TRIPATH IMAGING INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________

COMMISSION FILE NUMBER: 0-22885
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TRIPATH IMAGING, INC.
(exact name of registrant as specified in its charter)

DELAWARE 56-1995728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

780 PLANTATION DRIVE, BURLINGTON, NORTH CAROLINA 27215
(Address of principal executive offices including zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (336) 222-9707

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE
(TITLE OF EACH CLASS)

Indicate by check mark whether the registrant (1) has 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 check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 voting stock held by non-affiliates of the
registrant as of March 25, 2002 was: $127,533,474.

There were 37,454,684 shares of the registrant's Common Stock outstanding
as of March 25, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement of the Registrant for the
Registrant's 2002 Annual Meeting of Shareholders to be held on May 23, 2002,
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of
December 31, 2001, are incorporated by reference into Part III of this Form
10-K.
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TRIPATH IMAGING, INC.

TABLE OF CONTENTS

As used in this report, the terms "we," "us," "our," "TriPath Imaging" and the
"Company" mean TriPath Imaging, Inc. and its subsidiaries, unless the context
indicates another meaning.

Note Regarding Trademarks

AutoCyte(R), AutoCyte Quic(R), AutoPap(R), CytoRich(R), ImageTiter(R),
NeoPath(R), PAPMAP(R), and PREPAP(R) are registered trademarks of TriPath
Imaging, Inc. TriPath Imaging(TM), TriPath Care Technologies(TM), i(3)
Series(TM), FocalPoint(TM), PrepMATE, PrepStain, SurePath(TM), SlideWizard(TM),
AutoCyte PREP(TM) and PREPAP(TM), are trademarks of TriPath Imaging, Inc. All
other products and company names are trademarks of their respective holders.

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains forward-looking statements,
including statements regarding our results of operations, research and
development programs, clinical trials and collaborations. Statements that are
not historical facts are based on our management's current expectations,
beliefs, assumptions, estimates, forecasts and projections. These
forward-looking statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that could cause actual results to
differ significantly from those discussed in these forward-looking statements.
Important factors that could cause or contribute to these differences include
those described in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Critical Accounting Policies"
and in "Factors Affecting Future Operating Results" attached hereto as Exhibit
99.1 and incorporated by reference into this Form 10-K. You should not place
undue reliance on the forward-looking statements, which speak only as the date
of this report. We undertake no obligation to update these statements to reflect
events or circumstances occurring after the date of this report or to reflect
the occurrence of unanticipated events, except as required by law.

THE COMPANY

We develop, manufacture, market, and sell proprietary products for cancer
detection, diagnosis, staging, and treatment selection. We are using our
proprietary technologies, and know-how to create an array of products designed
to improve the clinical management of cancer. We were formed in September 1999
through the merger of AutoCyte, Inc. and NeoPath, Inc. and acquisition of the
technology and intellectual property of Neuromedical Systems, Inc. We were
created to leverage the complementary nature of the products, technologies, and
intellectual property developed by our predecessor companies, all of whom were
early pioneers in the application of computerized image processing and analysis
to detect the often subtle cellular abnormalities associated with cancer and its
precursors. To date, we have developed an integrated solution for cervical
cancer screening and other products that deliver image management, data
handling, and prognostic tools for cell diagnosis, cytopathology and
histopathology. We believe that recent advances in genomics, biology, and
informatics are providing new opportunities and applications for our proprietary
technology.

We are organized into two operating units:

- Commercial Operations, through which we manage the market introduction,
sales, service, manufacturing and ongoing development of our products;
and

- TriPath Oncology, our wholly-owned subsidiary through which we manage the
development of molecular diagnostic and pharmacogenomic tests for cancer.

Commercial Operations

During 2002, we adopted the trademark TriPath Care Technologies to describe
our commercial product offering and to communicate the broad nature of our
corporate vision and the value created by our growing product portfolio,
including the "i(3)" series and SlideWizard product lines.

To further refine our market positioning and to enhance brand awareness
among our customers, we re-branded our cervical cancer screening products under
the "i(3)" product line. Our "i(3)" series product line for screening for
cervical cancer is the first integrated system for the collection, preparation,
staining and computerized analysis of conventional Pap smears and liquid-based,
thin-layer preparations. Our i(3) product line includes the:

- SurePath System, a proprietary, liquid-based cytology sample collection,
preservation and transport system and PrepStain, an automated slide
preparation system that produces slides with a standardized, thin layer
of stained cervical cells, which together were formerly known as the
AutoCyte PREP System ("PrepStain"). SurePath addresses errors in cell
sample collection and slide preparation while providing a liquid medium
for adjunctive laboratory testing of specimens, whereas the PrepStain
slide
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processor reduces the complexity of interpretation by providing a homogeneous,
more representative and standardized thin-layer of stained cells and a liquid
medium for adjunctive laboratory testing of specimens. The FDA approved
PrepStain in June 1999.

- FocalPoint SlideProfiler System, a slide screening system that uses
proprietary technology to distinguish between normal thin-layer or
conventional Pap smears and those that have the highest likelihood of
abnormality, formerly known as the AutoPap Primary Screening System
("FocalPoint"). In May 1998, FocalPoint was approved by the FDA as the
first and only fully automated device for primary screening of
conventional Pap smear slides. Additionally, in October 2001, the
FocalPoint was approved by the FDA to process thin-layer slides prepared
using our PrepStain system.

Our SlideWizard product line includes the Image Titer, an FDA cleared
method for automating the measurement of antinuclear antibody, research
applications for DNA, immunohistochemical quantification, cellular analysis, and
expression quantification, a system for the transmission and interpretation of
tissue specimens via remote telecommunications or "telepathology", and a
software based storage and retrieval system for microscopic images.

TriPath Oncology

Our TriPath Oncology business focuses on developing and commercializing
molecular diagnostic and pharmacogenomic tests for a variety of cancers. On July
31, 2001, we entered into a series of agreements with Becton, Dickinson and
Company ("BD") to develop and commercialize molecular diagnostics and
pharmacogenomic tests for malignant melanoma and cancers of the cervix, breast,
ovary, colon and prostate as part of the ongoing strategic alliance between BD
and Millennium Pharmaceuticals, Inc. ("Millennium").

The goal of our molecular oncology program is to utilize discoveries in
genomics and proteomics research to develop and commercialize diagnostic and
pharmacogenomic tests to improve the clinical management of cancer.
Specifically, we have active programs in development designed to identify
individuals with cancer at the earliest possible stage of the disease, provide
individualized predictive and prognostic information, guide treatment selection
for patients with cancer, and predict disease recurrence. The core products and
services we are developing through our collaboration with BD will be based upon
genomic and proteomic markers identified through discovery research, conducted
at Millennium, under its existing research and development agreement with BD.
TriPath Oncology will clinically validate and develop these proprietary cancer
markers into commercial diagnostic and pharmacogenomic oncology products and
services. Commercial responsibilities for resulting products will be shared
between BD and TriPath Oncology. BD will continue to fund additional discovery
research activities at Millennium.

We believe that the successful development and commercialization of
genomics based oncology products will require:

- identification and validation of novel molecular markers;

- expertise in assay formatting and development; and

- development of clinical instrumentation that will permit multiple and
quantitative gene and protein expression analyses within cells.

Completion of these steps requires technology and expertise in gene
discovery and proteomics, assay formatting and development, and image analysis
and instrumentation. We believe that our proprietary assets and technologies in
imaging analysis together with the broad access to novel molecular markers
offered by our relationship with BD, will provide us with the necessary
technology and expertise to successfully develop improved diagnostic oncology
products. We also believe that the establishment of TriPath Oncology as a
separate business unit will provide the flexibility necessary to create an
organization and dedicated management team with top-notch skills and expertise
in assay formatting and development, thereby fulfilling our vision for success
in the molecular oncology diagnostics market.

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THE CANCER MARKET

Cancer is a chronic and complex disease characterized by uncontrolled
growth and spread of abnormal cells. According to the World Health Organization
(WHO), the worldwide incidence of cancer in the year 2000 exceeded 10 million
cases, excluding basal and squamous cell cancers of the skin. The WHO further
estimates that approximately 6.2 million deaths worldwide were attributable to
cancer in 2000. In the United States, the American Cancer Society (ACS)
estimates that roughly 1.3 million cases of non-skin cancers were diagnosed in
2001. In the United States, men have about a 1 in 2 lifetime risk of developing
cancer, and women have about a 1 in 3 risk. The most frequently diagnosed
cancers include cancer of the prostate, breast, lung and colon, which combined
account for just over one half of all non-skin cancers diagnosed in the United
States.

Treatments for cancer are expensive and oftentimes ineffective. Current
treatments for cancer include surgery, radiation, and chemotherapy. Surgery is
limited in its effectiveness because it treats the tumor at a specific site and
may not remove all the cancer cells, particularly if the cancer has spread.
Radiation and chemotherapy can treat the cancer at multiple sites but can cause
serious adverse side effects because they destroy healthy cells and tissues as
well as cancer cells. The ACS projected that in 2001, approximately one half
million Americans died of cancer-related illness and that the five year relative
survival rate for individuals diagnosed with cancer is about 60%. The National
Institutes of Health estimates that the overall costs of cancer-related illness
in the US exceed $180 billion in 2000.

The market for cancer diagnostics is expected to grow substantially due to
the increased incidence of cancer, an aging population, early cancer awareness,
pressure to reduce cancer mortality rates and improvements in healthcare
screening systems. The existing cancer diagnostics market is characterized
predominantly by tests or methods that identify the presence of surrogate
markers or cellular abnormalities that are correlated with the presence or stage
of disease but, for the most part, do little to provide information specific to
the disease or the outcome of the patient. The current technologies used in
cancer diagnostics consist primarily of tumor marker immunoassays, cytology
evaluation and mammography.

While some of the underlying causes of specific cancers can be traced to a
single genetic alteration, it is now believed that multiple complex genetic
changes underlie the development of the vast majority of cancers. However, the
identification of genetic anomalies alone is unlikely to prove clinically
significant as many genetic events may have minimal or no impact on a patient's
health, whereas others may pose life-threatening health risks. Determining the
interrelationship of genes and proteins, and their interaction with one another
will be as important as understanding the underlying cause of the genetic change
itself. The scientific community's knowledge of these underlying genetic factors
has only recently come about through the development of more sophisticated
research and discovery tools, investment in mapping of the human genome, and
development of bioinformatics capabilities to assess the clinical relevance of
these genetic abnormalities.

In recent years, novel molecular oncology tests have been introduced to
provide additional clinical information previously unavailable to assess an
individual's predisposition or lifetime risk of developing certain cancers.
These tests are also used to screen and assist in the diagnosis of the presence
of disease, to assess patient prognosis and outcome more accurately, to guide
therapeutic selection in the management of certain cancers and to monitor for
disease recurrence. These tests offer the promise of providing a more accurate,
disease-specific understanding of cancer to best address the needs of medical
practitioners.

