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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



(Mark One)



|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

| | (NO | FEE REQUIRED)
| | --- | -------------



| | For the transition period from                      to
| | ------------------------------------------------------



Commission File Number 0-27558



CYTYC CORPORATION

(Exact name of registrant as specified in
its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 02-0407755                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification
No.)



250 Campus Drive, Marlborough,
MA 01752

(Address of principal executive offices, including Zip Code)



(508) 263-2900

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:None



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

Common Stock, $.01 par value, and Series A Junior
Preferred Stock Purchase Rights

(Title of class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No   ̈



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x



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.     ̈



Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of the Act:



|                             |  |                        |  |                           
|---------------------------- |  | ---------------------- |  | --------------------------
|Large accelerated filer    x |  | Accelerated filer     ̈ |  | Non-accelerated filer     ̈



Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Act).     Yes   ̈    No  x



The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of June 30, 2005 (based on the closing price of $22.06 per share as quoted by The NASDAQ Stock Market as of such date) was $1,815,071,453. As of February 1, 2006, 115,336,010 shares of the
registrants common stock were outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE



The registrant intends to file a definitive proxy
statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2005. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.



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Cytyc Corporation

Annual Report on Form 10-K

For the fiscal year ended December 31, 2005



Table of Contents



|                                           |  |                                                                                                              |  |     
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                           |  |                                                                                                              |  | Page
|Part I                                     |  |                                                                                                              |  |     
|Item 1.                                    |  | Business                                                                                                     |  | 3   
|Item 1A.                                   |  | Risk Factors                                                                                                 |  | 17  
|Item 1B.                                   |  | Unresolved Staff Comments                                                                                    |  | 24  
|Item 2.                                    |  | Properties                                                                                                   |  | 24  
|Item 3.                                    |  | Legal Proceedings                                                                                            |  | 25  
|Item 4.                                    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 26  
|                                           |  |                                                                                                             
|Part II                                    |  |                                                                                                              |  |     
|Item 5.                                    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26  
|Item 6.                                    |  | Selected Consolidated Financial Data                                                                         |  | 28  
|Item 7.                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29  
|Item 7A.                                   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 39  
|Item 8.                                    |  | Financial Statements and Supplementary Data                                                                  |  | 39  
|Item 9.                                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 39  
|Item 9A.                                   |  | Controls and Procedures                                                                                      |  | 40  
|Item 9B.                                   |  | Other information                                                                                            |  | 42  
|                                           |  |                                                                                                             
|Part III                                   |  |                                                                                                              |  |     
|Item 10.                                   |  | Directors and Executive Officers of the Registrant                                                           |  | 42  
|Item 11.                                   |  | Executive Compensation                                                                                       |  | 42  
|Item 12.                                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 42  
|Item 13.                                   |  | Certain Relationships and Related Transactions                                                               |  | 42  
|Item 14.                                   |  | Principal Accounting Fees and Services                                                                       |  | 42  
|                                           |  |                                                                                                             
|Part IV                                    |  |                                                                                                              |  |     
|Item 15.                                   |  | Exhibits and Financial Statement Schedules                                                                   |  | 43  
|Signatures                                 |  |                                                                                                              |  | 47  
|Index to Consolidated Financial Statements |  | F-1                                                                                                         
|Exhibits Index                             |  |                                                                                                             



Forward-Looking Statements

The forward-looking statements in this Form 10-K are made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended. Our operating results and financial condition have varied and may in the future vary significantly depending on a number of factors. Statements in this Form 10-K which are not strictly historical statements, including, without limitation,
statements regarding managements expectations for future growth and plans and objectives for future management and operations, domestic and international marketing and sales plans, key customer relationships, product plans and performance,
research and development plans, the successful integration of new technologies or businesses, regulatory uncertainties, potential savings to the healthcare system, managements assessment of market factors, costs and uncertainties related to
current or future litigation, as well as statements regarding our strategy and plans, constitute forward-looking statements that involve risks and uncertainties. In some cases these forward-looking statements can be identified by the use of words
such as may, will, could, should, would, expect, project, predict, potential or the negative of these words or comparable words. The factors
listed under Risk Factors in Part I, Item 1A, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to
time. Such factors, among others, may have a material adverse effect upon our business, financial condition, and results of operations. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made.



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Part I



Item 1. Business

Throughout this Annual Report on Form 10-K, unless the context states otherwise, the words we,
us, our and Cytyc refer to Cytyc Corporation and all of its affiliates and subsidiaries taken as a whole, and our board of directors refers to the board of directors of Cytyc Corporation.



Overview of Business

Cytyc Corporation is a diversified womens health company that designs, develops, manufactures, and markets innovative and clinically effective products. Cytycs products
cover a range of womens health applications, including cervical cancer screening, treatment of excessive menstrual bleeding, radiation treatment of early-stage breast cancer and breast cancer risk assessment.



Our goal is to become the market leader in providing innovative technologies that improve womens
health. To accomplish this, our strategy is to build on our existing capabilities in the fields of obstetrics and gynecology and breast cancer, which includes a sales force of over 300 people around the world, a clinically driven marketing approach
and research and development experience in devices and diagnostic products.



We operate
our business in three segments: domestic diagnostic products, domestic surgical products and international.



Available Information.

Cytyc files annual, quarterly and current reports, proxy statements and other information with
the Securities and Exchange Commission (the SEC). You may read and copy any document we file at the SECs public reference room at 100F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the
public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Cytyc) file electronically with the SEC. The SECs website is
http://www.sec.gov. Cytycs Internet address is http://www.cytyc.com. Cytyc makes available free of charge through our website our annual, quarterly and current reports, and all amendments to those reports as soon as reasonably
practicable after such materials are electronically filed with or furnished to the SEC. The information on Cytycs website is not incorporated by reference into this Annual Report on Form 10-K.



Incorporation.

Cytyc was incorporated in Delaware in 1987.



Domestic Diagnostic Products

Our domestic diagnostic products segment develops and markets the ThinPrep® System in the United States primarily for use in cytology testing applications focused on womens
health, such as cervical cancer screening.



The ThinPrep System

The ThinPrep System is the most widely used method for cervical cancer screening in the United States. Cervical cancer is one of the most common cancers among
women throughout the world. If detected in the pre-cancerous stage, virtually all cervical cancer cases are preventable. The ThinPrep System for cervical cancer screening is a covered benefit by most health insurance plans in the United States. The
ThinPrep System consists of any one or more of the following: the ThinPrep 2000 Processor, ThinPrep 3000 Processor, ThinPrep Imaging System, and related reagents, filters and other supplies, such as the ThinPrep Pap Test and our proprietary ThinPrep
PreservCyt® Solution.



The U.S. Food and Drug Administration (FDA) approved the ThinPrep Pap Test in 1996 as an
effective replacement for the conventional Pap smear method for the detection of low grade and more severe lesions in a variety of patient populations. The FDA later allowed expanded labeling to include our clinical trial data, which indicated a
59.7% increase in the detection of high grade lesions with the ThinPrep System. The ThinPrep



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System offers significantly improved specimen quality over that of the conventional Pap smear method. Since the FDA approval, a number of studies have been published
or presented that evaluate the performance of the ThinPrep Pap Test compared to the conventional Pap smear. These studies have been conducted in every region of the United States, as well as Europe, Asia, Central America and Australia and have
consistently demonstrated improved detection of pre-cancerous cervical lesions compared to the conventional Pap smear. Of particular importance is the number of studies demonstrating statistically significant increases in the detection of high-grade
cervical lesions, which are the immediate precursors to cervical cancer. To date, more than 170 published studies demonstrate a wide range of benefits including increased disease detection, reduction of equivocal diagnoses and false negatives,
improved specimen adequacy, adjunctive molecular testing, morphology assessment, and cost effectiveness.



The ThinPrep System also serves as a platform for additional gynecological applications using residual patient specimen collected in ThinPrep PreservCyt Solution. Our PreservCyt Solution has been approved by the FDA as a
transport medium in testing for sexually transmitted infections due to Chlamydia trachomatisand Neisseria gonorrheadirectly from the ThinPrep Pap Test vial using Roche Diagnostics Corporations (Roche) COBAS
Amplicorautomated system, as well as using Gen-Probe Incorporateds APTIMA Combo 2® assay. In addition, our PreservCyt Solution has been approved by the FDA as a transport medium for testing
for the human papillomavirus (HPV) using Digene Corporations (Digene) Hybrid Capture® II HPV DNA Assay. During 2005, we obtained approval of two pre-market approval supplements from the FDA: (1) one that allows for the removal of up to four milliliters from the PreservCyt sample vial
before preparing the ThinPrep Pap Test slide to better facilitate ancillary testing, which improves the implementation of and provides broader application of molecular testing, particularly in high-volume laboratories and (2) one related to the
detection of endocervical and endometrial glandular lesions with the ThinPrep Pap Test.



The ThinPrep Imaging System is a device that uses computer imaging technology to assist in primary cervical cancer screening of ThinPrep Pap Test slides processed through the ThinPrep System. The system combines imaging technology to
identify diagnostic fields of interest with an automated microscope to facilitate locating these fields. Our clinical data indicates an increase in sensitivity in the detection of atypical squamous cells of undetermined significance and more severe
lesions when using the ThinPrep Imaging System to review a ThinPrep Pap Test slide as compared to manual review. Additionally, cytotechnologists using the ThinPrep Imaging System are subject to higher workload limits compared to the workload limits
applicable to manual review of slides. As a result, we believe the ThinPrep Imaging System increases, and is expected to continue to increase, a cytology laboratorys screening productivity and diagnostic accuracy while leveraging the increased
effectiveness of the ThinPrep Pap Test. As of December 31, 2005, we had approximately 280 ThinPrep Imaging Systems installed worldwide.



The ThinPrep Process

The ThinPrep process begins with the patients
cervical sample being taken by the physician using a cervical sampling device that, rather than being smeared on a microscope slide as in a conventional Pap smear, is rinsed in a vial filled with our proprietary PreservCyt Solution. This enables
virtually all of the patients cell sample to be preserved before the cells can be damaged by air drying. The ThinPrep specimen vial is then labeled and sent to a laboratory equipped with a ThinPrep Processor for slide preparation.



At the laboratory, the ThinPrep specimen vial is inserted into a ThinPrep Processor, a proprietary
sample preparation device which automates the process of preparing cervical specimens. Once the vial is inserted into the ThinPrep Processor, a dispersion step breaks up blood, mucus, non-diagnostic debris and large sheets of cells and homogenizes
the cell population. The cells are then automatically collected onto our proprietary ThinPrep Pap Test Filter, which incorporates a porous membrane specifically designed to collect cells. The ThinPrep Processor constantly monitors the rate of flow
through the ThinPrep Pap Test Filter during the cell collection process in order to prevent the cellular concentration from being too scant or too dense. A thin layer of cells is then transferred from the filter to a glass slide in a 20 mm-diameter
circle and the slide is automatically deposited into a fixative solution. This slide is then available for microscopic examination.



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The cytotechnologist manually screens each Pap test
slide with a microscope to first determine the adequacy of the slide and to then differentiate diseased or abnormal cells from healthy cells. With the introduction of the ThinPrep Imaging System, the screening process has been automated to combine
the power of computer imaging technology and human interpretive skills. Prior to human review, the ThinPrep Imaging System rapidly scans and locates areas of interest for review. The cytotechnologist then places the imaged slide onto the ThinPrep
Imaging System review scope which automatically presents each area of interest to the cytotechnologist in geographic order. The cytotechnologist evaluates each area of interest, selecting those areas which require further pathologist review, or the
cytotechnologist may look beyond the identified areas of interest. Alternatively, the cytotechnologist can determine that the slide is negative and simply sign the case out. By directing the cytotechnologist to areas of interest on a slide, the
system may increase a cytology laboratorys screening productivity and diagnostic accuracy.



Additional Applications of the ThinPrep System

In addition to acting as a replacement for the conventional Pap smear, the ThinPrep
System also offers significant improvements for non-gynecological cytology screening applications. Non-gynecological cytology applications include fine-needle aspiration specimens (e.g., breast, thyroid, lung or liver), lavage specimens (e.g.,
breast, gastrointestinal), body fluids (e.g., urine, pleural fluid, ascitic fluid, pericardial fluid), respiratory specimens (e.g., sputum, brushing of respiratory tracts) and ancillary testing (e.g., cell blocks, immunocytochemistry, special
stains). The ThinPrep System provides significant improvements over other methods of non-gynecological cytology screening by optimizing cell preservation through use of our CytoLyt® and PreservCyt Solutions, standardizing preparation of specimens using the gentle dispersion and transfer process of the ThinPrep 2000
Processor, simplifying slide screening by offering one single, well-preserved slide per case and allowing laboratories to perform additional ancillary testing out of one PreservCyt Solution vial.



The ThinPrep System is also the platform from which we launched our expansion into breast cancer risk
assessment with the FirstCyte® Breast Test, which is used to detect atypical
changes in cells lining the milk ducts, where an estimated 95 percent of all breast cancers originate. Breast cancer is a progressive disease. By identifying high risk women who are harboring atypical ductal epithelial cells and who are apparently
at highest risk for developing breast cancer, the FirstCyte Breast Test assists in decision making about appropriate preventative measures and enables doctors to adopt a paradigm of predicting and preventing breast cancer, rather than the current
paradigm of detection and treatment. We are currently conducting clinical trials of the FirstCyte Breast Test to more precisely define the value of ductal lavage cytology in high-risk women. In these trials, high-risk women undergo a ductal lavage
every six months for three years. We will follow these women for a period of two years following the initial three years of active enrollment and the result is expected to provide a statistically valid understanding of the value of benign cytologic
results in high-risk women. This study should also clarify the predictive value of an abnormal result from the ductal lavage test.



Customers and Competition of our Domestic Diagnostic Products Segment

Customers Within our domestic diagnostic products segment, Quest Diagnostics, Inc. (Quest) accounted for 11%, 17% and 22% of our consolidated net sales for the years ended December 31, 2005, 2004
and 2003, respectively. These year-over-year decreases are primarily due to increased unit sales to new and existing customers, therefore resulting in net sales to Quest representing a smaller percentage of total consolidated net sales. Laboratory
Corporation of America (LabCorp) accounted for 10% of our consolidated net sales for the year ended December 31, 2003.



Competition While we are the market leader in the sale of liquid-based slide preparation systems in the United States, we face direct competition in
the United States from TriPath Imaging, Inc., which also manufactures liquid-based slide preparation systems and slide imaging systems, and from other sample preparation systems on a worldwide basis. In addition, in December 2005, a new market
entrant named MonoGen, Inc. announced that it had received an approvability letter from the FDA for its liquid-based slide preparation system. We also compete with the conventional Pap smear and other alternative methods for detecting cervical
cancer and/or its precursors. We compete on the basis of a number of factors, including



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clinical performance, product quality, marketing and sales capabilities, manufacturing efficiency, price and customer service and support. The development, FDA
approval and commercial marketing of competing systems for cervical cancer screening could have a material adverse effect on our business, financial condition and results of operations.



Domestic Surgical Products

Our domestic
surgical products division manufactures the NovaSure® System, the MammoSite® Radiation Therapy System and the GliaSite® Radiation Therapy System and markets these products in the United States.



The NovaSure System

The NovaSure System allows physicians to treat women suffering from excessive menstrual bleeding in a minimally invasive manner to eliminate or reduce their bleeding. The FDA
granted pre-market approval in September 2001 for the NovaSure System to treat excessive menstrual bleeding due to benign causes in women for whom childbearing is complete. The NovaSure System was commercially launched in the United States in early
2002.



We estimate that there are approximately seven million women in the United States
that suffer from excessive menstrual bleeding who are generally considered beyond typical childbearing age and of these, approximately 2.5 million seek treatment. Industry sources estimate that one in five women worldwide is affected by
excessive menstrual bleeding. Excessive menstrual bleeding can have a significant impact on a womans quality of life by disrupting family, social, personal and professional activities. Gynecologists typically diagnose excessive menstrual
bleeding, determine the best treatment and prescribe or perform the therapy. Successful treatment of excessive menstrual bleeding is typically defined as a reduction of menstrual blood loss to a normal level, a state known as eumenorrhea. Treatment
may also result in the complete cessation of menstrual bleeding, a state known as amenorrhea. Often treatment of excessive menstrual bleeding begins with drug therapy, which preserves a womans ability to bear children but may have significant
side effects and/or contra-indications. Women who do not desire to have children may pursue alternative solutions including traditional surgeries, such as hysterectomy, dilation and curettage or rollerball ablation, or second generation minimally
invasive endometrial ablation procedures like the NovaSure System.



The NovaSure System
provides physicians and patients with a fast, simple, safe and effective treatment for excessive menstrual bleeding. The system primarily consists of a disposable device and a controller that delivers radio frequency, or RF, energy to the
endometrial wall of the uterus to ablate the endometrium. The NovaSure disposable device is a hand-held, single- use device that incorporates a flexible gold-plated mesh electrode used to deliver radiofrequency energy during the NovaSure procedure.
The NovaSure RF controller generates and delivers an amount of radiofrequency energy individually determined for each patient, monitors several critical treatment and safety parameters, and automatically controls other aspects of the procedure.



The NovaSure procedure is typically performed as an outpatient procedure and is also
performed as an in-office procedure by some physicians. We believe the NovaSure System offers significant benefits to physicians, patients, hospitals and outpatient surgery centers, including clinical efficacy, fast and efficient treatment, lack of
a need for pre-treatment, low general anesthesia use, convenience and ease of use, a variety of safety features and nationwide Medicare reimbursement rates. Based on pivotal clinical trial data used to obtain initial U.S. regulatory approval, the
NovaSure System was demonstrated to have a success rate for treatment of 77.7% at twelve months after treatment, as compared to a success rate of 74.4% by rollerball ablation, a traditional first generation endometrial ablation
treatment.



