cancer and infectious disease diagnostics
               -      Quantitative immunohistochemistry
               -      Cytogenetics, screening and toxicology including in-situ
                      hybridization
               -      Anatomic pathology and information systems
               -      QC/QA for cytology/histology quality monitoring and
                      reporting
               -      Telepathology and medical image archiving/databases
               -      Marker and probe development
               -      Drug development for cancer patients
               -      Linking diagnostics assays to therapeutics
               -      Cellular imaging and analysis
               -      Quantitative cytology and histology
               -      Microscopy-based tests
               -      Medical informatics

        B.     PRODUCTS

               AccuMed's product development strategy has focused on taking what
the human experts do best and "wrapping around them" technological solutions
that make them more effective with respect to quality and cost-effectiveness. In
addition, AccuMed provides instruments such as the AcCell-Savant to measure and
analyze what the human eye-brain combination cannot see or perceive. AccuMed has
developed the following technology and products relying upon its core
technologies including computer-aided microscopy, medical informatics, optical
and electronic imaging systems, quantitative microscopy, and
cytometry/histometry systems.

               The product development strategy employed at AccuMed is a layered
approach. The underlying support for the product line is the AcCell
computer-aided microscope, which is primarily a quality assurance device
utilizing robotic and medical informatic technologies. The TracCell layer above
it provides productivity enhancements by electronically mapping slides to
identify the fields-of-view with the well stained and well preserved cells for
human review. The AcCell-Savant layer immediately above the TracCell layer adds
quantitative microscopy that facilitates systems that measure and report the
content and distribution of DNA and other cellular constituents in biosamples.
Probes analyzers are yet an additional layer of technology that introduce the
capability of quantitatively determining the presence of genetics markers and
probes in cellular and histological samples, for example. Finally, the top layer
of the technological pyramid anticipates the integration of all of these
technologies with a medical informatics system to furnish complete assays from
specimen processing through medical results reporting.

               The AcCell, TracCell and AcCell-Savant are AccuMed's original
product lines (Series 2000) in computer-aided microscopy, slide mapping systems,
and quantitative microscopy systems.

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               COMPUTER-AIDED MICROSCOPY:  ACCELL CYTOPATHOLOGY WORKSTATIONS

               Clinical cytology laboratories, using technologists and
cytopathologists to prepare, screen and diagnose specimens are facing
cost-containment pressures and a need to improve quality simultaneously. These
requirements are increasing the demands on laboratories and their highly skilled
cytologists to both increase throughput (i.e., laborsaving products that reduce
cost and increase margin per test) and decrease their false negative rate (i.e.,
minimize liability exposure). The AcCell workstations were developed to enable
cytologists to do what they do best - interpret cytological findings - and to
speed the tedious non-interpretative functions while concurrently providing
improved quality control, assurance and reporting functions during the screening
and diagnostic process.

               The resultant AcCell product line is a comprehensive family of
integrated, expandable and technologically advanced products consisting of
proprietary workstations that provide bar-coding for automated specimen
identification, robotic slide loading to increase throughput and accuracy,
support to ensure that 100% of a slide's sample deposition area is imaged during
screening, XYZ electronic coordinate marking of cells and other
objects-of-interest for rapid and reproducible automated relocation of selected
cells of interest by pathologists during review sessions, accurate positional
information that is continuously available, automated and high-accuracy physical
dotting of slides, a data management system (DMS; typically interfaced to a
Laboratory Information Systems (LIS)) that speeds and aids pathologists in
diagnostic review sessions, automated report generation for specimen and
laboratory management, and compatibility with both conventionally prepared Pap
smears and liquid-based preparations. The DMS supports both gynecological and
other sample processing and analysis. The primary benefits derived from the use
of AcCell workstations are cost and timesavings, improved process control and
quality, proactive risk management, and reported increases in the detection of
abnormal cases.

               AcCellS are the reliable, production-oriented workhorses for all
of AccuMed's products. They are optimized review stations that support the human
experts by maximizing their performance and providing a means for quality
assurance in cytology and histology operations.

               Most importantly, however, these AcCell workstations form the
basic building block of semi-automated and automated systems in that they serve
as (a) the core of the human expert's specimen or patient sample review station
and (b) the building block for all of the analytical instruments in the other
screening and diagnostic market sectors.


               ELECTRONIC IMAGING SYSTEMS:  TRACCELL SLIDE MAPPING

Another technology developed by AccuMed is computerized slide mapping. This
technology, implemented in the TracCell Slide Mapping System, has been
FDA-cleared for use with conventional Pap smears as well as with Cytyc ThinPrep
liquid-based preparations. The TracCell stand-alone slide preprocessor produces
electronic "maps" of slide-based cytological samples. These maps were designed
to save slide-screening time and associated labor

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costs. The basic principle of TracCell slide mapping is that cytologists do not
need to screen or review microscope fields-of-view that do not contain any
adequately stained, well-preserved diagnostic cells. By processing slides with a
TracCell before the cytologist screens the slides at an AcCell review station,
the cytologist can save time by being automatically routed past these "empty"
fields-of-view. This productivity enhancement technology is also adaptable to
the processing and review of tissue sections on microscope slides. An indirect
benefit of the TracCell tool is that screeners can spend more time analyzing
difficult-to-interpret cells or regions-of-interest without sacrificing overall
productivity. The TracCell Slide Mapping System, by definition, includes an
AcCell review station. AccuMed is seeking a licensee for the AcCell and TracCell
products for use in the automation of conventional cytology diagnostic
laboratories. Also, AccuMed is utilizing these products and technologies in more
advanced clinical applications (e.g., early lung cancer detection and diagnosis;
and quantitative immunohistochemistry and in-situ hybridization systems already
licensed to Ventana Medical Systems, Inc.) that AccuMed intends to commercialize
through several joint venture or other strategic relationships.


               QUANTITATIVE MICROSCOPY SYSTEMS:  ACCELL-SAVANT IMAGE CYTOMETERS

               The AcCell-Savant/research (ACSr) instrument combines an AcCell
computer-aided microscope with the Savant proprietary system of stains,
protocols, imaging hardware and analytical software. This automated image
cytometer generates analytical results regarding individual cells, including DNA
content, optical texture and morphometric features. Statistical, graphical, and
image data are displayed in a variety of formats to support cytology and
histology research scientists, engineers, and clinicians.

               More specifically, AccuMed's MAC methods and instruments are one
of AccuMed's powerful sets of automated cytophotometry tools facilitating the
cytological detection and diagnosis of cancer at early, more curable stages of
development. The lead research product at AccuMed, known as the AcCell-Savant,
is a high-resolution image cytometer and is currently available as a research
instrument - the AcCell-Savant/research (ACS/r). This analytical instrument
incorporates an AcCell computer-aided microscope with the Savant system of
stains, protocols, as well as proprietary imaging hardware and analytical
software. The ACSr is a fully automated, high-resolution, absorbance
microscopy-based cytometer that processes Thionin-Feulgen-stained cytology
preparations and presents analytical results regarding the cellular DNA content
of processed samples. This quantitative microscopy system includes an AcCell
equipped with electronic-imaging for the evaluation of cytology samples prepared
with proprietary nuclear DNA stains. Applications of this technology include
measurement of cellular DNA content, chromatin distribution patterns, and
nuclear areas for detection of early cancer and other diseases.

               - ACSr's automated operation makes it possible to measure
               thousands of cells per sample, thus increasing the statistical
               accuracy of tests.


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               - ACSr's proprietary high precision computer-aided microscope
               with robotic slide handling and bar-coded sample identification
               ensures the reproducibility and reliability of results.

               - ACSr's proprietary electronic imaging and digital image
               processing are capable of selecting cells of interest,
               distinguishing them from background debris, cell clusters and
               non-targeted cells. This speeds the tedious non-interpretive
               functions while improving quality control and assurance.

               - ACSr's digital image processing and proprietary statistical
               analyses generate not only quantitative results but graphical
               displays as well (e.g., two-dimensional histograms, scattergrams
               and cell image gallery displays). These enable the user to detect
               subtle changes and rare cellular events readily and reliably.

               - ACSr's automated cell classification capability is customizable
               to the user's specifications. This eliminates the time consuming
               and labor-intensive process of manually classifying cells and
               provides flexibility for user-specific requirements.

               A key competitive advantage of the AcCell-Savant/research is its
rapid, production-oriented automation enabling it to scan and analyze thousands
of cells per sample without human intervention. Rather than relying upon
interactive, labor-intensive approaches with statistical samples too small for
sensitive cell cycle or ploidy analyses, the AcCell-Savant approach solves these
problems making speedy analyses of small or large (> 15,000 cellular events)
sample sizes practical and cost-effective. In addition, this robust and unique
approach enables users to select the cells of interest for analysis, free from
background debris, cluster, and non-targeted cells such as non-tumor cells that
could mask significant findings regarding the cells of interest to the operator.
Additionally, use of the ACSr is a complementary approach to flow cytometry. The
relative advantages of the image cytometry approach are that flow cytometry
typically requires at least an order of magnitude more cells per analysis, the
AcCell-Savant enables selectivity (ability to eliminate extraneous objects that
mask results), and unlike the AcCell-Savant, flow cytometry users cannot "see &
save" cells with their corresponding feature data sets. Finally, neither flow
nor image cytometry can process histological sections in general, though the
AcCell-Savant can process some tissue sections (e.g., muscle, heart, brain,
nerve, ovary, and testicle) when the majority of their nuclei are
non-overlapping.

               This robust and unique instrument is versatile enough to handle a
variety of applications. Typical applications of the AcCell-Savant include
research and applications development in the following areas: disease detection
from cytology samples, Malignancy Associated Changes (MAC), DNA ploidy analyses,
treatment planning and monitoring, cell cycle analyses of S-phase fractions,
quality assurance via post-screening of cytology samples, infectious disease
investigations, transplant rejection analyses, toxicology, chemoprevention, and
general cellular research.



                                       12
<PAGE>   13

               Features and benefits of the AcCell-Savant/research system
include the following:

               -      Fully automated and high-speed operations
               -      Normalized DNA data with calibration
               -      Accurate, reproducible, and high resolution
               -      Classifiers providing high sensitivity & specificity
               -      Tunable to a wide variety of markers and probes
               -      Enables rapid generation of feasibility data
               -      Speeds drug research via faster protocols
               -      Suitable for new clinical screening assays
               -      Compatible with production-oriented AcCell-Savant Systems


               MALIGNANCY ASSOCIATED CHANGES

               AccuMed owns multiple patents related to methods and devices for
automatically detecting malignancy associated changes. Malignancy-associated
changes are subtle changes known to take place in the nuclei of apparently
normal cells found near cancerous or precancerous tissue. David M. Garner,
Ph.D., co-inventor of the MAC patents and Senior Scientist at the British
Columbia Cancer Agency (Vancouver, Canada) indicated "Malignancy-associated
changes (MACs) are subtle changes that are known to take place in the nuclei of
apparently normal cells found near cancer or precancerous tissue. As such, the
measurement of MAC features can potentially improve specimen adequacy rates,
increase the sensitivity of an early cancer detection screening test, and result
in an easier-to-use, simpler, and more reliable assay. Also, MACs can be used to
detect, not only lung cancer, but many other types of cancer and precancerous
conditions."

               The AcCell-Savant products offer the unique combination of
patented MAC methods and the benefits of high accuracy, sensitivity and
throughput which enable research clinicians and scientists to detect and measure
early subtle cellular changes in disease processes that may not be otherwise
detectable by visual analyses alone.



               SYSTEM 3000

               The next generation System 3000 products are being developed to
enhance product features and benefits, and to increase market acceptance in
diverse clinical applications.


               ACCUTECH

               Specifically, the AccuTech was developed by AccuMed to remove the
need to use commercially available microscopes in the AcCell and related product
lines. Such commercially available microscopes did not provide adequate
mechanical stability, for example, to enable high-speed focusing on machines
that were being designed to operate consistently during multiple shifts and for
seven days per week.



                                       13
<PAGE>   14


               Features and benefits of the AccuTech systems include the
following:

                  -        High-precision computer-controlled imaging
                  -        Fixed optical system without field-operation
                           variability
                  -        Computer-controlled illumination intensity with
                           feedback control
                  -        High-resolution, ultra-fast computer-controlled
                           focusing subsystem
                  -        Power objective changer with full XYZ and
                           illumination compensation
                  -        Integral rotating filter mechanism for high-speed
                           multi-spectral sensing
                  -        Rigid and fixed camera mounting system
                  -        Automatic re-calibration system to ensure
                           slide-by-slide data quality


               ACCELL 3000 REVIEW STATION

               The AcCell 3000 is the human-operated cytology workstation of
AccuMed's System 3000 product line. It is a fully integrated light microscopy
and data management system for use in laboratories that perform slide-based
microscopic examination of cellular materials. This combination microscope and
computer was designed as the cytologist's and/or pathologist's flagship
"workhorse" tool. Specifically, the AcCell 3000 supports needs of the
gynecological and non-gynecological cytology (e.g., cervical Pap smears and
liquid-based preparations (LBPs), sputum cytology, fine-needle aspirations)
laboratories as well as laboratories that perform hematology, gastroenterology,
urology, cytogenetic, histology and related cytological and histological
interpretations for the screening, diagnosis and reporting of cell-based
samples, and for professional education and training. The AcCell 3000 provides
this support through a set of user-oriented hardware and software tools
integrated within a compact, reliable and easy-to-use package. The AcCell 3000
microscope automates the microscopy process while improving process control. It
features a highly ergonomic user interface, a multi-user relational database and
an interface to laboratory information systems (LIS) to improve the speed,
accuracy and reliability of the sample evaluation process while reducing the
physical strain that microscopists face in a clinical production environment.
The instrument is capable of supporting multilingual operations. This
computer-aided microscopy workstation can be operated as a stand-alone device,
in a stand-alone network of other AcCell workstations within a cytology or
anatomic pathology laboratory, or as a network of AcCell workstations interfaced
to an LIS through an AcCell file server. The AcCell 3000 computer-aided
microscopy products can also work in conjunction with the other System 3000
products under development (e.g., AccuTech-based versions of the FDA-cleared
TracCell Slide Mapping Systems and AcCell-Savant Quantitative Microscopy
Systems) that offer additional information from computer-aided sample analyses
through the use of both interactive and fully automated electronic imaging
systems.


                                       14
<PAGE>   15

               Features and benefits of the AcCell 3000 Review Station include
the following:

               -      Small footprint and compact
               -      Enhanced user productivity
               -      Optimized slide throughput
               -      Data Management System
               -      Customizable
               -      User options protected
               -      Excellent optical imaging
               -      Coupled to Analyzer
               -      Enables "PreView" of images of abnormal cells received
                      from Analyzer
               -      AccuTech inside (i.e., "Savant powered")


               COGNETIX ANALYZER

               The AccuTech microscope frame is the core module not only within
the AcCell 3000 Review Station, but also in the instrument designed to handle
semi-automated or full automation with the capability of operating 24 hours/day,
7 days/week. That instrument is the Cognetix Analyzer.

               The Cognetix Analyzer is assembled from modular components that
enables it to be easily and rapidly customized to specific clinical assays based
upon microscope slide-based samples. Such sample may be either cellular or
histological.