Cervical Cancer

Cancer of the uterine cervix, or cervical cancer, is the second most common
form of cancer among women worldwide, with approximately 500,000 new cases
reported each year. The American Cancer Society estimates that during 2002,
doctors will diagnose approximately 13,000 cases of invasive cervical cancer in
the United States, and that approximately 4,100 women will die in the United
States of cervical cancer in 2002.

Invasive cervical cancer spreads from the surface of the cervix to tissue
deeper in the cervix or to other parts of the body. Cervical cancer develops in
stages over a period of time beginning with pre-invasive changes that eventually
progress to invasion. Because of the progression to invasion, most all deaths
due to invasive

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cervical cancer can be prevented with early-stage detection and treatment. Early
detection is critical in promoting patient wellness. The more advanced the
cancer, the lower the chances are of managing and/or curing the patient. Thus,
regular cervical screening examinations are recommended in the United States and
many foreign countries.

The Conventional Pap Smear

The conventional Pap smear is currently the most widely used screening test
for cervical cancer. This test was developed by Dr. George N. Papanicolaou in
the 1940's and has essentially remained unchanged until the advent of
liquid-based cytology and automated computer primary screening. The Pap smear
detects pre-cancerous lesions before they invade the cervix while they are 100%
curable. It is estimated that clinical laboratories in the United States perform
over 50 million Pap smears annually. We believe that annual test volume outside
of the United States is in excess of 80 million. Of the 50 million annual Pap
smear tests performed in the United States, industry sources estimate that
approximately 2.5 million, or five percent, are diagnosed at the pre-cancerous
or cancer stage.

In the United States, although widespread and regular use of the
conventional Pap smear has contributed to a greater than 70% decrease in deaths
resulting from cervical cancer, the death rate from the disease has declined at
a rate of only approximately 1.6% per year. We believe that despite the success
of the conventional Pap smear as a diagnostic tool, there are practical
limitations to the this test which contribute to an estimated $5.0 billion in
annual costs. These costs are associated with the treatment of advanced
pre-cancerous and cancerous cervical disease. Additional costs are also incurred
by third-party payers due to repeat testing for poor quality smears and by
clinical laboratories due to litigation associated with inaccurate diagnoses.
The introduction of liquid-based cytology has improved specimen adequacy and
automated computer screening has improved diagnostic accuracy.

The evaluation of conventional Pap smears involves the science of cytology,
which includes the microscopic evaluation and interpretation of pre-cancerous
and malignant morphological changes in cells. The process begins with the
collection of cervical cells during a gynecologic pelvic examination. To obtain
a Pap smear, a clinician uses a sampling device to scrape the surface of a
woman's uterine cervix to collect a sample of cervical cells. If the
conventional Pap smear method is used, this sample is smeared onto a microscope
slide and the sampling device is discarded. If our SurePath liquid-based method
is used, the device is placed into our proprietary fluid and the cells are
suspended in the fluid media.

After the cervical sample is taken, the sample and patient information are
sent to a clinical laboratory for further processing, screening and diagnosis. A
cytotechnologist who is specially trained to evaluate cell changes screens and
interprets the slide. Any abnormality is further reviewed by a medical doctor or
pathologist.

Typically, about 90% to 95% of all Pap smears are classified as normal. Pap
smears classified as other than normal specify the degree of abnormal change.
For example atypical cells commonly referred to as "atypia," represents the
least significant change with a very low likelihood to progress to cancer if
left untreated. The next classification is low-grade squamous intraepithelial
lesions ("LSIL") which has a slightly higher likelihood of progressing to cancer
if left untreated but overall is still relatively low. High-grade squamous
intraepithelial lesions ("HSIL") represent changes that biologically have the
highest likelihood of progressing to cancer if left untreated. The most serious
classification is the diagnosis of cancer itself. Optimally, the Pap test's
objective is to detect the atypical to HSIL lesions as well as early invasive
cancer so the lesion can be treated and the patient cured.

Limitations of the Conventional Pap Smear Test Process

Each Pap smear slide sample typically contains 50,000 to 300,000 cervical
cells. The process of manually screening and interpreting a conventional Pap
smear requires intense visual examination of the slide sample through a
microscope. Because abnormal cells are not readily visible, errors may occur and
abnormal cells may not be seen by the cytotechnologist during the microscopic
review process. Abnormal cells can be obscured by blood, mucus or white blood
cells making them difficult to find and interpret. Other factors such
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as air-drying distorts the cells, resulting in normal cells being misinterpreted
as abnormal, or abnormal cells being misinterpreted as normal. Most of these
limitations are a result of poor specimen quality and have been shown to be
minimized by using a liquid-based collection method

Pap smears also have a highly variable false-negative rate. A
false-negative results when the patient actually has evidence of disease but the
Pap smear is reported as negative. False-negative rates of the conventional Pap
smear vary widely among laboratories and have been reported to range from 5% to
55%, depending on factors such as the skill and experience of the practitioner
who collects the sample and prepares the slide, and the level of training of the
cytotechnologist and pathologist who review the slide. Studies suggest that the
highest percentage of false negative diagnoses are the result of inadequacies in
sample collection and slide preparation. In this situation, the abnormal cells
are either not collected properly on the sampling device or are collected
properly on the sampling device but are not transferred properly to the
microscopic glass slide. Other causes of false-negatives are attributable to
detection and interpretation errors where abnormal cells are present on the Pap
smear but they are either not seen at all, or are seen but interpreted as
negative.

A study published in the American Journal of Clinical Pathology reported
that, with a conventional Pap smear, as much as 80% of the sample taken from a
patient may not be transferred to the slide and remains on the discarded
collection device. In addition to inadequate cell transfer, the conventional Pap
smear slide preparation process may produce inconsistent and non-uniform slides
with extreme variability in quality, often making examination difficult. If a
Pap smear is interpreted as unsatisfactory or less-than-optimal because of poor
quality sampling or because of obscuring factors, the clinician may be prompted
to call the patient back for a repeat test.

When using the conventional Pap smear process, a physician is unable to
perform additional testing using the original patient sample. If additional
testing is required, the patient must return to the physician's office to
provide a second sample. This can cause a great deal of stress to the patient,
thereby reducing the accuracy of the second sample. The SurePath liquid
collection method allows the laboratory access to the remaining cellular
material from the original patient sample. Repeat and ancillary testing from the
residual cell solution may provide a more cost effective patient management
program for inconclusive Pap smear tests, and may reduce a patient's stress and
anxiety associated with repeat testing.

OUR PRODUCTS

THE I(3) SERIES PRODUCT LINE

Our "i(3)" series product line of cervical cytology products are intended
to address the current limitations of the conventional Pap smear process and the
lack of automation in the cytopathology laboratory. The products within our
"i(3)" series product line work together as part of an integrated system for the
collection, preparation, staining and computerized analysis of liquid-based,
thin-layer Pap preparations and the screening of conventional Pap smears. The
silent exponent "3" suggests the expertise contributed by each of our three
predecessor companies, AutoCyte, NeoPath and NSI, as well as the value of these
component products in providing intelligent identification through innovation.
Within the "i(3)" series line, individual products have been renamed to better
communicate the value they provide to the physician, patients and laboratory
professionals. Our "i(3)" series line of cervical cytology products includes
SurePath, formerly called CytoRich, a proprietary, liquid-based cytology sample
collection, cell preservation and transport system, and PrepStain, an automated
slide preparation system that produces slides with a standardized, thin layer of
stained cervical cells. In addition, the i(3) series includes FocalPoint which
utilizes proprietary technology to distinguish between either normal thin-layer
or normal conventional Pap smears and those that have the highest likelihood of
abnormality.

The PrepStain System (formerly AutoCyte PREP)

Our PrepStain system consists of proprietary reagents, plastic disposables
and automated equipment for preparing a thin-layer of cervical cells on a
SurePath microscope slide. The SurePath slide preparation process begins with
the clinician collecting a patient's cervical sample using a conventional
collection device provided in the SurePath collection kit, in this case a
cervical broom with a detachable head. The clinician then

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immediately places and detaches the head of the collection device in a vial
containing our proprietary SurePath preservative fluid, thereby retaining all of
the cells from the collection device. The sample is thoroughly mixed, resulting
in a randomized cell suspension which is removed from the vial and layered onto
a proprietary liquid density reagent in a plastic centrifuge tube using our
patented syringe device. Batch centrifugation is then conducted on the cell
suspension to remove excess blood, inflammatory cells and other debris from the
sample.

Once centrifugation is completed, the lab technician places the tube
containing the separated diagnostic cells onto an automated pipetting system.
This pipetting system then distributes the cervical cells in a thin-layer on the
microscope slide and discretely stains the slide for subsequent analysis. A
SurePath slide typically contains approximately 50,000 to 160,000 diagnostic
cells that are distributed uniformly over a 13-mm diameter circle. PrepStain is
currently capable of preparing and discretely staining approximately 48
thin-layer SurePath slides in approximately one hour.

We have also developed an automated accessory to the PrepStain system
called PREPmate that reduces the number of manual preparation steps required on
the PrepStain system. PREPmate is intended to reduce the time required to
prepare samples for processing on the PrepStain instrument. The FDA approved
PREPmate for use in the U.S. in May 2001.

Advantages of PrepStain Over the Conventional Pap Smear Process

We believe that the PrepStain system offers the following advantages over
the conventional Pap smear process:

- More Complete Sample Collection. Because the clinician places the
collection device directly into the SurePath vial, the entire patient
sample is contained in our proprietary preservative fluid. Since all
collected cells are retained, the sub-sample on the thin-layer
preparation is more representative of the patient's specimen. In a
conventional Pap smear process, as much as 80% of the cervical sample can
be inadvertently discarded on the collection device after smearing the
sample onto the slide.

- Improved Sample Quality. By eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process, PrepStain virtually eliminates air-drying, generates a more
complete fixation, and provides a more standardized preparation process
in a controlled, laboratory environment. This more uniform cell sample
distribution also reduces cell clumping and obscuring from debris. We
believe that SurePath thin-layer slides provide cytotechnologists with
samples that are clearer, more representative and easier to diagnose than
conventional Pap smear slides.

- Improved Cytotechnologist Productivity. In our clinical studies, some
laboratories using PrepStain experienced a greater than 50% increase in
cytotechnologist screening productivity. The impact on cytotechnologist
efficiency is important to clinical laboratories because of the growing
shortage of qualified cytotechnologists in recent years and the need to
create and maintain a desirable working environment for cytology
professionals.