The NovaSure System is the only commercially available second
generation endometrial ablation therapy approved by the FDA to be performed without drug or surgical pre-treatment. Pre-treatment can be time-consuming, expensive and inconvenient for both patients and physicians and can result in
uncomfortable or painful side effects and complications. The NovaSure procedure is completed in a single outpatient visit. In addition, in our pivotal clinical trial, the mean procedure time, or the period from device insertion to device



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removal, for the NovaSure System was 4.2 minutes, as compared to 24.2 minutes for rollerball ablation. The NovaSure System has the shortest treatment time (average of
84 seconds of RF energy delivery), based on labeling indications for other FDA-approved second generation endometrial ablation therapies. In addition, patients have a median recovery room time of 85 minutes and most NovaSure patients return to
normal activities within one to two days. In addition, in our pivotal clinical trial, general anesthesia was used in 27% of NovaSure cases as compared to 82% of cases using rollerball ablation. Therefore, we believe NovaSure is less expensive,
avoids the risks associated with general anesthesia and permits faster patient recovery as compared to rollerball ablation. Also, in our experience, physicians and nursing personnel quickly understand how to use the NovaSure System effectively after
proper training.



The MammoSite System

The MammoSite Radiation Therapy System is a single-use device for the treatment of early-stage breast cancer, which incorporates a patented balloon catheter that positions a
therapeutic radiation source directly into the resection cavity created after removal of a tumor from the breast. Industry sources estimate that one in seven women in the United States will eventually be diagnosed with breast cancer, which accounts
for approximately one-third of all female cancers and is the second overall leading cause of cancer death. On a worldwide annual basis, over 1.2 million women are diagnosed with breast cancer. The MammoSite System positions a radiation source
directly within the post-surgical cavity, delivering optimally dosed radiation to the tissue that is at the highest risk for cancer recurrence while minimizing radiation exposure. In addition, the device allows for radiation treatment to be
completed within five days as compared to six to seven weeks for traditional radiation therapy. We believe the MammoSite System also offers patients better cosmetic outcomes resulting in high patient satisfaction.



Over the past few decades, breast cancer diagnosis and treatment has been evolving from the radical
mastectomy alone to lumpectomy, which is a less disfiguring, breast-conserving therapy for early-stage cancer patients followed by a course of radiation. The MammoSite System provides partial-breast irradiation, which delivers high-dose radiation to
the specific lumpectomy site for five days while minimizing radiation exposure. The MammoSite System is an alternative to traditional radiation therapy during which the patient is exposed to external beam radiation for a period of six to seven weeks
resulting in radiation exposure to healthy tissue in addition to the cancer site. Published data indicates that on an annual basis, approximately 25% of breast cancer patients who undergo lumpectomy surgery choose not to receive any form of
post-surgical radiation as a result of the harmful effects of traditional radiation therapy and the hardship of an extended schedule of daily therapy.



There are few FDA restrictions on the use of the MammoSite System for patients undergoing lumpectomy, however indications have shown that patients with tumors with a diameter of
less than three centimeters and those at least 45 years of age are the most appropriate for the MammoSite procedure. The MammoSite System is comprised of an inflatable balloon catheter in which a radioactive source is introduced for therapy
delivery. The inflatable balloon is inserted into the surgical cavity remaining after removal of the tumor. The catheter portion of the system allows the radioactive source to be added or withdrawn over the course of the therapy. This local
placement of the balloon enhances therapeutic delivery of radiation to the tissue most likely to contain residual cancerous cells following surgery.



The GliaSite System

Each year, over 18,000 people in the United States
are diagnosed with a primary malignant brain tumor. Brain metastases occur approximately ten times more often than primary tumors and occur in approximately 20% to 40% of all cancer patients, most commonly in lung and breast cancer patients.
Malignant brain tumors recur frequently, often within one year and typically near the original tumor site. Industry sources estimate that most patients die within one year of diagnosis and within six months of recurrence.



The GliaSite System works in the same manner and utilizes similar technology as the MammoSite System,
using Iotrex, a proprietary, liquid radiation source for which Cytyc has an exclusive license. The GliaSite System provides a full course of post-surgical radiation therapy that can be delivered even after a full course of external



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beam radiation therapy has been given to a patient. In clinical trials, the GliaSite System has demonstrated improved median survival time, preservation of cognitive
function and improvement of overall quality of treatment. In addition, the GliaSite System allows for radiation treatment to be completed within three to six days, often as an outpatient therapy.



Customers and Competition of our Domestic Surgical Products Segment

Customers No customer within our domestic surgical products segment accounted for more than 10% of our consolidated net sales for the years ended
December 31, 2005, 2004 or 2003.



Competition Our
NovaSure System currently faces direct competition from Johnson & Johnson, Boston Scientific Corporation, American Medical Systems, Inc. and Microsulis Medical Limited, each of which currently markets an FDA-approved second
generation endometrial ablation device for the treatment of excessive menstrual bleeding. In addition to these devices, there exist alternative treatments to our NovaSure System, such as drug therapy, hysterectomy, dilation and curettage and
rollerball ablation. Rollerball ablation and the Johnson & Johnson endometrial ablation device have been in use for a longer time than our procedure for the treatment of excessive menstrual bleeding. Because drug therapy is an alternative
to our NovaSure procedure, our competitors also include many major pharmaceutical companies that manufacture hormonal drugs for women.



As a result of the relatively short period of time the MammoSite and GliaSite Systems have been in the market, these products face competition from the more
commonly-known alternatives, such as treatment using external beam radiation, which has longer-term data on patient outcome, and products such as Xoft Microtube, Inc.s (Xoft) electronic brachytherapy.



Current or future competitors may develop technologies and products that demonstrate
better safety or effectiveness, clinical results, ease of use or lower cost than our surgical products. Our surgical products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or
more of our competitors. We believe the principal competitive factors in our market include product safety and proven efficacy; reliability and ease of use; customer focus and service; effective training, marketing and distribution; patent
protection; and reimbursement.



International

Our international segment markets our diagnostic and surgical products outside of the United States, with a presence in Canada, Europe, Australia and Hong Kong, all of which we
believe represent significant market opportunities for all of our products. These operations have been established to manage sales, service, training and distribution in the Canadian, European and Asia/Pacific markets. We also utilize a network of
third-party distributors in various other countries throughout the world, including Japan and China. Our international strategy is to establish sales channels appropriate for increasing our international customer base, taking into consideration
factors such as government regulations and clinical practices of the particular country or region.



During 2005, we placed our first ThinPrep Imaging System in the U.K. at The Doctors Laboratory (TDL) in London. TDL is the largest clinical pathology service in the independent healthcare sector in the U.K. Our
contract with TDL is for a term of five years and represents a potential of approximately 200,000 imaged ThinPrep Pap Tests during that period. Together with our multi-year agreement with the Scottish government to convert all cervical cancer
screening in Scotland exclusively to the ThinPrep Pap Test, we estimate these locations in the U.K. will provide cancer screening for approximately 3.2 million women annually. The local U.K. governments are required by law to convert to
liquid-based cytology by 2008. As of December 31, 2005, we estimate that approximately 25% of the U.K. pap tests have been converted to the ThinPrep Pap Test.



During 2005, we also placed two ThinPrep Imaging Systems in Hong Kong and two in Australia.



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In July 2005, we entered into an exclusive agreement
with Olympus Corporation, Japans microscope market leader, appointing Olympus as the sole and exclusive distributor for the sale of our ThinPrep System in Japan. The term of the agreement is five years, during which time Olympus will apply its
extensive sales and marketing resources and distributor network to expand use of the ThinPrep System for cervical cancer screening throughout Japan. Currently, there are approximately ten million Pap tests performed annually in Japan.



In December 2004, Interventional Procedural Guidance was issued by the National Institute of Clinical
Excellence (NICE) in the U.K. regarding the NovaSure System. This guidance should facilitate use of the NovaSure System by National Health Service physicians. As a result, we made substantial investments in 2005 to build our NovaSure
sales force in the U.K. and in other key markets in Europe. For MammoSite, we are actively working with key opinion leaders in Europe to introduce the MammoSite System into the European marketplace and we are working toward building our sales force
where significant market opportunities exist.



We believe that international sales and
marketing efforts will continue to involve a lengthy process, requiring us to educate healthcare providers, clinical laboratories, government entities and other third-party payors regarding the clinical benefits and cost-effectiveness of our current
products, as well as any other new products and applications. In order to effectively market our current products and any other new products and applications on a worldwide basis, we will need to continue to increase our international marketing and
sales capabilities.



Customers and Competition of our International
Segment

Customers No customer within our international segment accounted for more than 10% of our consolidated net sales for the
years ended December 31, 2005, 2004 or 2003.



Competition Similar to the diagnostic products marketplace in the United States, in Europe we compete with the conventional Pap smear and other alternative methods for detecting cervical cancer and/or its precursors. In
addition to TriPath Imaging, Inc., we compete with a variety of other companies and off-market tests, since fewer regulatory barriers exist in Europe as compared to the United States. In the endometrial ablation market, we compete
with drug therapy, as well as other endometrial ablation devices, including Johnson & Johnsons Thermachoice, Boston Scientific Corporations HTA, Microsulis Device and two other relatively small companies that do not have FDA
approval. Our MammoSite product faces competition from the traditional mastectomy and a more radical breast-conserving procedure called a quadrantectomy. Additional surgical methods are being explored in Europe by potential competitors,
however such alternative methods have not achieved widespread commercial use. In the Asia/Pacific region, the competition is similar to that in Europe for our diagnostic and surgical products.



Third-Party Reimbursement

The ThinPrep Pap Test is generally billed by laboratories to third-party payors and results in a higher reimbursement amount for the ThinPrep Pap Test than the current
reimbursement paid for conventional Pap smears. Our other primary products, including the ThinPrep Imaging System, the NovaSure System and the MammoSite System, are also billed by our customers to third-party payors. Successful sales of the these
products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as private insurance plans, managed care organizations, Medicare and Medicaid and foreign governmental
healthcare agencies. Although a majority of managed care organizations in the United States have added the ThinPrep Pap Test to their coverage, and the Novasure System and the MammoSite System are reimbursed by many private healthcare insurance and
managed care payors, there can be no assurance that third-party payors will provide or continue to provide such coverage, that reimbursement levels will be adequate or that healthcare providers or clinical laboratories will use our products in lieu
of other methods. In addition, we will need to secure adequate third-party reimbursement for any new products we develop or obtain.



Since January 1, 1998, our laboratory customers have been able to request reimbursement for the ThinPrep Pap Test from health insurance companies and the Centers for Medicare
and Medicaid Services (CMS) using a Current Procedural Terminology (CPT) code specifically for liquid-based cervical cell specimen preparation.



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CPT codes are assigned, maintained and revised by the CPT Editorial Board, which is administered by the American Medical Association (AMA), and are used in
the submission of claims to third-party payors for reimbursement for medical services. CMS has established a national limitation amount for Medicare reimbursement in 2006 of approximately $28 for the CPT code describing the ThinPrep Pap Test. This
is nearly double the national limitation amount for reimbursement of the conventional Pap smear. As of December 31, 2005, based on information provided to us, we believe that all of the health insurance companies that announced coverage of the
ThinPrep Pap Test as part of the ThinPrep System, representing more than 90% of insured women in the United States, have implemented the CPT code and have established a reimbursement amount.



CMS has established a national limitation amount for Medicare reimbursement in 2006 of the CPT code for
the screening of liquid-based preparations using an automated system. The reimbursement rate for this CPT code is approximately $37.



Third-party reimbursement for our NovaSure System is well established in the United States. A currently effective Category I CPT billing code covers endometrial ablation
procedures. Our NovaSure System is typically reimbursed by private healthcare insurance or managed care payors. However, many of these private payors use reimbursement amounts determined by Medicare and the CMS as a benchmark in setting their
reimbursement policies. CMS sets reimbursement rates for services and procedures covered by Medicare. Effective January 1, 2006, the national average Medicare reimbursement rate to hospitals for endometrial ablation furnished in a hospital
outpatient department increased to approximately $1,923 from approximately $1,728 in 2005. In addition to making payment to hospitals, Medicare reimburses physicians for performing the procedure in the hospital. Also, effective January 1, 2005,
for the first time, CMS established a reimbursement rate for endometrial ablations performed in a physicians office, which includes the fees to the physician for performing the service, practice expense costs and professional liability
insurance costs. The initial national average rate of approximately $2,288 increased slightly in 2006 to approximately $2,400. These changes in the Medicare reimbursement rates may not result in an increase in our sales volume or revenue. Some
private payors do not follow the CMS and Medicare guidelines and those payors may reimburse for only a portion of our procedure or not at all. Payments to physicians by non-Medicare third-party payors can vary substantially depending on the
reimbursement arrangement between the third-party payor and the physician.



The MammoSite
System is generally used in hospital outpatient departments. Medicares reimbursement system for hospital outpatient services groups procedures into payment categories based on clinical and cost similarity and assigns a single payment amount to
each group. A number of services associated with use of the MammoSite System, including implantation of the catheters, treatment planning and management, and removal of the catheters, are separately reimbursed under this system. Effective
January 1, 2005, the AMA established two new CPT codes that describe implantation of the MammoSite System concurrent with a partial mastectomy and implantation at a later date. For 2005 and 2006, Medicare designated these codes as new
technology services in hospital outpatient departments, with payment of $2,750 or $3,250, depending on whether the implantation is performed concurrently with the partial mastectomy or at a later date, respectively. Medicare reimbursement for these
services may change in 2007 or 2008 when these codes new technology status expires. Private payors may reimburse for a portion of these procedures or not at all. Payments by non-Medicare third-party payors can vary substantially depending on
the reimbursement arrangements between the third-party payor and the physician or hospital.



Research and Development

Our core research and development strategy is to enhance our existing product lines, such as the ThinPrep
Imaging System, the NovaSure System and the MammoSite System, through operational enhancements and cost reductions, as well as to continue to develop additional innovative medical diagnostic and surgical devices and therapeutic applications. To
implement this strategy, we are utilizing internal resources, as well as sponsored and collaborative research agreements with leading medical institutions. Cytyc engineers and scientists are working collaboratively with the researchers at these
outside institutions to translate their findings into further enhancements to Cytycs existing technologies.



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There can be no assurance that we will be successful
in developing or marketing additional applications of the ThinPrep System, the NovaSure System, the MammoSite System or the GliaSite System or that we will further enhance the ThinPrep Imaging System. Furthermore, additional applications may require
additional approvals from the FDA prior to the marketing of such applications. There can be no assurance that the FDA would approve such submissions on a timely basis, if at all.



Our research and development expenses totaled approximately $32.3 million, $20.8 million and $14.7 million for the years ended December 31, 2005,
2004 and 2003, respectively.



Business Development

We are continually evaluating a variety of new business opportunities that would take advantage of our distribution channels, customer call points, and existing technology. We also
evaluate opportunities that could provide new customer types, distribution channels and technology capabilities. We believe there are new developments in diagnostic tests and therapeutics in the womens health sector that could represent
promising growth opportunities which we might pursue through an array of potential transactions, including direct funding of research projects, equity investments or acquisitions to provide access to new technologies and/or enhance product
offerings. We believe business development will continue to play an important role in the development and execution of our growth strategy.



Sales and Marketing

Our sales and marketing
strategy is to achieve broad market acceptance of the ThinPrep System, including the ThinPrep Imaging System, for cervical cancer screening and other diagnostic applications, as well as the NovaSure System for treating excessive menstrual bleeding
and the MammoSite and GliaSite Systems for the treatment of breast and malignant brain tumors. A critical element of our strategy in the United States is to utilize the results of our clinical trials and expanded FDA labeling to demonstrate the
safety, efficacy and productivity improvements to patients, healthcare providers, clinical laboratories and third-party payors.



We plan to continue to expand our market reach through the efforts of our more than 300-person worldwide direct sales force focused on healthcare providers, clinical laboratories
and third-party payors. Our integrated sales force has been trained to cross-sell our product offerings, as appropriate. We are focusing significant sales and marketing efforts towards the commercialization of the ThinPrep Imaging System, the
NovaSure System and the MammoSite System, including a direct-to-consumer marketing program initiated in 2005 for the NovaSure System. We expect to use our existing relationships with customers, healthcare providers and third-party payors to
successfully market all of our products. Our sales and marketing programs also focus on educating healthcare providers regarding the use of our products and on providing materials to help them educate their patients about our procedure. Our
international sales and marketing efforts involve educating healthcare providers, clinical laboratories, government entities and other third-party payors regarding the clinical benefits and cost-effectiveness of our current products, as well as any
other new products and applications. We will continue to increase our international marketing and sales capabilities in order to effectively market our current and any other new products and applications.



Raw Materials and Manufacturing

We purchase many of the components and raw materials used in our products from numerous suppliers worldwide. In some cases, we have established long-term supply contracts with our
suppliers. For reasons of quality assurance, sole source availability or cost effectiveness, certain components and raw materials are available only from a sole supplier. We work closely with our suppliers and develop contingency plans to assure
continuity of supply while maintaining high quality and reliability. Due to the FDAs requirements regarding manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain components or
materials. Generally, we have been able to obtain adequate supplies of such raw materials and components. In the event that we are unable to obtain sufficient quantities of raw materials or components on commercially reasonable terms or in a timely
manner, we would not be able to manufacture our products on a timely and cost-competitive basis, which may have a material adverse effect on our business, financial condition and results of operations.



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We assemble all ThinPrep Processors and ThinPrep
Imaging Systems at our facility in Marlborough, Massachusetts. We fill all of the ThinPrep System vials at our facility in Londonderry, New Hampshire. We manufacture our ThinPrep System filters at both our Marlborough and Londonderry facilities. We
manufacture the disposable subassembly component of our NovaSure System at our manufacturing facilities in Palo Alto, California and San Jose, Costa Rica. Additionally, we contract with a leading global electronics contract manufacturer for
production of the RF controller component of our NovaSure System and we take delivery of finished controllers at our Palo Alto facility for testing and packaging. We contract with several third-parties to manufacture portions of our MammoSite System
and GliaSite System based on our specifications. We also have a commercial supply agreement for the production of Iotrex for use with our GliaSite System. We take delivery of the finished MammoSite System at our Palo Alto, California facility and of
certain supplies for our GliaSite System at our Alpharetta, Georgia facility, the lease for which we assumed as part of our acquisition of Proxima Therapeutics, Inc. on March 7, 2005.