               Feature and benefits of the Cognetix Analyzer include the
following:

               -      MAC detection and tunable to a variety of probes
               -      Labor savings and walk-away automation
               -      Continuous and high-speed operations
               -      Image acquisition & sample classification software with
                      classifiers
               -      Sample tracking
               -      Stable & reliable in field use with precision mechanics
                      and focusing
               -      Environment-tolerant
               -      Photonic sensors
               -      Configurable, scalable, and easy to use
               -      Link to Review Station facilitates sending Dx images to
                      Review Station
               -      Built-in QC and QA
               -      AccuTech inside (i.e., "Savant powered")

                                       15
<PAGE>   16


SUPPLIES

               Supplies for AccuMed products include calibration slides, dotter
tape cartridges, and DNA stain kits (i.e., microscope slides and reagents for
DNA cytophotometry using the AcCell-Savant).


INTELLECTUAL PROPERTY

               AccuMed has a strong intellectual property patent portfolio and
core expertise (i.e., scientific and technical know-how) in computer-aided
(AcCell, TracCell) and quantitative (Savant) optical microscopy; automated
electronic imaging and screening systems; cytochemistry and histochemistry (DNA
stains); analytical instruments and algorithms for cell and tissue image
analysis; methods to measure intracellular malignancy associated changes (MAC);
and medical devices and diagnosis systems.



               APPROACH TO PROPRIETARY TECHNOLOGY

               AccuMed aggressively develops its patent portfolio to establish
value for its investors in areas of its core technologies, such as
computer-aided microscopy. Furthermore, AccuMed pursues patent protection in
disabling and competitive technologies if inventions occur which can protect key
markets for AccuMed. Patents, trade secrets, and copyrights are used by AccuMed
to protect its proprietary technology.


3.             SALES AND MARKETING

               Typically, AccuMed's products are not currently sold to
laboratory end-users unaffiliated with AccuMed. Rather, AccuMed has four classes
of customers. Quadrant I customers are beta-site customers who are used to
provide marketing feedback to AccuMed regarding product design, performance and
preferred enhancements. AccuMed remains confident that its core computer-aided
microscope platform, the AcCell workstation, continues to provide a unique
approach to improving cytology processes even in the conventional Pap test
laboratories. Nevertheless, regardless of the merits of the originally targeted
market, the AcCell workstation is the workhorse platform embedded in all other
products by AccuMed, including the AcCell-Savant research systems, and the
integral review station component of the automated early lung cancer screening
systems, among others.

               Quandrant II customers are research and development scientists
and clinicians who execute a commercialization agreement with AccuMed. Quadrant
II creates a product pipeline for AccuMed through a virtual R&D organization
that frees AccuMed from the direct expense of funding R&D for new applications
development. This extramural R&D program is designed for leading researchers
actively developing new clinical applications with commercial potential. These
physicians, scientists and engineers are conducting funded research using
cytometry and histometry at teaching hospitals, universities and research
institutes. Benefits to participating researchers include:



                                       16
<PAGE>   17


                -       Discounted purchases of AcCell-Savant/ research and
                        other R&D products
                -       Royalty-based revenue stream from AccuMed commercialized
                        products
                -       Access to powerful and proprietary development tools
                -       Ongoing technical support, services and updates
                -       Access to advanced training and collaborations
                -       Potential to participate in new product beta-tests and
                        clinical trials
                -       Participation in joint development projects
                -       Expedited commercialization of new clinical assays
                -       Support for patents and other intellectual property
                        protection

               To date this AccuMed program has been successful with sites in
Japan and Australia selecting AccuMed as their sole source for the
commercialization of clinical tests involving cytology, histology, cytometry and
histometry.

               Quadrant III customers are the primary business opportunity for
AccuMed. This is the area in which AccuMed believes that significant and
multiple business opportunities exist today, and that these opportunities are
reliant upon the core existing technologies of AccuMed. The recent announcement
of the R&D and analytical instrument sales agreement with Ventana Medical
Systems is an excellent example of a Quadrant III opportunity. Other examples
include announced or to-be-completed and announced licensing, R&D and product
supply agreements in the fields of early lung cancer detection and follow-up as
well as in the fields identified earlier in this Marketing and Products section.
Typically, with Quadrant III customers, AccuMed seeks a combination of (a)
license fees, (b) R&D contracts, (c) use-based royalty stream, (d) product
supply contracts, and (e) equity participating in the Licensee's business.

               Quadrant IV customers are typically businesses in which AccuMed
can either license its technology into a field-of-use that is remote from
AccuMed's primary fields-of-interest in business development, or in which
AccuMed can provide the customer with product on an OEM basis. This "technology
transfer" market opportunity has already generated revenues for AccuMed in the
area of point-of-care diagnostic systems.


COMPETITION

               AccuMed believes that its cytopathology products must compete on
the basis of functionality, product features and effectiveness of the product in
standard medical practice, although price is also an important competitive
factor.

               AccuMed's cytopathology products will face competition from
companies that have developed or may be developing competing or alternative
systems. AccuMed's existing and potential competitors possess substantially
greater financial, marketing, sales, distribution and technical resources than


                                       17
<PAGE>   18

AccuMed, and more experience in research and development, clinical trials,
regulatory matters, manufacturing and marketing.


OPERATIONS

               AccuMed assembles and tests its cytopathology products at its
Chicago facility. AccuMed purchased and modified the stage-control mouse for use
with the AcCell(TM) 2000 series workstations but is currently developing a
proprietary and patented stage-control mouse. Currently, AccuMed is not
manufacturing product though it assembles and tests manufactured subassemblies.
AccuMed anticipates future AcCell(TM) production will be done on a contract
basis in the latter half of 2000, based on customer order backlog.


GOVERNMENTAL REGULATION

               AccuMed's products and manufacturing processes are regulated by
state and federal authorities, including the FDA and comparable authorities in
certain states and other countries.

               The Federal Food, Drug and Cosmetic Act (the "FDA Act")
regulations provide that many of AccuMed's products may not be shipped in
interstate commerce without prior authorization from the FDA. Such authorization
is based on a review by the FDA of the product's safety and efficacy as
indicated for its intended uses. Medical devices may be authorized by the FDA
for marketing in the United States either pursuant to a 510(k) Pre-market
Notification or a Pre-marketing Approval ("PMA"). The process of obtaining FDA
marketing clearance and other applicable regulatory authorities may be costly.
Some FDA 510(k) Notification applications and PMA's require preliminary internal
studies, field studies and/or clinical trials in addition to an FDA submission
to attain market clearance (the 510(k) process or market approval (the PMA
process)).

               A 510(k) Notification, among other things, requires an applicant
to show that its products are "substantially equivalent" in terms of safety and
effectiveness to an existing FDA cleared predicate product. An applicant may
only market a product submitted through the 510(k) Notification at such time as
the FDA issues a written clearance determining that the product has been found
to be substantially equivalent.

               A PMA is the FDA submission process where the product must
demonstrate, independently of other like devices, that it is safe and effective
for its indications for intended use. A PMA must be supported by extensive data,
including preclinical and clinical trial data, as well as extensive literature
to prove the safety and effectiveness of the device. The approval process
usually takes substantially longer. During the review period, the FDA may
conduct extensive reviews of AccuMed's facilities, deliver multiple requests for
additional information and clarifications and convene advisory panels to assist
in its determination.

               FDA enforcement policy strictly prohibits the promotion of
learned or approved medical devices for non-approved or "off-label" uses. In


                                       18
<PAGE>   19

addition, product clearances or approvals may be withdrawn for failure to comply
with regulatory standards.

               Marketing in the United States of AccuMed's products under
development may require additional FDA clearances. The FDA Act and other
statutes and regulations, including various state statutes and regulations,
govern the marketing, advertising and promotion of AccuMed's products. Failure
to comply with applicable requirements can result in fines, recall or seizure of
products, total or partial suspension of production, withdrawal of existing
product approvals or clearances, refusal to approve or clear new applications or
notices and criminal prosecution.

               Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain clearance by a foreign country may be longer or shorter than
that required for FDA clearance, and the requirements may differ. Export sales
of certain devices that have not received FDA marketing clearance generally are
subject to both FDA Certificate for Foreign Governments and, in some cases,
general U.S. export regulations. In order to obtain a FDA export permit, AccuMed
may be required to provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located.

               AccuMed has secured "CE" mark for the AcCell(TM) 2000 series and
is seeking the mark for its proposed products. The CE mark is recognized by
countries that are members of the European Free Trade Association and will be
required to be affixed to all medical devices sold in the European Union.


RAW MATERIALS AND COMPONENTS

               Certain key components and raw materials used in assembling
AccuMed's products are currently provided by single-source vendors. Although
AccuMed believes that alternative sources for such components and raw materials
are available, any supply interruption in a single-sourced component or raw
material would have a material adverse effect on AccuMed's ability to
manufacture products until a new source of supply were qualified.


RESEARCH AND DEVELOPMENT

               AccuMed's research and development efforts are focused on
introducing new cytopathology products as well as enhancing its existing
products to address unmet needs within the diagnostic cytopathology market.
AccuMed believes that a commitment to research and development is critical to
its ability to achieve its goals. During the fiscal years ended December 31,
1999, 1998, and 1997 expenditures for research and development were
approximately $1,900,000, $2,600,000 and $4,000,000 respectively.

                                       19
<PAGE>   20

               AccuMed is currently developing the following products:

               ACCELL/SAVANT(TM) DNA IMAGE CYTOMETER

               This product ("AcCell-Savant") is an automated high-resolution
image cytometer (nuclear DNA analyzer) that processes Thionin-Feulgen stained
cytology specimens for DNA analysis. Designed for both the research and clinical
laboratory markets, this product line offers a unique combination of features
and benefits including: (a) highly accurate, reliable, and reproducible system
operation, (b) easy-to-use, rapid, and well documented instrument operation, (c)
optimized accompanying specimen preparation/staining kits, (d) full
automation---"load and walk-away" operation, (e) multi-slide cassette with
random-access robotic slide handling, (f) high-resolution images with square
pixels and large field-of-view, (g) stable, reliable, DNA specific
Thionin-Feulgen stain, (h) suitable for many applications including ploidy, MAC,
general cellular research, (i) ability to process conventional smears and
monolayer preparations, (j) automated focus, (k) automated image segmentation,
(l) optional automated cell/object classifier based upon user-supplied and
defined training sets, (m) cell or object relocation and review capability in
microscope or on monitor, (n) normalization: 1-D and 2-D histograms, (o) ability
to normalize DNA histograms with internal and/or external references, (p)
ability to extract measurements by cell populations or by individual
cells/objects, (q) statistical analyses of measured data sets with graphical
output displays, (r) display capabilities include cell image gallery displays,
(s) Report generator, (t) option for networked review microscopes to increase
productivity, and (u) data export routines to interface to third-party
applications such as multivariate statistical analyses packages.

               This product focuses on the clinical research and the clinical
laboratory market, for clinical applications of image cytometry technology.
Benefits of this product are anticipated to be:

               (1) High-quality instrumentation for automated and quantitative
analyses (e.g., assays that cannot be performed by human experts alone).

               (2) Optimized for clinical application in production laboratory
settings (e.g., high-volume tests).

               (3) Unattended slide handling; integrated with staining and cover
slipping systems; custom reports, interface with LIS.

               (4) Use of (e.g., integrated solutions) DNA/Fuelgen stain kits,
calibration slides and clinical laboratory protocols.

               AccuMed estimates that there are approximately 600 images
processing and analysis systems installed worldwide for research purposes and
additional 600 clinical systems. Because of uncertainty of current market
provider commitment, AccuMed believes there is an opportunity for a competitive
image analysis system. The size of this worldwide market is estimated to be over
1200 units at a cost of $100,000 per unit. Consumables such as staining kits
used in conjunction with the DNAnalyzer would represent a potentially high
margin continuing revenue stream.


                                       20
<PAGE>   21

               AccuMed believes various factors will influence market demand for
this product within the domestic healthcare marketplace.

               The pressure for cost containment drives the need for tools that
streamline aspects of the operational process. This product offers a
user-friendly, general-purpose image analysis that operates on the AcCell(TM)
technology platform, designed for clinical laboratory use.

               Also, competitive image analysis systems currently serving this
market have been designed largely for the research market, but the level of
customer support necessary to accommodate the clinical laboratory market is not
readily available. AccuMed intends to offer strong field service and support
along with this product.

               Lastly, the consolidation of the healthcare industry drives the
need to integrate various functions within the clinical laboratory. This product
is part of an integrated family of tools that support a wide variety of
functions within the clinical laboratory.


               LUNG SPUTUM TESTING USING THE ACCELL-SAVANT

               AccuMed believes current screening methods for the detection of
early lung cancer are impractical and ineffective, creating clear need for a
simple, cost effective, and reliable test for screening high-risk populations
for lung cancer. AccuMed is developing its Savant technologies to meet this
need. The Savant technology is similar to the screening done for cervical
cancer, where the death rate due to cervical cancer has been reduced by 5 to 10
times during the past 50 years as a results of Pap test screening.

               AccuMed's principal lung sputum analysis technology revolves
around the use of the AcCell-Savant to screen high-risk individuals for lung
cancer. The objective is to identify patients who have lung cancer at an early
more curable stage. AccuMed believes that patients detected with lung cancer at
an early stage have up to a six times better chance of survival.

               The Savant medical technologies can detect the presence of early
lung cancer from sputum on a microscope slide by measuring subtle changes in the
DNA of cell nuclei ("MAC's" or "malignancy associated changes"). These subtle
changes are measured using: The AcCell-Savant, an automated high-resolution
image cytometer; and the DNA staining kit, a quantitative and proprietary method
of reagents for staining DNA.

               Feasibility tests have shown that this technology successfully
detected early lung cancer in over 80% of the samples and has the ability to
detect lung cancer up to two years before it can be detected by existing
conventional sputum tests or chest x-rays.

               Successful commercialization of the lung sputum screening test in
the United States and other countries will depend on the availability of
reimbursement from third-party payors such as private insurers and managed care
organizations. Because the up-front, direct costs of using AccuMed's products
will result in an overall lower healthcare costs, AccuMed believes it

                                       21
<PAGE>   22

can convince third-party payors that the overall cost savings to the healthcare
system, resulting from earlier detection for lung cancer, will more than offset
the cost of AccuMed's products. AccuMed intends to focus on obtaining coverage
and reimbursement from major national and regional managed care organizations
and insurance carriers throughout the United States. Most third-party payor
organizations independently evaluate new diagnostic procedures by reviewing the
published literature and the Medicare coverage and reimbursement policy on the
specific diagnostic procedure. To assist third-party payors in their respective
evaluations, AccuMed intends to provide scientific and clinical data to support
its claims of the safety and efficacy of AccuMed's product lines.

               AccuMed believes the AcCell-Savant platform can be applied
effectively for tissue sites other than for lung tissue. In particular, the
AcCell-Savant, with its MAC's capabilities, has the ability to not only detect
early stage cervical cancer in an automated manner, but it has the potential
ability to determine whether pre-cancerous cells will develop into cancer or
not.


INTELLECTUAL PROPERTY

               AccuMed relies on a combination of patents, licensing
arrangements, trade names, trademarks, copyrights, trade secrets, know-how and
proprietary technology as well as policies and procedures for maintaining the
secrecy of trade secrets, know-how and proprietary technology in order to secure
and protect its intellectual property rights. Three of AccuMed's patent
applications related to AcCell(TM) technology have been granted in the United
States as of the date of this report. Two additional AcCell-related patent
applications have been allowed in the U.S. and several other applications remain
pending (10) or are in development. AccuMed has twelve additional pending patent
applications covering certain aspects of its TracCell(TM)-based cytopathology
technology and products. AccuMed is also developing products (e.g.,
AcCell-Savant) that relies upon or utilizes the intellectual property of its
wholly owed subsidiary, Oncometrics. Oncometrics has five issued patents, two
allowed patents, and twelve pending patents in related technologies.
Additionally, AccuMed sold six microbiology-related U.S. patents with the
divestiture of that business.