- Automated and Discrete Staining Function. PrepStain includes a discrete,
or individual, slide staining function performed by a computer-controlled
robotic pipetting station. Unlike conventional Pap smear slides that are
often manually stained in a batch process using common reservoirs of
staining reagents, PrepStain's staining reagents are directly applied to
individual slides. As a result, staining reagents are not shared among
slides. We believe this reduces the risk of cross-contamination among
cell samples that can lead to inaccurate diagnoses.

- Multiple Testing Capability. Because our proprietary SurePath
preservative system enables the patient sample to be preserved for
several months, it permits, if necessary, preparation of several slides
from a single sample. We believe that the ability to perform adjunctive
slide-based tests using a single sample, together with the improved
quality of the slide itself, will reduce re-testing expenses typically
associated with inconclusive Pap smear tests. The residual patient sample
may also be used for other diagnostic protocols such as HPV testing,
infectious disease testing and application of specific tumor
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markers. Residual sample testing is under FDA review and will require FDA
approval if and when such testing is determined to be viable.

Advantages of PrepStain Over Other Thin-Layer Sample Preparation Systems

We believe that PrepStain offers the following advantages over other
thin-layer devices:

- Improved Sample Quality. The SurePath sample is processed through the
PrepStain series of proprietary liquid-based reagents and centrifuge
separation techniques designed to "enrich" the sample with a high
concentration of diagnostic cells. The only other currently FDA-approved
thin-layer device relies on membrane filtration. We believe that our cell
enrichment process more effectively controls the incidence of infectious
agents, mucus, inflammatory cells and other debris that may reduce the
performance of membrane filtration systems. We believe that, in
populations with high rates of gynecological infection, PrepStain's cell
enrichment process will result in a more representative slide sample that
should ultimately lead to a reduction in uncertain or incorrect
diagnoses.

- Higher Throughput. PrepStain has the capacity to produce approximately
48 thin-layer slide preparations in approximately one hour, using a
hands-off robotic system. We believe the throughput capability of
PrepStain to be the highest of any thin-layer product on the market
today.

- Improved Screening. The cell circle on a SurePath slide is smaller than
the cell circle on other available thin-layer devices, yet the number of
diagnostic cells is approximately equal. We believe that the smaller cell
circle, coupled with a lower incidence of infectious agents, mucus,
inflammatory cells and other debris, should result in faster, more
efficient screening by cytology professionals.

- Familiarity with Sample Preparation Approach. The PrepStain
centrifugation and robotic liquid handling techniques are similar to
conventional procedures already in use in clinical laboratories.

- Discrete Staining Function. Unlike other thin-layer devices that rely on
batch staining using common reservoirs of staining reagents, PrepStain
staining reagents are applied directly to individual slides. Discrete
staining offers several benefits, including reduced risk of
cross-contamination among cell samples, less degradation of the staining
solution and less staining time and lower costs.

- Increased Screening Output. Unlike other thin-layer devices, slides
prepared using the PrepStain instrument are approved by the FDA to be
screened by our FocalPoint Slide Profiler instrument. Using this
technology, up to 25% of slides screened by the FocalPoint can be
archived without requiring further human review, resulting in time and
labor savings to the laboratory. Further, use of the FocalPoint can
accelerate the laboratory's turnaround time on test results.

FocalPoint Slide Profiler (formerly AutoPap Primary Screening System)

FocalPoint Slide Profiler is a primary interpretation system designed to
distinguish between normal and abnormal Pap smears. FocalPoint was approved by
the FDA in May 1998 as a primary screening device for conventional Pap smear
slides. In October 2001, the FDA approved the use of FocalPoint as a primary
screening device for our PrepStain-prepared, SurePath thin-layer slides.
FocalPoint uses visual intelligence algorithms to improve accuracy in the
primary screening of conventional Pap smear slides and our SurePath thin-layer
slides. As approved by the FDA, FocalPoint identifies up to 25% of slides as
"within normal limits" and requiring no further review (sometimes referred to as
"sort rate" or "no further review rate"). Cytotechnologists then manually screen
the remaining slides with the assistance of FocalPoint's ranked review report.
This ranked review report shows the relative scores of the processed slides. At
least 15% of the highest-ranking slides that are classified normal by manual
review then undergo quality control re-screening. Outside the United States, the
FocalPoint is used, in some instances, to identify up to 50% of slides "within
normal limits."

FocalPoint works with a range of staining procedures used on
conventionally-prepared Pap smear slides. FocalPoint analyzes a Pap smear in
about the same time as a cytotechnologist. It holds 288 Pap smear slides at
once, is easy to load and unload and can operate continuously with minimal
intervention for up to 24 hours

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per day. We provide each clinical laboratory with on-site training, system
documentation, a comprehensive quality assurance program and ongoing customer
and technical support.

Advantages of FocalPoint Slide Profiler Over Conventional Pap Smear Screening

We believe the FocalPoint offers the following advantages over manual
screening of Pap smears:

- Improved Screening. Clinical laboratories rely on the manual screening
of Pap smear slides by cytotechnologists. The FocalPoint is the only
instrument approved by the FDA to process Pap smears without human
review. Clinical studies have shown that the use of FocalPoint to review
conventionally prepared Pap smear slides results in the identification of
significantly more abnormal slides as compared to the manual screening
process. We believe that the FocalPoint-assisted laboratory is better
able to correctly identify abnormal slides as compared to laboratories
that rely only on manual Pap smear screening. We believe that
laboratories using of FocalPoint will substantially improve their quality
of practice, and have the potential to reduce their exposure to liability
resulting from false-negative results.

- Detection of Pre-Cancerous Cells. In recent years the medical community
has increasingly focused on improving the quality of women's healthcare.
We believe that FocalPoint will allow laboratories to better detect
pre-cancerous cervical conditions and cervical cancer, thereby improving
the standard of care for female patients. Earlier detection and treatment
of cervical cancer can lower risks of morbidity and death.

- Increased Screening Output. Currently, in the U.S. market there exists a
shortage of trained and qualified cytotechnologists to review slides. By
archiving up to 25% of slides requiring "no further review", the
FocalPoint can reduce the number of Pap smears requiring cytotechnologist
review and therefore increase a laboratory's overall screening capacity.
The commercial laboratory industry is highly competitive, and improved
turnaround on result reporting can be an important source of
differentiation. By incorporating the FocalPoint, we believe laboratories
have an opportunity to substantially improve their turnaround times for
reporting results by eliminating and preventing backlogs from occurring
due to existing labor shortages.

- Improved Economics. In the past several years, the U.S. market has
transitioned from 100% conventional Pap smears to approximately in excess
of 50% thin-layer prepared Pap smears. While we anticipate the trend
toward thin-layer testing to continue, most laboratories currently offer
a mix of both testing methods. For conventional Pap smears screened by
the FocalPoint system, the national reimbursement limit amount is $15.73
for each sample that falls within the category of slides classified as
"within normal limits" and requiring no further review, or up to 25% of
all slides screened. The national reimbursement limit for the remaining
75% or more of the slides screened using the FocalPoint system and
requiring further review is $21.00. This compares favorably to a $14.00
national reimbursement limit for manual screening of conventional Pap
smears. We believe that the FocalPoint offers laboratories an effective
platform to transition to thin-layer testing while realizing the clinical
and economic benefits of computerized screening of both SurePath slides
and conventional Pap smears.

FocalPoint GS

In the fourth quarter of 2000, we launched the FocalPoint GS, the next
generation of the FocalPoint system for use outside the United States. The
FocalPoint GS further improves the screening process by automating the
microscopic analysis of SurePath thin-layer slides or conventional Pap smears
designated for further review by the FocalPoint Slide Profiler. The FocalPoint
GS integrates our SlideWizard technology into the FocalPoint screening process.
The FocalPoint instrument is interfaced to our SlideWizard platform and
networked to one or more commercially available microscopes that have been
equipped with computer-controlled automated stages for fast relocation of
"fields of interest" on microscopic slides. During the initial screening
process, and for each slide screened, the FocalPoint GS identifies and stores a
pre-set number of "fields of interest" in which it has calculated a higher
probability of abnormality. As with the FocalPoint Slide Profiler screening
process, the FocalPoint GS identifies up to 25% of slides as "within normal
limits" for which
9

no further review is required. For each of the remaining slides, the FocalPoint
communicates the location coordinates of the "fields of interest" to the
computer controlled microscope stage via the SlideWizard platform. The "fields
of interest" are electronically highlighted for easy identification. This
facilitates an abbreviated microscopic review and allows the cytotechnologist to
quickly analyze the slide for the presence of cellular abnormality. Abnormal
findings thus identified can be confirmed by full microscopic review. If no
abnormality is identified during this rapid cytologic assessment, no further
review is required.

We believe the established quality of the FocalPoint algorithms, coupled
with the highly focused nature of location-guided screening, allow a laboratory
to improve quality, increase capacity by up to 200% and alleviate backlogs
and/or labor shortages.

We anticipate initiating clinical trials in the second half of 2002 to
obtain data to support an application for U.S. approval of the FocalPoint GS by
the FDA. Upon completion of these studies, we plan to submit a PMA supplement to
the FDA for domestic approval of FocalPoint GS.

SLIDEWIZARD PRODUCT LINE

Our long-term product strategy involves the entry into the broader clinical
laboratory automation market. Our SlideWizard product line consists of PC-based
applications focused on the quantification of the nuclear DNA content of cells
and of specific molecules in cells or tissue sections (immunohistochemistry and
immunocytochemistry assays), the management and archiving of images and patient
information, the exchange of data via telepathology and the creation of
comprehensive reports combining color images and patient data. Our SlideWizard
line of products include:

- A telepathology system for the transmission and interpretation of tissue
specimens via remote telecommunication;

- A software-based image management, archiving and retrieval system for
microscopic images;

- A system that performs quantitative analysis of DNA by quantifying
Feulgen Stain, nuclear texture and morphology;

- A general purpose image analysis system for the recognition and
quantification of virtually any stain application on a variety of
biologic materials;

- ImageTiter, a method for automating measurement of antinuclear
antibodies, as well as research applications in histopathology; and

- LGS, an electronic dotting and labeling system.

In November 1995, we received 510K clearance by the FDA to market the
ImageTiter for automating antinuclear antibody testing. Our DNA and
immuno-quantification applications are presently offered "For Research Only" in
the United States. A SlideWizard workstation is also a component of the
FocalPoint GS system which is currently sold only outside the United States. We
expect to develop additional applications or modules in the field of tissue
diagnosis and prognosis to run on the proprietary SlideWizard platform. We may
elect to pursue regulatory clearance to market in the United States for
additional SlideWizard applications currently under development or developed by
us in the future.