Quality Management

We place significant emphasis on providing quality products and services to our customers. A major portion of our quality systems relate to the design and development, manufacturing, packaging, sterilization, handling,
distribution and labeling of our products. These quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for product design, raw materials, components,
packaging materials, labels, sterilization procedures and overall manufacturing process control. Our quality systems integrate the efforts of suppliers of raw materials, components and finished goods to ensure we meet customer and regulatory
requirements. These systems are designed to ensure that appropriate standards and requirements are met before goods are released.



Certain of our facilities are certified under ISO 13485-2003, an international quality standard. There can be no assurance that we will be able to maintain compliance with ISO
requirements or that failure to maintain compliance with these requirements will not have a material adverse effect upon our business, financial condition and results of operations.



Government Regulation

The manufacture and
sale of medical diagnostic devices intended for commercial use are subject to extensive governmental regulation in the United States and in other countries. Our existing products are regulated in the United States as medical devices by the FDA under
the Federal Food, Drug, and Cosmetic Act (FDC Act). The ThinPrep System, ThinPrep Imaging System and NovaSure System required separate pre-market application (PMA) approval prior to commercial distribution, which demonstrated
to the FDA that these devices are safe and effective for their intended uses. The devices which comprise the MammoSite System, GliaSite System and the FirstCyte Breast Test required the clearance of 510(k) submissions prior to commercial
distribution, based upon a finding that the devices are substantially equivalent to legally marketed devices that are not subject to PMA approval. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture, safety, labeling,
storage, record keeping, advertising, distribution and production of medical devices in the United States. Non-compliance with applicable requirements of the FDC Act can result in the failure of the government to allow 510(k) clearance or PMA
approval for a device, withdrawal of clearances or approvals, total or partial suspension of production, fines, injunctions, civil penalties, recall or seizure of products, and criminal prosecution.



The FDAs regulations may require agency approval of a PMA supplement or clearance of a new 510(k)
notification for certain changes if they affect the safety, effectiveness or substantial equivalence of the device, respectively, as a result of: new indications for use; labeling changes; the use of a different facility or establishment to
manufacture, process, or package the device; changes in manufacturing facilities, methods, or quality control systems; and changes in performance or design specifications.



The regulatory approval process can be expensive, lengthy and uncertain for both original and supplemental clearance or approvals. There can be no
assurance that we will be able to obtain necessary regulatory clearances or approvals for any proposed future products or modifications of existing products. The failure to obtain



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clearances or approvals, loss of previously received approvals, or failure to comply with existing or future regulatory requirements, would have a material adverse
effect on our business, financial condition and results of operations.



Beginning in
1996, the following FDA and/or PMA approvals were obtained for:



| |  |  | the ThinPrep System for cervical cancer screening;
| | - |  | --------------------------------------------------



| |  |  | the expanded product labeling for the ThinPrep System to include the claim that the ThinPrep System is significantly more effective in detecting Low-Grade Squamous Intraepithelial Lesions and
more severe lesions than the conventional Pap smear method in a variety of patient populations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the expanded product labeling to include a claim that the specimen quality using the ThinPrep System is significantly improved over that of the conventional Pap smear method;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our PMA supplement application for use of a combination of an endocervical brush and spatula sampling devices;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | our PMA supplement applications for the testing for HPV directly from a single vial of patient specimen collected in ThinPrep solution using Digenes Hybrid Capture and Hybrid Capture II
HPV DNA Assay, respectively;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ThinPrep 3000 Processor, our batch processor for automated sample preparation;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our PMA supplement application for the inclusion of data describing the detection of High-Grade Squamous Intraepithelial Lesions with the ThinPrep Pap Test;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our PMA supplement applications to allow for testing for Chlamydia trachomatis and Neisseria gonorrhea directly from the ThinPrep Pap Test vial using Roches COBAS Amplicor
automated system, as well as Gen-Probe Incorporateds APTIMA Combo 2 Assay;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our PMA application for the ThinPrep Imaging System.
| | - |  | ----------------------------------------------------



In September 2005, we obtained approval of two pre-market approval supplements: (1) one that allows for the removal of up to four milliliters from the PreservCyt sample vial
before preparing the ThinPrep Pap Test slide to better facilitate ancillary testing, which improves the implementation of and provides broader application of molecular testing, particularly in high-volume laboratories and (2) one related to the
detection of endocervical and endometrial glandular lesions with the ThinPrep Pap Test. We anticipate that any other proposed uses for the ThinPrep System and ThinPrep Imaging System would likely require approval of a PMA supplement or a new PMA
application.



The PMA application for the NovaSure System, which we acquired in March
2004, was approved by the FDA in September 2001, authorizing commercialization of the NovaSure System for the treatment of excessive menstrual bleeding due to benign causes in pre-menopausal women who have completed childbearing. The MammoSite
System, which we acquired in March 2005, was cleared by the FDA in May 2002 for the delivery of intra-cavity radiation to the surgical margins following lumpectomy for breast cancer. Subsequent FDA clearances were received in May 2003, February
2004 and August 2004 relating to the MammoSite catheters. The GliaSite System, which we also acquired in March 2005, received 510(k) clearance in April 2001, authorizing commercialization of the GliaSite System for radiation therapy in patients with
any malignant brain tumor following resection surgery.



The ThinPrep, ThinPrep Imaging,
NovaSure, MammoSite and GliaSite Systems are, and any other products we may manufacture or distribute pursuant to an approved PMA application or supplements or 510(k) clearance will be, subject to pervasive and continuing regulation by the FDA,
including the Quality System Regulation, or QSR,



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which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures; labeling requirements; the FDAs
general prohibition against false or misleading statements in the labeling or advertising products for unapproved or off-label uses; the Corrections and Removals regulation, which requires that manufacturers report to the FDA recalls and
field corrective actions taken to reduce a risk to health or to remedy a violation of the FDC Act that may pose a risk to health; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may
have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. We are subject to inspection by the FDA to determine our compliance with
regulatory requirements. Product labeling, advertising and promotional activities may be subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Products may only be promoted by us and any of our distributors for
their approved indications. No assurance can be given that modifications to the labeling that may be required by the FDA in the future will not adversely affect our ability to market or sell the ThinPrep, ThinPrep Imaging, NovaSure, MammoSite and
GliaSite Systems, as well as the FirstCyte Breast Test, or any other products we may develop or acquire. Our failure to comply with applicable regulatory requirements could result in possible administrative and legal actions by the FDA and other
regulatory agencies. Such actions may include fines, product recalls, product seizures, injunctions to halt manufacture and distribution, and other civil and criminal sanctions.



We are also subject to various federal and state laws pertaining to healthcare fraud and abuse, including federal and state anti-kickback laws.
Anti-kickback laws make it illegal for an entity to solicit, offer, receive, or pay remuneration or anything of value in exchange for, or to induce, the referral of business or the purchasing, leasing, ordering, or arranging for or recommending the
purchase, lease or order of any item or service paid for by Medicare, Medicaid or certain other federal healthcare programs. The statute has been broadly interpreted to cover a wide array of practices. Some states have passed similar laws. The
federal government has published regulations that identify safe harbors, which if applicable will assure that certain arrangements will not be found to violate the federal anti-kickback statutes. Our activities relating to the sale and
marketing of our products may be subject to scrutiny under these laws. While we make every effort to comply with the regulations, it is possible that our practices might be challenged under federal anti-kickback or similar laws due to the breadth of
the statutory provisions and the absence of extensive guidance regarding compliance. Violations of these laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion
from federal healthcare programs (including Medicare and Medicaid). If the government were to raise questions about our behavior or find that we have violated these laws, there could be a material adverse effect on our business. Our activities could
be subject to challenge for the reasons discussed above, due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities.



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. There can be 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.



Sales of medical devices outside of the United States are subject to foreign regulatory requirements that vary widely from country to country. In 2003, we met the essential
requirements of the European In Vitro Medical Devices Directive that apply to the ThinPrep Pap Test and ThinPrep Imaging System, as well as the essential requirements of the European Medical Devices Directive that apply to the NovaSure System and
the FirstCyte Breast Test. As a result, our products bear the CE mark and may be legally marketed in the countries of the European Union and the European Free Trade Association. In addition, in August and December 2001, the MammoSite System and
GliaSite System received CE mark certification, respectively. The time required to obtain approval from a foreign country to market and sell our products 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. In addition, there can be no assurance that we will meet the FDAs export requirements or receive FDA export approval when such
approval is necessary, or that countries to which



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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 importation into various countries, could have a material adverse effect on our business, financial condition and results of operations.



The laboratories that purchase the ThinPrep System and ThinPrep Imaging System are subject to extensive regulation under the Clinical Laboratory
Improvement Amendments of 1988 (CLIA), which require 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 the ThinPrep System, including the ThinPrep Imaging System, operates in a manner that will allow laboratories purchasing the device to comply with CLIA requirements. However, there can be no
assurance that adverse interpretations of current CLIA regulations or future changes in CLIA regulations would not have an adverse effect on sales of the ThinPrep System and ThinPrep Imaging System.



Patents, Trademarks, Copyrights, Licenses and Proprietary Rights

We rely on a combination of patents, trademarks, trade secrets, copyrights and confidentiality agreements to protect our proprietary technology, rights and know-how. We pursue
patent protection in the United States and file corresponding patent applications in certain foreign jurisdictions. We hold 69 issued United States patents, 130 pending United States patent applications, and corresponding foreign patents or patent
applications relating to various aspects of our ThinPrep System, ThinPrep Imaging System, NovaSure System, MammoSite System, GliaSite System, FirstCyte Breast Test and other related technologies.



There can be no assurance, however, that pending patent applications will ultimately issue as patents
or 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 competitors. In addition, 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 existing patents or proprietary rights of third parties. In the event that any relevant claims of
third-party patents are successfully enforced against us, we could be prevented from selling our products or could be required to obtain licenses from the owners of such patents or be 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 attempts to redesign our products or processes to avoid infringement. Our failure to obtain these
licenses or to successfully redesign our products would have a material adverse effect on our business, financial condition and results of operations.



Our employees and third parties with whom we have entered into confidentiality agreements are obligated to maintain the confidentiality of our trade secrets and proprietary
information. There can be no assurance that such obligations will effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information if there is unauthorized use or disclosure. At the
same time, technology similar to ours may be independently developed by our competitors.



We hold an exclusive worldwide license from DEKA Products, LP (DEKA). In addition, we are the exclusive licensee of certain patented technology for use in the field of diagnosis and treatment of breast cancer and we are the
exclusive licensee for the use of Iotrex, for use with our GliaSite System, for the life of the two related patents. We currently are obligated to pay royalties in varying amounts. Our failure to maintain rights to such technology could have a
material adverse effect on our business, financial condition and results of operations. In November 2003, DEKA filed a demand for arbitration with the American Arbitration Association alleging that we underpaid royalties and on April 26, 2005,
the arbitration panel issued its final decision and as a result, we recorded a pre-tax charge in the first quarter of fiscal year 2005 in the amount of $7.8 million, which is in addition to the $1.3 million previously recorded. See Item
3. Legal Proceedings in this Form 10-K for a discussion of this matter.



We
presently have several trademarks, some of which have been registered with the United States Patent and Trademark Office and other comparable agencies worldwide. There can be no assurance that any copyrights or



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trademarks we own will provide competitive advantages for our products or will not be challenged or circumvented by our competitors. We also hold unregistered
copyrights on internally developed documentation and operating software developed for the ThinPrep System and ThinPrep Imaging System.



Litigation may be necessary to defend against claims of infringement, or to enforce our patents, copyrights, trademarks or trade secrets which could result in substantial cost to
us and diversion of focus away from our business. 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, which may reduce the competitive advantage afforded by
our intellectual property protection in certain jurisdictions.



Seasonality

Our industry is subject to seasonal fluctuations in operating results and cash flows, which may reduce net sales and operating
cash flows below annual averages. We experience fluctuations in our business as a result of time of year, physicians vacation schedules and severe weather, which vary in severity from year to year. Therefore, comparison of the results of
successive quarters may not accurately reflect trends or results for the full year.



Employees

As of December 31, 2005, we employed 1,331 persons worldwide. We are not subject to any collective bargaining agreements, have
never experienced a work stoppage and consider our relations with our employees to be good.



Financial Information Regarding Segment Reporting and Geographic Areas

We currently operate our business in three segments: domestic
diagnostic products, domestic surgical products and international. Please refer to Note 2(s) Segment and Enterprise-Wide Reporting in the notes to consolidated financial statements included in this Annual Report on Form 10-K under
Item 8, Financial Statements and Supplementary Data.



Executive Officers of Cytyc Corporation

The executive officers of Cytyc Corporation are set forth below. Business experience for the past five
years is provided and ages are as of January 1, 2006.



|Patrick J. Sullivan (54). | Chief Executive Officer and Director (since March 1994). Concurrently serves as President (since July 2002, previously from March 1994 to January 2002).
Chairman of the Board (since May 2002).
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Daniel J. Levangie (55). | Executive Vice President, Commercial Operations (since January 2004). Executive Vice President (July 2002 to January 2004). Mr. Levangie has held
several positions with Cytyc Corporation, including President, Executive Vice President, Chief Operating Officer, Senior Vice President and Vice President, Commercial Operations (December 1997 to July 2002). Chief Executive Officer and President of
Cytyc Health Corporation (July 2002 to December 2003). Mr. Levangie is a member of the board of directors of Dune Medical Devices Ltd.
|------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Timothy M. Adams (46). | Vice President, Chief Financial Officer and Treasurer (since November 2004). Chief Financial Officer, Modus International, Inc., (October, 2002 to August,
2004). Chief Operating and Chief Financial Officer, GeoTrust (March to September 2002). Chief Financial Officer, Digex, Inc. (January, 2000 to December, 2001).
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|James Linder, M.D. (51). | Senior Vice President (since March 2004). Chief Medical Officer (since January 2002). Consulting Medical Director (May 1996 to January 2002).
|------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------



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|A. Suzanne Meszner-Eltrich (53). | Senior Vice President (since March 2004). Vice President, General Counsel and Secretary (since September 1997). Concurrently served as Vice President, Human
Resources (September 1997 to May 2002).
|-------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|John P. McDonough (46). | Senior Vice President of Development and Operations (since March 2004). Vice President, Corporate Development (October 2003 to March 2004). Founder, Chief
Executive Officer and President of Soundbite Communications (April 2000 to September 2003).
|----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|David P, Harding (40). | Senior Vice President, Cytyc Corporation, and President of Cytyc International, Inc. (since October 2005). Vice President, Marketing (October 2004 to
October 2005). Associate and Principal with McKinsey & Company, Inc. (October 1993 to October 2004).
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 1A. Risk Factors.

The following factors, among others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon our business, financial condition, and results of operations.



The following discussion of our risk factors should be read in conjunction with the consolidated
financial statements and related notes included herein. Because of these and other factors, past financial performance should not be considered an indication of future performance.



We depend principally on the sale of three product lines.

Prior to our acquisitions of Novacept in March 2004 and Proxima Therapeutics, Inc. (Proxima) in March 2005, we derived most of our revenues from sales of our ThinPrep processor, filters and other disposable supplies
for use in gynecological and non-gynecological testing applications. As a result of the Novacept and Proxima acquisitions, we now manufacture and market the NovaSure, MammoSite and GliaSite Systems, which represented 29% of worldwide consolidated
net sales in the year ended December 31, 2005. Nevertheless, we still rely heavily on sales of our ThinPrep products to generate a significant portion of our net sales and earnings. If we are unable to continue to successfully develop and
commercialize our current products as well as other new or improved products, our business, sales and profits may be materially impaired.



In addition, in October 2003, an article in the New England Journal of Medicine suggested that the interval between screenings for cervical cancer could be extended from one year
to three years for women over 30 who have had consistently negative results from previous screenings. If screening periods are extended as suggested, aggregate demand for testing is likely to decrease and if we are unable to successfully develop
additional products, our business may be materially adversely affected. Furthermore, we may be required to obtain FDA approval and secure adequate reimbursement from insurance companies and other third-party payors for any other new or improved
products that we are able to develop or acquire, and we may not be able to do so.



Our sales are dependent on third-party reimbursement.

Widespread adoption of our ThinPrep, ThinPrep Imaging, NovaSure, our newly acquired
MammoSite and GliaSite Systems, and the FirstCyte Breast Test in the United States and other countries is dependent upon the ability of healthcare providers and laboratories to secure adequate reimbursement from third-party payors such as private
insurance plans, managed care organizations, Medicare and Medicaid and foreign governmental healthcare agencies. Although a majority of managed care organizations in the United States have added the ThinPrep Pap Test to their coverage and the
NovaSure, MammoSite and GliaSite procedures are reimbursed by many private healthcare insurance and managed care payors, we cannot guarantee that reimbursement will increase or continue to be available, or that reimbursement levels will be adequate
to enable healthcare providers and clinical



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laboratories in the United States and other countries to use our products instead of conventional methods or existing therapies, such as whole breast irradiation and
brachytherapy, or the products of our competitors. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. There can be no assurance
that third-party payors will provide or continue to provide such coverage, that third-party reimbursement will be made available at an adequate level, if at all, for our products under any such overseas reimbursement system or that healthcare
providers or clinical laboratories will use our products in lieu of other methods. We also will be required to secure adequate reimbursement for any new products we develop or acquire, and we may not be able to do so successfully.



We are dependent upon a relatively small number of large clinical laboratory
customers in the United States for a significant portion of our sales of the ThinPrep System.

We are dependent upon a relatively small number of large clinical
laboratory customers in the United States for a significant portion of our sales of the ThinPrep System, and our business may materially suffer if we are unable to increase sales to, or maintain our pricing levels with, our existing customers and
establish new customers both within and outside the United States. Due in part to a trend toward consolidation of clinical laboratories in recent years and the relative size of the largest United States laboratories, it is likely that a significant
portion of ThinPrep System sales will continue to be concentrated among a relatively small number of large clinical laboratories.



Our business faces intense competition from other companies.