                AccuMed is continuing to prepare additional patent applications.
Since patent applications in the United States are maintained in secrecy until
patents issue, and since publications of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months, AccuMed
cannot be certain that AccuMed or other relevant patent application filer was
the first creator of inventions covered by pending patent applications or that
such persons were the first to file patent applications for such inventions.
Protections relating to portions of such technologies may be challenged or
circumvented by competitors, and other portions may be in the public domain or
protectable only under state trade secret laws.

               AccuMed owns or has guaranteed trademark applications for
"SpeciFind", "TracCell", "MacCell", "AcCell-Savant", "Improving Cytology
Processes", and is currently preparing and may file additional U.S. and foreign
trademark applications in the future.

                                       22
<PAGE>   23

        (e)   Available Information.

        We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy the documents we have
filed at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information about
the Public Reference Room. Our SEC filings are also available to the public at
the SEC's Internet site found at "http://www.sec.gov." You can also inspect our
SEC filings at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.

        AccuMed's Internet website is "http://www.accumed.com".


EMPLOYEES

               At March 27, 2000, AccuMed employed 10 full-time employees. None
of AccuMed's employees are represented by a labor union. AccuMed considers its
relations with its employees to be good.


ITEM 2. PROPERTY

               AccuMed currently leases a 10,062 square foot facility at 920
North Franklin Street, Chicago, Illinois, pursuant to a lease expiring September
30, 2004.


ITEM 3. LEGAL PROCEEDINGS

               AccuMed is not currently a party to any material litigation and
is not aware of any pending or threatened litigation against AccuMed that could
have a material adverse effect upon AccuMed's business, operating results or
financial condition.


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

               No matters were submitted to a vote of security holders during
the quarter ended December 31, 1999.


ADDITIONAL ITEM:    EXECUTIVE OFFICERS OF THE REGISTRANT

               The following table lists the names, ages and positions of all of
our executive officers. Officers are elected annually by the board of directors
at the first meeting of the board following the annual meeting of stockholders.

                                       23
<PAGE>   24


<TABLE>
<CAPTION>

              NAME                   AGE                  POSITION

<S>                                  <C>   <C>
Paul F. Lavallee                     60    Chairman of the Board and Chief
                                           Executive Officer
Norman J. Pressman, Ph.D.            52    President and Chief Scientific Officer
</TABLE>

               PAUL F. LAVALLEE. Mr. Lavallee has been a director of AccuMed
since December 1995 and was elected Chairman, Chief Executive Officer and
President by the Board of Directors on January 30, 1998. He relinquished the
title of President in March 1999. Since January 1996, Mr. Lavallee has been a
healthcare consultant to the Venture Capital industry and has served as Chairman
of the Board for two start-up companies. From 1989 until December 1995, Mr.
Lavallee served as Chairman, President and Chief Executive Officer of Sigmedics,
Inc. Mr. Lavallee has a B.S. degree in biology from Bates College and a M.B.A.
degree from the University of Chicago.

               NORMAN J. PRESSMAN, Ph.D. Dr. Pressman was named President in
March 1999 and continues to serve as Chief Scientific Officer. In 1998, Dr.
Pressman was appointed Chairman of the Board of Oncometrics Imaging, Corp., a
subsidiary of AccuMed International. He served as a Senior Vice President of
AccuMed and President of AccuMed's Cytopathology Division from July 1996 to May
1997 when he became Senior Vice President for Research and Development and Chief
Scientific Officer. From July 1993 until joining AccuMed, Dr. Pressman was
Manager of Biotechnology Development, Strategic Business Development Group of
Olympus America. Between July and September 1989, Dr. Pressman was engaged in
the formation of Cell Systems International, Inc., a consulting firm in
biomedical specimen collection, processing and analysis, of which he served as
President from September 1989 until July 1993. Dr. Pressman was the lead
research scientist in the Cytometry and Histometry program of the Central
Research and Development Department at E.I. du Pont de Nemours & Company from
December 1986 until July 1989. From September 1976 until December 1986, he was
as Assistant Professor (Pathology and Engineering) at The Johns Hopkins
University School of Medicine and Head of the Quantitative Cytopathology
Laboratories at The Johns Hopkins Medical Institutions. Dr. Pressman has a B.S.
degree in electrical engineering from Columbia University, a M.S. degree in
systems engineering and a Ph.D. in biomedical engineering from the University of
Pennsylvania.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

               Our common stock is quoted on the Nasdaq SmallCap Market and is
currently under the symbol "ACMI". The table below sets forth, for the periods
indicated, the range of high and low sales prices for the common stock during
the periods specified.

1998 FISCAL YEAR                    High           Low
                                    ----           ---
        First Quarter              13.88           3.75
        Second Quarter              8.63           1.31
        Third Quarter               2.06           0.56
        Fourth Quarter              2.75           0.31

                                       24
<PAGE>   25


1999 FISCAL YEAR                    High           Low
                                    ----           ---
        First Quarter               1.91           0.59
        Second Quarter              1.31           0.72
        Third Quarter               1.22           0.47
        Fourth Quarter              4.00           0.56

               As of March 27, 2000, AccuMed had approximately 178 record
holders of common stock. As of March 27, 2000, AccuMed estimates that there are
approximately 3,325 beneficial holders of Common Stock, based on preliminary
results of the broker search for conducted in January 2000.

               AccuMed has never paid dividends on its common stock and does not
intend to pay cash dividends for the foreseeable future.


ITEM 6. SELECTED FINANCIAL DATA

               On January 29, 1999, AccuMed closed the sale of its microbiology
business. Prior to December 29, 1995, AccuMed's only operations were related to
the microbiology business. The income statement and balance sheet data presented
below reflects the microbiology business as a discontinued operation. See Note 1
in the accompanying Financial Statements starting on page F-1.

<TABLE>
<CAPTION>


                                                  FISCAL YEARS ENDED DECEMBER 31, (1)
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
                               -------------------------------------------------------------------------
                                  1999            1998            1997            1996            1995
                               ---------       ---------       ---------       ---------       ---------
<S>                            <C>             <C>             <C>             <C>             <C>
Income Statement Data:
Net sales                      $     136       $     327       $   1,001       $   1,412       $      --
Gross profit (loss)               (1,146)           (529)           (556)             19              --
Operating loss                    (6,446)         (9,796)        (15,800)        (13,387)             --
Interest expense                     501           1,411           3,569             458              --
Loss from continuing
  operations before
  income taxes                    (6,803)        (10,360)        (18,858)        (10,904)             --


Income taxes                          --              --              --              --              --
Loss from continuing
  operations                      (6,803)        (10,360)        (18,858)        (10,904)             --

Income (loss) from
  Discontinued
  Operations                       8,199           3,351           1,939            (670)         (3,759)

Net income (loss)                  1,396          (8,170)        (16,919)        (11,574)         (3,759)

Per Share Data:

Basic loss from
  continuing operations        ($   1.24)      ($   2.04)      ($   5.13)      ($   3.85)             --

Income (loss) from
  discontinued operations           1.49            0.66            0.53           (0.24)          (3.54)

Extraordinary loss                    --           (0.23)             --              --              --
Basic net income (loss)        $    0.25       ($   1.61)      ($   4.60)      ($   4.09)      ($   3.54)
</TABLE>



                                       25
<PAGE>   26

<TABLE>
<CAPTION>


<S>                            <C>           <C>            <C>            <C>           <C>
Weighted average
  shares outstanding
  (000's)                         5,491         5,080          3,675          2,829         1,063
Balance Sheet Data:
Working capital (deficit)      $     39      ($ 1,393)      ($ 1,600)      $  2,150            --


Total assets                      7,222        13,448         16,085         13,444         1,098
Long-term debt                      167         5,782         11,455            231            --
Stockholders' equity              5,668         4,223            733         10,136         1,098
</TABLE>

    (1)        AccuMed changed from a September 30 fiscal year end to a December
               31 fiscal year end effective in 1995. The fiscal year 1995
               amounts are for the September 30 year-end. For the three months
               ended December 31, 1995, AccuMed's net loss was $5,742,000, or
               $2.94 per share.


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

GENERAL

               During 1998, AccuMed received stockholder approval to sell its
microbiology business. Accordingly, the results of the microbiology business are
reported as a discontinued operation in the accompanying financial statements.
On January 29, 1999, AccuMed closed the sale of the microbiology business for
net proceeds of $14,400,000.

               The following management discussion and analysis of financial
condition and results of operations relate only to the cytopathology business,
AccuMed's only business line. Also, AccuMed is committed to a substantial
research and development program. Accordingly, AccuMed expects to incur
additional operating losses over at least the next 12 months due to continued
spending for product development, prototype construction and testing and
regulatory activities. AccuMed anticipates it will offset some of these expenses
through contract research with licenses of our intellectual property.


OVERVIEW

               AccuMed is engaged in the marketing and development of cost
effective screening instruments and systems for clinical diagnostic
laboratories, hospitals and others. Our integrated systems use reliable,
accurate and innovative products and methods to provide laboratories with
comprehensive solutions that are intended to improve efficiency and reduce costs
while achieving significant improvements in disease detection. AccuMed currently
is developing cytology computer-aided image cytometry instruments and systems
that support early detection and diagnosis programs for screening high-risk
individuals for cellular diseases, such as lung cancer.

               On March 29, 2000, the Company entered into a patent and
technology license agreement with BCAM International, Inc. ("BCAM"), whereby the
Company agreed to license its patents and proprietary information and rights to
BCAM for

                                       26
<PAGE>   27

certain medical applications. Under the terms of the agreement, the Company will
receive guaranteed license fees over the next nine months, shares of BCAM common
stock, and royalties to be received in the future on the sale of covered
products by BCAM.

               On March 24, 2000, AccuMed entered into a license and development
agreement with Ventana Medical Systems, Inc., whereby we agreed to license our
patents and proprietary information and rights to Ventana for certain medical
applications. Under the terms of the agreement, we have received an up-front
licensing fee, advanced royalty payment and, development funds, paid
immediately. Additional funds will be received over the next twelve months for
contract research and purchase of AcCell Systems, and royalties to be received
in the future on the sale of covered products by Ventana.

               On February 28, 2000, Microsulis Corporation chose not to extend
the time limit to complete its intended merger with AccuMed. On November 16,
1999, we entered into a merger agreement with Microsulis, whereby Microsulis
would have been merged into AccuMed.

               On December 29, 1995, AccuMed acquired all of the common stock of
AccuMed, Inc. and its wholly owned subsidiary. Pursuant to the terms of a merger
agreement, 313,652 shares of common stock and 21,158 warrants were issued to
AccuMed, Inc. stockholders and warrantholders, respectively, which were
contingent and subject to forfeiture if specified performance goals were not
achieved by AccuMed. The contingency associated with 156,826 shares of common
stock and 10,579 warrants was resolved (performance goal achieved) in March 1996
resulting in contingent consideration of $5,430,326. Such amount has been
allocated to identifiable intangibles of acquired proprietary technology
($1,930,599) and in process research and development ($3,499,727). The acquired
proprietary technology is being amortized over the expected period to be
benefited of ten years, with the in-process research and development charged to
operations during the year ended December 31, 1996.

               The contingency associated with the remaining 156,826 shares of
common stock and 10,579 warrants was resolved (performance goal achieved) in
March 1997, resulting in contingent consideration of $3,582,068. Such amount has
been recorded as goodwill associated with the merger and charged off in its
entirety to operations during the year ended December 31, 1997 as an impaired
asset.

               On October 15, 1996, AccuMed acquired a two-thirds interest in
Oncometrics Imaging Corp. Oncometrics was formed in 1995 to complete the
development of an automated instrument designed to be used in the detection,
diagnosis and prognosis of early-stage cancer by measuring the DNA in cells on
microscope slides. In June 1998, AccuMed acquired the final one-third of
Oncometrics stock it did not own for $685,000.

                                       27
<PAGE>   28



RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

               REVENUES AND GROSS MARGINS

               AccuMed's sales revenues were $136,000 for the year ended
December 31, 1999 compared to $327,000 for the year ended December 31, 1998, a
decrease of $191,000. The decrease in sales reflects a decline in the number of
units of AccuMed's AcCellTM products sold. Cost of sales for the year ended
December 31, 1999 includes a fourth quarter non-cash charge of $1,106,000 to
write-down inventories to net realizable value. In October 1998, we ceased our
manufacturing operations to eliminate the associated indirect overhead costs and
anticipate our future product sales will be made on a build to order or contract
manufacturing basis. Cost of sales for the year ended December 31, 1998 also
includes non-capitalizable overhead costs and costs associated with suspending
the manufacturing operations.


               OPERATING EXPENSES

               General and administrative expenses decreased by $2,161,000, or
40.1%, from $5,308,000 in 1998 to $3,147,000 in 1999. The decrease in these
expenses is a result of reduced corporate level activity, including a reduction
in personnel due to the sale of the microbiology business and less
administrative cost due to the consolidation of AccuMed's cytopathology
operations.

               Research and development expenses decreased by $700,000, or
27.2%, from $2,570,000 in 1998 to $1,870,000 in 1999. The decrease in these
expenses reflects a reduction in personnel and activity levels associated with
our ongoing efforts to develop next generation products associated with the
Savant medical technologies. Expenses in 1998 represent costs associated with
the AcCell 2000 and TracCell slide mapping systems, which were completed in
August 1998.

              Sales and marketing expenses decreased by $1,107,000, or 80.0%,
from $1,389,000 in 1998 to $282,000 in 1999. This decrease is a result of a
reduction in our marketing personnel beginning in October 1998. AccuMed
continues to market its AcCell-Savant directly to research facilities.

               For the year ended December 31, 1999, an asset impairment loss of
$137,000 was recorded for the write-down of certain leasehold improvements. The
impairment loss is a result of our consolidation of facilities and
re-negotiation of leasing arrangements in February 2000.


               OTHER INCOME AND EXPENSE

Interest expense for the year ended December 31, 1999 was $501,000 compared to
$1,411,000 for 1998. The decline in interest expense is a result of the
repayment in January 1999 of AccuMed's 14.5% secured note payable and our 12.0%
unsecured convertible notes with proceeds received from our sale of its
microbiology division. Interest expense in 1999 also includes $370,000

                                       28
<PAGE>   29

from a non-cash write-off of deferred financing costs and debt discounts related
to the repayment of these notes.

               Other income for the year ended December 31, 1999 was $145,000
compared to $848,000 for 1998. The decrease in other income is a result of a
reduction in licensing fee income and a reduction in invested cash on hand,
which had been available from proceeds received in a private placement in March
1998.


               DISCONTINUED OPERATIONS

               AccuMed's loss of $158,000 in 1999 and income of $3,351,000 in
1998 from discontinued operations reflects the results of operations of
AccuMed's microbiology business before is sale in January 1999. In 1999, we
recorded a gain of $8,199,000, net of income taxes of $140,000, on the disposal
of the microbiology business.


               EXTRAORDINARY LOSS

               For the year ended December 31, 1998, AccuMed incurred a
$1,168,000 extraordinary loss related to the conversion of $5,275,000 in par
value of convertible notes and $329,000 in accrued interest thereon into
1,245,340 shares of series A convertible preferred stock. Of the total expense,
$193,000 represented cash fees and expenses. As a result of this exchange of
convertible notes for convertible preferred stock, AccuMed's net tangible assets
increased by about $4,700,000 and our interest expense was reduced by about
$633,000 through January 1999. At the conclusion of the sale of the microbiology
business in January 1999 the remaining notes were paid off using a portion of
the proceeds from that sale.


YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

               REVENUES AND GROSS MARGINS

               Fiscal 1998 revenues reflect the initial sale of the
AcCell-Savant(R) Research System for clinical DNA Analyzer to a medical research
facility. The 1998 gross loss on sales reflects non-capitalizable manufacturing
cost and costs associated with suspending manufacturing operations.


               OPERATING EXPENSES

               General and administrative expenses decreased $890,000 to
$5,309,000 in 1998 from $6,199,000 in 1997. This decrease is due primarily to
the reduction in the number of management and administrative personnel necessary
to support a reduced level of activity and a reduction in professional fees.

               Research and development expenses decreased $1,465,000 to
$2,570,000 in 1998 from $4,035,000 in 1997. The decrease is due to costs

                                       29
<PAGE>   30


associated with AccuMed's 510(K) clearance received from the U.S. Food and Drug
Administration in August 1997, and a reduction in personnel to focus on our next
generation product.

               Sales and marketing expenses decreased by $39,000 to $1,389,000
in 1998 compared to $1,428,000 1997. These expenses remained relatively flat in
1998 as a result of growth of staff and development of the initial marketing
program for AccuMed's AcCell product line, which occurred in the first three
quarters of 1998. AccuMed reduced sales efforts in the fourth quarter of 1998 to
obtain additional documentation of the quantitative benefits of its products.


               OTHER INCOME AND EXPENSE

               Interest expense for the year ended December 31, 1998 was
$1,411,000 compared to $3,568,000 for 1997. The decrease reflects reduced debt
levels as a result of the conversion of $5.2 million in 12% convertible notes
into Series A preferred stock in February 1998. Also, in 1997 AccuMed had a
write-off of $1.9 million related to an "in the money" conversion feature of its
12% convertible notes.

               Other income increased to $848,000 in 1998 from $511,000 in 1997.
This increase reflects licensing fee income of approximately $500,000 and
interest income earned from cash received in the private placement in March
1998.


               DISCONTINUED OPERATIONS

               Discontinued operations reflect the operating results of
AccuMed's microbiology business, which was disposed of in January 1999.


LIQUIDITY AND CAPITAL RESOURCES

               AccuMed's primary cash requirements are for research and
development, general corporate and marketing expenses, which include salaries,
materials and consulting support, to develop and market our cytopathology
products and technology. We anticipate that the receipt of the license fees and
development funds under our license, product sales, and development agreement
with Ventana, our available cash and marketable securities on hand, and
collection of the line of credit with Microsulis Corporation will provide the
necessary liquidity to finance our projected operations and financing
obligations through the next twelve months.

               At December 31, 1999, AccuMed's non-current assets include
purchased technology of $ 4,186,000, which is being amortized over a period of
ten years, and patents of $842,000, which are being amortized over the useful
lives of the patents, generally 17 years. The purchased technology was
originally recorded in connection with the merger of AccuMed Inc. in 1995 and
purchase of Oncometrics Imaging Corp. in 1996 and 1998. The carrying value of
these assets is expected to be realized from our licensing to others, such as

                                       30
<PAGE>   31

Ventana, and our application in AccuMed's AcCell/Savant(R) Research Systems and
AcCell/Savant(R) DNA Image Cytometer.

               At December 31, 1999, AccuMed has long-term debt, including the
current portion, of $530,000. The long-term debt consists of a $500,000 Canadian
dollar note and a non-interest bearing repayable contribution of $187,000. The
Canadian dollar note is payable in monthly installments of $25,000 US dollars,
plus interest at a rate of 6.0% over the Canadian prime rate, beginning March
15, 2000 through July 15, 2000, with the remainder due on demand. The demand
portion of the Canadian note is convertible into shares of AccuMed's common
stock at a price of $1.43 per share. The repayable contribution was received
under a Canadian government program and calls for semi-annual installments based
on a percentage of future sales of product and net working capital.

               AccuMed's equity at December 31, 1999 was $5,668,000, of which
$8,199,000 was recorded in January 1999 from the gain on the sale of our
microbiology business.


               OPERATING ACTIVITIES

               Cash used in operating activities decreased to $5,273,000 in 1999
from $10,418,000 in 1998 and $12,352,000 in 1997. The decrease in cash used in
operating activities primarily reflects AccuMed's reduced operating costs during
these periods. The use of cash in operating activities reflects AccuMed's
ongoing efforts to develop our next generation product, which we believe will
have applications for early lung cancer testing. In addition, over $1,000,000 of
cash was used during 1999 to reduce vendor financing carried over from the third
and fourth quarters of 1998.


               INVESTING ACTIVITIES

               For the year ended December 31, 1999, investing activities
generated $13,976,000 in cash compared to the use of cash of $500,000 in 1998
and $7,290,000 in 1997. In 1999, AccuMed received $14,400,000 in proceeds, net
of expenses incurred, from the sale of AccuMed's microbiology business and
funded $400,000 under a line of credit arrangement to Microsulis Corporation,
which is expected to be re-paid in the second quarter of 2000. In 1998 and 1997,
we used $343,000 and $6,000,000, respectively, of cash to acquire the stock of
our Oncometrics subsidiary. Capital expenditures declined to $24,000 in 1999
from $157,000 in 1998 and $1,208,000 in 1997. The decline in capital
expenditures reflects the start-up of manufacturing activities and purchases of
equipment for sales and marketing and research and development activities in
1997 and subsequent reduction in these activities in 1998 and 1999. AccuMed does
not anticipate material capital expenditures during 2000.


               FINANCING ACTIVITIES

For the year ended December 31, 1999, AccuMed used $8,498,000 in cash in
financing activities compared to $4,943,000 and $12,670,000 provided by
financing activities in 1998 and 1997, respectively. In January 1999, we



                                       31
<PAGE>   32

repaid all of our outstanding 14.5% secured notes and 12% unsecured convertible
notes with proceeds from the sale of its microbiology business. In March 1998,
AccuMed received $4,852,000 in net proceeds from a private placement of its
common stock. During 1997, we received $12,151,000 in proceeds from long-term
debt, net of fees paid.

               AccuMed currently has no commitments with respect to sources of
additional financing other than with respect to funds to be received under the
license and development agreement with Ventana.

               AccuMed's future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of the our product
development and licensing efforts, the costs and timing of acceptance of
AccuMed's products, competing technological and market developments, the
progress of commercialization efforts of AccuMed and its distributors, the costs
involved in preparing, filing, prosecuting, maintaining, enforcing and defending
patent claims and other intellectual property rights, developments related to
regulatory and third-party reimbursement matters, and other factors.


IMPACT OF YEAR 2000

               We completed our Year 2000 readiness initiatives and did not
experience any significant problems. We do not anticipate any significant
adverse business effects related to this issue. AccuMed did not incur material
costs to dedicated solely to Year 2000 remediation.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The following financial statements are filed with this report as
pages F-1 through F-20 following the signature page:

               Independent Auditors' Report
               Consolidated Balance Sheets
               Consolidated Statements of Operations
               Consolidated Statements of Stockholders' Equity
               Consolidated Statements of Cash Flows
               Notes to Consolidated Financial Statements


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               Certain information relating to executive officers is included in
this report in the last section of Part I under the caption "Executive

                                       32
<PAGE>   33

Officers of the Registrant". Information relating to directors appearing under
the caption "Election of Directors" in the definitive proxy statement for the
2000 Annual Meeting of Stockholders to be filed with the SEC within 120 days
following AccuMed's last fiscal year end is hereby incorporated herein by
reference. Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 appearing under the caption "Compliance With
Reporting Requirements" in the definitive proxy statement for the 2000 Annual
Meeting of Stockholders to be filed with the SEC is within 120 days following
AccuMed's last fiscal year end is hereby incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

               The information contained under the caption "Executive
Compensation" contained in the definitive proxy statement for the 2000 Annual
Meeting of Stockholders to be filed with the SEC within 120 days following
AccuMed's last fiscal year end is hereby incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

               The information contained under the caption "Security Ownership
of Certain Beneficial Owners and Management" contained in the definitive proxy
statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC
within 120 days following AccuMed's last fiscal year end is hereby incorporated
herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information contained under the caption "Certain
Relationships and Related Transactions" contained in the definitive Proxy
statement for the 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following AccuMed's last fiscal year end is hereby
incorporated herein by reference.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

               (a) Financial Statements. The following financial statements are
        filed as part of this report as pages F-1 through F-20 following the
        signature page:

               Independent Auditors' Report
               Consolidated Balance Sheets
               Consolidated Statements of Operations
               Consolidated Statements of Stockholders' Equity
               Consolidated Statements of Cash Flows
               Notes to Consolidated Financial Statements

               (b) No reports on Form 8-K were filed during the three month
        period ended December 31, 1999.

                                       33
<PAGE>   34

               (c)    Exhibit Index


Exhibit
Number         Description of Exhibit
------         ----------------------

3.1     Bylaws of AccuMed. (1)

3.2     Amendment No. 1 to Bylaws of AccuMed. (19)

4.1     Certificate of Incorporation of AccuMed (1)

4.2     Certificate of Amendment to Certificate of Incorporation of AccuMed
        increasing authorized Common stock (14)

4.3     Certificate of Designation, Rights and Preferences of Series A
        Convertible Preferred Stock (15)

4.4     Certificate of Correction to Certificate of Designation, Rights and
        Preferences of Series A Convertible Preferred Stock (15)

4.5     Certificate of Amendment to Certificate of Incorporation of AccuMed
        effecting reverse stock split (21)

4.6     Specimen Certificate for Common stock (1)

4.7     Bylaws of AccuMed (1)

4.8     Amendment No. 1 to Bylaws of AccuMed (19)

4.9     Warrant Agreement dated as of February 23, 1998 between AccuMed and
        Commonwealth Associates, including form of Warrant Certificate attached
        as Exhibit A thereto, representing an aggregate of 1,245,340 (pre split)
        Common stock purchase Warrants issued to investors in a Note Exchange
        Offer. (15)

4.10    Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth
        Associates representing an aggregate of 350,000(pre split) Common stock
        purchase warrants issued to Commonwealth Associates and/or its designees
        in exchange for warrants issued thereto in connection with a Note
        Exchange Offer (19)

4.11    Form of Subscription Agreement and Registration Rights Agreement dated
        as of February 23, 1998 between AccuMed and each of the investors in a
        Note Exchange Offer (15)

4.12    Warrant Agreement dated as of March 19, 1998, as amended by Amendment
        No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth
        Associates pertaining to an aggregate of 8,686,667 (pre split) Common
        stock purchase Warrants issued to investors in a private placement. (19)


                                       34
<PAGE>   35


4.13    Form of Warrant Certificate representing an aggregate of 8,686,667 (pre
        split) Common stock purchase Warrants issued to investors in a private
        placement in March 1998 (19)

4.14    Form of Warrant to Purchase Common stock dated March 19, 1998 or March
        23, 1998, including form of Warrant Certificate attached as Exhibit A
        thereto, representing an aggregate of 1,337,333 (pre split) Common stock
        purchase Warrants issued to Commonwealth Associates, Bellingham Capital
        Industries, and Harold S. Blue and/or their respective designees in
        connection with a private placement. (19)

4.15    Form of Subscription Agreement and Registrant Rights Agreement dated
        March 19, 1998 or March 23, 1998 between AccuMed and each of the
        investors in a private placement (19)

4.16    Specimen stock certificate for Common stock. (1)

10.1    AccuMed's Board of Directors Compensation Plan as amended by Minutes of
        Board of Directors meeting dated January 18, 1996 authorizing grants of
        stock options to non-employee directors. (1)(4)

10.2    Employment Agreement between AccuMed and Norman J. Pressman dated June
        13, 1996 and Addendum to Employment Agreement between AccuMed and Norman
        J. Pressman dated July 16, 1996. (4)(5)

10.3    1995 Stock Option Plan. (1)(4)

10.4    Amendment No. 1 to AccuMed's 1995 Stock Option Plan.(4)(7)

10.5    Amendment No. 2 to the 1995 Stock Option Plan. (4)(16)

10.6    Amendment No. 3 to the 1995 Stock Option Plan. (4)(19)

10.7    Form of Non-Qualified Stock Option Agreement governing options granted
        to former employees of AccuMed, Inc. pursuant to the Agreement and Plan
        of Reorganization dated as of April 21, 1995, as amended. (1)(4)

10.8    Form of Non-Qualified Stock Option Agreement governing options granted
        to employees and consultants under the 1995 Stock Option Plan. (1)(4)

10.9    Form of Incentive Stock Option Agreement governing options granted to
        employees under the 1995 Stock Option Plan. (1)(4)

10.10   Amended and Restated 1990 Stock Option Plan. (4)(8)

10.11   Amendment No. 1 to Amended and Restated 1990 Stock Option Plan.(4)(16)

10.12   Franklin Square Commercial Lease dated July 13, 1994 between AccuMed and
        the Lumber Company as Agent for the Beneficiary of LaSalle National
        Trust, N.A. pertaining to the premises located at Suite 401, 4th Floor
        North, 900 North Franklin Street, Chicago, Illinois. (1)

                                       35
<PAGE>   36


10.13   Form of Warrant Certificate dated as of March 13, 1997 evidencing right
        to acquire an aggregate of 850,000 shares of Common stock issued to
        several investors in a private placement consummated March 13, 1997.
        (16)

10.14   Form of Subscription Agreement between AccuMed and several investors in
        the private placement consummated on March 13, 1997. (16)

10.15   Form of Warrant to Purchase Common stock dated February 23, 1998 between
        AccuMed and Commonwealth Associates representing an aggregate of 200,000
        Common stock purchase Warrants issued to Commonwealth Associates and/or
        its designees in exchange for warrants previously issued thereto in
        connection with the placement of 12% Convertible Promissory Notes. (19)

10.16   Warrant Agreement dated as of February 2, 1998 between AccuMed and
        Robert L. Priddy representing warrants to purchase 100,000 shares of
        Common stock. (19)

10.17   Agreement between AccuMed and Paul F. Lavallee and Gypsy Hill LLC
        effective January 29, 1998 (21)

10.18   Warrant Agreement dated as of February 23, 1998 between AccuMed and
        Commonwealth Associates, including form of Warrant Certificate attached
        as Exhibit A thereto, representing an aggregate of 1,245,340 Common
        stock purchase Warrants issued to investors in a Note Exchange Offer.
        (15)

10.19   Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth
        Associates representing an aggregate of 350,000 Common stock purchase
        Warrants issued to Commonwealth Associates and/or its designees in
        exchange for warrants issued thereto in connection with a Note Exchange
        Offer. (19)

10.20   Form of Subscription Agreement and Registration Rights Agreement dated
        as of February 23, 1998 between AccuMed and each of the investors in a
        Note Exchange Offer. (15)

10.21   Warrant Agreement dated as of March 19, 1998, as amended by Amendment
        No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth
        Associates pertaining to an aggregate of 8,686,667 Common stock purchase
        Warrants issued to investors in a private placement. (19)

10.22   Form of Warrant Certificate representing an aggregate of 8,686,667
        common stock purchase Warrants issued to investors in a private
        placement in March 1998. (19)

10.23   Form of Warrant to Purchase Common stock dated March 19, 1998 or March
        23, 1998, including form of Warrant Certificate attached as Exhibit A
        thereto, representing an aggregate of 1,337,333 Common stock purchase
        Warrants issued to Commonwealth Associates, Bellingham Capital
        Industries, and Harold S. Blue and/or their respective designees in
        connection with a private placement. (19)


                                       36
<PAGE>   37


10.24   Form of Subscription Agreement and Registration Rights Agreement dated
        March 19, 1998 or March 23, 1998 between AccuMed and each of the
        investors in a private placement. (19)

10.25   1997 Stock Option Plan and Amendment No. 1 to the 1997 Stock Option
        Plan (19)

10.26   Asset Purchase Agreement by and between AccuMed International, Inc. and
        AMI Acquisition Corp. dated as of November 20, 1998 (22)

10.27   Floating Rate Convertible Promissory Note dated June 26, 1998 by AccuMed
        in favor of Xillix Technologies Corp. in the original principal amount
        of CDN$500,000. (23)

10.28   Amendment to Floating Rate Convertible Promissory Note dated March 15,
        2000 between AccuMed and Xillix Technologies Corp.