MOLECULAR DIAGNOSTICS PRODUCTS

We are developing oncology products and services under our collaboration
with BD. These products and services will be based upon genomic and proteomic
markers identified through discovery research, conducted at Millennium under its
existing research and development agreement with BD. TriPath Oncology will
clinically validate and develop these proprietary cancer markers into commercial
diagnostic and pharmacogenomic oncology products and services. Commercial
responsibilities for resulting products will be shared between BD and TriPath
Oncology. BD will continue to fund additional discovery research activities at
Millennium.

10

We believe that our automated visual intelligence technology can be used
for other diagnostic tests that involve microscopic analysis of biological
specimens on glass slides, such as sputum, blood, urine or other samples. To
develop our technologies for other applications, we will need to adapt software
algorithms to analyze each of these other samples.

In February 2002, we executed a letter of intent to collaborate with
AmeriPath, Inc., a leading national provider of cancer diagnostics, genomic, and
related information, on the validation and clinical use of a novel gene
expression assay for malignant melanoma. According to the terms of the letter of
intent, AmeriPath will validate reagents and procedures to incorporate a novel
gene target for malignant melanoma. The assay results will be analyzed using our
Extended SlideWizard imaging and telepathology platform. We expect to finalize
this arrangement in May 2002, subject to obtaining various authorizations and
approvals, as well as the negotiation and execution of a definitive agreement.

Commercial development of additional products and services resulting from
our collaboration with BD is expected to begin in 2004 for the staging and
prognosis of cervical, breast and prostate cancer followed by assays for the
early detection and monitoring of ovarian, breast, prostate and colon cancer in
2005. In the interim, TriPath Oncology is investigating a number of potential
strategic alliances to complement, accelerate and augment the activities arising
from the collaboration with BD.

MARKETING AND SALES

Automation of the historically labor intensive in vitro diagnostic industry
has provided one of the largest opportunities for cost reduction in health care
services, a necessity driven by the current health care environment. Today,
virtually all sectors of the clinical diagnostics industry have been automated
to a significant extent. Automating strategies that have employed digital
technology and robotics, and specific techniques for sensing and identifying
specific analytes, such as radioimmunoassay, enzyme and enzyme-linked
immunoassay, flow cytometry, immunohistochemistry, and emerging DNA based
techniques, such as polymerase chain reaction and in situ hydridization, have
redefined the practice of clinical laboratory medicine. Laboratory application
of automated diagnostic systems has resulted in reduced labor costs, more
reliable diagnosis in shorter periods of time and the availability of digitally
formatted information which facilities the independent evaluation of
cost-effectiveness and the determination of evidence based core pathways
designed to optimize patient care. Concomitantly, the steadily increasing trend
toward complete process automation has driven the bottom line growth of
suppliers of diagnostic reagents and automating medical devices.

The two exceptions to this pattern of rapidly increasing automation in in
vitro diagnostics have been the cytopathology and histopathology laboratories,
where the standard of practice is defined by the visual examination and analysis
of cells and tissues. Cancer, in one of its many forms, is the disease most
often considered and evaluated in laboratories. Samples being examined are
typically tissue biopsies or Pap smears. The collection and preparation of these
samples have been resistant to the general wave of automation because they have
required human observation and analysis under a microscope. The observer is
required to identify and interpret what are often very subtle changes within
human tissues. These are often very complex, time consuming, tedious and
exacting tasks. The practices of cytopathology and histopathology remain largely
manual and labor intensive.

Previously, the complex biologic structural, or morphologic, changes
exhibited by cancer were considered too subtle for identification and
interpretation by computer or other automated apparatus. The conventional wisdom
was that cell and tissue diagnosis is an intrinsically qualitative process that
requires subjective visual judgment. However, as the science of image processing
and analysis has matured, it has become increasingly accepted that these
"subjective" signals can be redefined in terms of mathematical algorithms. These
algorithms, in turn, provide the basis for computerization and an automated
solution.

11

As the last frontier for automation in in vitro diagnostics, the
cytopathology and histopathology laboratories present a major opportunity. We
believe that automation of these laboratories through computerized image
analysis will:

- significantly reduce labor costs;

- drive improved standardization, reproducibility, and quality control;

- enhance the efficiency of treatment by increasing the accuracy and
precision of diagnosis, and;

- provide an opportunity to collect digitalized information to facilitate
the development of highly specific and targeted outcome patient care
programs.

Automated slide preparation and screening products were introduced into the
cervical cancer screening market in the mid-1990's. We expect to benefit from
the increased awareness and growing acceptance of these new technologies.

Marketing Strategy

We currently market our cervical cytology products as part of an integrated
system and have been combined them under our "i(3)" series product line. Our
SurePath, PrepStain and FocalPoint systems, together, provide the only
integrated solution for sample preparation, processing, staining and
computerized analysis of liquid based thin-layer preparations. We began limited
international commercial sales of our PrepStain system in 1993, and commenced
commercialization in the United States following FDA approval in 1999. We began
placements of AutoPap QC systems, a predecessor to the current FocalPoint
system, in 1995 and of FocalPoint system in 1998. FocalPoint is the only fully
automated Pap smear screening device to receive regulatory clearance for
marketing in the United States.

The principal market for gynecological applications of PrepStain and
FocalPoint are clinical laboratories worldwide. Clinical laboratories are also
the primary focus for patients, physicians and third party payers in connection
with the Pap smear process. In an effort to facilitate the adoption of our
products, we have engaged the necessary sales professionals to educate and
promote our products to each of these groups. Furthermore, we have contractual
partnerships with organizations associated with physician education and third
party payer/reimbursement support. We view these partnerships as a necessary
extension of our business given their potential to fuel our growth and expansion
into new technologies.

The principal market for non-gynecological applications of PrepStain is
also clinical laboratories worldwide, although these applications are performed
in significantly lower quantities than cervical cancer screening applications.
Non-gynecological applications for the detection of cancer are performed on body
fluids, including urine samples, respiratory specimens and a variety of
fine-needle aspirates of specific organs.

We market our products to domestic and foreign clinical laboratories
through direct sales activities in the United States and primarily through
distributors in international markets. In the fourth quarter of 2000, we
significantly expanded our marketing and sales activities to accelerate the
commercialization of our products. We hired approximately 15 additional
laboratory sales representatives to increase contact with laboratories. Through
an alliance with Nelson Professional Sales ("NPS"), we engaged the physician
market directly for the first time by adding approximately 25 physician-directed
representatives on a contract basis, and augmented our direct sales efforts. In
July 2001, we added 15 additional physician-directed representatives to our
sales force through our agreement with NPS, resulting in a sales and marketing
force of nearly 100 individuals. Our sales force includes individuals engaged
directly with the OB-GYN and primary care physician market to sell the PrepStain
system. Additionally, our expanded laboratory sales force has been organized
under geographical segments to better address potential customers around the
country.

We have also increased our marketing efforts by directing resources toward
various marketing-related initiatives designed to promote brand identification
and awareness, increase market acceptance of our products and services and
enhance product management. To further educate and reinforce the benefits of our
products, we initiated a long-term partnership with a third party physician/peer
selling organization that will continue into 2002. An important element of our
marketing strategy is to achieve broad market acceptance of our
12

integrated product consisting of our PrepStain thin-layer slides for cervical
cancer screening by the FocalPoint system. In implementing this strategy, we
will seek to address the needs of the constituencies described below.

Clinician/OB-GYN. The clinician requires a simple collection technique
that results in an accurate and adequate sample from the patient. We believe
that PrepStain's patented cell enrichment process and SurePath's single
collection device facilitate high quality results using a simple collection
technique.

Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. We believe that approximately 50% of
cervical cancer test volume is concentrated among a relatively small number of
large laboratories. We believe the following factors will enable us to market
PrepStain and FocalPoint successfully to this concentrated market segment:

- PrepStain's high throughput and cost-effectiveness;

- FocalPoint's ability to identify more abnormal slides than conventional
methods;

- FocalPoint's ability to show improved specificity over current practice;
and

- FocalPoint's ability to screen both conventional and liquid-based slides.

Moreover, the pressures associated with rising health care costs, rising
litigation costs, and the limited supply of qualified cytotechnologists should
further facilitate adoption of PrepStain and FocalPoint by the large laboratory
market.

Medium and small clinical laboratories. We also intend to continue to
devote a portion of our marketing and sales resources to targeting medium-sized
and small clinical laboratories. Hospital consolidation, particularly the
consolidation of laboratories of larger hospitals, has created a medium-sized
customer for our products. We expect that the medium-sized and small clinical
laboratory segment of the market generally will utilize our IPO or equipment
rental programs.

Third-party payers. We have gained a significant level of market
acceptance of our products by third party payers by devoting additional
resources in the area of reimbursement. We plan to continue promoting the
clinical and economic benefits of our PrepStain and FocalPoint systems to
nationally managed care providers, major private insurers and other third-party
payers, including the benefits of their combined use. We have demonstrated that
the overall cost savings to the health care system, resulting from the early
detection of cervical cancer and the decrease in unnecessary repeat Pap smears,
biopsies and colposcopies resulting from improved specimen adequacy, more than
offset the cost of our products. See also "Third-Party Reimbursement" below.

Sales Strategy

We generate PrepStain related revenue from either the sale, rental or lease
of PrepStain systems and from the sale of the related SurePath test kits,
comprised of proprietary reagents and other disposables. Additionally, we
generate revenue from service contracts on the PrepStain systems. For system
sales, customers purchase the PrepStain instrument and make separate purchases
of test kits. Revenue recognition on the sales of the PrepStain system occurs at
the time the instrument is installed and accepted at the customer site. For
system rentals, PrepStain systems are placed at the customer's site free of
charge and the customer is obligated to purchase SurePath test kits for a fixed
term, typically three or four years. Under these rental arrangements, there is
no revenue recognized on the PrepStain system hardware. For system leases, we
offer two alternatives. The first alternative involves a lease arrangement
directly through us for the PrepStain instrument and related hardware. These
leases require monthly payments for the equipment and are typically for 36 or
48-month terms. The customer purchases the PrepStain reagents and disposables
that run on the instruments separately from the lease on an as-needed basis.
Under these lease arrangements, there is no revenue recognized on the PrepStain
system hardware. The second alternative is known as our Integrated Purchase
Option, or "IPO" program, under which PrepStain systems are purchased by a third
party financial institution and are placed at the customer's site free of
charge. The customer then purchases the PrepStain reagents at a price that is
sufficient to repay the financial institution for the cost of the PrepStain
instrument and to provide us with an acceptable profit on the reagents and
disposables. Under the IPO program, we
13

record revenue for the instrument sale at the time the instrument is installed
and accepted at the customer site. During 2001, our strategy was to emphasize
system leases versus the IPO program for the instruments placed with customers
and thereby retaining a greater percentage of our ongoing, higher margin
PrepStain reagent revenue stream. However, regardless of whether PrepStain
systems are sold, rented or leased, each system placed typically provides a
recurring revenue stream as customers process our SurePath test kits.