Our products
face direct competition from a number of publicly-traded and privately-held companies. Some of our competitors are large companies that enjoy significant competitive advantages over us, including:



| |  |  | significantly greater name recognition;
| | - |  | ---------------------------------------



| |  |  | established distribution networks;
| | - |  | ----------------------------------



| |  |  | additional lines of products, and the ability to offer rebates or bundle products to offer discounts or incentives to gain competitive advantage;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater resources for product development, sales and marketing; and
| | - |  | -------------------------------------------------------------------



| |  |  | well-established products for procedures such as the radical mastectomy or traditional radiation therapy.
| | - |  | ---------------------------------------------------------------------------------------------------------



The markets we sell in are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market
activities of industry participants. Other companies may develop products that are superior to ours or less expensive, or both. Improvements in existing competitive products or the introductions of new competitive products may reduce our ability to
compete for sales, particularly if those competitive products demonstrate better safety or effectiveness, clinical results, ease of use or lower costs. The development, FDA approval and commercial marketing of competitive systems for cervical cancer
screening, treatment for excessive menstrual bleeding, breast cancer, or malignant brain tumors could have a material adverse effect on our business and financial condition. If we are unable to compete effectively against existing and future
competitors and existing and future alternative treatments, our sales could decline and our business could be adversely affected.



The success of our business depends on our ability to protect our intellectual property rights.

We rely on a combination of patents, trade secrets, copyrights, trademarks and confidentiality agreements to protect our products proprietary technology, rights and know-how. We also are the exclusive licensee of certain
patented technology for use in the field of cytology related to the ThinPrep System, in the field of breast cancer detection and treatment related to the FirstCyte Breast Test and in the treatment of any proliferative disease relating to our
GliaSite System.



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With our acquisitions in March 2004 and 2005, we
acquired all of Novacepts and Proximas intellectual property rights, respectively, including those with respect to the NovaSure System, the MammoSite System and the GliaSite System. However, the medical device industry in general, and
the therapeutic use of devices employing radiofrequency energy, such as the NovaSure System, in particular, have been subject to extensive litigation and administrative proceedings regarding patents and other intellectual property rights.



If we fail to protect, defend and maintain the intellectual property rights with respect
to any of our products or if we are subject to a successful third-party claim of infringement, the competitive position of these products could be impaired. In addition, infringement, interference and other intellectual property claims and
proceedings, with or without merit, are expensive and time-consuming to litigate and could adversely affect our business, financial condition and operating results.



If breast surgeons, radiation oncologists and patients do not adopt the MammoSite System as a preferred treatment for early-stage
breast cancer, the intended benefits of our acquisition of Proxima may not be realized and the market price of our common stock could decline.

The primary
product acquired as a result of our acquisition of Proxima is the MammoSite System, which is used to treat early-stage breast cancer. The MammoSite System is supported by only four years of patient follow-up studies from the initial 43-patient study
that was designed to gain clearance from the FDA and the one-year follow-up study from a 1,600-patient registry following the FDA clearance. We could discover that the results of these clinical trials are not indicative of results experienced in the
market over time. Furthermore, some of the existing data has been produced in studies that involve relatively small patient groups, and such data may not be reproduced in wider patient populations. Currently, with respect to our MammoSite System, we
are competing against breast cancer treatment using external beam radiation, which has longer-term data on patient outcome.



We may have difficulty gaining further acceptance of the MammoSite System among breast surgeons, radiation oncologists and patients for a number of reasons including:



| |  |  | the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the introduction or existence of competing products or technologies that may be more effective, safer or easier to use than the MammoSite System;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the results of long-term clinical studies relating to the effectiveness of the MammoSite System;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the availability of alternative treatments or procedures that provide comparable levels of improvement in breast cancer treatment at a lower cost than the MammoSite System;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | breast surgeons, radiation oncologists and patient perceptions of the MammoSite System as compared to other treatments for breast cancer; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continued availability of satisfactory reimbursement from healthcare payors for breast cancer treatment procedures.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



We believe that continued recommendation and support for the use of the MammoSite System by influential
breast surgeons and radiation oncologists and treatment centers are essential for widespread market acceptance. If the MammoSite System does not continue to receive support from these key constituencies, or if longer-term data does not demonstrate
continued support for the clinical efficacy of the MammoSite System, breast surgeons and radiation oncologists may not use, and hospitals and outpatient surgery centers may not purchase, the MammoSite System. If this occurs, the intended benefits of
the acquisition, such as increased net sales, may not be realized and the market price of our common stock could decline.



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Current levels of growth in the
market for new endometrial ablation procedures for the treatment of excessive menstrual bleeding may not be indicative of future growth.

Demand for newly
introduced technologies or treatments can initially be exaggerated as supply increases to meet pre-existing demand. However, once the pre-existing demand is met, growth in the market may abruptly stop or significantly slow. We believe that some of
the current growth in the market for new endometrial ablation procedures may be the result of a considerable pre-existing unmet demand for products of this nature. We cannot determine what portion of Novacepts historical sales is attributable
to this pre-existing demand, nor can we predict when, or at what rate, this demand may stop or decline in growth. If the demand for treatments like the NovaSure System were to stop abruptly or begin to decline, our operating results and
profitability could be adversely affected.



We cannot accurately
predict the rates at which women will undergo the NovaSure procedure.

We cannot assure you that the market for endometrial ablation products will continue to
develop in the future or that the new endometrial ablation procedures, including the NovaSure procedure, will continue to experience similar or greater rates of use. We cannot assure you that we will be successful in continuing to attract physicians
and women to use the NovaSure System, or whether or not evolving trends in the treatment of excessive menstrual bleeding will favor new endometrial ablation procedures as compared to traditional approaches.



Our success depends on the continued market acceptance of our ThinPrep System
products and their cost.

Our success and growth depends on the continued market acceptance of our ThinPrep System and ThinPrep Imaging System, including any
follow-on applications of ThinPrep technology. The laboratory cost of using the ThinPrep System and ThinPrep Imaging System for cervical cancer screening, both together and individually, is higher than that of a conventional Pap smear and, we
believe, competing liquid-based slide preparation systems. Due in part to increased competitive pressures in the healthcare industry to reduce costs, our ability to gain market acceptance of the ThinPrep System and follow-on products depends on our
ability to demonstrate that the higher cost of using the ThinPrep System is offset by (1) a reduction in costs often associated with conventional Pap smears or competing liquid-based slide preparation systems, such as inaccurate diagnoses and
the need for repeat Pap smears, as well as (2) the ability to use our ThinPrep System for additional testing applications, such as testing for the HPV, Chlamydia trachomatis and Neisseria gonorrhea. In particular, for both the
ThinPrep Imaging System and the FirstCyte Breast Test, we need to convince healthcare providers, insurance companies and other third-party payors, and clinical laboratories of the clinical benefits and cost-effectiveness of these products. For the
FirstCyte Breast Test, we await the results of an outcome study to support additional claims to drive market acceptance of this product and its cost.



Our success depends on our ability to manage growth effectively.

The
scope of our operations and facilities, the number of our employees and the geographic area of our operations have grown rapidly. If we are not able to manage our growth effectively, our business and financial condition will materially suffer. Our
growth may significantly strain our managerial, operational and financial resources and systems. To manage our growth effectively, we will have to continue to implement and improve additional management and financial systems and controls, and to
effectively expand, train and manage our employee base.



We may not be
able to successfully integrate future acquisitions.

We continually explore opportunities to acquire related businesses, some of which could be material to us.
Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating such companies, achieving cost efficiencies and managing these businesses as part of our company. We may not be able
to effectively integrate acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our effort to integrate these
businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition, the loss of customers resulting from the acquisitions and the assumption of unknown
liabilities. In addition, the process of integrating these businesses could cause an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. The diversion of managements
attention and



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any delays or difficulties encountered in connection with the integration of these businesses could negatively impact our business if any of the above adverse effects
were to occur. Further, the benefits that we anticipate from any future acquisitions may not develop.



Future acquisitions may also harm our operating results, dilute our stockholders equity and create other financial difficulties for us.

We may in the future pursue acquisitions that we believe could provide us with new technologies, products or service offerings, or enable us to obtain other competitive advantages.



Acquisitions by us may involve some or all of the following financial risks:



| |  |  | use of significant amounts of cash;
| | - |  | -----------------------------------



| |  |  | potential dilutive issuances of equity securities;
| | - |  | --------------------------------------------------



| |  |  | incurrence of debt or amortization expenses related to certain intangible assets; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | future impairment charges related to diminished fair value of businesses acquired as compared to the price we pay for them.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



We may not be successful in overcoming the risks described above or any other problems associated with
future acquisitions. Any of these risks and problems could materially harm our business, prospects and financial condition. Additionally, we cannot guarantee that any companies we may acquire will achieve anticipated revenues or operating results.



We may be subject to the risk of product liability claims relating to
our products.

Regardless of the technology employed, surgical procedures involve risk of complications and companies that produce medical devices for use in
surgical procedures are subject to risk of product liability litigation. We could become a party to legal proceedings involving injuries to patients that occurred when one of our products is used. We will vigorously defend against any product
liability claims that may arise related to any of our products. However, there can be no assurance that any defense against alleged claims will be successful.



If one of our products is found to have caused or contributed to injuries or deaths, we could be held liable for substantial damages. Product liability insurance is in place for
all of our products. However, we cannot assure you that available insurance will be sufficient to cover damages from any possible future claims. In addition, claims could adversely affect the reputation of the related product, which could damage its
competitive position in the market. The sale and use of one of our diagnostic products could also lead to the filing of product liability claims if someone were to allege that one of our products contained a design or manufacturing defect that
resulted in the failure to detect a disorder for which it was being used to screen or caused injuries to a patient. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability
insurance rates or the inability to secure additional coverage in the future. Also, even a meritless or unsuccessful product liability claim could be time consuming and expensive to defend, which could result in a diversion of managements
attention from our business and could adversely affect the perceived safety and efficacy of our products, as well as our financial condition and operating results.



Our quarterly operating results may fluctuate.

Our operating results have fluctuated significantly in the past on a quarterly basis. We expect that our operating results may fluctuate significantly from quarter to quarter and we may experience losses in the future depending on a number
of factors, including the extent to which our products continue to gain or maintain market acceptance, the rate and size of expenditures incurred as we expand our domestic and establish our international sales and distribution networks, the timing
and level of reimbursement for our products by third-party payors, and other factors, many of which are outside our control.



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We currently have limited
international sales capabilities and cannot guarantee success in international markets.

Although we commenced sales in countries outside the United States in
1998, only a small percentage of our sales to date have been to international markets. If we fail to increase international sales, our business and financial condition may suffer materially. We cannot guarantee that we will successfully develop
international sales channels or capabilities that will enable us to generate significant revenue from international sales. Even though we have established international sales capabilities, we may not be able to obtain favorable third-party
reimbursements and required regulatory approvals in foreign countries. While we believe we have developed a comprehensive international patent filing strategy, we have not secured patents in all foreign countries which we
currently sell or plan to sell our products. In some cases our ability to pursue patents in certain countries has lapsed. In those countries where we do have patents covering our products, we cannot guarantee that such patents may be
successfully enforced against infringing products. We may also face difficulty and added expense in complying with the U.S. and international regulations applicable to the sale and marketing of our products internationally.



We are highly dependent on key personnel.

We are highly dependent on the principal members of our management staff. Loss of our key personnel would likely impede achievement of our research and development, operational, or
strategic objectives. To be successful, we must retain key employees and attract additional qualified employees.



Our reliance on single source or limited source suppliers could harm our business.

We currently obtain certain key components of our products, including the proprietary filter material and microscope slides used in the ThinPrep Pap Test, radioisotopes, certain balloons and other items used in the design and manufacture of
the MammoSite System and the Iotrex liquid isotope used with the GliaSite System, from single or a limited number of sources due to technology, availability, price, quality and other considerations. Additionally, the NovaSure System utilizes several
components that may become obsolete or no longer be manufactured. We attempt to mitigate these risks by working closely with key suppliers regarding our supply needs and we have qualified backup vendors for several of our key components. Although we
believe that alternative sources for these components are available, a supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified. Switching components may require product redesign
and submission to the FDA of a pre-market supplement or possibly a separate pre-market approval, either of which could significantly delay production. If we are unable to obtain sufficient quantities of these components that meet our quality and
technical requirements at reasonable prices and in a timely manner, we will not be able to manufacture and sell our products on a timely and cost-competitive basis, which would materially and adversely affect our business and financial condition.



Our lack of redundant manufacturing capabilities could harm our
business.

We assemble all of our ThinPrep Processors, the ThinPrep Imaging System, the FirstCyte Breast Test and the single-use disposable devices in the
NovaSure System. In addition, we contract with third-parties to manufacture our MammoSite System and GliaSite System. We have established a certain level of site redundancy on our core products, or have developed alternate sources. While we have
made significant efforts to safeguard these core manufacturing processes, the loss of any of these facilities would impede our manufacturing and sales efforts, which would materially and adversely affect our business and financial condition.



Because a component of the NovaSure System is manufactured in Costa
Rica, we will be subject to the political and economic risks of doing business there.

We cannot guarantee that the political, labor and economic climate in Costa
Rica will remain sufficiently stable for uninterrupted manufacturing operations in that country. Our operations relating to the NovaSure System could be adversely affected by political unrest and we could also be harmed by strikes and other labor
disruptions. Any of these events could result in increased costs or in disruptions of supply of the NovaSure disposable devices, or any other product or component we may elect to manufacture in Costa Rica in the future, which could harm our
business, financial condition and operating results.



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We are subject to numerous FDA laws
and regulations, and non-compliance with such laws, as well as changes in such laws or future interpretations of such laws, could cause us to incur significant compliance costs and/or subject us to significant civil and criminal sanctions.

Our products are subject to expansive FDA regulation. Complying with these requirements imposes significant expenses on our operations. If we fail to comply with
applicable regulations, we could be subject to a wide range of civil and criminal enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or loss of FDA marketing claim approval.



We cannot guarantee we will obtain or maintain necessary regulatory
approvals for our products.

The FDA regulatory approval process can be expensive, lengthy and uncertain for both original and supplemental approvals. There can
be no assurance that we will be able to obtain necessary regulatory clearances or approvals for any proposed future products or modifications of existing products. The failure to obtain clearances or approvals, loss of previously received clearances
or approvals, or a failure to comply with existing or future regulatory requirements, would have a material adverse effect on our business, financial condition and results of operations.



Any modifications to a device that has received a pre-market approval that affect its safety or effectiveness require a pre-market approval supplement
or possibly a separate pre-market approval, either of which is likely to be time-consuming, expensive and uncertain to obtain. The FDA requires the device manufacturer to make and document its determination whether or not a pre-market approval or
supplement is required, but the FDA can review the manufacturers decision. Before the acquisition, Novacept modified various aspects of the NovaSure System and filed and received approval for one pre-market supplement with respect to some of
the changes in the design of and manufacturing process for its disposable device. However, the FDA may not agree with Novacepts decisions not to seek supplements or new approvals for the other device modifications or with our decisions
regarding any future device modifications for the NovaSure System or any of our other product lines. If the FDA requires us to seek one or more pre-market approval supplements or new pre-market approvals for any modification to a previously approved
device, we may be required to cease marketing or to recall the modified device until we obtain approval, and we may be subject to significant criminal and/or civic sanctions, including but not limited to, regulatory fines or penalties.



If we or our contract manufacturers fail to comply with the FDAs Quality
System Regulation, manufacturing operations could be interrupted, and our product sales and operating results could be adversely affected.

Our design and
manufacturing processes are required to comply with the FDAs Quality System Regulation, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage
and shipping of our devices. The FDA enforces its Quality System Regulation through unannounced inspections. If one of our manufacturing facilities fails an inspection, operations and manufacturing could be disrupted. Failure to take adequate and
timely corrective action in response to an adverse inspection could force a shutdown of these manufacturing operations or a recall of the product. If we shut down manufacturing operations or recall our products, we may lose customers and experience
a decline in our revenues.



Our products may be subject to recalls
even after receiving FDA clearance or approval, and if a recall occurs, the reputation of our products and our operating results could be adversely affected.

The
FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as
a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall could harm the reputation of our products and adversely affect our financial condition and operating results.



Some of our activities may subject us to risks under federal and state laws
prohibiting kickbacks and false or fraudulent claims.

We are subject to the provisions of a federal law commonly known as the Medicare/Medicaid
anti-kickback law, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer



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patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. While the federal law applies only to referrals, products or
services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of
medical devices, such as us, by limiting the kinds of financial arrangements, including sales programs, with hospitals, physicians, laboratories and other potential purchasers of medical devices. Other federal and state laws generally prohibit
individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services that were not provided as claimed.
Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance that can be substantial. While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to
marketing practices is ever evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could have a material adverse effect on our business, results of operations and financial condition.



Certain provisions of our certificate of incorporation, bylaws and
Delaware law may delay or prevent a change in control of our company.

Our corporate documents and Delaware law contain provisions that may enable our board of
directors to resist a change in control of our company. These provisions include:



| |  |  | a staggered board of directors;
| | - |  | -------------------------------



| |  |  | limitations on persons authorized to call a special meeting of stockholders;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a stockholder rights agreement or poison pill.
| | - |  | ------------------------------------------------



In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those
owning 15% or more of our outstanding voting stock, from merging or consolidating with us except under certain circumstances.



These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests
and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions stockholders desire.



Item 1B. Unresolved Staff Comments.

None.