10.29   License and Development Agreement dated March 24, 2000 between AccuMed
        and Ventana Medical Systems, Inc. +

10.30   Patent and Technology License and Registration Rights Agreement dated
        March 29, 2000 between AccuMed and BCAM International, Inc.+

21.1    Subsidiary of AccuMed.

23.1    Consent of KPMG LLP.

27.1    Financial Data Schedule

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


+       Confidential treatment sought for portions of this document.


(1)     Incorporated by reference to AccuMed's Transition Report on Form 10-KSB
        for the transition period ended December 31, 1995.

(2)     Incorporated by reference to Pre-Effective Amendment No. 4 to the
        Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the
        Commission on October 9, 1993.

(3)     Incorporated by reference to AccuMed's Registration Statement on Form
        S-4 (File No. 33-99680), filed with the Commission on November 22, 1995.

(4)     Represents a management contract or compensatory plan or arrangement
        required to be filed as an exhibit to this Registration Statement.

(5)     Incorporated by reference to AccuMed's Registration Statement Form S-2
        (Regis. No. 333-09011) filed with the Commission on July 26, 1996.


                                       37
<PAGE>   38

(6)     Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for
        the year ended September 30, 1994.

(7)     Incorporated by reference to Pre-effective Amendment No. 1 to the
        Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the
        Commission on August 29, 1996.

(8)     Incorporated by reference to AccuMed's Registration Statement on Form
        S-1 (Reg. No. 33-48302), filed with the Commission on June 3, 1992.

(9)     Incorporated by reference to Pre-effective Amendment No. 4 to the
        Registration Statement of Form S-2 (Regis. No. 333-09011) filed with the
        Commission on October 3, 1996.

(10)    Incorporated by reference to Pre-Effective Amendment No. 1 to Form SB-2,
        filed with the Commission on November 8, 1993).

(11)    Incorporated by Reference to Pre-effective Amendment No. 2 to the
        Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the
        Commission on September 23, 1996.

(12)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 (Reg. No. 333-07681), filed with the Commission on July 3, 1996.

(13)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        March 3, 1997.

(14)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 (Regis. No. 333-28125) filed with the Commission on May 30, 1997.

(15)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        March 20, 1998.

(16)    Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for
        the year ended December 31, 1996.

(17)    Incorporated by reference to Registrant's Quarterly Report on From
        10-QSB for the quarter ended June 30, 1997.

(18)    Incorporated by reference to Registrant's Quarterly Report on from
        10-QSB for the quarter ended September 30, 1997.

(19)    Incorporated by reference to AccuMed's Annual Report on Form 10-K for
        the year ended December 31, 1997.

(20)    Incorporated by reference to the Registration Statement on Form S-3
        (Regis. No. 333-56393) filed with the Commission on June 9, 1998.

(21)    Incorporated by reference to AccuMed's Quarterly Report on Form 10-Q for
        the quarter ended June 30, 1998.


                                       38
<PAGE>   39


(22)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        January 29, 1999.

(23)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 filed with the Commission on November 9, 1999 (Regis. No.
        333-90637).

                (d) Financial Statement Schedules. The following financial
        statement schedule is filed as part of this report as page F-22
        following the signature page:

                                       39
<PAGE>   40

                 Schedule IX - Valuation and Qualifying Accounts

               All other schedules required by Form 10-K Annual Report have been
omitted because they were not applicable, were included in the notes to be
consolidated financial statements, or were otherwise not required under the
instructions contained in Regulation S-X.

                                       40
<PAGE>   41

                                   SIGNATURES

               Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.

Dated: April 14, 2000


                               ACCUMED INTERNATIONAL, INC.


                               By:     /s/  PAUL F. LAVALLEE
                                     ---------------------------------
                                     Paul F. Lavallee,
                                     Chairman of the Board
                                     and Chief Executive Officer
                                     (principal executive officer
                                     and principal accounting officer)


               Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates so indicated.

               Each Director of the registrant whose signature appears below,
hereby appoints Paul F. Lavallee individually as his attorney-in-fact to sign in
his name and on his behalf as a director of the registrant, and to file with the
SEC any and all Amendments to this Annual Report on Form 10-K to the same extent
and with the same effect as if done personally.


DATED: April 14, 2000               By:     /s/  PAUL F. LAVALLEE
                                        ----------------------------------------
                                                Paul F. Lavallee, Chairman


DATED: April 14, 2000               By:     /s/  JACK H. HALPERIN
                                        ----------------------------------------
                                                Jack H. Halperin, Director


DATED: April 14, 2000               By:     /s/  MARK BANISTER
                                        ----------------------------------------
                                                Mark Banister, Director


DATED: April 14, 2000               By:     /s/  LEONARD M. SCHILLER
                                        ----------------------------------------
                                                Leonard M. Schiller, Director


DATED: April 14, 2000               By:     /s/  ROBERT L. PRIDDY
                                        ----------------------------------------
                                                Robert L. Priddy, Director


                                       41
<PAGE>   42


Exhibit
Number         Description of Exhibit
------         ----------------------

3.1     Bylaws of AccuMed. (1)

3.2     Amendment No. 1 to Bylaws of AccuMed. (19)

4.1     Certificate of Incorporation of AccuMed (1)

4.2     Certificate of Amendment to Certificate of Incorporation of AccuMed
        increasing authorized Common stock (14)

4.3     Certificate of Designation, Rights and Preferences of Series A
        Convertible Preferred Stock (15)

4.4     Certificate of Correction to Certificate of Designation, Rights and
        Preferences of Series A Convertible Preferred Stock (15)

4.5     Certificate of Amendment to Certificate of Incorporation of AccuMed
        effecting reverse stock split (21)

4.6     Specimen Certificate for Common stock (1)

4.7     Bylaws of AccuMed (1)

4.8     Amendment No. 1 to Bylaws of AccuMed (19)

4.9     Warrant Agreement dated as of February 23, 1998 between AccuMed and
        Commonwealth Associates, including form of Warrant Certificate attached
        as Exhibit A thereto, representing an aggregate of 1,245,340 (pre split)
        Common stock purchase Warrants issued to investors in a Note Exchange
        Offer. (15)

4.10    Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth
        Associates representing an aggregate of 350,000(pre split) Common stock
        purchase warrants issued to Commonwealth Associates and/or its designees
        in exchange for warrants issued thereto in connection with a Note
        Exchange Offer (19)

4.11    Form of Subscription Agreement and Registration Rights Agreement dated
        as of February 23, 1998 between AccuMed and each of the investors in a
        Note Exchange Offer (15)

4.12    Warrant Agreement dated as of March 19, 1998, as amended by Amendment
        No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth
        Associates pertaining to an aggregate of 8,686,667 (pre split) Common
        stock purchase Warrants issued to investors in a private placement. (19)

4.13    Form of Warrant Certificate representing an aggregate of 8,686,667 (pre
        split) Common stock purchase Warrants issued to investors in a private
        placement in March 1998 (19)

4.14    Form of Warrant to Purchase Common stock dated March 19, 1998 or March
        23, 1998, including form of Warrant Certificate attached as Exhibit A
        thereto, representing an aggregate of 1,337,333 (pre split) Common stock

                                       42
<PAGE>   43

        purchase Warrants issued to Commonwealth Associates, Bellingham Capital
        Industries, and Harold S. Blue and/or their respective designees in
        connection with a private placement. (19)

4.15    Form of Subscription Agreement and Registrant Rights Agreement dated
        March 19, 1998 or March 23, 1998 between AccuMed and each of the
        investors in a private placement (19)

4.16    Specimen stock certificate for Common stock. (1)

10.1    AccuMed's Board of Directors Compensation Plan as amended by Minutes of
        Board of Directors meeting dated January 18, 1996 authorizing grants of
        stock options to non-employee directors. (1)(4)

10.2    Employment Agreement between AccuMed and Norman J. Pressman dated June
        13, 1996 and Addendum to Employment Agreement between AccuMed and Norman
        J. Pressman dated July 16, 1996. (4)(5)

10.3    1995 Stock Option Plan. (1)(4)

10.4    Amendment No. 1 to AccuMed's 1995 Stock Option Plan.(4)(7)

10.5    Amendment No. 2 to the 1995 Stock Option Plan. (4)(16)

10.6    Amendment No. 3 to the 1995 Stock Option Plan. (4)(19)

10.7    Form of Non-Qualified Stock Option Agreement governing options granted
        to former employees of AccuMed, Inc. pursuant to the Agreement and Plan
        of Reorganization dated as of April 21, 1995, as amended. (1)(4)

10.8    Form of Non-Qualified Stock Option Agreement governing options granted
        to employees and consultants under the 1995 Stock Option Plan. (1)(4)

10.9    Form of Incentive Stock Option Agreement governing options granted to
        employees under the 1995 Stock Option Plan. (1)(4)

10.10   Amended and Restated 1990 Stock Option Plan. (4)(8)

10.11   Amendment No. 1 to Amended and Restated 1990 Stock Option Plan.(4)(16)

10.12   Franklin Square Commercial Lease dated July 13, 1994 between AccuMed and
        the Lumber Company as Agent for the Beneficiary of LaSalle National
        Trust, N.A. pertaining to the premises located at Suite 401, 4th Floor
        North, 900 North Franklin Street, Chicago, Illinois. (1)

10.13   Form of Warrant Certificate dated as of March 13, 1997 evidencing right
        to acquire an aggregate of 850,000 shares of Common stock issued to
        several investors in a private placement consummated March 13, 1997.
        (16)

10.14   Form of Subscription Agreement between AccuMed and several investors in
        the private placement consummated on March 13, 1997. (16)

10.15   Form of Warrant to Purchase Common stock dated February 23, 1998 between
        AccuMed and Commonwealth Associates representing an aggregate of 200,000
        Common stock purchase Warrants issued to Commonwealth Associates and/or


                                       43
<PAGE>   44


        its designees in exchange for warrants previously issued thereto in
        connection with the placement of 12% Convertible Promissory Notes. (19)

10.16   Warrant Agreement dated as of February 2, 1998 between AccuMed and
        Robert L. Priddy representing warrants to purchase 100,000 shares of
        Common stock. (19)

10.17   Agreement between AccuMed and Paul F. Lavallee and Gypsy Hill LLC
        effective January 29, 1998 (21)

10.18   Warrant Agreement dated as of February 23, 1998 between AccuMed and
        Commonwealth Associates, including form of Warrant Certificate attached
        as Exhibit A thereto, representing an aggregate of 1,245,340 Common
        stock purchase Warrants issued to investors in a Note Exchange Offer.
        (15)

10.19   Warrant Agreement dated March 19, 1998 between AccuMed and Commonwealth
        Associates representing an aggregate of 350,000 Common stock purchase
        Warrants issued to Commonwealth Associates and/or its designees in
        exchange for warrants issued thereto in connection with a Note Exchange
        Offer. (19)

10.20   Form of Subscription Agreement and Registration Rights Agreement dated
        as of February 23, 1998 between AccuMed and each of the investors in a
        Note Exchange Offer. (15)

10.21   Warrant Agreement dated as of March 19, 1998, as amended by Amendment
        No. 1 dated as of March 23, 1998, between AccuMed and Commonwealth
        Associates pertaining to an aggregate of 8,686,667 Common stock purchase
        Warrants issued to investors in a private placement. (19)

10.22   Form of Warrant Certificate representing an aggregate of 8,686,667
        common stock purchase Warrants issued to investors in a private
        placement in March 1998. (19)

10.23   Form of Warrant to Purchase Common stock dated March 19, 1998 or March
        23, 1998, including form of Warrant Certificate attached as Exhibit A
        thereto, representing an aggregate of 1,337,333 Common stock purchase
        Warrants issued to Commonwealth Associates, Bellingham Capital
        Industries, and Harold S. Blue and/or their respective designees in
        connection with a private placement. (19)

10.24   Form of Subscription Agreement and Registration Rights Agreement dated
        March 19, 1998 or March 23, 1998 between AccuMed and each of the
        investors in a private placement. (19)

10.25   1997 Stock Option Plan and Amendment No. 1 to the 1997 Stock Option
        Plan (19)

10.26   Asset Purchase Agreement by and between AccuMed International, Inc. and
        AMI Acquisition Corp. dated as of November 20, 1998 (22)

10.27   Floating Rate Convertible Promissory Note dated June 26, 1998 by AccuMed
        in favor of Xillix Technologies Corp. in the original principal amount
        of CDN$500,000. (23)

10.28   Amendment to Floating Rate Convertible Promissory Note dated March 15,
        2000 between AccuMed and Xillix Technologies Corp.

                                       44
<PAGE>   45

10.29   License and Development Agreement dated March 24, 2000 between AccuMed
        and Ventana Medical Systems, Inc. +

10.30   Patent and Technology License and Registration Rights Agreement dated
        March 29, 2000 between AccuMed and BCAM International, Inc.+

21.1    Subsidiary of AccuMed.

23.1    Consent of KPMG LLP.

27.1    Financial Data Schedule
------------------

+       Confidential treatment sought for portions of this document.


(1)     Incorporated by reference to AccuMed's Transition Report on Form 10-KSB
        for the transition period ended December 31, 1995.

(2)     Incorporated by reference to Pre-Effective Amendment No. 4 to the
        Registration Statement on Form S-1 (Reg. No. 33-48302), filed with the
        Commission on October 9, 1993.

(3)     Incorporated by reference to AccuMed's Registration Statement on Form
        S-4 (File No. 33-99680), filed with the Commission on November 22, 1995.

(4)     Represents a management contract or compensatory plan or arrangement
        required to be filed as an exhibit to this Registration Statement.

(5)     Incorporated by reference to AccuMed's Registration Statement Form S-2
        (Regis. No. 333-09011) filed with the Commission on July 26, 1996.

(6)     Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for
        the year ended September 30, 1994.

(7)     Incorporated by reference to Pre-effective Amendment No. 1 to the
        Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the
        Commission on August 29, 1996.

(8)     Incorporated by reference to AccuMed's Registration Statement on Form
        S-1 (Reg. No. 33-48302), filed with the Commission on June 3, 1992.

(9)     Incorporated by reference to Pre-effective Amendment No. 4 to the
        Registration Statement of Form S-2 (Regis. No. 333-09011) filed with the
        Commission on October 3, 1996.

(10)    Incorporated by reference to Pre-Effective Amendment No. 1 to Form SB-2,
        filed with the Commission on November 8, 1993).

(11)    Incorporated by Reference to Pre-effective Amendment No. 2 to the
        Registration Statement on Form S-2 (Regis. No. 333-09011) filed with the
        Commission on September 23, 1996.

(12)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 (Reg. No. 333-07681), filed with the Commission on July 3, 1996.

                                       45
<PAGE>   46

(13)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        March 3, 1997.

(14)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 (Regis. No. 333-28125) filed with the Commission on May 30, 1997.

(15)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        March 20, 1998.

(16)    Incorporated by reference to AccuMed's Annual Report on Form 10-KSB for
        the year ended December 31, 1996.

(18)    Incorporated by reference to Registrant's Quarterly Report on From
        10-QSB for the quarter ended June 30, 1997.