We generate FocalPoint related revenue from the direct sale of FocalPoint
systems, and from the placement of FocalPoint systems under fee-per-use
contracts. In the latter case, fee-per-use revenue commences in the month a
system is initially placed in commercial use at a customer site and consists of
per-slide monthly billings, fixed rental billings, or certain fee-per-use
contracts that require minimum payments. Domestic customers may also elect to
purchase the FocalPoint instrument under the IPO program. We have recently
converted fee-per-use contracts to direct sale arrangements. Additionally, we
generate revenue from service contracts on FocalPoint systems.

We also generate revenue from either the sale or rental of our SlideWizard
line of products and from service contracts on these products. For system sales,
customers purchase the products through distributors in countries where such
relationships exist. Where distributor arrangements do not exist, we sell these
products directly to the customer.

Marketing and Sales Organization

We currently utilize in excess of 110 full-time marketing and sales
personnel worldwide, including approximately 40 people through our arrangement
with NPS, to market, sell and provide after-sale support of our products. Our
agreement with NPS is scheduled to end in mid-2002, unless extended. We are
presently exploring various options in anticipation of the expiration of the
agreement, including continuing with a contracted physician sales force and
offering employment to individuals contracted to us under the agreement, subject
to its terms and conditions regarding offers of employment. We expect to
selectively increase our worldwide base of sales and marketing employees, if and
where opportunities arise, by the end of 2002.

In the United States, we have expanded our efforts to market our cervical
cancer screening products through a direct sales force. This direct sales
organization is focused both on the physician market, primarily OB-GYN and
primary care physicians, and the laboratory market to achieve market penetration
and availability of our products. Further, our marketing organization is
expanding our presence in the marketplace through increased advertising and
promotion, company-sponsored seminars and trade shows, and peer selling
activities. We also plan to continue to increase the number of our reimbursement
specialists with an emphasis on managed care organizations and other third-party
payers to achieve maximum reimbursement levels and to further stimulate demand
for our products. We will also seek co-marketing agreements with sales
organizations of major reference laboratories to market our products directly to
health care providers.

In international markets, we market and sell our products primarily through
a distribution network. To support these efforts, we employ seven full-time
personnel, consisting of sales professionals, product managers and after-sales
support personnel located in Europe. We anticipate that these distributor
organizations will ultimately assume responsibility for all sales and after
sales support activities, as well as a portion of our marketing activities. We
have employed both large distribution organizations with products focused on the
clinical diagnostic market, and smaller distribution organizations with products
focused specifically on the anatomic pathology market to distribute our products
worldwide.

We offer after-sale support services, including customer training, product
installation, telephone technical support and repair service directly to
customers in the United States. Our support personnel are located both at our
headquarters and in select major metropolitan areas. Internationally, we provide
these services through our employees and distributor organizations.

14

MANUFACTURING

FocalPoint

We currently assemble, integrate and test the electronic, mechanical and
optical components and modules of FocalPoint, and PrepMate, the front-end
accessory to the PrepStain, at our Redmond, Washington facility. Our operations
have produced sufficient FocalPoint systems to meet customer demand since we
began commercial operations in 1996 and we believe we have sufficient capacity
to meet anticipated near-term customer needs for our FocalPoint and PrepMate
products.

We purchase all components for the FocalPoint system from outside vendors.
Several components of the FocalPoint are supplied by sole-source vendors. If any
of these sole-source suppliers are unable to provide an adequate and constant
supply of components, we will need to modify any components provided by
additional or replacement suppliers. We may be unable to quickly establish
additional or replacement sources of supply for several FocalPoint components.
In addition, we may need to obtain regulatory approval to substitute certain
components. If one of our vendors becomes unable to supply acceptable components
in a timely manner and in the quantity required, we may need to delay or halt
our manufacturing process.

PrepStain

We currently assemble, test and package components of PrepStain at our
manufacturing facility in Burlington, North Carolina. We also manufacture our
SurePath preservative fluid and our PrepStain line of reagents and stains for
PrepStain at the Burlington facility. We believe that our existing manufacturing
and assembly processes are adequate to meet the near-term, full-scale production
requirements of our SurePath and PrepStain systems for cervical cancer
screening.

We purchase certain PrepStain instrument components from a single supplier
in Europe. The consumable items used with PrepStain are purchased from a variety
of third-party vendors, some of which are sole-source suppliers. We have a
multi-year, exclusive contract with the supplier of manufactured instrument
components that are incorporated into our PrepStain product line, which expires
in December 2004. Pricing for components is fixed, but is subject to adjustment
based upon changes in raw material costs. Our obligation to use this supplier
exclusively for the components is contingent upon this supplier supplying us at
prices competitive with those offered by third parties on similar terms, and
upon this supplier meeting our quality and production requirements. We believe
that the supplier has sufficient capacity to meet our present and future
requirements for these components.

SlideWizard Products

We currently manufacture the majority of our SlideWizard product line at
our Burlington, North Carolina facility. We also manufacture a limited number of
our SlideWizard instruments and integrate them into the FocalPoint GS at our
Redmond, Washington facility. We believe we have sufficient capacity to meet
anticipated near-term customer demand for our SlideWizard product line.

Our SlideWizard products consist primarily of off-the-shelf components and
proprietary software. The components are supplied by a variety of vendors, some
of which are sole-source suppliers. We have been integrating and selling
extended SlideWizard products since 1993.

Molecular Diagnostics

We anticipate that reagents for melanoma gene targets will be manufactured
by BD. We believe BD has adequate capacity and production capability to satisfy
customer demand and technical product requirements. We will consider in-house or
third-party manufacturing of molecular diagnostic products that we develop.

Our Suppliers

Several components of our products are supplied by sole-source vendors.
Subject to any of our exclusive contractual arrangements, we may seek to
establish relationships with additional suppliers or vendors for

15

components of our products. If any of our current or future sole-source
suppliers are unable to provide an adequate and constant supply of components,
we will need to modify any components provided by additional or replacement
suppliers for use in our products. We may be unable to quickly establish
additional or replacement sources of supply for several of these components. The
incorporation of new components, or replacement components from alternative
suppliers into our products may require us to submit PMA supplements to, and
obtain further regulatory approvals from, the FDA before marketing the products
with the new or replacement components. There can be no assurance that we will
be able to obtain the necessary approvals. If one of our vendors becomes unable
to supply acceptable components in a timely manner and in the quantity required,
we may need to delay or halt our manufacturing process. Any delay or cessation
of manufacturing could adversely affect our business.

Manufacturing Standards

Our manufacturing process is subject to extensive regulation by the FDA,
including the FDA's Quality System Regulation ("QSR," also known as Good
Manufacturing Practice, or "GMP") requirements. As part of the FDA regulatory
process, we face periodic FDA inspections and other periodic inspections by U.S.
and foreign regulatory agencies. See "Governmental Regulation." Both the
Burlington, North Carolina and Redmond, Washington facilities are subject to
periodic FDA inspections. Failure to comply with the FDA's QSR requirements in
the future would materially impair our ability to achieve or maintain
commercial-scale production. In addition, if we are unable to maintain
full-scale production capability, acceptance by the market of PrepStain,
SurePath and FocalPoint would be impaired, which in turn would have a material
adverse effect on our business.

In addition to QSR requirements, we are required to meet requirements
relating to ISO 9001 certification, including European regulatory requirements.
A European "CE" certification is required to successfully sell PrepStain and
FocalPoint in Europe according to certain directives of the European Union. The
addition of other European directives may require us to further demonstrate
compliance with new or modified requirements in order to apply the CE mark
specific to those directives. The OEM supplier of the PrepStain instrument
components has ISO 9001 certification and has obtained CE certification for the
main PrepStain component. We obtained CE compliance for the entire PrepStain
system. The FocalPoint System is certified to EN55022:94/CISPR 22, Class A, EN
50082-1 92, AS/NZS2064/CISPR 11, Class A.

We obtained ISO 9001 certification at our Burlington, North Carolina
facility in 1999. Compliance audits were conducted on our Burlington, North
Carolina facility by a certified ISO auditor in May 2000, January 2001, June
2001, and January 2002. We were subsequently notified in each case that the
facility had no outstanding deficiencies and had successfully passed each of the
audits.

We have initiated efforts to obtain ISO 9001 certification at our Redmond,
Washington facility.

RESEARCH AND DEVELOPMENT

Our research and development programs are currently focused on four major
goals:

- development of molecular diagnostic and pharmacogenomic tests for
malignant melanoma and cancer of the cervix, breast, ovary, colon and
prostate through our collaboration with BD.

- continued improvement and streamlining of the FocalPoint system and
FocalPoint GS product;

- additional enhancement of the PrepStain system, including adjunctive
testing using the SurePath preservative solution, improvement of related
PrepStain reagents and disposables, and further streamlining and
automating the PrepStain slide processor with regard to the preparation
and handling process; and

- development of additional SlideWizard applications with scalable
automation capabilities to address the needs of the broader pathology
automation market, as well as the needs of potential strategic partners.

16

TriPath Oncology is developing molecular diagnostic and pharmacogenomic
tests for malignant melanoma and cancer of the cervix, breast, ovary, colon and
prostate through our collaboration with BD. The goal of this research and
development program is to develop tests designed to identify cancer at its
earliest stage and provide individualized diagnostic and prognostic information
for patients with cancer. We are also seeking alternative applications for our
technologies through internal research and development, as well as through
strategic partnerships with other companies.

We completed the relocation of BD's molecular oncology program to temporary
facilities in North Carolina at the end of December 2001. In January 2002, we
signed a multi-year lease on approximately 22,000 square feet of laboratory and
office space to principally house the TriPath Oncology operations. This space
will be ready for occupancy by mid-2002. TriPath Oncology has assumed complete
responsibility for both assay and instrument development-related activities. We
anticipate establishing an in-house laboratory to facilitate the validation and
commercialization of assays developed from these activities.

Enhancements to both FocalPoint and PrepStain are specifically designed to
increase the instruments' efficiency, ease of use, reliability and
cost-effectiveness. This also includes initiatives directed at extending the
shelf life of the SurePath and PrepStain lines of reagents and preservatives
used with the PrepStain system. We also plan to explore alternative uses for
adjunctive testing using our SurePath preservative fluid and to seek approval
for the use of alternative collection devices in connection with the specimen
collection process related to the PrepStain system.

We are continually enhancing our SlideWizard line of products. We have
expanded this product line to a modular concept which allows rapid prototyping
and product development. The degree of automation for the resulting applications
can be adjusted to the needs of the corresponding market, from interaction to
complete automation. This technology takes advantage of our intellectual
property portfolio and will be primarily applied to complement the existing
portfolio of applications with new developments focused on gene or protein based
cancer staging and prognostic testing.