Item 2. Properties

Our executive offices, as well as our administrative, research, and certain manufacturing and distribution
operations are located in a leased facility consisting of approximately 216,000 square feet in Marlborough, Massachusetts for a term of 15 years, beginning January 2004. We own approximately 2.7 acres of land and 46,000 square feet of facilities
housing additional manufacturing operations in Londonderry, New Hampshire. We also lease a distribution facility consisting of approximately 37,000 square feet in Methuen, Massachusetts. Certain manufacturing, administrative, sales and marketing,
research and development and operations for our NovaSure product are conducted at our Palo Alto, California facility consisting of approximately 26,200 square feet. In July 2005, we entered into a new lease agreement for a facility consisting of
62,000 square feet to relocate our Palo Alto operations to Mountain View, California and we expect to take occupancy during the first



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quarter of fiscal year 2006. This lease expires in August 2012. Until we move our California operations to Mountain View, we will maintain a month-to-month lease in
Palo Alto. Our primary manufacturing facility for the NovaSure single-use devices consists of approximately 26,500 square feet in San Jose, Costa Rica. The lease for this facility expires in 2008, with an option to renew for two additional five-year
terms. In addition, as part of our acquisition of Proxima in March 2005, we assumed a leased facility located in Alpharetta, Georgia consisting of certain administrative, sales and marketing, and research and development functions for our MammoSite
and GliaSite Systems. This facility consists of approximately 12,400 square feet and expires in June 2007. In 2005, we moved all key administrative and research and development functions relating to the MammoSite System to our Palo Alto facility. We
believe that we have adequate facilities to satisfy our operational requirements for the foreseeable future.



Item 3. Legal Proceedings

On November 17, 2003, DEKA Products Limited Partnership (DEKA) initiated arbitration
proceedings against us alleging that Cytyc underpaid royalties due to DEKA pursuant to a cross-license agreement entered into in 1993 (the 1993 DEKA Agreement). Under the 1993 DEKA Agreement, we are obligated to pay a one percent royalty
on net sales of the ThinPrep 2000 and 3000 Processors plus any filter cylinder or similar disposable. The dispute concerned the method of calculating royalties on the sale of the single use disposable ThinPrep Pap Test kit.
The 1993 DEKA Agreement required disputes to be resolved through binding arbitration. The ThinPrep 2000 and 3000 Processors may be used to prepare both gynecological and/or non-gynecological specimen slides. Our gynecological product, the ThinPrep
Pap Test, consists of four disposable components sold in a kit: our patented preservative solution and filter, a proprietary microscope slide, and collection devices manufactured for us by third parties. With respect to the ThinPrep Pap Test, we
formerly calculated the royalty owed to DEKA based only on the value of the filter, not the full kit. Specifically, we used a cost-ratio method to derive the portion of ThinPrep Pap Test kit sales price attributable to the filter. DEKA, however,
challenged our method of calculating the royalty and sought a one percent royalty on the entire Thin Prep Pap Test kit rather than on just the filter. DEKA also made claims that we breached an implied covenant of good faith; engaged in deceptive
trade practices; breached an alleged fiduciary duty; and sought treble damages.



In March
2005, the arbitration panel issued a partial final award in which it agreed with DEKAs interpretation of the 1993 DEKA Agreement and on April 26, 2005, issued its final decision. According to the award, we are required to pay a one
percent royalty on the net sales of all ThinPrep Pap Test disposable components, both for the period from November 17, 2000 to December 31, 2004 (the Retroactive Royalties) as well as for future sales, plus interest
related to the Retroactive Royalties. The panel determined that the applicable statute of limitations limited the Retroactive Royalties to sales from November 17, 2000. The panel also awarded DEKA the recovery of audit costs related to the
royalty audit conducted after the dispute arose, as well as reimbursement for a portion of DEKAs legal fees and expenses related to the arbitration proceeding. As to DEKAs other claims, with the exception of certain equitable defenses,
the arbitration panel found in favor of us.



The panel rejected DEKAs contentions
of bad faith, finding that we did not act irrationally or in a secretive manner, did not engage in deceptive trade practices and did not breach any fiduciary duties. In addition, the panel rejected DEKAs claim for treble damages. As a result
of the arbitration panels decision, we recorded a pre-tax charge in the three months ended March 31, 2005 in the amount of $7.8 million, which is in addition to the $1.3 million previously recorded. On May 5, 2005, we filed a
motion to vacate the arbitration award in the United States District Court for the District of Massachusetts as we believe the award manifestly disregarded applicable law as well as the language of the underlying agreement. Our motion to vacate the
arbitration award was denied by the United States District Court on July 8, 2005. On August 5, 2005, we filed a notice of appeal in the United States Court of Appeals for the First Circuit, appealing the July 8, 2005
judgment of the District Court. Oral arguments have been scheduled for February 8, 2006. Given the stage of the appeal proceeding, we are unable to reasonably estimate the ultimate outcome of this appeal.



On June 16, 2003, we filed a suit for Declaratory Judgment in United States District Court for the
District of Massachusetts asking the court to determine and declare that certain of TriPath Imaging, Inc.s (TriPath) patents are invalid and not infringed by our ThinPrep Imaging System. On June 17, 2003, TriPath announced



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that it had filed a lawsuit against us in the United States District Court for the Middle District of North Carolina alleging patent infringement, false advertising,
defamation, intentional interference, unfair competition, and unfair and deceptive trade practices. On October 30, 2003, an order was entered by the district court judge in North Carolina transferring the North Carolina action to
Massachusetts, thereby consolidating the cases into a single action to be heard in United States District Court for the District of Massachusetts. Additionally, on October 30, 2003, the district court judge in Massachusetts denied a motion
by TriPath to have our Massachusetts case dismissed. The Massachusetts court has not yet set a trial date. On September 2, 2005 a joint motion for partial dismissal was filed dismissing each partys claims and counterclaims relative to
seventeen patent claims from two of the patents in suit. A so-called Markman or claim construction hearing took place from September 6, 2005 through September 8, 2005 and on November 28, 2005, the Court issued its claim
construction opinion and order. Based on the current case status, we anticipate that a trial will be scheduled to occur sometime in mid-to-late 2006. We believe that the claims against us are without merit and intend to vigorously defend this suit.
Given the stage and current status of the litigation, we are unable to reasonably estimate the ultimate outcome of this case.



On December 22, 2005, Xoft Microtube, Inc. filed suit in the Northern District of California against us and Proxima Therapeutics, Inc. asking the court to determine and
declare that U.S. Patent Nos. 5,913,813, 5,931,774, 6,083,148, 6,413,204, and 6,482,142 are invalid and not infringed by Xoft. We believe that the claims against us are without merit and intend to vigorously defend this suit. Given the early stage
the litigation, we are unable to reasonably estimate the ultimate outcome of this case.



We are subject to legal claims and assertions in the ordinary course of business. Although the outcomes of any other lawsuits and claims are uncertain, we do not believe that, individually or in the aggregate, any such lawsuits or claims
will have a material adverse effect on our business, financial condition, results of operations or liquidity.



Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders during
the fourth quarter of the year ended December 31, 2005.



Part II



Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common
stock is traded on The Nasdaq National Market under the symbol CYTC. The following table sets forth, for the calendar periods indicated, the range of high and low sale 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.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | High |       | Low
|2004:          |  |      |       |     |   |      
|First Quarter  |  | $    | 22.48 |     | $ | 13.60
|Second Quarter |  |      | 28.48 |     |   | 17.79
|Third Quarter  |  |      | 25.18 |     |   | 21.32
|Fourth Quarter |  |      | 29.05 |     |   | 23.51
|2005:          |  |      |       |     |   |      
|First Quarter  |  | $    | 27.78 |     | $ | 21.02
|Second Quarter |  |      | 24.50 |     |   | 19.83
|Third Quarter  |  |      | 27.50 |     |   | 21.26
|Fourth Quarter |  |      | 29.60 |     |   | 23.76



On February 1, 2006, the last reported
sales price of our common stock on The Nasdaq National Market was $30.02 per share. As of February 1, 2006, there were 371 holders of record of our common stock.



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We have never declared nor paid cash dividends and do
not expect to pay dividends in the foreseeable future.



Stock
Repurchase Program

On November 18, 2005, our board of directors terminated our existing stock repurchase program and approved a new stock repurchase
program. Under the new program, we are authorized to repurchase up to $200 million of our common stock through open market purchases or private transactions that will be made from time to time as market conditions allow. The stock repurchase program
is expected to be in effect for a maximum of four years. Shares repurchased under this program will be held in our treasury. The stock repurchase program may be suspended or discontinued at any time without prior notice. No shares were repurchased
during the three months ended December 31, 2005 under the new or prior stock repurchase program. As of December 31, 2005 and 2004, we had repurchased 17,469,890 and 15,279,039 shares, respectively, under the previous stock repurchase
program, with an aggregate cost of $207.5 million and $157.4 million, respectively.



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Item 6. Selected Consolidated Financial Data

The selected consolidated financial data set forth below are derived from our audited
consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and related notes thereto and with Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this report.



|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                                                    |  | Years Ended December 31,                 |          
|                                                                    |  | 2005                                     |           |   | 2004 |   |         | 2003 |  | 2002 |         | 2001 |  
|                                                                    |  | (in thousands, except per share amounts) |          
|Statements of Income Data:                                          |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Net sales                                                           |  | $                                        | 508,251   |   |      | $ | 393,593 |      |  | $    | 303,060 |      | $ | 236,493 |  | $ | 220,993 |  
|Cost of sales                                                       |  |                                          | 107,149   |   |      |   | 82,523  |      |  |      | 57,420  |      |   | 48,622  |  |   | 40,168  |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Gross profit                                                        |  |                                          | 401,102   |   |      |   | 311,070 |      |  |      | 245,640 |      |   | 187,871 |  |   | 180,825 |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Operating expenses:                                                 |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Research and development                                            |  |                                          | 32,330    |   |      |   | 20,820  |      |  |      | 14,724  |      |   | 14,524  |  |   | 18,975  |  
|In-process research and development(1)                              |  |                                          |          |   |      |   | 19,100  |      |  |      |        |      |   |        |  |   | 56,000  |  
|Sales and marketing                                                 |  |                                          | 131,346   |   |      |   | 102,011 |      |  |      | 79,547  |      |   | 69,971  |  |   | 59,161  |  
|General and administrative                                          |  |                                          | 45,298    |   |      |   | 35,274  |      |  |      | 28,008  |      |   | 23,125  |  |   | 16,987  |  
|Arbitration decision(2)                                             |  |                                          | 7,807     |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|Expenses related to terminated merger(3)                            |  |                                          |          |   |      |   |        |      |  |      |        |      |   | 5,705   |  |   |        |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Total operating expenses                                            |  |                                          | 216,781   |   |      |   | 177,205 |      |  |      | 122,279 |      |   | 113,325 |  |   | 151,123 |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Income from operations                                              |  |                                          | 184,321   |   |      |   | 133,865 |      |  |      | 123,361 |      |   | 74,546  |  |   | 29,702  |  
|Other (expense) income, net(4)                                      |  |                                          | (5,603    | ) |      |   | (3,468  | )    |  |      | 2,622   |      |   | 2,711   |  |   | 8,006   |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Income before provision for income taxes                            |  |                                          | 178,718   |   |      |   | 130,397 |      |  |      | 125,983 |      |   | 77,257  |  |   | 37,708  |  
|Provision for income taxes                                          |  |                                          | 65,232    |   |      |   | 56,809  |      |  |      | 49,763  |      |   | 29,363  |  |   | 25,073  |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Net income                                                          |  | $                                        | 113,486   |   |      | $ | 73,588  |      |  | $    | 76,220  |      | $ | 47,894  |  | $ | 12,635  |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|                                                                    |  |                                          |           |   |     
|Net income per common and potential common share(5):                |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Basic                                                               |  | $                                        | 1.00      |   |      | $ | 0.66    |      |  | $    | 0.69    |      | $ | 0.40    |  | $ | 0.11    |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Diluted                                                             |  | $                                        | 0.94      |   |      | $ | 0.63    |      |  | $    | 0.68    |      | $ | 0.39    |  | $ | 0.10    |  
|                                                                    |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|                                                                    |  |                                          |           |   |     
|Weighted average common and potential common shares outstanding(5): |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Basic                                                               |  |                                          | 113,528   |   |      |   | 111,148 |      |  |      | 110,983 |      |   | 120,114 |  |   | 115,396 |  
|Diluted                                                             |  |                                          | 125,446   |   |      |   | 121,922 |      |  |      | 112,807 |      |   | 122,782 |  |   | 120,776 |  
|                                                                    |  |                                          |           |   |     
|Balance Sheet Data:                                                 |  |                                          |           |   |      |   |         |      |  |      |         |      |   |         |  |   |         |  
|Cash, cash equivalents and investment securities                    |  | $                                        | 220,619   |   |      | $ | 232,295 |      |  | $    | 177,897 |      | $ | 163,744 |  | $ | 153,242 |  
|Total assets                                                        |  |                                          | 1,039,879 |   |      |   | 809,350 |      |  |      | 390,900 |      |   | 361,626 |  |   | 386,760 |  
|Long-term debt                                                      |  |                                          | 250,000   |   |      |   | 250,000 |      |  |      |        |      |   |        |  |   |        |  
|Retained earnings (deficit)                                         |  |                                          | 286,718   |   |      |   | 173,232 |      |  |      | 99,644  |      |   | 23,424  |  |   | (24,470 | )
|Total stockholders equity                                          |  |                                          | 628,351   |   |      |   | 487,445 |      |  |      | 353,631 |      |   | 324,728 |  |   | 350,308 |  

---



(1) We incurred in-process research and development charges totaling approximately $19.1 million in 2004 related to our acquisition of Novacept and approximately $56.0 million in 2001 related to our acquisition of Pro-Duct
Health, Inc.



(2) We incurred a charge in connection with the DEKA Products Limited
Partnership arbitration panel decision in the first quarter of 2005.



(3) We incurred
charges totaling approximately $5.7 million in 2002 related to our terminated merger with Digene Corporation.



(4) We received other income of $3.1 million in 2001 from a litigation settlement.



(5) See Note 2(p) in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for an explanation of the computation of basic and diluted net income per share data.



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview

Cytyc Corporation is a diversified womens health company
that designs, develops, manufactures, and markets innovative and clinically effective products. Our products cover a range of womens health applications, including cervical cancer screening, treatment of excessive menstrual bleeding, radiation
treatment of early-stage breast cancer and breast cancer risk assessment. We operate our business in three segments: domestic diagnostic products, domestic surgical products and international. Our domestic diagnostics products segment develops and
markets the ThinPrep® System in the United States primarily for use in cytology
testing applications focused on womens health, such as cervical cancer screening. Our domestic surgical products segment manufactures the NovaSure® System, an innovative endometrial ablation device to treat menorrhagia, or excessive menstrual bleeding, the MammoSite® Radiation Therapy System, a device for the treatment of breast cancer that positions radiation sources
directly into the post-lumpectomy site to optimize radiation treatment delivery while minimizing damage to healthy tissue, and the GliaSite® Radiation Therapy System for the treatment of malignant brain tumors. The domestic surgical products segment markets these products in the United States. Our
international segment markets our diagnostic and surgical products outside of the United States through our subsidiaries and distributors in locations such as Canada, Europe, Australia and Hong Kong.



Net sales have grown in all of our segments during the last three years through product diversification
within the womens health market. Net sales in fiscal year 2005 were $508.3 million, an increase of 29% from the prior year. Net income in fiscal year 2005 was $113.5 million, an increase of 54% from the prior year. Net income per diluted share
was $0.94 in fiscal year 2005 compared to $0.63 in the prior year. Our strategy is to yield sustainable growth through diversification of our revenue streams. The growth in sales of our NovaSure System resulted from increased market penetration, as
well as sales generated by the MammoSite and GliaSite Systems acquired during the year. The growth in our domestic diagnostic sales primarily reflects the growing adoption of the ThinPrep Imaging System, which was commercially released in June 2003
and which continues to strengthen and grow our ThinPrep System product line. We are also making investments in the enhancement of our current product offerings, as well as emerging technologies in such fields as cervical cancer and breast cancer
diagnosis and treatment. We are making major investments in sales and marketing, including integration efforts following the Proxima acquisition in March 2005, to better support our customers and help expand market demand, as well as to increase our
market share.



The investment in our future is supported by our continued strong cash
flow generated from operations of $176.0 million, $137.6 million and $87.3 million during fiscal years 2005, 2004 and 2003, respectively, and our $220.6 million in cash, cash equivalents and investment securities as of December 31, 2005.
We will continue to utilize our positive cash flow from operations to invest in our existing business operations as well as to make certain strategic acquisitions or investments.



We remain committed to our goal to become the market leader in providing innovative technologies that improve womens health. The strength of our
existing capabilities in the field of obstetrics and gynecology, along with our entrance in the field of breast cancer diagnosis and treatment, including the size of our dedicated sales team, our clinically driven marketing approach, and our
training to date of thousands of medical professionals, provide the foundation for our growth. We are confident in our ability to drive long-term shareholder value using the principles of our mission, our strong product offerings, and continued
commitment to expansion of our existing product offerings.



Understanding Our Financial Information

Our financial information is summarized in this Managements Discussion and Analysis, the
Consolidated Financial Statements, and the related Notes to the Consolidated Financial Statements as of December 31, 2005 and 2004 and for each of the three fiscal years ended December 31, 2005, 2004, and 2003. The following will assist
you in fully understanding our financial information.



Organization of
Financial Information

Managements discussion and analysis provides material historical and prospective disclosures enabling investors and other users to
assess our financial condition and results of operations.



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The consolidated financial statements, excluding the
related notes, include the consolidated balance sheets, consolidated statements of income, consolidated statements of stockholders equity and consolidated statements of cash flows.



The notes, which are an integral part of the consolidated financial statements, provide additional information required to fully understand the nature
of amounts included in the consolidated financial statements.



Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. A critical accounting estimate is one which is both important to the portrayal of our financial condition and results and
requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We continuously evaluate our critical accounting estimates. We
base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Valuation of Long-Lived Assets, Intangibles and Goodwill.

Tangible and
intangible assets acquired in a business combination, including acquired in-process research and development, are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. The fair values of acquired
assets are determined by management using relevant information and assumptions and assisted, in certain situations, by independent appraisers. Fair value of acquired intangible assets is generally calculated as the present value of estimated future
cash flows using a risk-adjusted discount rate, which requires significant management judgment with respect to revenue and expense growth rates, analyses of project accomplishments, assessment of overall contributions, project risks and the
selection and use of an appropriate discount rate. Amortization of all our intangibles with defined lives, including those acquired individually, is calculated either using the straight-line or cash flow method. The cash flow method requires
managements estimate of net cash flows over the life of the intangible asset, reflecting the pattern in which the economic benefits of the intangible asset are expected to be consumed.