(18)    Incorporated by reference to Registrant's Quarterly Report on from
        10-QSB for the quarter ended September 30, 1997.

(19)    Incorporated by reference to AccuMed's Annual Report on Form 10-K for
        the year ended December 31, 1997.

(20)    Incorporated by reference to the Registration Statement on Form S-3
        (Regis. No. 333-56393) filed with the Commission on June 9, 1998.

(21)    Incorporated by reference to AccuMed's Quarterly Report on Form 10-Q for
        the quarter ended June 30, 1998.

(22)    Incorporated by reference to AccuMed's Current Report on Form 8-K dated
        January 29, 1999.

(23)    Incorporated by reference to AccuMed's Registration Statement on Form
        S-3 filed with the Commission on November 9, 1999 (Regis. No. 333-9063

                                       46
<PAGE>   47
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report ...........................................    F-2

Consolidated Balance Sheets as of December 31, 1999 and 1998 ...........    F-3

Consolidated Statements of Operations
for the Years Ended December 31, 1999, 1998 and 1997 ...................    F-4

Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 ...................    F-5

Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997 ...................    F-6

Notes to Consolidated Financial Statements .............................    F-7
</TABLE>



                                       F-1

<PAGE>   48

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
AccuMed International, Inc.:

We have audited the accompanying consolidated balance sheets of AccuMed
International, Inc. and subsidiary (the Company) as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AccuMed
International, Inc. and subsidiary as of December 31, 1999 and December 31,
1998, and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.


                                                   /s/  KPMG LLP

Chicago, Illinois
March 29, 2000



                                       F-2

<PAGE>   49

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                          ------------------------------
                            ASSETS                                           1999              1998
                                                                          ------------      ------------
<S>                                                                       <C>               <C>
CURRENT ASSETS
  Cash and cash equivalents                                               $    196,303      $    213,386
  Accounts receivable, net                                                          --            33,348
  Prepaid expenses and other current assets                                      7,944            64,048
  Available-for-sale security                                                  121,301                --
  Note receivable                                                              400,000                --
  Inventories                                                                  700,919         1,738,611
                                                                          ------------      ------------
     TOTAL CURRENT ASSETS                                                    1,426,467         2,049,393
                                                                          ------------      ------------

Fixed assets, net                                                              705,273         1,488,809

Deferred financing costs, net                                                       --           177,625
Purchased technology, net of amortization of $2,214,000 in 1999
  and $1,315,000 in 1998                                                     4,185,868         5,085,018
Patents, net of accumulated amortization of $130,000 in 1999                   842,484           761,414
  and $82,000 in 1998
Note receivable, officer                                                        62,237           123,150
Net assets of discontinued operations                                               --         3,762,397
                                                                          ------------      ------------

                                                                          $  7,222,329      $ 13,447,806
                                                                          ============      ============

  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Long term debt, current portion                                         $    362,550      $  1,155,400
  Accounts payable                                                             223,822         1,808,249
  Accrued interest                                                              15,415           189,069
  Income taxes                                                                  35,000                --
  Other current liabilities                                                    750,183           290,292
                                                                          ------------      ------------
     TOTAL CURRENT LIABILITIES                                               1,386,970         3,443,010
                                                                          ------------      ------------

Long term debt                                                                 167,000         5,781,850
                                                                          ------------      ------------

STOCKHOLDERS' EQUITY
  Preferred stock, Series A convertible, 5,000,000 shares authorized;
     944,384 issued and outstanding at December 31, 1999;
     962,102 issued and outstanding at December 31, 1998                     4,249,735         4,329,466
  Common stock, $0.01 par value; 50,000,000 shares authorized;
     5,491,901 issued and outstanding at December 31, 1999;
     5,480,088 issued and outstanding at December 31, 1998                      54,919            54,801
  Additional paid-in capital                                                59,619,262        59,539,649
  Accumulated other comprehensive income                                        (4,960)          (53,995)
  Accumulated deficit                                                      (58,033,860)      (59,430,238)
  Treasury stock; 6,326 shares at December 31, 1999 and 1998                  (216,737)         (216,737)
                                                                          ------------      ------------
     TOTAL STOCKHOLDERS' EQUITY                                              5,668,359         4,222,946
                                                                          ------------      ------------

                                                                          $  7,222,329      $ 13,447,806
                                                                          ============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       F-3
<PAGE>   50

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                              ------------------------------------------------
                                                                  1999              1998              1997
                                                              ------------      ------------      ------------
<S>                                                           <C>               <C>               <C>
Sales                                                         $    136,405      $    326,862      $  1,000,776
Less cost of sales                                              (1,146,291)         (855,788)       (1,557,175)
                                                              ------------      ------------      ------------
     Gross profit (loss)                                        (1,009,886)         (528,926)         (556,399)
                                                              ------------      ------------      ------------

Operating expenses:
     General and administrative                                  3,147,154         5,308,417         6,198,665
     Research and development                                    1,869,587         2,569,864         4,035,360
     Asset impairment                                              137,211                --         3,582,068
     Sales and marketing                                           282,398         1,388,826         1,427,735
                                                              ------------      ------------      ------------
        Total operating expenses                                 5,436,350         9,267,107        15,243,828
                                                              ------------      ------------      ------------

Operating loss                                                  (6,446,236)       (9,796,033)      (15,800,227)
                                                              ------------      ------------      ------------

Other income (expense):
     Interest expense                                             (501,379)       (1,411,335)       (3,568,603)
     Other income, net                                             144,794           847,613           511,145
                                                              ------------      ------------      ------------
        Total other income (expense)                              (356,585)         (563,722)       (3,057,458)
                                                              ------------      ------------      ------------

Loss before income taxes from continuing operations             (6,802,821)      (10,359,755)      (18,857,685)

Income tax expense                                                      --                --                --
                                                              ------------      ------------      ------------

Loss from continuing operations before extraordinary item       (6,802,821)      (10,359,755)      (18,857,685)
                                                              ------------      ------------      ------------

Discontinued operations:
  (Loss) income from discontinued operations                      (158,250)        3,351,486         1,939,109
  Gain on disposal, net of income taxes of $140,000              8,357,449                --                --
                                                              ------------      ------------      ------------

Income from discontinued operations                              8,199,199         3,351,486         1,939,109
                                                              ------------      ------------      ------------

Extraordinary item - debt extinguishment loss                           --        (1,168,080)               --
                                                              ------------      ------------      ------------

        Net income (loss)                                        1,396,378        (8,176,349)      (16,918,576)
                                                              ============      ============      ============

Basic loss per share from continuing operations
  before extraordinary item                                   $      (1.24)     $      (2.04)     $      (5.13)

Income per share from discontinued operations                         1.49              0.66              0.53

Extraordinary loss per share from debt extinguishment                   --             (0.23)               --
                                                              ------------      ------------      ------------

Basic net loss per share                                      $       0.25      $      (1.61)     $      (4.60)
                                                              ============      ============      ============

Weighted average common shares outstanding                       5,491,480         5,079,894         3,675,488
                                                              ============      ============      ============
</TABLE>


           See accompanying notes to consolidated financial statements



                                       F-4
<PAGE>   51

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                          PREFERRED STOCK                   COMMON STOCK               ADDITIONAL
                                                  -----------------------------     ----------------------------        PAID-IN
                                                     SHARES           AMOUNT           SHARES          AMOUNT           CAPITAL
                                                  ------------     ------------     ------------     ------------     ------------
<S>                                               <C>              <C>              <C>              <C>              <C>
Balances at December 31, 1996                               --               --        3,475,696     $     34,757     $ 44,598,431
                                                  ------------     ------------     ------------     ------------     ------------
Issuances of common stock                                   --               --           11,892              119          206,170
Issuances of warrants                                       --               --               --               --        3,187,606
Stock options exercised                                     --               --           60,310              603          407,958
Warrants exercised                                          --               --           83,422              834          258,795
Refund of stock issuance fees, net                          --               --               --               --           74,877
Cumulative translation adjustment                           --               --               --               --               --
Shares received in litigation settlement                    --               --               --               --               --
Contingent shares issued                                    --               --          156,825            1,568        3,409,394
Net loss                                                    --               --               --               --               --
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1997                               --               --        3,788,145           37,881       52,143,231
                                                  ------------     ------------     ------------     ------------     ------------
Issuances of common stock                                   --               --        1,494,869           14,949        6,066,070
Issuances of preferred stock                         1,245,338        5,604,030               --               --               --
Conversion of preferred stock to common               (283,236)      (1,274,564)         188,824            1,888        1,272,676
Stock options exercised                                     --               --            8,250               83           57,672
Cumulative translation adjustment                           --               --               --               --               --
Net loss                                                    --               --               --               --               --
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1998                          962,102        4,329,466        5,480,088           54,801       59,539,649
                                                  ------------     ------------     ------------     ------------     ------------
Conversion of preferred stock to common                (17,718)         (79,731)          11,813              118           79,613
Cumulative translation adjustment                           --               --               --               --               --
Change in value of available-for-sale security              --               --               --               --               --
Net loss                                                    --               --               --               --               --
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1999                          944,384     $  4,249,735        5,491,901     $     54,919     $ 59,619,262
                                                  ============     ============     ============     ============     ============
</TABLE>


<TABLE>
<CAPTION>
                                                  ACCUMULATED
                                                     OTHER
                                                 COMPREHENSIVE      ACCUMULATED       TREASURY      STOCKHOLDERS'     COMPREHENSIVE
                                                    INCOME            DEFICIT          STOCK            EQUITY        INCOME (LOSS)
                                                 -------------     ------------     ------------    -------------     -------------
<S>                                              <C>               <C>              <C>             <C>               <C>
Balances at December 31, 1996                     $     32,586     $(34,335,313)    $   (194,465)    $ 10,135,996     $(11,541,227)
                                                  ------------     ------------     ------------     ------------     ------------
Issuances of common stock                                   --               --               --          206,289               --
Issuances of warrants                                       --               --               --        3,187,606               --
Stock options exercised                                     --               --               --          408,561               --
Warrants exercised                                          --               --               --          259,629               --
Refund of stock issuance fees, net                          --               --               --           74,877               --
Cumulative translation adjustment                      (10,000)              --               --          (10,000)         (10,000)
Shares received in litigation settlement                    --               --          (22,272)         (22,272)              --
Contingent shares issued                                    --               --               --        3,410,962               --
Net loss                                                    --      (16,918,576)              --      (16,918,576)     (16,918,576)
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1997                           22,586      (51,253,889)        (216,737)         733,072      (16,928,576)
                                                  ------------     ------------     ------------     ------------     ------------
Issuances of common stock                                   --               --               --        6,081,019               --
Issuances of preferred stock                                --               --               --        5,604,030               --
Conversion of preferred stock to common                     --               --               --               --               --
Stock options exercised                                     --               --               --           57,755               --
Cumulative translation adjustment                      (76,581)              --               --          (76,581)         (76,581)
Net loss                                                    --       (8,176,349)              --       (8,176,349)      (8,176,349)
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1998                          (53,995)     (59,430,238)        (216,737)       4,222,946       (8,252,930)
                                                  ------------     ------------     ------------     ------------     ------------
Conversion of preferred stock to common                     --               --               --               --               --
Cumulative translation adjustment                      (72,266)              --               --          (72,266)         (72,266)
Change in value of available-for-sale security         121,301               --               --          121,301          121,301
Net income                                                  --        1,396,378               --        1,396,378        1,396,378
                                                  ------------     ------------     ------------     ------------     ------------
Balances at December 31, 1999                     $     (4,960)    $(58,033,860)    $   (216,737)    $  5,668,359     $  1,445,413
                                                  ============     ============     ============     ============     ============
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       F-5

<PAGE>   52

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                                          ----------------------------------------------
                                                                              1999             1998             1997
                                                                          ------------     ------------     ------------
<S>                                                                       <C>              <C>              <C>
OPERATING ACTIVITIES:
        Net income (loss)                                                 $  1,396,378     ($ 8,176,349)    ($16,918,576)
        Adjustments to reconcile net income (loss) to net cash used in
        operating activities:
          Income from discontinued operations                               (8,199,199)      (3,351,486)      (1,939,109)
          Non-cash expenses of asset disposal                                  432,500               --               --
          Write-off of leasehold improvements                                  137,211               --               --
          Write-down of inventory                                            1,106,399               --               --
          Depreciation and amortization                                      1,111,655        1,534,034          946,000
          Write-off of impaired goodwill                                            --               --        3,582,068
          Bad debt expense                                                          --          337,353               --
          Debt extinguishment loss                                                  --        1,168,080               --
          Writeoff of debt discount                                                 --               --        2,139,000
          Minority interest                                                         --         (191,560)        (437,127)
          Non-cash gain on settlement                                               --               --          (22,272)
          Expenses paid with issuances of stock or warrants                         --           99,000               --
          Changes in assets and liabilities:
            Decrease in restricted cash                                             --               --          100,000
            Decrease in accounts receivable                                     33,348           58,950          714,937
            Decrease in prepaid expenses and deposits                           56,104           34,600           99,105
            (Increase) in inventories                                          (68,707)        (456,472)        (597,066)
            (Increase) in patents and other assets                             (15,821)         (66,975)        (555,925)
            (Decrease) in accounts payable                                  (1,584,427)      (1,241,309)        (239,918)
            Increase (Decrease) in other current liabilities                   321,237         (165,825)         776,530
                                                                          ------------     ------------     ------------
CASH USED IN OPERATING ACTIVITIES                                           (5,273,322)     (10,417,959)     (12,352,353)
                                                                          ------------     ------------     ------------

INVESTING ACTIVITIES:
        Purchase of fixed assets                                               (23,999)        (157,132)      (1,208,130)
        Purchase of Oncometrics stock                                               --         (342,500)      (6,000,000)
        Increase in note receivable                                           (400,000)              --               --
        Proceeds from sale of Microbiology division                         15,150,000               --               --
        Expenses related to sale of Microbiology division                     (750,000)
        Purchased technology                                                        --               --          (82,342)
                                                                          ------------     ------------     ------------
CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES                            13,976,001         (499,632)      (7,290,472)
                                                                          ------------     ------------     ------------

FINANCING ACTIVITIES:
        Proceeds from issuances of common stock, net                                --        4,852,394          743,064
        Deferred financing costs                                                    --                          (849,124)
        Notes receivable collected                                                  --               --           50,074
        Payment of notes payable and capital lease obligation               (8,497,551)        (909,305)      (6,273,758)
        Proceeds from issuance of notes payable                                     --        1,000,000       13,000,000
        Proceeds from bridge loan                                                   --               --        6,000,000
                                                                          ------------     ------------     ------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                             (8,497,551)       4,943,089       12,670,256
                                                                          ------------     ------------     ------------
CASH TRANSFER (TO) FROM DISCONTINUED OPERATIONS                               (209,945)       5,872,486        4,670,652
                                                                          ------------     ------------     ------------
EFFECT OF EXCHANGE RATES ON CASH                                               (12,266)         (16,581)         (10,000)
                                                                          ------------     ------------     ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                      (17,083)        (118,597)      (2,311,917)
                                                                          ------------     ------------     ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               213,386          331,983        2,643,900
                                                                          ------------     ------------     ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                $    196,303     $    213,386     $    331,983
                                                                          ============     ============     ============
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       F-6

<PAGE>   53

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1.  DESCRIPTION OF BUSINESS

        AccuMed International, Inc. and subsidiary ("the Company") engage in the
development and assembling of cost effective screening instruments and systems
for clinical diagnostic laboratories, hospitals and others. These activities are
conducted primarily in the United States and Canada. The Company markets its
products primarily to the Cytopathology laboratory market. Cytopathology systems
are made up of multiple instruments networked via proprietary software that
support the review and analysis of Pap smears and other microscope slide-based
cellular preparations. Substantially all of the Company's assets are located in
the United States.