There can be no assurance that any product enhancement or development
project that we undertake, either currently or in the future, will be
successfully completed, receive regulatory approvals or be successfully
commercialized. The failure of any such enhancement or project to be completed,
approved or commercialized could prevent us from successfully competing in our
targeted markets and could have a material adverse effect on our business.

As of December 31, 2001, we had approximately 65 employees engaged in
research and development activities. Our expenditures for research and
development were approximately $11.2 million, $8.6 million, and $6.7 million for
the years ended December 31, 1999, 2000 and 2001, respectively.

THIRD-PARTY REIMBURSEMENT

Most private third-party medical insurance providers and governmental
agencies offer reimbursement for laboratory testing associated with routine
medical examinations, including Pap smears. In the United States, the level of
reimbursement by those third-party payers for Pap smears varies considerably. On
average, there has been a general increase in reimbursement amounts due to
recent minimums established by the Center for Medicare and Medicaid Services
("CMS") which administers Medicare, (formerly known as Health Care Financing
Administration, or HCFA). Third-party healthcare payers in the United States are
increasingly sensitive to containing healthcare costs and heavily scrutinize new
technology. Third-party payers may also influence the pricing or perceived
attractiveness of our products and services by regulating the maximum amount of
reimbursement they provide. Successful commercialization of PrepStain and
FocalPoint for cervical cancer screening in the United States and some other
countries will depend on the availability of reimbursement from such third-party
payers. Because the up-front costs of using our products are typically greater
than the cost of the conventional Pap smear, we have worked to convince
third-party payers that the overall cost savings to the health care system,
resulting from early detection of cervical cancer and its precursors will more
than offset the cost of our products.

17

We have focused on obtaining coverage and reimbursement from major national
and regional managed care organizations and insurance carriers throughout the
United States. In early 1998, we established a reimbursement team to work with
third-party insurers and managed care organizations to establish and improve
third-party reimbursement rates for our products. Most third-party payer
organizations independently evaluate new diagnostic procedures by reviewing the
published literature and the Medicare coverage and reimbursement policies on the
specific diagnostic procedures. To assist third-party payers in their respective
evaluations of PrepStain and FocalPoint, we provide scientific and clinical data
to support our claims of the safety and efficacy of our products. We focus on
improved disease detection and long-term cost savings benefits in obtaining
reimbursement for PrepStain and FocalPoint for cervical cancer screening.

In a Program Memorandum to Regional Intermediaries/Carriers dated March 14,
2001, CMS announced it had established National Limitation Amounts for the CPT
reimbursement codes that relate to our products. CMS set the national
reimbursement limit at $28.00 for the manual screening (CPT code 88142) and
re-screening (CPT code 88143) of each liquid-based, thin-layer prepared using
the PrepStain system.

For conventional Pap smears screened by the FocalPoint system, the national
limit amount is $15.73 for each sample which falls within the category of slides
classified as "within normal limits" and requiring no further review, or up to
25% of all slides screened (CPT code 88147). The national limit for the
remaining 75% or more of the slides screened using the FocalPoint system and
requiring further review (CPT code 88148) is $21.00. We do not believe these
limits will adversely impact our current pricing strategy or reduce the demand
for our products.

In connection with the FDA's approval of the use of FocalPoint to screen
PrepStain slides, we submitted information to the AMA CPT Editorial Committee
necessary for the establishment of new CPT codes that reflect this new
procedure. We anticipate the assignment of new CPT codes available for use with
the January 2003 codebook revision. Until such time as codes are assigned,
laboratories using our integrated system will be advised to report utilizing the
miscellaneous cytopathology code (CPT code 88199). In the interim, our
reimbursement team will continue working with our laboratory customers, and
their third-party payers, to introduce the new procedure, define reporting
requirements and assist in the establishment of reimbursement rates. In
consideration of the overall acceptance of both the PrepStain and the FocalPoint
by third party medical insurance payers and governmental agencies, individually,
we anticipate that the integration of these devices will receive similar overall
acceptance with respect to coverage and reimbursement.

Reimbursement for laboratory testing is generally based upon the level of
technical complexity required to perform the test. Because most tumor marker
immunoassays and immunohistochemical procedures are highly automated on
instrumented platforms, reimbursement levels are typically significantly lower
than for more extensive procedures associated with DNA analysis, nucleic acid
amplification and in situ hybridization techniques. Through the development of
molecular oncology products and services, We will determine the most appropriate
test configuration and format based on clinical performance, manufacturability,
laboratory ease-of-use, anticipated throughput requirements and reimbursement
considerations.

PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

We currently hold over 110 issued or allowed United States patents and have
six United States patent applications pending. We also hold over 100 foreign
patents and have applied for patent protection for certain aspects of our
technology in various foreign countries. We acquired many of these patents in
the merger of AutoCyte and NeoPath and the acquisition of the intellectual
property and technology of Neuromedical Systems, Inc. We further expanded our
patent portfolio through the acquisition of the intellectual property of Cell
Analysis Systems from BD in September 1999. Our patents cover system components,
such as the disaggregation syringe, the PrepStain process, and various aspects
of our high-speed image-interpretation technology, as applied to cytopathology
and histopathology. Because of the substantial length of time and expense
required to bring new products through development and regulatory approval to
the marketplace, we rely on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect our proprietary technology, rights and
know-how. We intend to continue to pursue patent protection where it is
available and cost-effective, both in the United States as well as in other
countries. Most of our existing

18

United States and foreign patents will expire between 2012 through 2019. A few
of our foreign patents will expire as early as 2003. There can be no assurance,
however, that the claims allowed in any of our existing or future patents will
provide competitive advantages for our products, or will not be successfully
challenged or circumvented by our competitors.

Under current law, patent applications in the United States and in foreign
countries are generally maintained in secrecy for a period after filing. The
right to a patent in the United States is attributable to the first to invent,
not the first to file a patent application. We cannot be sure that our products
or technologies do not infringe patents that may be granted in the future
pursuant to pending patent applications or that our products do not infringe any
patents or proprietary rights of third parties. There can be no assurance that a
court would rule that our products do not infringe other third-party patents or
would invalidate such third-party patents. We may incur substantial legal fees
in defending against a patent infringement claim or in asserting claims of
invalidity against third parties. For example, in September 1999, Cytyc filed
suit against us alleging that our CytoRich proprietary preservative fluid
infringed Cytyc's patent titled "Cell Preservative Solution," and in May 2000,
Cytyc filed another suit against us alleging that we had distributed misleading
information to current and potential purchasers of Cytyc's products. In both
cases, we denied all of Cytyc's claims and in January 2001, we settled all
litigation with Cytyc. In the event that we are determined to be infringing any
claims of third-party patents and such claims are upheld as valid and
enforceable, we may be required to pay damages, prevented from selling our
products, required to obtain a license from the owners of such patents or
required to redesign our products to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to us or that we would be successful in any attempt to redesign
our products or processes to avoid infringement. Our failure to obtain these
licenses or to redesign our products would have a material adverse effect on our
business, financial condition and results of operations.

We have entered into confidentiality agreements with all of our employees
who we believe should sign such agreements, and several of our consultants and
third-party vendors. These agreements also require employees and consultants to
disclose to us ideas, developments, discoveries or inventions they conceive
during employment or consultation. They also must assign any proprietary rights
in any inventions conceived or developed while employed by us if such relate to
our business and technology. These agreements may not provide meaningful
protection for our confidential information if there is unauthorized use or
disclosure of our proprietary information. There can be no assurance that the
obligations of our employees and consultants and third parties with whom we have
entered into confidentiality agreements to maintain the confidentiality of trade
secrets and proprietary information, will effectively prevent disclosure of our
confidential information. There also can be no assurances that our trade secrets
or proprietary information will not be independently developed by our
competitors.

We have registered trademarks in the United States for AUTOCYTE(R),
AUTOCYTE QUIC(R), AUTOPAP(R), CYTORICH(R), IMAGETITER(R), NEOPATH(R), PAPMAP(R),
PREPAP(R), and SLIDEWIZARD(R). We have pending U.S. registrations for i(3)
SERIES(TM), FOCALPOINT(TM), PrepMATE(TM), PREPSTAIN(TM), SUREPATH(TM), TRIPATH
CARE TECHNOLOGIES(TM), and TRIPATH IMAGING(TM). Registered trademarks abroad are
maintained in Argentina, Belgium, Brazil, Chile, China, Denmark, France,
Germany, Greece, Hong Kong, Italy, The Netherlands, Portugal, Russia, Taiwan,
and the United Kingdom for AUTOCYTE(R), AUTOPAP(R), and PAPNET(R). We are
currently pursuing registrations abroad for FOCALPOINT(TM), PREPMATE(TM),
PREPSTAIN(TM), SLIDEWIZARD(R), SUREPATH(TM), TRIPATH CARE TECHNOLOGIES(TM), and
TRIPATH IMAGING(TM). In addition to trademark activity, we issue a copyright
notice on all of our documentation and operating software. There can be no
assurance that any trademarks or copyrights that we own will provide competitive
advantages for our products or will not be challenged or circumvented by our
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents, trademarks and copyrights, or to protect trade
secrets and could result in substantial cost to, and diversion of effort by, us.
There can be no assurance that we would prevail in any such litigation. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent, as do the laws of the United States.

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COMPETITION

The cervical cancer screening market is comprised of the conventional Pap
smear process and certain technologies that have been introduced in recent
years, or are currently under development to provide improvements over the
conventional Pap smear process. Our competitors in the development and
commercialization of alternative cervical cancer screening technologies include
both publicly traded and privately held companies. Alternative technologies
known to us have focused on improvements in slide sample preparation, the
development of automated, computerized screening systems and adjunctive testing
technologies. Nevertheless, some competitors' products have already received FDA
approval and are being marketed in the United States. In addition, one of our
competitors has greater financial, marketing, sales, distribution and technical
resources than us, and more experience in research and development, clinical
trials, regulatory matters, customer support, manufacturing and marketing.

We believe that our products will compete on the basis of a number of
factors, including slide specimen adequacy, screening sensitivity, ease of use,
efficiency, cost to customers and performance claims. We believe a fully
automated solution incorporating collection, preparation, staining, and
computerized imaging for liquid based thin-layer preparations is required for
sustaining our competitive advantage. While we believe that our products will
have competitive advantages based on some of these factors, there can be no
assurance that our competitors' products will not have competitive advantages
based on other factors, including earlier market entry, which may adversely
effect market acceptance of PrepStain and FocalPoint. Moreover, there can be no
assurance that we will be able to compete successfully against current or future
competitors or that competition, including the development and commercialization
of new products and technologies, will not have a material adverse effect on our
business. Our products could be rendered obsolete or uneconomical by
technological advances of our current or potential competitors, the introduction
and market acceptance of competing products, or by other alternative approaches
for cervical cancer screening.