We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or
changes in circumstances indicate that the carrying value may not be recoverable and at least annually in the case of goodwill. If it is determined that the carrying value of long-lived assets, intangibles or goodwill might not be recoverable based
upon the existence of one or more indicators of impairment, we would measure any impairment based on a projected discounted cash flow method if the undiscounted cash flows did not exceed the carrying value of such assets. No such impairment charges
have been recorded to date. We are required to perform an impairment review for goodwill on an annual basis, or earlier if indicators of potential impairment exist. Based on our impairment review during 2005, the carrying amount of goodwill did not
exceed its fair value and, accordingly, no impairment loss exists. At December 31, 2005, we had $582.0 million of net intangible assets, of which $389.4 million represented goodwill. An impairment of our intangible assets could result in a
material, non-cash expense in our consolidated statement of income.



Property and
equipment is depreciated over the useful lives of the assets. Included in property and equipment is equipment under customer usage agreements (for example, a ThinPrep Processor or a ThinPrep Imaging System), where we install the equipment at
customer sites under an agreement whereby customers commit to purchasing minimum quantities of disposable supplies from us over a defined contract term. Under these arrangements, the equipment remains our property and we have the right to either
remove the equipment or increase the price per disposable supply if the customer does not consume at least the number of disposable supplies committed in the contract. The cost of the equipment is depreciated as cost of sales over its estimated
useful life. Any change in conditions that would cause us to change our estimate as to the useful lives of a group



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or class of assets included in property and equipment may significantly increase or decrease our depreciation expense on a prospective basis. In January 2005, we
revised our estimate of the useful lives of our equipment under customer usage agreements from the specific contract terms (which are generally between three to five years) to a range of three to eight years, depending on the nature of the equipment
under the usage agreement. This change in estimate was based on our assessment of historical usage patterns and the useful lives of similar devices. This change in estimate has been reflected in our operating results beginning on January 1,
2005. Net income would have been approximately $2.4 million lower in 2005 had this change in estimate not occurred.



Income Taxes and Deferred Taxes.

We file income tax returns in eleven
countries as well as many states and other localities. We must estimate our income tax expense after considering, among other factors, differing tax rates between jurisdictions, allocation factors, tax credits, non-deductible items and changes in
enacted tax rates. A 1% change in our 2005 effective income tax rate would have the effect of changing net income by approximately $1.8 million or $0.01 per diluted share. Deferred taxes arise because of the different treatment between financial
statement accounting and tax accounting, known as temporary differences. We record the tax effect of these temporary differences as deferred tax assets and deferred tax liabilities on our consolidated balance
sheet. Deferred tax assets generally result in tax deductions or credits subsequent to the period in which the related item was recorded in the consolidated statement of income. Deferred tax liabilities typically reflect a current tax deduction for
which the related item has not yet been recorded in the consolidated statement of income. The carrying value of our deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on
estimates and assumptions, to fully recover the net carrying value of the assets. If these estimates and related assumptions change in the future, we may be required to record a valuation allowance against our deferred tax assets resulting in
additional income tax expense in our consolidated statement of income.



When we acquired
Proxima in March 2005, we recorded a net deferred tax liability of $17.8 million. This balance primarily is comprised of $21.5 million of deferred tax assets, net of a $1.1 million valuation allowance relating to acquired net operating losses and
tax credits, offset by deferred tax liabilities of $39.3 million relating to patents and developed technology. When we acquired Novacept in March 2004, we recorded a net deferred tax asset of $1.0 million. This balance primarily is comprised of
$31.4 million of deferred tax assets, net of a $7.0 million valuation allowance relating to acquired net operating losses and tax credits offset by deferred tax liabilities of $32.6 million relating to patents and developed technology. If we are
unable to realize the benefits of these net operating losses, tax credits and other tax assets in future years, we may be required to record additional tax expense in our consolidated statement of income.



The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. We are currently undergoing various audits on both the Federal and State levels. We expect the majority of these audits to conclude at various dates throughout 2006. Although we believe we have adequate reserves for
potential assessments, we recognize liabilities for potential tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. If we ultimately determine
that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary or, if the reversal relates to deferred tax assets recorded in
connection with the acquisitions, we would adjust the carrying value of goodwill.



Legal Proceedings.

We are involved in various legal actions, the outcomes of which are not within our complete control and may not be known
for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, which, if granted, would require significant expenditures. We record a liability in our consolidated financial statements for these actions when a
loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If the loss is not probable or
cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. During the first quarter of fiscal year 2005, we recorded a



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pre-tax charge in the amount of $7.8 million, which is in addition to the $1.3 million we had previously recorded, in connection with an arbitration panels
decision regarding the DEKA Products Limited Partnership proceeding against Cytyc. Our significant legal proceedings are discussed in Note 10(e) to our consolidated financial statements and in Part I, Item 3. Legal Proceedings of
this Form 10-K.



Stock-based Compensation.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We adopted SFAS No. 123R on January 1,
2006, as required, and we will continue to evaluate the impact of such adoption on our financial position and results of operations. As a result of adopting the provisions of SFAS No. 123R, we expect stock-based compensation expense in fiscal
year 2006 to reduce our diluted net income per common share by approximately $0.12 to $0.14. However, our estimate will be affected by the future market price of our common stock, as well as the actual results of certain assumptions we used to value
the equity awards, including the related tax impact. These assumptions include, but are not limited to, the volatility of our common stock during fiscal year 2006 and the number of stock options to be issued, forfeited and exercised by employees. In
order to value our equity awards, we have used the Black-Scholes option pricing model and we will recognize stock-based compensation expense for future grants on a straight-line basis over the requisite service period of the award.



Prior to January 1, 2006, we accounted for stock options using the intrinsic value method,
pursuant to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, stock-based compensation expense was measured as the difference between the options exercise
price and the market price of our common stock on the date of grant. Historically, under this method, stock-based compensation has not been material because we grant stock options at the market price of our common stock on the date of grant.



The above list is not intended to be a comprehensive list of all of our accounting
estimates. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with little need for managements judgment in their application. There are also areas in which
managements judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto, beginning on page F-1, which contain accounting policies and
other disclosures required by generally accepted accounting principles in the United States.



Results of Operations



Net Sales



|                              |  |                          |       |                |   |       |  |            |       |            |      |  |    
|----------------------------- |  | ------------------------ | ----- | -------------- | - | ----- |  | ---------- | ----- | ---------- | ---- |  | ---
|                              |  | Years Ended December 31, |       | Percent Change
|                              |  | 2005                     |       | 2004           |   | 2003  |  | 2005/ 2004 |       | 2004/ 2003
|                              |  | (in millions)            |       |                |   |      
|                              |  |                          |       |                |  
|Domestic Diagnostic Products  |  | $                        | 311.3 |                | $ | 289.5 |  | $          | 271.3 |            | 8%   |  | 7% 
|Domestic Surgical Products(1) |  |                          | 143.9 |                |   | 62.5  |  |            |      |            | 130% |  |   
|International(2)              |  |                          | 53.1  |                |   | 41.6  |  |            | 31.8  |            | 28%  |  | 31%
|                              |  |                          |       |                |   |       |  |            |       |            |      |  |    
|Total Company                 |  | $                        | 508.3 |                | $ | 393.6 |  | $          | 303.1 |            | 29%  |  | 30%
|                              |  |                          |       |                |   |       |  |            |       |            |      |  |    

---

(1) Our fiscal year 2004 operating results include the results
of Novacept from the date of acquisition (March 24, 2004). Our fiscal year 2005 operating results include the results of Proxima from the date of acquisition (March 7, 2005).



(2) The international segment includes international sales of our diagnostic products of $50.3 million, $40.5 million and $31.8 million in fiscal
years 2005, 2004 and 2003, respectively. This segment also includes international sales of our surgical products of $2.8 million and $1.1 million in fiscal years 2005 and 2004, respectively. International surgical product sales in fiscal year
2004 were not significant.



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Net sales for each
segment as a percentage of total consolidated net sales is as follows (dollars in millions):



LOGO



Our domestic diagnostic products sales increased 8% in
2005 as compared to 2004 and 7% in 2004 as compared to 2003, due primarily to increased adoption and utilization of the ThinPrep Imaging System (commercially released in June 2003) across our customer base. ThinPrep Pap Test sales to our
largest customer, Quest Diagnostics, Inc., represented 11%, 17% and 22% of our consolidated net sales in fiscal years 2005, 2004 and 2003, respectively. This decrease is primarily due to increased unit sales of the ThinPrep Pap Test and our other
products to new customers and other existing customers, which thereby are representing a greater percentage of our consolidated net sales. No individual lab is expected to represent more than 10% of our consolidated net sales in 2006. Subsequent to
the expiration of our agreement with Quest Diagnostics, Inc. during the second quarter of fiscal year 2005, we implemented an arrangement that includes terms to supply both instrumentation and disposables of the ThinPrep System to meet their
customers demand.



Net sales of our domestic surgical products segment increased in
fiscal year 2005 as compared to fiscal year 2004 primarily as a result of an increase in unit sales and increased pricing of the NovaSure single-use disposable devices, as well as sales of the MammoSite Radiation Therapy single-use disposable
devices. Domestic sales of our NovaSure System represented 86% and 100% of domestic surgical products segment net sales in 2005 and 2004, respectively, and sales of the MammoSite System represented 12% of domestic surgical products segment net sales
in 2005. Our fiscal year 2005 operating results include the results of Proxima from the date of acquisition (March 7, 2005). Our fiscal year 2004 operating results include the results of Novacept from the date of acquisition (March 24, 2004).



Net sales in our international segment, which is comprised of sales to customers outside
the United States of both diagnostic and surgical products, increased 28% in 2005 as compared to 2004 and 31% in 2004 as compared to 2003. The increase in each year primarily reflects higher unit sales of the ThinPrep Pap Test and the NovaSure
single-use disposable devices and, to a lesser degree, an increase in average pricing.



Gross Margin

Our gross margin was 79% for fiscal years 2005 and 2004 and was 81% in fiscal year 2003. The gross margin remained consistent in
fiscal year 2005 as compared to fiscal year 2004, as the impact of domestic net sales of the ThinPrep Pap Test and increasing sales of the higher-margin NovaSure and MammoSite disposable devices were offset by increased placements of the ThinPrep
Imaging System and growth in international sales of our diagnostic products, both of which generally have lower profit margins. The decrease in gross margin in fiscal



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year 2004 as compared to fiscal year 2003 primarily resulted from expenses related to increased placement of the ThinPrep Imaging System, as well as the increase in
international sales of our diagnostic products, which as noted above, generally have lower profit margins as compared to domestic sales of the ThinPrep Pap Test.



Operating Expenses

Total operating expenses
increased to $216.8 million for fiscal year 2005, an increase of 22% over fiscal year 2004, as compared to an increase of 45% in fiscal year 2004 over fiscal year 2003. Operating expenses in 2005 include a $7.8 million charge recorded during the
first quarter of fiscal year 2005 as a result of an arbitration decision (see Note 10(e) to our consolidated financial statements and Part I, Item 3. Legal Proceedings in this Form 10-K) and our operating expenses in 2004
include a charge of $19.1 million to write off acquired in-process research and development costs related to our acquisition of Novacept in March 2004. The following is a summary of operating expenses for the years ended December 31, 2005,
2004 and 2003:



|                                    |  |                          |       |                      |   |       |  |      |       |      |     |      |     |  |    
|----------------------------------- |  | ------------------------ | ----- | -------------------- | - | ----- |  | ---- | ----- | ---- | --- | ---- | --- |  | ---
|                                    |  | Years Ended December 31, |       | Percent of Net Sales
|                                    |  | 2005                     |       | 2004                 |   | 2003  |  | 2005 |       | 2004 |     | 2003
|                                    |  | (in millions)            |       |                      |   |       |  |     
|Research and development            |  | $                        | 32.3  |                      | $ | 20.8  |  | $    | 14.7  |      | 6%  |      | 5%  |  | 5% 
|In-process research and development |  |                          |      |                      |   | 19.1  |  |      |      |      |    |      | 5%  |  |   
|Sales and marketing                 |  |                          | 131.4 |                      |   | 102.0 |  |      | 79.5  |      | 26% |      | 26% |  | 26%
|General and administrative          |  |                          | 45.3  |                      |   | 35.3  |  |      | 28.0  |      | 9%  |      | 9%  |  | 9% 
|Arbitration decision                |  |                          | 7.8   |                      |   |      |  |      |      |      | 2%  |      |    |  |   
|                                    |  |                          |       |                      |   |       |  |      |       |      |     |      |     |  |    
|Total operating expenses            |  | $                        | 216.8 |                      | $ | 177.2 |  | $    | 122.2 |      | 43% |      | 45% |  | 40%
|                                    |  |                          |       |                      |   |       |  |      |       |      |     |      |     |  |    



Research and Development

Our core research and development strategy is to enhance our existing product lines, such as the ThinPrep Imaging System, the NovaSure System and the MammoSite
Radiation Therapy System, through operational enhancements and cost reductions, as well as to continue to develop additional innovative medical diagnostic and surgical devices and therapeutic applications for womens health. Our research and
development costs increased to $32.3 million in fiscal year 2005, an increase of $11.5 million or 55%, over fiscal year 2004, as compared to an increase of $6.1 million or 41% in fiscal year 2004 over fiscal year 2003, primarily reflecting:
(1) $3.7 million of incremental non-cash amortization of our developed technology intangible assets, specifically resulting from our acquisitions of Novacept in March 2004 and Proxima in March 2005; (2) incremental expenses supporting the
MammoSite Radiation Therapy System; (3) our efforts to continue to improve the NovaSure System and the MammoSite Radiation Therapy System by augmenting our medical development team; and (4) increasing clinical trial costs in support of the
FirstCyte Breast Test. We expect the non-cash amortization of our existing developed technology portfolio to increase by $4.1 million, to $10.9 million of our research and development expense, in fiscal year 2006.



The increase in research and development costs to $20.8 million in fiscal year 2004, primarily
reflected our efforts to continue to improve the ThinPrep Imaging System and the addition of development efforts related to the second generation RF Controller and other operational enhancements to the NovaSure System at our surgical products
business, as well as $1.7 million in non-cash amortization of the developed technology intangible asset that resulted from our acquisition of Novacept.



In-Process Research and Development

As part of the allocation of the
purchase price of Novacept in March 2004, all intangible assets were identified and valued. It was determined that certain developed and in-development technology had value. As a result of this identification and valuation process, we allocated
$19.1 million of the purchase price to in-process research and development projects in 2004. This allocation represents the estimated fair value based on risk-adjusted cash flows related to incomplete research and development activities associated
with an upgrade to the RF Controller. The RF Controller delivers radio frequency energy and is one of the two primary components of the NovaSure System. The upgrade to the RF Controller was necessary to replace the existing power supply, a critical
component of the RF Controller which was being discontinued by its supplier.



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The rate utilized to discount the net cash flows to
their present value was based on estimated weighted-average cost of capital calculations. A discount rate of 20% was used to value the in-process research and development project. This discount rate was higher than our weighted-average cost of
capital due to the early-stage life cycle of the acquired products, the inherent uncertainties surrounding the outcome of the upgrade project and successful commercialization and development of the acquired assets, the useful life of the acquired
technology, the profitability levels of such technology and the uncertainty of technological advances that were unknown at that time.



As of the date of acquisition (March 24, 2004), the upgrade to the RF Controller was under design review, the remaining costs to complete the project were not material and the
project was anticipated to be, and actually was, completed in late 2004 with net cash inflows commencing at that time. Accordingly, the acquired in-process research and development was charged to expense as of the date of the acquisition. There have
been no variations from our underlying projections and assumptions as compared to actual operating results that would have had a material impact on the valuation of the in-process research and development. In addition, since that time, there have
been no additional significant, ongoing activities associated with the in-process research and development and there were no other significant acquired projects. There were no in-process research and development charges in connection with our
acquisition of Proxima in March 2005.



Sales and Marketing

Sales and marketing costs increased to $131.4 million for the year ended December 31, 2005, an increase of 29% over fiscal year 2004, as compared to a 28%
increase in fiscal year 2004 over fiscal year 2003, primarily due to sales and marketing costs at our domestic surgical products business. The increase of approximately $29.4 million in fiscal year 2005 reflects the expansion of our domestic sales
force resulting from the acquisitions of Novacept and Proxima in March 2004 and 2005, respectively, costs to integrate and cross-train our sales forces following the Proxima acquisition and costs associated with a direct-to-consumer marketing
program launched during 2005 for our NovaSure product. In addition, we incurred incremental sales and marketing costs of approximately $3.4 million in 2005 as compared to 2004 to support our international expansion efforts.



The increase in fiscal year 2004 as compared to 2003 was primarily due to sales and marketing costs of
approximately $21.0 million at our surgical products business, including costs following the March 2004 acquisition of Novacept to integrate and cross-train our domestic diagnostic products and domestic surgical products sales forces. In addition,
we incurred incremental sales and marketing costs in 2004 as compared to 2003 to support our international expansion efforts, including efforts following the recommendation of liquid-based cytology as the primary means to process samples for
cervical cancer screening programs by the United Kingdoms National Institute for Clinical Excellence in October 2003, as well as higher selling and customer training costs associated with supporting the continued market release of the ThinPrep
Imaging System.



Overall, our sales and marketing expense remained 26% of net sales in
fiscal years 2005, 2004 and 2003.



General and Administrative

General and administrative costs increased to $45.3 million for the year ended December 31, 2005, an increase of 28% over fiscal year 2004 as compared to a
26% increase in fiscal year 2004 over fiscal year 2003, primarily due to increased personnel and facility costs to support the growth of our business, increased efforts to enhance our management information systems, increased costs relating to
product liability insurance largely due to the expansion of our business and legal costs associated with the growth of our intellectual property portfolio and ongoing litigation (see Note 10(e) to our consolidated financial statements and Part I,
Item 3. Legal Proceedings in this Form 10-K).