        Basis of Presentation

        On December 22, 1998, (the measurement date), the company received
shareholder approval to sell its microbiology division under a sales agreement
negotiated by management under the approval of the board of directors. On
January 29, 1999, AccuMed closed the sale of the microbiology division for
proceeds of $15,150,000. The Company recognized a gain of $8,357,000, net of
income taxes of $140,000 and after working capital adjustments, on the disposal
of the microbiology division. Accordingly, the microbiology division is
accounted for as a discontinued operation in the accompanying consolidated
balance sheets, statements of operations and statements of cash flows.

        Reverse Stock Split

        On May 19, 1998, the stockholders approved a reverse one-for-six stock
split, which was effected by the Board of Directors as of May 21, 1998. The
reverse split covered all outstanding common shares and all agreements
concerning stock options, warrants, convertible notes and other commitments
payable in shares of the Company's common stock. All references to per-share
information in the accompanying financial statements and notes to the
consolidated financial statements have been adjusted to reflect the reverse
split on a retroactive basis.

2.  SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation

        The consolidated financial statements include the accounts of AccuMed
International, Inc. and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.

        Revenue Recognition

        Product revenue is recognized when products have been shipped and the
customer has made final acceptance.

        Cash and Cash Equivalents

        Cash and cash equivalents include cash held by financial institutions
and money market fund investments with original maturities of three months or
less.

        Inventories

        Inventories consist primarily of raw materials and finished product and
are stated at the lower of cost (average cost) or market. Cost is determined by
the first-in first-out method (FIFO). In the fourth quarter of 1999, AccuMed
reduced the carrying value of inventories by $1,106,399 based on management's
estimate of the recoverability of the inventories.



                                      F-7
<PAGE>   54
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        Available-for-Sale Security

        The available-for-sale security is reported at fair market value.
Unrealized gains and losses on the available-for-sale security are excluded from
earnings and reported as a separate component of stockholders' equity until
realized.

        Property, Plant and Equipment

        Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided using the straight-line method over the estimated
useful lives of the assets. Amortization of leasehold improvements is provided
on the straight-line method over the shorter of the estimated useful life of the
improvement or the term of the lease. Expenditures for repairs and maintenance
are charged to operations when incurred.

        Purchased Technology

        Purchased technology consists principally of values assigned to acquired
proprietary technology. Such amounts are being amortized on a straight-line
basis over the expected periods to be benefited, generally 10 years. The Company
assesses the recoverability of such assets by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows of the related acquired businesses using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of these various assets will be impacted if the estimated future
operating cash flows are not achieved.

        Patents

        The cost of patents is amortized straight line over the estimated useful
lives of the patent, generally 17 years.

        Research and Development Costs

        Research and development costs are charged to operations as incurred.

        Income Taxes

        Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

        Warranty

        Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related revenue is
recognized.



                                      F-8
<PAGE>   55
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        Use of Estimates

        Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses to prepare these financial statements in conformity with generally
accepted accounting principles. Estimates are used when accounting for the
allowance for uncollectable accounts receivable, inventory valuation,
depreciation, warranty costs, income taxes and contingencies, among others.
Actual results could be materially different from those estimates.

        Valuation of Options and Warrants Issued

        The Company utilizes the Black-Scholes pricing model to determine the
fair value of warrants and options issued in exchange for goods or services.
During 1999, 1998 and 1997, the Company incorporated the following assumptions
into the model: risk free rate - ranging from 5% to 7%, expected volatility -
143% in 1999, 30% in 1998 and 20% in 1997, and expected dividends of zero. The
risk-free rate is determined based on the interest rate of U.S. Government
treasury obligations with a maturity date comparable to the life of the option
or warrant issued. Other assumptions, relating to option life, strike price and
stock price, are determined at the date the option or warrant is issued.

        Non-monetary Transactions

        Non-monetary transactions are recorded based on the fair values of the
assets or services involved. Fair values are determined based on the assets
exchanged or received, whichever is more clearly evident.

        General Information Regarding Reportable Segments of an Enterprise

        Effective December 31, 1997, the Company adopted SFAS No. 131 regarding
disclosures about segments of an enterprise and related information. Refer to
Note 1 for a description of the types of products from which the Company derives
its revenues. Subsequent to the sale of the Company's microbiology division on
January 29, 1999, the Company's products are marketed solely to the
Cytopathology laboratory market.

3.  ACCOUNTS RECEIVABLE

        Accounts receivable are carried at estimated net realizable value. At
December 31, 1999 and 1998, the Company had provided no allowances to write the
carrying value of accounts receivable to estimated net realizable value. Bad
debt expense was zero for each of the years ended December 31, 1999, 1998 and
1997, respectively.

4.  NOTE RECEIVABLE

        On November 16, 1999, the Company entered into a merger agreement with
Microsulis Corporation ("Microsulis"), which was subsequently terminated on
February 28, 2000. Under the terms of the merger agreement, the Company agreed
to provide a secured line of credit of $650,000 to Microsulis. The line of
credit bears interest at 10% per annum, payable semi-annually, matures on April
18, 2000, and is secured by certain assets of Microsulis. At December 31, 1999,
the Company had advanced $400,000 under the line of credit to Microsulis.



                                      F-9
<PAGE>   56
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.  AVAILABLE-FOR-SALE SECURITY

On December 4, 1998, the Company received 85,776 common shares of Bell National
Corporation, ("Bell), a public shell corporation, and warrants to purchase an
additional 63,517 common shares of Bell at a price of $0.001 per share in
exchange for its 2,000 membership units of InPath, L.L.C., a privately held
company. No value was assigned to the Bell shares received because the
underlying market value of Bell at the date of the transaction was deminimus.
During 1999, the Company exercised all of the warrants. On May 26, 1999, Bell
was merged into its wholly owned subsidiary, Ampersand Medical Corporation,
("Ampersand"). As a result of this merger, the Company's shares of Bell were
exchanged for an equal number of shares of Ampersand. At December 31, 1999, the
Company held 149,293 shares of Ampersand with a market value of $121,301. In
February 2000, the Company sold 85,776 shares in the open market for proceeds of
$334,844. In the first quarter of 2000, the Company recorded a realized gain on
the sale of these shares of $334,844.

6.  INVENTORIES

        Inventories include the following at December 31:

<TABLE>
<CAPTION>
                                                    1999            1998
                                                 ----------      ----------
<S>                                              <C>             <C>
        Raw material and packaging supplies      $  529,919      $  907,038
        Work in process                                  --              --
        Finished goods                              171,000         831,573
                                                 ----------      ----------
                   Total                         $  700,919      $1,738,611
                                                 ==========      ==========
</TABLE>

7.  FIXED ASSETS

        Fixed assets includes the following at December 31:

<TABLE>
<CAPTION>
                                                             Estimated
                                                            Useful Life          1999              1998
                                                            ------------      -----------       -----------
<S>                                                         <C>               <C>               <C>
        Equipment                                           3 - 5 Years       $ 1,876,344       $ 2,383,839
        Leasehold improvements                              5 - 13 Years          140,290           713,322
                                                                              -----------       -----------
                                                                                2,016,634         3,097,161
        Less accumulated depreciation and amortization                         (1,311,361)       (1,608,352)
                                                                              -----------       -----------
                 Total                                                        $   705,273       $ 1,488,809
                                                                              ===========       ===========
</TABLE>

        Maintenance and repair expenses for the years ended December 31, 1999,
1998 and 1997 were $14,663, $55,942 and $51,854, respectively. There were no
material construction commitments outstanding as of December 31, 1999.



                                      F-10
<PAGE>   57
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.  OTHER CURRENT LIABILITIES

        Other current liabilities consist of the following at December 31:

<TABLE>
<CAPTION>
                                                        1999          1998
                                                      --------      --------
<S>                                                   <C>           <C>
        Litigation reserves                           $485,000      $     --
        Warranty reserve                                    --        12,000
        Accrued rent                                   103,247       158,000
        Payroll and related                            136,787        50,000
        Other                                           25,149        70,292
                                                      --------      --------
                Total                                 $750,183      $290,292
                                                      ========      ========
</TABLE>

9.  LONG-TERM DEBT

        Long-term debt at December 31, 1999 and 1998, respectively, consists of
the following:

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                    ----------      ----------
<S>                                                                 <C>             <C>
    14.5% secured note payable, net of unamortized discount of
      $109,800 in 1998                                              $       --      $3,266,700
    12% unsecured convertible notes due March 13, 2000, net of
      unamortized discount of $84,000 in 1998                               --       3,141,000
    Floating rate convertible note payable                             342,550         342,550
    Non-interest bearing repayable contribution                        187,000         187,000
                                                                    ----------      ----------
            Total long-term debt                                       529,550       6,937,250
            Less current installments                                  362,550       1,155,400
                                                                    ----------      ----------
            Long-term debt, excluding current installments          $  167,000      $5,781,850
                                                                    ==========      ==========
</TABLE>


        In 1998, $5,275,000 in principal amount of the 12% unsecured convertible
notes was exchanged for Series A convertible preferred stock. See Note 18 Debt
Extinguishment. On February 2, 1999, the Company repaid in full the remaining
portion of principal of $3,225,000, plus accrued interest, of the 12% unsecured
convertible notes with proceeds from the sale of its microbiology division.

        The 14.5% secured note payable was repaid on January 29, 1999 for
$3,900,000, including prepayment penalties, with proceeds from the sale of the
Company's microbiology division.

        The floating rate convertible note has a face amount of $500,000
Canadian dollars and was originally due on December 29, 1999. In 2000, the note
was amended to provide for monthly principal installments of $36,000 Canadian
dollars, plus interest, beginning March 15, 2000 through July 15, 2000. The
remaining portion of the note is due on demand. The demand portion of the note
is convertible, in whole or in part, into common stock of the Company at a price
of $1.43 per share. Interest on the note is at 6% over the Canadian prime rate
(7% at December 31, 1999).

        The repayable contribution was received under a foreign government
program and calls for semi-annual installments based on future sales of product
and net working capital.



                                      F-11
<PAGE>   58
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999 are as follows:

<TABLE>
<S>                                              <C>
                   2000                          $  362,550
                   2001                             167,000
                   2002                                --
                   2003                                --
                   2004                                --
                   Thereafter                          --
</TABLE>


10. STOCKHOLDERS' EQUITY

        On February 23, 1998, the Company exchanged $5,275,000 in principal
amount of its 12% convertible promissory notes plus accrued interest thereon of
$329,030 for 1,245,338 shares of Series A convertible preferred stock and 5-year
warrants to purchase 207,557 shares of common stock at an exercise price of
$6.75 per share. The preferred stock is convertible into 830,227 shares of
common stock at a conversion price of $6.75 per share. The Company registered
the resale of the shares of common stock underlying the preferred stock and
warrants with the Securities and Exchange Commission during 1998. See Note 18
Debt Extinguishment.

        During March 1998, the Company completed a private placement of
1,447,778 shares of common stock and 7-year warrants to purchase an aggregate of
1,447,778 shares of common stock at an exercise price of $4.50 per share for
gross proceeds of $6,515,000, including $1,000,000 in notes payable converted
into common stock, and net proceeds of $5,864,000 after payment of fees,
commissions and expenses related thereto. The Company has registered the resale
of the outstanding common stock and the common stock underlying the Warrants
with the Securities and Exchange Commission.

        During 1999 and 1998, 17,718 shares and 283,236 shares, respectively, of
Series A convertible preferred stock were converted into 11,813 shares and
188,824 shares, respectively, of common stock.



                                      F-12
<PAGE>   59
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        Warrants

        At December 31, 1999, the Company had outstanding warrants to purchase
shares of common stock at any time through the expiration date as follows:

<TABLE>
<CAPTION>
                          Shares            Price       Expiration Date
                          ------            -----       ---------------
<S>                                         <C>         <C>
                           4,213            30.00         April, 2000
                          41,639             3.78         May, 2000
                          49,040             3.78         August, 2000
                          20,266             4.92         August, 2000
                          20,266             9.84         August, 2000
                          20,266            14.82         August, 2000
                          10,583             1.50         September, 2000
                          12,500             6.78         December, 2000
                         119,834             7.50         December, 2000
                          16,667             7.50         January, 2001
                          16,667            12.78         March, 2001
                          33,334             6.78         March, 2002
                           8,334            15.00         September, 2002
                          40,964            15.60         September, 2002
                          16,667             4.50         February, 2003
                         207,557             6.75         February, 2003
                          58,334             6.75         February, 2005
                       1,503,483             4.50         March, 2005
</TABLE>

        Stock Option Plan

        The Company has the following stock option plans for its employees,
directors and consultants: the 1990 plan, the 1992 plan, the 1995 plan and the
1997 plan. Terms of the plans are summarized as follows:

Exercise Price - For the 1990 Plan, fair market value determined by the Board of
Directors and not less than 110% of the determined fair market value in certain
instances. For the 1992, 1995 and 1997 plans, fair market value as determined by
the closing price of the common stock on the date of issuance as reported by
NASDAQ.

Vesting Period - A portion of the options granted to certain participants vest
immediately with the remaining options vesting on varying schedules not
exceeding six years from date of grant. Options granted to others vest on
varying schedules not exceeding six years from date of grant.

 Shares Available - At December 31, 1999 there were 120,098 additional shares
available for grant under the Plans. The maximum number of shares that may be
issued under the plans is 510,117 at December 31, 1999.



                                      F-13
<PAGE>   60
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Stock Option Plans for employees. Accordingly, no
compensation cost has been recorded. Had compensation cost for the Company's
Stock Option Plans been determined consistent with FASB Statement No. 123, the
Company's net income (loss) and net income (loss) per share would have been as
indicated below.



<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                   ----------------------------------------------------
                                                        1999               1998                1997
                                                   -------------      -------------       -------------
<S>                                                <C>                <C>                 <C>
     Net income (loss), as reported                $   1,396,378      $  (8,176,349)      $ (16,918,576)
     Net income (loss), pro forma                  $     715,784      $ (10,476,223)      $ (17,906,072)
     Net income (loss) per share, as reported      $        0.25      $       (1.61)      $       (4.60)
     Net income (loss) per share, pro forma        $        0.13      $       (2.06)      $       (4.87)
</TABLE>


        Pro forma net income (loss) and net income (loss) per share reflect only
options granted since December 31, 1994. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) amounts presented above because
compensation cost is reflected over the options' vesting period of up to 10
years and compensation cost for options granted prior to January 1, 1995 is not
considered.

        The compensation cost of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996.