Our primary competitor in thin-layer slide preparation is Cytyc
Corporation. Cytyc's systems, the ThinPrep 2000 and ThinPrep 3000 Processors,
are based on a membrane-filtration separation system rather than the
centrifugation approach used in our PrepStain process. The Cytyc ThinPrep
systems are presently the only other thin-layer sample preparation systems
approved by the FDA as a replacement for the conventional Pap smear. They are
also used for non-gynecological applications. The FDA has allowed Cytyc to
conclude in the discussion section of the package insert for ThinPrep 2000 and
ThinPrep 3000, that the sample preparation is "...significantly more effective
than the conventional Pap smear for the detection of Low Grade Squamous
Intraepithelial and more severe lesions in a variety of patient populations."
The FDA has also allowed Cytyc to conclude in the package insert that specimen
quality "...is significantly improved over that of conventional Pap smear
preparation in a variety of patient populations."

In addition, in October 1996, Cytyc announced a non-exclusive co-marketing
agreement with Digene Corporation. Digene has developed a product that detects
the presence or absence of HPV in pre-cancerous cervical lesions. In September
1997, the FDA approved PMA supplements submitted by Cytyc and Digene enabling
testing for HPV directly from Cytyc's ThinPrep process cell suspension. We are
presently working with Digene on a PMA supplement for use of our SurePath cell
suspension with Digene's HPV test in the United States. In Europe, the SurePath
cell suspension is already in routine use with Digene's HPV test. In January
2000, Cytyc and Quest Diagnostics announced a multi-year agreement naming
ThinPrep as the exclusive liquid-based cervical cancer screening methodology for
Quest. In October 2000, Cytyc announced an exclusive U.S. strategic alliance for
women's health with Roche Diagnostics. Further, in January 2001, Cytyc announced
an exclusive co-promotion agreement with Digene Corporation surrounding the use
of Digene's HPV test using the Cytyc preservative solution. Additionally, Cytyc
announced its submission to the FDA of its application for approval for an
automated screening device for use with slides prepared using its slide
preparation systems.

In February 2002, Cytyc and Digene announced their intention to merge. The
proposed transaction is subject to review by the Federal Trade Commission under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Federal Trade
Commission has extended its investigation beyond the initial 30-day waiting
period and has requested additional information from Cytyc pertaining to the
proposed merger. Cytyc's

20

success with implementation of any of the foregoing arrangements or marketing
initiatives may make it more difficult for us to promote PrepStain and
FocalPoint in markets in which we compete with Cytyc. Additionally, the
successful completion of the Cytyc-Digene merger could prevent us from
incorporating HPV testing into our existing products which could have a material
adverse effect on our business.

We also face several competitors, or potential competitors, in the imaging
field. To date, the FocalPoint system is the only FDA-approved device for the
automated primary screening of PrepStain, thin-layer, and conventional, Pap
smear slides. Cytyc has announced its submission to the FDA its application for
approval for an automated screening device for use with slides prepared using
its slide preparation systems. Other competitors include ChromaVision Medical
Systems, Inc., which develops, manufactures and markets an automated cellular
imaging system to assist in the detection, diagnosis and treatment of cellular
diseases such as cancer and infectious disease, and Applied Imaging Corporation,
which develops and markets automated genetic testing systems and imaging systems
used in cancer pathology and research which are capable of sending digital
images electronically for remote review and consultation.

Competition in the field of cancer diagnostic products is concentrated in a
few areas and is expected to further intensify. Aside from mammography screening
for breast cancer, the in vitro cancer diagnostics market consists primarily of
tumor marker immunoassays. The cancer immunoassay market encompasses a number of
blood-based tumor marker tests that are utilized extensively to assess
therapeutic response and monitor for disease recurrence but have limited
applications for screening due to their lack of sensitivity and specificity.
Currently, prostate specific antigen (PSA) is the only blood based tumor marker
that is universally utilized for cancer screening. Among the companies competing
in the tumor marker immunoassay market are Abbott Diagnostics, Bayer
Diagnostics, Roche Diagnostics, Ortho Clinical Diagnostics, Beckman-Coulter and
Dade-Behring.

We believe that genomic and proteomic-based assays will likely provide a
more accurate, disease-specific understanding of cancer to improve the clinical
management of cancer. Although there are a number of companies that are
investing in genomic and proteomic discovery research, few have invested as
broadly in the cancer diagnostics area as we have through our relationship with
BD. We view our primary competitors in this area to be Abbott Diagnostics, Bayer
Diagnostics, and Roche Diagnostics. Abbott Laboratories, through its acquisition
of Vysis, Inc., develops and markets clinical laboratory products targeting DNA
chromosomal and genomic abnormalities for cancer and pre- and post-natal genetic
disorders. Bayer Diagnostics and Roche Diagnostics operate in the immunoassay
and tumor marker markets.

In addition to immunoassay based tests, we believe the staging, prognosis
and prediction of outcomes will also be heavily influenced by the assessment of
special stains utilizing immunohistochemical (IHC) and in situ hybridization
techniques on tissue specimens. The primary companies currently competing in
this area Dako Corporation and Ventana Medical Systems. Both companies
specialize in automated IHC staining instrumentation and offer a wide range of
validated IHC tumor markers.

We also have several competitors with competing technology in the molecular
diagnostics field. TriPath Oncology faces a host of competition from companies
like F. Hoffmann-La Roche, Abbott Laboratories and Bayer, all of which have
announced active programs in this area. There can be no assurance that these or
other competitors will not succeed in developing technologies and products that
are more effective, easier to use or less expensive that those which we
currently offer or are developing, or that would render our technology and
products obsolete. In addition, these or other competitors may succeed in
obtaining FDA and other regulatory clearances and approvals of their products
more rapidly than us.

GOVERNMENT REGULATION

The manufacture and sale of our medical diagnostic devices is subject to
extensive governmental regulation in the United States and in other countries
where we sell our products. In addition, our research and development activities
in the United States are subject to various health and safety, employment and
other laws and regulations.

21

United States FDA Approval

PrepStain and FocalPoint are regulated for cervical cytology applications
in the United States as medical devices by the FDA under the FDC Act and require
pre-market approval by the FDA prior to commercial distribution. In addition,
certain modifications to the manufacturing process or labeling of medical
devices are subject to FDA review and approval before marketing. Pursuant to the
FDC Act, the FDA regulates the clinical testing, manufacture, labeling,
distribution, sales, marketing, advertising and promotion of medical devices in
the United States. Noncompliance with applicable requirements, including good
clinical practice requirements, can result in the refusal of the government to
grant pre-market approval for devices, suspension or withdrawal of clearances or
approvals, total or partial suspension of production, distribution, sales and
marketing, fines, injunctions, civil penalties, recall or seizure of products,
and criminal prosecution of a company, its officers and employees.

Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling and adherence to FDA-mandated quality system
requirements, including QSR, and, in some cases, pre-market notification
("510(k)"). Class II devices are subject to general controls including, in most
cases, pre-market notification, and to special controls (e.g., performance
standards, patient registries and FDA guidelines). Generally, Class III devices
are those that must receive pre-market approval by the FDA to ensure their
safety and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices) and also include most devices that were not on the market before May
28, 1976, known as "new medical devices," and for which the FDA has not made a
finding of "substantial equivalence" based on a pre-market notification. Class
III devices usually require clinical testing that demonstrates the device is
safe and effective, and must have FDA approval prior to marketing and
distribution. The conduct of clinical studies is subject to FDA regulations,
including requirements for institutional review board approval, informed
consent, record keeping, and reporting. Our PrepStain and FocalPoint products,
when intended for gynecological use, are regulated as Class III medical devices.
In addition, the FDA has developed special rules for in vitro diagnostic
devices, including restrictions on the sale and use of analyte specific reagents
("ASR's"). Products that we develop now and in the future may be subject to
these and other applicable FDA regulations.

Device manufacturers are required to register their establishments and list
their devices with the FDA and to provide periodic reports containing
information on safety and effectiveness. The FDC Act requires that medical
devices be manufactured in accordance with the FDA's QSR regulation. PrepStain
and FocalPoint and any other products that we manufacture or distribute pursuant
to an approved PMA application and any supplements, or pursuant to 510(k)
clearances, or as ASR's, are and will be subject to pervasive and continuing
regulation by the FDA, including record-keeping requirements and reporting of
adverse experience with the use of the device. We will continue to be inspected
on a routine basis by the FDA for compliance with regulations with respect to
manufacturing, testing, distribution, storage and control activities. We have
established and maintain a system for tracking FocalPoint and PrepStain systems
through the chain of distribution and conduct post-market surveillance. Product
labeling and promotional activities are also subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. We and our distributors
may only promote products for their approved indications. If the FDA requires us
to make modifications to our product labeling in the future, these changes may
adversely affect our ability to market or sell PrepStain, FocalPoint or any of
our other products.

In addition, the FDA's Medical Device Reporting regulations require medical
device companies to provide information to the FDA whenever evidence reasonably
suggests that a device may have caused or contributed to a death or serious
injury. These regulations also apply if the device malfunctions and the device
or a similar device sold by the company would be likely to cause or contribute
to a death or serious injury if the malfunction were to recur.

22

If the FDA believes that we have not complied with the law, it can take one
or more of the following actions:

- refuse to review or clear applications to market our products in the
United States;

- refuse to allow us to enter into government supply contracts;

- withdraw approvals already granted;

- require that we notify users regarding newly found risks;

- request repair, refund or replacement of faulty devices;

- request corrective advertisements, recalls or temporary marketing
suspension; or

- initiate legal proceedings to detain or seize products, enjoin future
violations, or assess civil or criminal penalties against us, our
officers or employees.

These actions could seriously disrupt our operations for an indefinite
period of time.

Environmental, Health, Safety and Other Regulations

We also are subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. Our manufacturing activities involve the use, storage,
handling and disposal of hazardous materials and chemicals and, as a result, we
are required to comply with regulations and standards of the Occupational Safety
and Health Act and other safety and environmental laws. Although we believe that
our activities currently comply with all applicable laws and regulations, the
risk of accidental contamination or injury cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result, which could have a material adverse effect on our business, financial
condition and results of operations. Further, we can give no assurance that we
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon our business, financial condition and results of
operations.