General and
administrative costs increased to $35.3 million for the year ended December 31, 2004 from $28.0 million for the year ended December 31, 2003, largely due to approximately $4 million of costs such as business insurance and personnel-related
costs at our domestic surgical products business acquired in March 2004, as well as an increase in legal costs of over $2 million related to then-pending litigation.



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As a percentage of net sales, general and
administrative expenses were 9% in 2005, 2004 and 2003.



Arbitration
Decision

On November 17, 2003, DEKA Products Limited Partnership (DEKA) initiated arbitration proceedings against us alleging that we underpaid
royalties due to DEKA pursuant to a cross-license agreement entered into in 1993 (the 1993 DEKA Agreement) (see Note 10(e) to our consolidated financial statements and Part I, Item 3. Legal Proceedings in this Form 10-K
for details). In March 2005, the arbitration panel issued a partial final award in which it agreed with DEKAs interpretation of the 1993 DEKA Agreement and on April 26, 2005, issued its final decision. According to the award, we are
required to pay a one percent royalty on the net sales of all ThinPrep Pap Test disposable components, both for the period from November 17, 2000 to December 31, 2004 (the Retroactive Royalties) as well as for future
sales, plus interest related to the Retroactive Royalties. The panel determined that the applicable statute of limitations limited the Retroactive Royalties to sales from November 17, 2000. The panel also awarded DEKA the recovery of audit
costs related to the royalty audit conducted after the dispute arose, as well as reimbursement for a portion of DEKAs legal fees and expenses relating to the arbitration proceeding. As to DEKAs other claims, with the exception of certain
equitable defenses, the arbitration panel found in favor of us. The panel rejected DEKAs contentions of bad faith, finding that we did not act irrationally or in a secretive manner, did not engage in deceptive trade practices and did not
breach any fiduciary duties. In addition, the panel rejected DEKAs claim for treble damages.



As a result of the arbitration panels decision, we recorded a pre-tax charge in the first quarter of fiscal year 2005 in the amount of $7.8 million, which is in addition to the $1.3 million previously recorded. On
May 5, 2005, we filed a motion to vacate the arbitration award in the United States District Court for the District of Massachusetts as we believe the award manifestly disregarded applicable law as well as the language of the underlying
agreement. Our motion to vacate the arbitration award was denied by the United States District Court on July 8, 2005. On August 5, 2005, we filed a notice of appeal in the United States Court of Appeals for the First Circuit, appealing the
July 8, 2005 judgment of the District Court. Oral arguments have been scheduled for February 8, 2006. Given the stage of the appeal proceeding, we are unable to reasonably estimate the ultimate outcome of this appeal.



Other (Expense) Income, net

We recorded interest expense of $7.2 million and $5.4 million for the years ended December 31, 2005 and 2004, respectively, related to our 2.25% convertible notes due 2024,
which were issued on March 22, 2004, including amortization of $1.5 million and $1.2 million, respectively, of deferred financing costs associated with the issuance of these notes. Prior to the issuance of the convertible notes, we did not have
any long-term debt obligations. Interest income increased to $3.3 million for fiscal year 2005 compared to $2.4 million for fiscal year 2004, as the average interest rate for our cash, cash equivalents and investment securities was higher during
2005 as compared to 2004. Interest income also totaled $2.4 million in fiscal year 2003, reflecting consistent cash balances available for investment.



Income Taxes

Our effective tax rate for fiscal year 2005 was 36.5%, as
compared to 43.6% and 39.5% in fiscal years 2004 and 2003, respectively. Exclusive of the effects of the non-deductible $19.1 million in-process research and development charge incurred in connection with the Novacept acquisition in March 2004, our
effective tax rate for fiscal year 2004 was 38%. The decrease from fiscal year 2004 to 2005 is due to savings from tax planning initiatives which began in 2003, as well as the impact in 2005 of the American Jobs Creation Act of 2004. The decrease
from fiscal year 2003 to fiscal year 2004, excluding the impact of the $19.1 million in-process research and development charge, was primarily due to savings from tax planning initiatives. We estimate that our effective tax rate for fiscal year 2006
will remain 36.5% as we continue to recognize savings from these tax planning initiatives and the American Jobs Creation Act of 2004.



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Liquidity and Capital Resources

At December 31, 2005, we had cash, cash equivalents and investment securities totaling $220.6 million. Cash provided by operations was $176.0 million for
fiscal year 2005, an increase of 28%, as compared to cash from operations of $137.6 million in fiscal year 2004, primarily as a result of increasing net sales and current year utilization of favorable tax attributes included in the Novacept and
Proxima acquisitions. Our net accounts receivable increased 30% to $82.8 million at December 31, 2005, as compared to $63.6 million at December 31, 2004, primarily reflecting continued growth in net sales. Our Days Sales Outstanding
increased from 50 days at December 31, 2004 to 53 days at December 31, 2005. We have had no significant issues of collectibility. The term Days Sales Outstanding, which we calculate by dividing gross trade accounts receivable
at the end of the quarter by our average consolidated daily net sales for the quarter, refers to the estimated number of days worth of sales that are outstanding and unpaid at any given time. Our inventories increased 39% to $24.0 million at
December 31, 2005, as compared to $17.3 million at December 31, 2004, primarily reflecting an increase in inventory to support the growth in net sales in our domestic surgical products and international segments.



Our investing activities used cash of $152.4 million in fiscal year 2005, primarily related to the
purchase of Proxima in March 2005, partially offset by net proceeds from sales and maturities of investment securities. As of December 31, 2005, we paid $163.0 million of the Proxima purchase price using a combination of cash, cash
equivalents and investment securities to fund the purchase. During fiscal year 2005, we also invested $27.3 million in equipment used under customer usage agreements, of which approximately $22.0 million represented ThinPrep Imaging Systems for
use at customer sites. We also made $13.4 million of capital expenditures during fiscal year 2005, related primarily to our investment in manufacturing processes, facilities and information systems to support the growth of our business, as well as
costs to manufacture the ThinPrep Imaging System units to be placed at customer sites under usage agreements.



Our investing activities used cash of $411.7 million in fiscal year 2004, primarily related to the purchase of Novacept in March 2004. We paid $325.8 million to purchase Novacept, including acquisition-related costs, using a
combination of debt financing and cash on hand to fund the purchase. During fiscal year 2004, we also invested $28.5 million in equipment used under customer usage agreements, of which approximately $27.0 million represented ThinPrep Imaging
Systems for use at customer sites. We also made $32.8 million of capital expenditures during fiscal year 2004, related primarily to the expansion of our manufacturing and administrative facilities to support the growth of our business as well as
costs to manufacture the ThinPrep Imaging System units to be placed at customer sites under usage agreements.



During fiscal year 2006, we expect to spend between $40 million and $45 million for the manufacture of the ThinPrep Imaging Systems to be placed at customer sites, as well as for capital expenditures, including an investment in
systems and infrastructure improvements and other machinery and equipment purchases to support the growth in our business. In addition, we will pay $20.9 million in fiscal year 2006 to the former shareholders of Proxima resulting from contingent
earn-out payments earned during 2005 and included in the purchase price for Proxima (see Note 4 to the consolidated financial statements).



Our financing activities in fiscal year 2005 generated cash of $14.0 million, resulting from proceeds of $61.1 million and $2.9 million from the exercise of stock options
and employee purchases of our common stock under the employee stock purchase plan, respectively, partially offset by our repurchase of $50.1 million of our common stock, including $0.1 million in commissions, as part of our stock repurchase program.
Our financing activities in fiscal year 2004 generated cash of $288.6 million, primarily as a result of the private placement of $250 million of 2.25% convertible notes due 2024. Net proceeds from this offering totaled $242.3 million following
payment of debt issuance costs. We also generated cash of $48.0 million as a result of proceeds from the exercise of stock options and our employee stock purchase plan.



Long-Term Debt and Contractual Obligations

Long-Term DebtOn March 22, 2004, we completed the sale of $250 million aggregate principal amount of our 2.25% convertible notes due 2024. The convertible notes initially were sold to qualified institutional



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buyers pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended. We subsequently filed a registration statement with the
Securities and Exchange Commission to register the resale of the convertible notes. We used the proceeds from the offering along with existing cash to finance the acquisition of Novacept. Total proceeds from the private placement were $242.3
million, net of debt issuance costs of $7.7 million. The notes bear interest at a rate of 2.25% per year on the principal amount, payable semi-annually in arrears in cash on March 15 and September 15 of each year, beginning
September 15, 2004. Holders may require us to repurchase the notes on March 15 of 2009, 2014 and 2019 at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and
liquidated damages, if any, to, but excluding, the repurchase date. We may redeem any of the notes beginning March 20, 2009, by giving holders at least 30 days notice. We may redeem the notes either in whole or in part at a redemption
price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any, to, but excluding, the redemption date.



Contractual ObligationsOur future contractual cash obligations as of December 31, 2005 are as follows (in
thousands):



|                                                                  |  |                        |         |      |   |        |  |      |        |      |   |        |  |            |         |  |   |       |  |   |       
|----------------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------- |  | - | ----- |  | - | ------
|                                                                  |  | Payments Due by Period
|Contractual Obligations                                           |  | Total                  |         | 2006 |   | 2007   |  | 2008 |        | 2009 |   | 2010   |  | Thereafter
|                                                                  |  |                        |         |      |   |        | 
|Operating leases                                                  |  | $                      | 78,916  |      | $ | 7,192  |  | $    | 7,544  |      | $ | 7,291  |  | $          | 6,856   |  | $ | 6,772 |  | $ | 43,261
|Inventory purchase commitments                                    |  |                        | 24,023  |      |   | 4,023  |  |      | 4,000  |      |   | 4,000  |  |            | 3,000   |  |   | 3,000 |  |   | 6,000 
|Contingent earn-out payments to former shareholders of Proxima(1) |  |                        | 20,906  |      |   | 20,906 |  |      |       |      |   |       |  |            |        |  |   |      |  |   |      
|Private equity investment commitment(2)                           |  |                        | 4,350   |      |   | 4,350  |  |      |       |      |   |       |  |            |        |  |   |      |  |   |      
|Acquired patent and license fees(3)                               |  |                        | 773     |      |   | 473    |  |      | 300    |      |   |       |  |            |        |  |   |      |  |   |      
|Long-term debt:                                                   |  |                        |         |      |   |        |  |      |        |      |   |        |  |            |         |  |   |       |  |   |       
|Principal(4)                                                      |  |                        | 250,000 |      |   |       |  |      |       |      |   |       |  |            | 250,000 |  |   |      |  |   |      
|Interest                                                          |  |                        | 19,688  |      |   | 5,625  |  |      | 5,625  |      |   | 5,625  |  |            | 2,813   |  |   |      |  |   |      
|                                                                  |  |                        |         |      |   |        |  |      |        |      |   |        |  |            |         |  |   |       |  |   |       
|Total contractual cash obligations                                |  | $                      | 398,656 |      | $ | 42,569 |  | $    | 17,469 |      | $ | 16,916 |  | $          | 262,669 |  | $ | 9,772 |  | $ | 49,261
|                                                                  |  |                        |         |      |   |        |  |      |        |      |   |        |  |            |         |  |   |       |  |   |       

| | 
| | 

(1) A portion of our purchase price for Proxima includes potential earn-out
payments which are based on incremental sales growth of the breast-related products during 2005 and 2006 and are subject to an aggregate cap of $65 million. In 2006, we will pay $20.9 million for the earn-out payments relating to the 2005
performance milestones. See Note 4(a) to the consolidated financial statements.



(2) Relates to our $5 million private equity investment commitment, which may be paid over the next three years. See Note 10(d) to the consolidated financial statements.



(3) Relates to non-cancelable payments due in connection with an acquired patent and a license to patented technology, the agreements
for which were entered into during December 2005. Future payments under the agreements are contingent upon achieving future milestones and will not be material to our operating results.



(4) Relates to our $250 million aggregate principal amount of 2.25% convertible senior notes described above. The amounts in the table
above include interest and principal payable assuming redemption at the earliest redemption date of March 5, 2009. These amounts assume that conversion of the notes into shares of our common stock does not occur.



Our operating lease obligations relate primarily to our facilities, but also include
certain automobiles and office equipment outside of the United States. These operating leases have expiration dates ranging from 2006 through 2018. In addition to operating leases, we have certain long-term supply contracts with remaining terms of
up to seven years to assure continuity of supply of certain key components and raw materials, while maintaining high quality and reliability. In certain of these contracts, a minimum purchase commitment has been established. Our inventory purchase
commitments do not exceed our projected requirements over the related terms and are in the normal course of business.



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We expect that our cash and cash
equivalents, investment securities and cash flows from operating activities will be sufficient to meet our projected operating cash needs, including capital expenditures, lease and purchase commitments and tax payments. However, from time to time,
we review our capital structure and financing arrangements. As a result of these reviews, we may periodically elect to pursue alternatives to our current structure, including the refinancing of our existing debt securities, the issuance of
additional debt securities and the emplacement of a credit facility. In addition, if we make future acquisitions, we may be required to seek additional capital.



Off-Balance Sheet Arrangements

We do not
maintain any off-balance sheet financing arrangements apart from the operating leases described above.



Recent Accounting Pronouncement

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
standard is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.
SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, in March 2005, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107 which discusses topics related to the implementation of SFAS No. 123R and provides interpretations of items such as the valuation models, expected
volatility, expected option term, income tax effects, classification and capitalization of stock-based compensation expense, as well as certain disclosure requirements. In October and November 2005, the FASB issued FASB Staff Position Nos. 123R-2
and 123R-3, respectively, which provide further guidance regarding the adoption and application of SFAS No. 123R. We adopted SFAS No. 123R on January 1, 2006, as required, and we will continue to evaluate the impact of such adoption
on our financial position and results of operations. As a result of adopting the provisions of SFAS No. 123R, we expect stock-based compensation expense in fiscal year 2006 to reduce our diluted net income per common share by approximately
$0.12 to $0.14.



Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments, Other
Financial Instruments, and Derivative Commodity Instruments.

We do not participate in derivative financial instruments, other financial instruments for which the
fair value disclosure would be required under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, or derivative commodity instruments. At December 31, 2005, all of our investments are in municipal bonds and auction
rate securities that are carried at fair value on our books. Accordingly, we have no quantitative information concerning the market risk of participating in such investments.



Primary Market Risk Exposures.

Our primary
market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalents and investment securities is subject to interest rate fluctuations, but we believe this risk is
immaterial due to the short-term nature of these investments. Our business outside the United States is conducted primarily in local currencies, except in Costa Rica, where the majority of business is conducted in the U.S. dollar. We have no foreign
exchange contracts, option contracts, or other foreign hedging arrangements. We estimate that any market risk associated with our international operations is unlikely to have a material adverse effect on our business, financial condition or results
of operations.



Item 8. Financial Statements and Supplementary Data

The information required by this item may be found on pages F-1 through F-32 of
this Annual Report on Form 10-K.



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.



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I
tem 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are effective in timely notification to them of information we are required to disclose in our periodic SEC filings and in ensuring that this information is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and regulations.



Changes in Internal Control.

During the fourth quarter of fiscal year 2005, there have been no significant changes in
our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Managements Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal ControlIntegrated
Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.



Deloitte & Touche LLP, an independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has issued an
attestation report on managements assessment of our internal control over financial reporting. Such attestation, which expresses unqualified opinions on managements assessment and on the effectiveness of our internal control over
financial reporting as of December 31, 2005, is included in this Item 9A under the heading Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting.



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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING



To the Board of Directors and Stockholders of

Cytyc Corporation

Marlborough, Massachusetts



We have audited managements assessment, included in the Managements Report on Internal Control over Financial Reporting included in Item 9A of Form 10-K, that Cytyc Corporation and subsidiaries (the
Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys internal control over
financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



In our
opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005 of the Company and our report dated February 16, 2006 expressed an unqualified opinion on those financial statements.



Deloitte & Touche LLP



Boston, Massachusetts

February 16, 2006



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I
tem 9B. Other Information

None.



Part III



I
tem 10. Directors and Executive Officers of the Registrant

The information required under this item may be found under
Executive Officers of Cytyc Corporation in Part I, Item 1Business of this Annual Report on Form 10-K, as well as under the sections captioned Election of Directors, Directors, Section
16(a) Beneficial Ownership Reporting Compliance and Governance of Our Company in our Proxy Statement (the 2006 Proxy Statement), which will be filed with the Securities and Exchange Commission not later than 120 days
after the close of our fiscal year ended December 31, 2005, and is incorporated herein by reference.



I
tem 11. Executive Compensation

The information required under this item may be found under the section captioned Compensation
and Other Information Concerning Directors and Officers in the 2006 Proxy Statement, and is incorporated herein by reference.



It
em 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



Equity Compensation Plan Information

In May 2004, our stockholders
approved the Cytyc Corporation 2004 Omnibus Stock Plan (the 2004 Omnibus Plan), which is our primary plan for grants of equity and provides for the issuance of up to 12,250,000 shares of our common stock, no more than 8,200,000 of which
shares may be issued as awards other than stock options or stock appreciation rights. The 2004 Omnibus Plan provides for grant of various incentives, including stock options and other stock-based awards. Prior to the approval of the 2004 Omnibus
Plan, we had various employee and director equity compensation plans, including the 1989 Stock Plan, the 1995 Stock Plan, the 1995 Non-Employee Director Stock Option Plan, the 2001 Non-Employee Director Stock Plan. These plans were terminated with
the adoption of the 2004 Omnibus Plan and no further awards may be issued under these plans.



All of our equity compensation plans have been approved by our stockholders. We do not have any warrants or stock appreciation rights outstanding under our equity compensation plans. The following table summarizes information about our
equity compensation plans at December 31, 2005:



|                                                                         |  |                                                             |  |                                               
|------------------------------------------------------------------------ |  | ----------------------------------------------------------- |  | ----------------------------------------------
|Number of Shares to be Issued Upon Exercise of Outstanding Stock Options |  | Weighted Average Exercise Price ofOutstanding Stock Options |  | Number of Shares Available for Future Issuance
|                                                                         |  |                                                            
|16,710,904                                                               |  | $19.20                                                      |  | 7,808,565                                     



Additional information required under this item
may be found under the section captioned Securities Ownership of Certain Beneficial Owners and Management in the 2006 Proxy Statement, and is incorporated herein by reference.