<TABLE>
<CAPTION>
                                           Year Ended December 31,
                                         --------------------------
                                         1999       1998       1997
                                         ----       ----       ----
<S>                                      <C>        <C>        <C>
            Dividend yield                  0%         0%         0%
            Volatility                    143%        30%        20%
            Risk free interest rate      5.23%      7.00%      7.00%
            Expected life in years          5         10         10
</TABLE>



                                      F-14
<PAGE>   61
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Stock option activity during the periods indicated was as follows:


<TABLE>
<CAPTION>
                                                                 Weighted
                                            Number of         Average Exercise
                                             Options               Price
                                            ---------         ----------------
<S>                                         <C>               <C>
           Balance at December 31, 1996       289,172            $  18.90
                      Granted                 269,400            $  23.64
                      Exercised               (60,310)           $   6.78
                      Forfeited               (82,010)           $  34.20
                      Expired                      --                  --
                                             --------
           Balance at December 31, 1997       416,252            $  20.70
                      Granted                 370,004            $   4.87
                      Exercised                (8,250)           $   7.00
                      Forfeited              (277,852)           $  18.23
                      Expired                      --                  --
                                             --------
           Balance at December 31, 1998       500,154            $  10.60
                      Granted                 307,670            $   1.20
                      Exercised                    --                  --
                      Forfeited              (114,925)           $  19.10
                      Expired                    (792)           $   8.34
                                             --------
           Balance at December 31, 1999       692,107            $   4.98
                                             ========
</TABLE>

The fair value of options granted in 1999, 1998 and 1997 was $1.09, $2.72 and
$15.36 per share, respectively. The following table summarizes information about
stock options outstanding as of December 31, 1998:

<TABLE>
<CAPTION>
                                      Options outstanding                           Options exercisable
                          ---------------------------------------------         ---------------------------
                                             Weighted
                                              Average          Weighted                            Weighted
                                             Remaining         Average                             Average
    Range of                Number          Contractual        Exercise           Number           Exercise
 exercise prices          Outstanding          Life             Price           Exercisable         Price
 ---------------          -----------       -----------       ---------         -----------        --------
<S>                       <C>               <C>               <C>               <C>                <C>
 $1.00 to $1.31             292,670              9.19          $   1.21            66,670          $   1.23
 $3.78 to $4.50             272,745              8.03              4.45           189,412              4.43
 $6.00 to $8.64              52,919              7.08              6.07            36,252              6.11
     $10.50                  19,890              1.08             10.50            19,890             10.50
$22.50 to $23.64             49,215              5.17             23.45            45,603             23.43
$37.50 to $50.28              4,668              1.57             41.15             4,668             41.15
                           --------                                              --------
$1.00 to $50.28             692,107              8.00              4.98           362,495              7.21
                           ========                                              ========
</TABLE>



                                      F-15
<PAGE>   62
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11. INCOME TAXES

        The Company's income tax provision for the years ended December 31,
1999, 1998 and 1997 was allocated as follows:

<TABLE>
<CAPTION>
                                                 1999          1998          1997
                                               ------------------------------------
<S>                                            <C>           <C>           <C>
        Income from continuing operations      $     --      $     --      $     --
        Discontinued operations                 140,000            --            --
        Extraordinary item                           --            --            --
                                               ------------------------------------
                                               $140,000      $     --      $     --
                                               ====================================
</TABLE>

        A reconciliation of the significant differences between the Company
effective tax rate applicable to income from continuing operations and the
federal statutory tax rate for the years ended December 31, 1999, 1998, and 1997
is as follows:

<TABLE>
<CAPTION>
                                                1999          1998          1997
                                               ------        ------        ------
<S>                                            <C>           <C>           <C>
        Federal statutory income tax rate       (34.0)%       (34.0)%       (34.0)%
        State taxes, net of federal              (6.0)         (6.0)         (6.0)
            benefit
        Increase in valuation allowance          40.0          40.0          40.0
                                               ----------------------------------
        Effective income tax rate                 0.0%          0.0%          0.0%
                                               ==================================
</TABLE>

        The net deferred tax assets and liabilities consist of the following at
December 31:

<TABLE>
<CAPTION>
                                                        1999               1998
                                                     ------------       ------------
<S>                                                  <C>                <C>
        Deferred tax assets:
           Net operating loss carryforwards          $ 12,972,000       $ 15,037,000
           Research and development credits               595,000            527,000
           Other                                        1,763,000          1,088,000
                                                     ------------       ------------
                              Total                    15,330,000         16,652,000
        Valuation allowance                           (15,330,000)       (16,652,000)
                                                     ------------       ------------
        Net deferred tax assets and liabilities      $         --       $         --
                                                     ============       ============
</TABLE>

        At December 31, 1999, the Company had approximately $32,429,000 and
$10,718,000 in net operating losses for federal and state tax purposes,
respectively, available to be carried forward to future periods. The carry
forwards expire from 2005 to 2018 for federal purposes and from 2012 to 2018 for
state purposes.

        The Company's credits for research and development available to offset
future federal income taxes expire from 2002 to 2013.

        The Company has recorded a valuation allowance equal to the deferred tax
assets based on its continuing operating losses. The valuation allowance was
decreased by $1,322,000 in 1999 and increased by $3,376,000 in 1998.

        During the last three years, the Company has had more than a 50% change
in ownership. Section 382 of the Internal Revenue Code and comparable state
statutes impose certain annual limitations on the utilization of net operating
loss carry forwards and research and development credits that can be used to
offset income in future periods.



                                      F-16
<PAGE>   63
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.  LEASES

        Operating Leases

        The Company leases its facilities under operating type leases expiring
through 2004. Rental expense is recognized on a straight-line basis over the
life of the lease. As a result of the Company's consolidation of certain of its
facilities and re-negotiation of its leasing arrangements in February 2000, the
Company recorded an expense in 1999 for the write-off of $137,211 in net book
value of impaired leasehold improvements. At December 31, 1999, other current
liabilities include an accrual of $103,247 for rent concessions negotiated as
part of the new leasing arrangements. Total rental expense under operating type
leases during the years ended December 31, 1999, 1998 and 1997 was $531,000,
$379,000 and $394,000, respectively.

        Future minimum annual lease payments under operating leases as of
December 31, 1999 are:

<TABLE>
<CAPTION>
                    Year                               Amount
                    ----                              --------
<S>                                                   <C>
                        2000                          $238,000
                        2001                          $154,000
                        2002                          $152,000
                        2003                          $160,000
                        2004                          $124,000
                  Thereafter                          $     --
</TABLE>

13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

        Non-cash investing and financing activities:

        During the year ended December 31, 1999, 17,718 shares of Series A
convertible preferred stock were converted into 11,813 shares of common stock.

        During the year ended December 31, 1998, the Company extinguished debt
with a carrying value of $4,818,800 through the issuance of convertible
preferred stock and common stock warrants with a fair value of $5,986,880
including transaction fees, resulting in an extraordinary loss of $1,168,000.
The Company satisfied its obligation under a $1,000,000 note payable through the
issuance of 222,223 shares of common stock. During 1998, 283,236 shares of
Series A convertible preferred stock were converted into 188,824 shares of
common stock. The Company issued a note in 1998 for $342,550 in connection with
the purchase of a one-third interest in Oncometrics Imaging Corp. stock it did
not already own.



                                      F-17
<PAGE>   64
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


        During the year ended December 31, 1997, the Company issued common stock
and warrants for the payment of interest, fees, consideration for the merger
(see Note 15) and patents. The value of common stock and warrants issued was
$2,101,000, $77,500, $3,582,000 and $206,000, respectively. The Company received
common stock as compensation for a litigation settlement, valued at $22,272 and
recorded as treasury stock in the accompanying consolidated balance sheet.

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                ------------------------------------------
Cash paid during the year for:                    1999            1998            1997
                                                ----------      ----------      ----------
<S>                                             <C>             <C>             <C>
Operating Activities
      Interest                                  $  292,008      $1,336,566      $  821,719
      Income taxes                              $  105,000              --              --
Investing and Financing Activities
      Deposit reclassified to fixed assets              --      $  125,000              --
</TABLE>


14. COMMITMENTS AND CONTINGENCIES

        The company is involved in legal proceedings with certain vendors
regarding disputes over delivery of good and services. The Company has recorded
an estimated accrual of $485,000 relating to the probable settlement of these
legal proceedings. See Note 8, Other Current Liabilities.

15. MERGER AND RELATED TRANSACTIONS

        On December 29, 1995, the Company acquired all of the common stock of
AccuMed, Inc. and its wholly owned subsidiary. Pursuant to the terms of the
merger agreement, 313,650 shares of common stock and 21,158 warrants were issued
to AccuMed, Inc. stockholders and warrantholders respectively, which were
contingent and subject to forfeiture if specified performance goals were not
achieved by the merged entity during the 24 months beginning January 1, 1996.
The contingency associated with 156,825 shares of common stock and 10,579
warrants was resolved (performance goal achieved) in March 1996 resulting in
contingent consideration of approximately $5,430,000. Such amount has been
allocated to acquired proprietary technology ($1,930,000) and in-process
research and development ($3,500,000). The acquired proprietary technology is
being amortized over the expected period to be benefited of ten years, with the
in-process research and development charged to operations during 1996. The
contingency associated with the remaining 156,825 shares of common stock and
10,579 warrants was resolved (performance goal achieved) in March 1997 resulting
in contingent consideration of approximately $3,582,000. Such amount has been
recorded as goodwill associated with the merger and charged off in its entirety
to operations during 1997 as an impaired asset.

        The acquisition of AccuMed, Inc. was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
assets purchased and liabilities assumed based upon their estimated fair values
at the date of acquisition. The excess of the purchase price over the fair value
of the tangible assets has been allocated to identifiable intangibles of
acquired proprietary technology ($2,645,000) and in-process research and
development ($3,965,000). The acquired proprietary technology is being amortized
over the expected period to be benefited, which is estimated to be 10 years with
the in-process research and development charged to operations at the date of
acquisition.

        On October 15, 1996, the Company acquired a two-thirds interest in
Oncometrics Imaging Corp. ("Oncometrics") for a total purchase price of
$4,000,000, which included $2,000,000 to be used solely as working capital for
Oncometrics. On June 29, 1998, the Company acquired the remaining 33% of the
outstanding capital stock of Oncometrics Imaging Corp. ("Oncometrics") it did
not already own. The Company paid $342,500 in cash and $342,500 ($500,000 in
Canadian dollars) in a convertible note in exchange for the stock and a loan
payoff to the seller of $154,000. The note is



                                      F-18
<PAGE>   65
                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


convertible, in whole or in part, into common stock of the Company at a price of
$1.43 per share. See Note 9 Long-Term Debt.

        These acquisitions have been accounted for using the purchase method of
accounting, and accordingly the purchase prices have been allocated to assets
purchased and liabilities assumed based on the fair values at the dates of
acquisition. The excess purchase price consists of $1,645,200 of acquired
in-process research and development and $1,796,000 of purchased technology. The
Company's share of Oncometrics' operations from the dates of acquisition have
been recorded in the consolidated statements of operations.

16.  RELATED-PARTY TRANSACTIONS

        On February 2, 1998 a director/stockholder loaned the Company $1,000,000
at 12% annual interest plus 16,667 5-year warrants to purchase common stock of
the Company at an exercise price of $9.36 per share. The loan was converted into
common stock under the terms of the private placement of common stock in March
1998 and the exercise price of the warrants were repriced to $4.50 per share.

        In March 1997, the Company received a $6,000,000 bridge loan from a
director/shareholder of the Company. The loan was repaid 10 days later, together
with interest and a prepayment premium of $130,000. The Company used the
proceeds from this loan to purchase the ESP Product Line of its discontinued
microbiology division.

        In September 1997, the Company received a $500,000 bridge loan from a
director/shareholder of the Company. The loan was repaid 30 days later, together
with interest and a prepayment premium of $10,000 and 8,334 5-year warrants to
purchase common stock of the Company at an exercise price of $15.00 per share.
The warrants were valued at $39,500 and recorded as interest expense in 1997.

17.  DEBT EXTINGUISHMENT

        In 1998, the Company incurred an extraordinary loss of $1,168,080
related to the exchange of $5,275,000 in principal amount of its 12% convertible
notes into Series A convertible preferred stock. This loss included stock,
warrants and fees paid to the placement agent, warrants issued as an inducement
to the converting noteholders, and the write-off of a proportional amount of
deferred financing costs associated with the issuance of the convertible notes.
The placement agent received fees of $175,000, 8,334 shares of common stock
valued at $40,000, 7-year warrants to purchase 58,334 shares of common stock at
$6.75 per share valued at $84,000, and repricing of previously issued 4-year
warrants to purchase 33,334 shares of common stock at an exercise price of
$18.75 per share to $6.75 per share, valued at $26,000. The converting
noteholders received 5-year warrants to purchase 207,557 shares of common stock
at an exercise price of $6.75 per share, valued at $37,380.

        The Company utilized the Black-Scholes pricing model to determine the
fair value of warrants issued. The following assumptions were incorporated into
the model: risk-free rate - 6%, expected volatility - 30%, and expected dividend
- zero. The risk-free rate is determined based on the interest rate of U.S.
government treasury obligations with a maturity date comparable to the life of
the warrant issued. Other assumptions, relating to warrant life, strike price
and stock price, are determined at the date the warrant was issued.



                                      F-19
<PAGE>   66

                   ACCUMED INTERNATIONAL, INC. AND SUBSIDIARY
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18.  SUBSEQUENT EVENTS

        On March 24, 2000, the Company entered into a license and development
agreement with Ventana Medical Systems, Inc. ("Ventana"), whereby the Company
agreed to license its patents and proprietary information and rights to Ventana
for certain medical applications. Under the terms of the agreement, the Company
has received an up-front licensing fee, advance royalty payment, and development
funds. Additional funds will be received over the next twelve months for
contract research, purchase of AcCell Systems, and royalties to be received in
the future on the sale of covered products by Ventana.

        On March 29, 2000, the Company entered into patent and technology
license agreement with BCAM International, Inc. ("BCAM"), whereby the Company
agreed to license its patents and proprietary information and rights to BCAM for
certain medical applications. Under the terms of the agreement, the Company will
receive guaranteed license fees over the next nine months, shares of BCAM common
stock, and royalties to be received in the future on the sale of covered
products by BCAM.



                                      F-20
<PAGE>   67

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
AccuMed International, Inc.:

Under date of March 29, 2000 we reported on the consolidated balance sheet of
AccuMed International, Inc. and subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999, as contained in the annual report on Form 10-K for the year 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule included in
the annual report on Form 10-K for the year 1999. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.


                                                   /s/  KPMG LLP

Chicago, IL
March 29, 2000





                                      F-21
<PAGE>   68

                   ACCUMED INTERNATIONAL, INC AND SUBSIDIARIES
                 SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
   Reserves and
    Allowances
  deducted from
  asset accounts
                                         Additions
                        Balance at       Charged to       Write-offs                              Balance
                        Beginning        Costs and           and               Other             at End of
   Description          of Period         Expenses        Disposals           Changes              Period
-----------------      -----------      -----------       -----------       -----------          -----------
<S>                    <C>              <C>               <C>               <C>                  <C>
  Allowance for
  uncollectible
     accounts
    receivable

    Year Ended
December 31, 1997               --               --                --                --                   --

    Year Ended
December 31, 1998               --      $   245,592                --                --          $   245,592

    Year ended
December 31, 1999      $   245,592               --       ($  245,593)               --                   --

    Inventory
Valuation Reserve

    Year ended
December 31, 1997               --               --                --                --                   --

    Year ended
December 31, 1998               --               --                --                --                   --

    Year ended
December 31, 1999               --      $ 1,106,399                --                --          $ 1,106,399
</TABLE>


<TABLE>
<CAPTION>
     Reserve
 Allowances which
 support balance
  sheet caption
     reserves
                                        Deductions
                        Balance at      Credited to        Payments                                Balance
                        Beginning        Costs and          Under             Other               at End of
   Description          of Period        Expenses          Warranty          Changes                Period
-----------------      -----------      -----------       -----------       -----------          -----------
<S>                    <C>              <C>               <C>               <C>                  <C>
Warranty Reserves

    Year ended
December 31, 1997      $    30,000               --                --                --          $    30,000


    Year ended
December 31, 1998      $    30,000               --                --       ($   18,000)(a)      $    12,000


    Year Ended
December 31, 1999      $    12,000      ($   12,000)               --                --                   --
</TABLE>



                    (a) Reserves of Oncometrics Imaging Corp.
                          reclassified in current year