Foreign Regulatory Approval

Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. We have been advised by various parties, including
consultants we engaged and foreign distributors, that no regulatory approvals
for a device analogous to FDA approval of a PMA are currently required by any
country where we currently sell PrepStain. Such approval requirements may be
imposed in the future. In addition to regulatory approvals in the United States,
the FocalPoint system is approved for primary screening and quality control
re-screening in Japan, Canada, Australia, New Zealand, The Netherlands, Italy,
Hong Kong, Korea, and Taiwan. In September 2001, we announced receipt of a
Medical Device License in Canada to market both our PrepStain System (formerly
the AutoCyte PREP System) and the PrepMate accessory. We intend to pursue
additional product registrations in other foreign countries. We received an FDA
permit to export PrepStain and FocalPoint to all foreign countries in which we
are currently selling these products and where such a permit was required. There
can be no assurance that we will meet the FDA's export requirements or receive
additional FDA export approval when such approval is necessary, or that
countries to which the devices are to be exported will approve the devices for
import. Our failure to meet the FDA's export requirements or obtain FDA export
approval when required to do so, or to obtain approval for import, could have a
material adverse effect on our business, financial condition and results of
operations.

Our products are subject to a variety of regulations in Europe, including
the European Union. In vitro medical devices, including the FocalPoint System,
must now comply with the EU's In-Vitro Diagnostic Medical Devices Directive. The
Directive was published in the Official Journal of European Communities in

23

December 1998. The EU member states were required to implement the Directive
into national law by December 1999. A transition period, which begins from the
date of publication of the Directive and ends December 2003, applies to all
devices placed on the market in the EU. During this transition period, both
Directive CE-marked and non-CE-marked devices may be placed on the market. In
other words, companies may choose to follow either the CE mark or the national
legislation, if any. If no such national legislation exists, the devices can be
freely placed on the market. By the end of this transition period, our products
must comply with the requirements of the Directive and member-state local
language requirements. At such time, products not bearing the CE mark may not be
commercially distributed in European Union member countries. In addition, member
states may continue to restrict or prohibit the marketing of CE-marked devices
pursuant to the safeguard clause of the Directive if the member state determines
a particular device may compromise the health and/or safety of patients or
users. We intend to comply with the Directive and other applicable regulations
in accordance with the requirements of the countries in which we market and sell
our products.

Other European countries may enact national laws that would conform to the
Directive. Member states of the EU and the European Economic Area may enact
requirements in addition to those imposed by the Directive. Some European
countries have established national regulations relating to in vitro diagnostic
medical devices. EU directives and national laws impose requirements for
electrical safety and electromagnetic compatibility that apply to the PrepStain
System, PrepMate, and FocalPoint System. We have performed the requisite testing
procedures and related documentation to apply the European CE mark to the
FocalPoint, PrepStain and PrepMate systems. We cannot guarantee that the
FocalPoint System or any other product we may develop will receive any required
regulatory clearance or approval on a timely basis, if at all.

Congress has directed the Department of Health and Human Services to issue
regulations designed to improve the quality of biomedical analytic services,
particularly the examination of Pap smears. These regulations require clinical
laboratories to randomly re-screen at least 10% of the Pap smears classified on
initial manual screen as normal. This 10% must include normal cases selected
from the laboratory's total caseload, and from patients or groups of patients
that have a high probability of developing cervical cancer based on available
patient information. The laboratories that would purchase our PrepStain and
FocalPoint products, or our ASR's, are subject to extensive regulation under the
Clinical Laboratory Improvement Act of 1988, as amended (CLIA), which requires
laboratories to meet specified standards in the areas of personnel
qualifications, administration, participation in proficiency testing, patient
test management, quality control, quality assurance and inspections. We believe
that our PrepStain and FocalPoint products operate in a manner that will allow
laboratories using our products to comply with CLIA requirements. However, there
can be no assurance that interpretations of current CLIA regulations or future
changes in CLIA regulations would not make compliance by the laboratory
difficult or impossible and therefore have an adverse effect on sales of our
products.

In addition, laboratories often must comply with state regulations,
inspection, and licensing. In recent years, a few states, including New York and
California, have adopted regulations that limit the number of slides that may be
manually examined by a cytotechnologist within a given period of time. We cannot
guarantee that states will not directly regulate FocalPoint in the future, nor
can we predict the effect, if any, new regulations may have on our business or
operations.

PRODUCT LIABILITY

Commercial use of any of our products may expose us to product liability
claims. We currently maintain general liability and product liability insurance
coverage and believe that the amount of such coverage is adequate to meet our
present needs. The medical device industry has experienced increasing difficulty
in obtaining and maintaining reasonable product liability coverage, and
substantial increases in insurance premium costs in many cases have rendered
coverage economically impractical. To date, we have not experienced difficulty
obtaining an amount of insurance coverage commensurate with our level of sales.
As our sales expand, however, there can be no assurance that our existing
product liability insurance will be adequate or that additional product
liability insurance will be available to us at a reasonable cost, or that any
product

24

liability claim would not have a material adverse effect on our business,
financial condition and results of operations.

EMPLOYEES

As of December 31, 2001, we employed approximately 200 people on a
full-time basis. Additionally, we have contracted approximately 40 salespeople
to sell our products through our arrangement with NPS. We believe that relations
with our employees are good. None of our employees are party to a collective
bargaining agreement.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT

Our current executive officers are as follows:

Paul R. Sohmer, M.D. has served as our Chairman of the Board of Directors
since November 2000, and as our President and Chief Executive Officer since June
2000. Prior to joining us, Dr. Sohmer served as the President and Chief
Executive Officer of Neuromedical Systems, Inc. from 1997 through 1999. From
1996 until 1997, Dr. Sohmer served as President of a consulting firm which he
founded. From 1993 to 1996, he served as President and Chief Executive Officer
of Genetrix, Inc., a genetic services company based in Scottsdale, Arizona. From
1991 through 1993, Dr. Sohmer was the Corporate Vice-President of Professional
Services and President of the Professional Services Organization for Nichols
Institute, a clinical laboratory company, where he was responsible for sales,
marketing, information systems, logistics, and clinical studies. From 1985 until
1991, Dr. Sohmer served as the President and Chief Executive Officer of
Pathology Institute in Berkeley, California, during which time he founded and
served as Medical Director of the Chiron Reference Laboratory. Dr. Sohmer
received a B.A. degree from Northwestern University and an M.D. from Chicago
Medical School.

Stephen P. Hall, CPA has served as our Senior Vice-President and Chief
Financial Officer since September 2001. Prior to joining us, Mr. Hall served as
Chief Financial Officer and President of the Imaging and Power System Division
of Colorado Medtech, Inc., a Colorado-based medical products and services
company, from September 1999 until August 2001. From September 1993 to January
1999, he served as Chief Financial Officer for BioTechnica International, Inc.,
a publicly held agricultural products company, as well as privately held
operating companies in the software development, wireless communication
equipment and food processing machinery industries. Mr. Hall spent nine years in
the commercial banking industry and with the accounting firm of Peat, Marwick,
Mitchell & Co. He earned a bachelors degree from Harvard College and an MBA from
the Stanford Graduate School of Business.

John G.R. Hurrell, Ph.D. has served as Senior Vice-President of TriPath
Oncology since December 2001. Prior to joining us, Dr. Hurrell served as
Vice-President, Diagnostic Technology at Genzyme Corp., a biotechnology company
in Cambridge, Massachusetts, from January 1995 to September 1996. From July 1989
to January 1995, he served as the Vice-President Molecular Diagnostics,
Diagnostic Product Development, and Patient Care Systems at Boehringer Mannheim
Corporation, a medical diagnostics company in the US. Prior to that, Dr. Hurrell
served as the President, CEO, Director and Co-founder of FluorRx, Inc., a
medical technology company in Carmel, Indiana, from September 1996 to June 2000.
Immediately prior to joining TriPath, he served as the Chief Operating Officer
and Head of Research and Development for Argose, Inc., a glucose monitoring
company in Waltham, Massachusetts. Dr. Hurrell received his Ph.D. from the
University of Melbourne and was a Fullbright Research Fellow at Harvard Medical
School.

25

Ray W. Swanson has served as our Senior Vice President of Commercial
Operations since May 2001. Prior to joining us, he served as General Manager of
e-Business for Dade Behring, one of the world's largest clinical diagnostics
companies. Mr. Swanson held a number of senior management positions at Dade
Behring and its predecessor companies since 1987. From 1997 to 1999, he was the
general manager responsible for the introduction and market development of
Dade's platelet function business. As President of Dade's Japanese subsidiary
from 1994 to 1997, he was a member of the management team that purchased Baxter
International's diagnostics businesses and created Dade International as a
privately held, stand-alone company. Prior to 1987, he held positions with
Johnson and Johnson, American Hospital Supply Corporation, Solvay (a global
chemical and pharmaceutical company) and Washington University School of
Medicine's Department of Anatomy and Neurobiology. Mr. Swanson has B.S. and M.S.
degrees in zoology from Eastern Illinois University and an MBA from the
University of Iowa.

ITEM 2. PROPERTIES

We currently lease a total of 43,000 square feet of space devoted to
manufacturing, warehousing, administrative, research and development and
engineering functions, at 780 Plantation Drive, Burlington, North Carolina under
a seven-year lease expiring in July 2005. The lease is renewable for five
additional one-year terms. We lease approximately 72,000 square feet of office
and manufacturing space in Redmond, Washington under operating leases expiring
in December 2004. Of this space in Redmond, we sublease approximately 30,000
square feet as sub-lessor. We also currently lease approximately 10,000 square
feet to serve as educational and corporate office space at 1111 Huffman Mill
Road in Burlington, North Carolina under a three-year lease expiring in June
2004. This facility lease contained an option to expand the leased space by
4,500 square feet, which we exercised in June 2001. We also lease office space
in Brussels, Belgium, under an operating lease expiring in August 2007. We
believe that our facilities and other available office space are adequate for
our current needs.

We have signed a lease for the occupancy of approximately 22,000 square
feet near the Research Triangle Park area, in Durham, North Carolina. When
occupied in mid-2002, this space will be devoted primarily to the activities of
TriPath Oncology. The lease has a seven-year term expiring in 2009.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, we are subject to various legal
proceedings and claims.

On August 4, 2000, the Company and several other parties were named as
defendants to a civil action commenced in the District Court of Tarrant County,
Texas. The petition alleges that the defendants, including us, fraudulently
induced the plaintiffs to retain their investment in NeoPath. A final judgment
dismissing the claim with prejudice has been entered without any material
liability to us.

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

There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 2001.

26

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock, $0.01 par value per share (the "Common Stock"), is traded
on the Nasdaq National Market under the symbol "TPTH". The following table sets
forth, for the calendar periods indicated, the range of high and low bid and ask
prices for our Common Stock on the Nasdaq National Market. These prices do not
include retail mark-up, mark-down or commissions and may not represent actual
transactions.