I
tem 13. Certain Relationships and Related Transactions

The information required under this item may be found under the caption
Certain Relationships and Related Transactions in the 2006 Proxy Statement, and is incorporated herein by reference.



I
tem 14. Principal Accounting Fees and Services

The information required under this item may be found under the caption Audit
Fees and Pre-Approval of Services by the Independent Auditor in the 2006 Proxy Statement and is incorporated herein by reference.



42



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##### Table of Contents



Part IV



Item 15.
Exhibits and Financial Statement Schedules

(a)(1) Consolidated Financial Statements.



For a list of the consolidated financial information included herein, see Index on page F-1.



(a)(2) Financial Statement Schedules.



All schedules have been omitted because the information required to be set forth therein is not
applicable or is shown in the accompanying consolidated financial statements or notes thereto.



(a)(3) List of Exhibits.



The following exhibits are filed as part of,
and incorporated by reference into, this Annual Report on Form 10-K:



|            |  |                                                                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                
|            | 
|2.1(16)     |  | Agreement and Plan of Merger, dated March 1, 2004, by and among Cytyc Corporation, Radio Acquisition Corp. and Novacept.                                                                                                                                                                                   
|            | 
|2.2(17)     |  | Amendment No. 1, dated March 22, 2004, to the Agreement and Plan of Merger by and among Cytyc Corporation, Radio Acquisition Corp. and Novacept.                                                                                                                                                           
|            | 
|2.6(32)     |  | Agreement and Plan of Merger and Reorganization among Cytyc Corporation, Polaris Acquisition Corp., Proxima Therapeutics, Inc. and a Stockholders Representative, dated February 9,
2005.                                                                                                                 
|            | 
|3.1(2)      |  | Fourth Restated Certificate of Incorporation of Cytyc Corporation.                                                                                                                                                                                                                                         
|            | 
|3.2(31)     |  | Second Amended and Restated By-Laws of Cytyc Corporation.                                                                                                                                                                                                                                                  
|            | 
|4.1(1)      |  | Specimen certificate representing the Common Stock.                                                                                                                                                                                                                                                        
|            | 
|4.2(3)      |  | Rights Agreement, dated as of August 27, 1997, between Cytyc Corporation and BankBoston, N.A (the Rights Agreement) which includes as Exhibit A the Form of Certificate of Designations,
as Exhibit B the Form of Rights Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred Stock.
|            | 
|4.3(4)      |  | Amendment No. 1 to Rights Agreement, dated as of June 22, 1998, between Cytyc Corporation and BankBoston, N.A., amending the Rights Agreement.                                                                                                                                                             
|            | 
|4.4(15)     |  | Amendment to the Rights Agreement, dated as of January 3, 2003, among Cytyc Corporation, BankBoston, N.A. and EquiServe Trust Company, N.A.                                                                                                                                                                
|            | 
|4.5(13)     |  | Amendment No. 2 to Rights Agreement, dated as of November 6, 2003, between Cytyc Corporation and EquiServe Trust Company, N.A., amending the Rights Agreement.                                                                                                                                             
|            | 
|4.6(18)     |  | Indenture, dated as of March 22, 2004, between Cytyc Corporation and U.S. Bank Trust National Association., including the form of Note.                                                                                                                                                                    
|            | 
|4.7(19)     |  | Registration Rights Agreement, dated as of March 22, 2004, among Cytyc Corporation and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Piper Jaffray &
Co.                                                                                                                              
|            | 
|4.8(20)     |  | Senior Debt Indenture, dated October 26, 2004, between Cytyc Corporation and The Bank of New York.                                                                                                                                                                                                         
|            | 
|4.9(21)     |  | Subordinated Debt Indenture, dated October 26, 2004, between Cytyc Corporation and The Bank of New York.                                                                                                                                                                                                   
|            | 
|10.1(1)*    |  | 1988 Stock Plan.                                                                                                                                                                                                                                                                                           



43



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##### Table of Contents



|            |  |                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                  
|            | 
|10.2(1)*    |  | 1989 Stock Plan.                                                                                                                                                                             
|            | 
|10.3(1)*    |  | 1995 Stock Plan.                                                                                                                                                                             
|            | 
|10.4(6)*    |  | Amended and Restated 1995 Non-Employee Director Stock Option Plan.                                                                                                                           
|            | 
|10.5(7)*    |  | 1995 Employee Stock Purchase Plan, as amended.                                                                                                                                               
|            | 
|10.6(1)#    |  | License Agreement between Cytyc Corporation and DEKA Products Limited Partnership dated March 22, 1993.                                                                                      
|            | 
|10.7(1)     |  | Lease Agreement between Cytyc Corporation and BFA Realty Partnership, L.P. d/b/a BFA, Limited Partnership of February 1996.                                                                  
|            | 
|10.8(5)     |  | Amendment No. 1 to Lease Agreement dated as of February 1996 between Cytyc Corporation and BFA Realty Partnership, L.P. d/b/a BFA, Limited Partnership.                                      
|            | 
|10.9(8)*    |  | 2001 Non-Employee Director Stock Plan.                                                                                                                                                       
|            | 
|10.10(9)*   |  | Pro Duct Health, Inc. 1998 Stock Plan.                                                                                                                                                       
|            | 
|10.11(10)#  |  | Supply Agreement between Cytyc Corporation, Whatman, Inc. and Whatman SA dated as of December 31, 2000, as amended October 16, 2001 and May 2, 2002                                          
|            | 
|10.12(10)#  |  | Master Agreement between Cytyc Corporation and Laboratory Corporation of America Holdings dated February 1, 2000, as amended December 20, 2001                                               
|            | 
|10.13(11)#  |  | Agreement for Purchase of Equipment Reagents and Supplies between Cytyc Corporation and Quest Diagnostics, Inc. dated as of May 1, 2003                                                      
|            | 
|10.14(12)*  |  | Amended and Restated Director Compensation Method Plan                                                                                                                                       
|            | 
|10.15(14)*  |  | Form of Change of Control Agreement entered between Cytyc Corporation and certain executive officers dated as of July 30, 2003.                                                              
|            | 
|10.16(22)#  |  | Amendment No. 2, dated March 11, 2004, to the Master Agreement between Cytyc Corporation and Laboratory Corporation of America Holdings dated February 1, 2000, as amended
December 20, 2001.
|            | 
|10.17(23)*  |  | Cytyc Corporation 2004 Omnibus Stock Plan.                                                                                                                                                   
|            | 
|10.18(24)*  |  | Cytyc Corporation 2004 Employee Stock Purchase Plan.                                                                                                                                         
|            | 
|10.19(25)*  |  | Form of Indemnification Agreement between Cytyc and Certain Directors and Executive Officers                                                                                                 
|            | 
|10.20(26)*  |  | Form of Incentive Stock Option Agreement for Executive Officers.                                                                                                                             
|            | 
|10.21(27)*  |  | Form of Nonqualified Stock Option Agreement for Executive Officers.                                                                                                                          
|            | 
|10.22(28)*  |  | Form of Nonqualified Stock Option Agreement for Non-Employee Directors.                                                                                                                      
|            | 
|10.23(30)*  |  | Form of Restricted Stock Agreement.                                                                                                                                                          
|            | 
|10.24(33)*  |  | Form of Restricted Stock Unit Agreement.                                                                                                                                                     
|            | 
|10.25(29)#  |  | Master Agreement, dated October 15, 2004, between Cytyc Corporation and Laboratory Corporation of America.                                                                                   
|            | 
|10.26(19)   |  | Office Lease dated December 31, 2003 between Cytyc Corporation and Marlborough Campus Limited Partnership.                                                                                   
|            | 
|10.27**     |  | Summary of Director Compensation.                                                                                                                                                            



44



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##### Table of Contents



|            |  |                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                   
|            | 
|21.1**      |  | List of Our Subsidiaries.                                                                                                                                                                                                                     
|            | 
|23.1**      |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                             
|            | 
|24.1**      |  | Power of Attorney (see signature page hereto).                                                                                                                                                                                                
|            | 
|31.1**      |  | Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.             
|            | 
|31.2**      |  | Certification of Timothy M. Adams, Vice President, Chief Financial Officer and Treasurer, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1**      |  | Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                        
|            | 
|32.2**      |  | Certification of Timothy M. Adams, Vice President, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                           

---

(1) Incorporated herein by reference to the exhibits to our
Registration Statement on Form S-1 (File No. 333-00300).



(2) Incorporated herein by
reference to Exhibit 3.2 to our Current Report on Form 8-K, filed September 20, 2005.



(3) Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed August 29, 1997.



(4) Incorporated herein by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q, filed August 13, 1998.



(5) Incorporated herein by reference to Exhibit 10.9 to our Annual Report on Form 10-K, filed March 31, 1998.



(6) Incorporated herein by reference to Exhibit 10 to our Quarterly Report on Form 10-Q, filed
August 14, 2000.



(7) Incorporated herein by reference to Exhibit 10.5 to our
Registration Statement on Form S-1 (File No. 333-00300) and Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed August 8, 2001.



(8) Incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed August 8, 2001.



(9) Incorporated herein by reference to Exhibit 4 to our Registration Statement on Form S-8, filed December 17, 2001 (File No. 333-75292).



(10) Incorporated herein by reference to Exhibits to our Annual Report on Form 10-K,
filed March 24, 2003.



(11) Incorporated herein by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q, filed May 13, 2003.



(12) Incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K, filed November 18, 2005.



(13) Incorporated herein by reference to Exhibit 4.4 to our Quarterly Report on Form 10-Q, filed November 12, 2003.



(14) Incorporated herein by reference to Exhibit 4.5 to our Quarterly Report on Form 10-Q, filed November 12, 2003.



(15) Incorporated herein by reference to Exhibits to our Annual Report on Form 10-K, filed
January 30, 2004.



(16) Incorporated herein by reference to Exhibit 2.1 to our
Current Report on Form 8-K, filed March 5, 2004.



(17) Incorporated herein by
reference to Exhibit 2.2 to our Current Report on Form 8-K/A, filed April 27, 2004.



(18) Incorporated herein by reference to Exhibit 4.1 to our Registration Statement on Form S-3 (File No. 333-116237) filed June 7, 2004.



(19) Incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form S-3 (File No. 333-116237) filed June 7, 2004.



(20) Incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form S-3 (File
No. 333-120013) filed October 18, 2004.



(21) Incorporated herein by reference to
Exhibit 4.3 to our Registration Statement on Form S-3 (File No. 333-120013) filed October 18, 2004.



(22) Incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed May 6, 2004.



(23) Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 (File No. 333-117812)



(24) Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-8 (File No. 333-117812)



(25) Incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed
November 12, 2004.



45



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##### Table of Contents



(26) Incorporated herein by reference to Exhibit 10.2
to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(27) Incorporated
herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(28) Incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(29) Incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(30) Incorporated herein by reference to Exhibit 10.6 to our Current Report on Form 8-K, filed
September 19, 2005.



(31) Incorporated herein by reference to Exhibit 3.1 to our
Current Report on Form 8-K, filed September 19, 2005.



(32) Incorporated herein by
reference to Exhibit 2.1 to our Current Report on Form 8-K, filed February 15, 2005.



(33) Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed December 14, 2005.



* Indicates a management contract or any compensatory plan, contract or arrangement



** Filed herewith.



# Confidential treatment granted as to certain portions.



46



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##### Table of Contents



Signatures



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



|                        |  |                   |  |                                                          
|----------------------- |  | ----------------- |  | ---------------------------------------------------------
|                        |  | CYTYC CORPORATION
|                        |  |                  
|Date: February 16, 2006 |  | By:               |  | /S/    PATRICK J. SULLIVAN                               
|                        |  |                   |  | Patrick J. Sullivan Chief Executive Officer and President



Power of Attorney
and Signatures



We, the undersigned officers and directors of Cytyc Corporation, hereby
severally constitute and appoint Patrick J. Sullivan and Timothy M. Adams, and each of them singly, our true and lawful attorneys, with full power to both of them and each of them singly, to sign for us and in our names in the capacities indicated
below, any amendments to this Report on Form 10-K and generally to do all things in our names and on our behalf in such capacities to enable Cytyc Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all
the requirements of the Securities and Exchange Commission.



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



|                                                                |  |                                                                                                                      |  |                  
|--------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                                       |  | Title(s)                                                                                                             |  | Date             
|                                                                |  |                                                                                                                     
|/S/    PATRICK J.
SULLIVANPatrick J. Sullivan                   |  | Chief Executive Officer (Principal Executive Officer), President, and Chairman of the Board of Directors             |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    TIMOTHY M.
ADAMSTimothy M. Adams                         |  | Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    WALTER E.
BOOMERWalter E. Boomer                         |  | Director                                                                                                             |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    SALLY W.
CRAWFORDSally W. Crawford                       |  | Director                                                                                                             |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    BROCK
HATTOXBrock Hattox                                 |  | Director                                                                                                             |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    DANIEL
LEVANGIEDaniel Levangie                           |  | Executive Vice President, Director                                                                                   |  | February 16, 2006
|                                                                |  |                                                                                                                     
|/S/    JOSEPH B. MARTIN, M.D.,
PH.DJoseph B. Martin, M.D.,
Ph.D |  | Director                                                                                                             |  | February 16, 2006



47



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##### Table of Contents



|                                        |  |                                         |  |                  
|--------------------------------------- |  | --------------------------------------- |  | -----------------
|Signature                               |  | Title(s)                                |  | Date             
|                                        |  |                                        
|/S/    WILLIAM
MCDANIELWilliam
McDaniel |  | Vice Chairman of the Board of Directors |  | February 16, 2006
|                                        |  |                                        
|/S/    MARLA
PERSKYMarla Persky         |  | Director                                |  | February 16, 2006
|                                        |  |                                        
|/S/    WAYNE
WILSONWayne Wilson         |  | Director                                |  | February 16, 2006



48



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##### Table of Contents



CYTYC CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|                                                                                                     | 
|Report of Independent Registered Public Accounting Firm                                              |  | F-2 
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                         |  | F-3 
|                                                                                                     | 
|Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003               |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2005, 2004 and 2003 |  | F-5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003           |  | F-6 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-7 



F-1



---

##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON THE CONSOLIDATED FINANCIAL STATEMENTS



To the Board of Directors and Stockholders of

Cytyc Corporation

Marlborough,
Massachusetts



We have audited the accompanying consolidated balance sheets of Cytyc
Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our opinion, such
consolidated financial statements present fairly, in all material respects, the financial position of Cytyc Corporation and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control
over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16,
2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over
financial reporting.



Deloitte & Touche LLP



Boston, Massachusetts

February 16, 2006



F-2



---

##### Table of Contents



CYTYC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|                                                                                                                                    |  |              |           |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | -------- | -
|                                                                                                                                    |  | December 31, |          
|                                                                                                                                    |  | 2005         |           |   | 2004 |  
|ASSETS                                                                                                                              |  |              |           |   |      |   |          |  
|Current assets:                                                                                                                     |  |              |           |   |      |   |          |  
|Cash and cash equivalents                                                                                                           |  | $            | 123,468   |   |      | $ | 86,277   |  
|Investment securities                                                                                                               |  |              | 97,151    |   |      |   | 146,018  |  
|Accounts receivable, net of allowance of $1,592 and $1,152 at December 31, 2005 and 2004, respectively                              |  |              | 82,833    |   |      |   | 63,636   |  
|Inventories, net                                                                                                                    |  |              | 24,033    |   |      |   | 17,310   |  
|Deferred tax assets, net                                                                                                            |  |              | 4,266     |   |      |   | 3,737    |  
|Prepaid expenses and other current assets                                                                                           |  |              | 5,539     |   |      |   | 3,812    |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total current assets                                                                                                                |  |              | 337,290   |   |      |   | 320,790  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Property and equipment, net                                                                                                         |  |              | 113,610   |   |      |   | 91,512   |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Intangible assets:                                                                                                                  |  |              |           |   |      |   |          |  
|Patents and developed technology, net of accumulated amortization of $13,018 and $6,423 at December 31, 2005 and 2004,
respectively |  |              | 192,572   |   |      |   | 96,708   |  
|Goodwill                                                                                                                            |  |              | 389,385   |   |      |   | 292,200  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total intangible assets                                                                                                             |  |              | 581,957   |   |      |   | 388,908  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Other assets, net                                                                                                                   |  |              | 7,022     |   |      |   | 8,140    |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total assets                                                                                                                        |  | $            | 1,039,879 |   |      | $ | 809,350  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|                                                                                                                                    |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |  |              |           |   |      |   |          |  
|Current liabilities:                                                                                                                |  |              |           |   |      |   |          |  
|Accounts payable                                                                                                                    |  | $            | 10,627    |   |      | $ | 10,285   |  
|Accrued expenses                                                                                                                    |  |              | 74,291    |   |      |   | 30,029   |  
|Deferred revenue                                                                                                                    |  |              | 4,265     |   |      |   | 2,271    |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total current liabilities                                                                                                           |  |              | 89,183    |   |      |   | 42,585   |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Deferred tax liabilities, net                                                                                                       |  |              | 70,101    |   |      |   | 29,142   |  
|Long-term debt and other non-current liabilities                                                                                    |  |              | 252,244   |   |      |   | 250,178  |  
|Commitments and contingencies (Note 10)                                                                                             |  |              |           |   |      |   |          |  
|Stockholders equity:                                                                                                               |  |              |           |   |      |   |          |  
|Preferred stock, $0.01 par value                                                                                                   |  |              |           |   |      |   |          |  
|Authorized5,000,000 shares                                                                                                         |  |              |           |   |      |   |          |  
|No shares issued or outstanding                                                                                                     |  |              |          |   |      |   |         |  
|Common stock, $0.01 par value                                                                                                      |  |              |           |   |      |   |          |  
|Authorized400,000,000 shares                                                                                                       |  |              |           |   |      |   |          |  
|Issued 132,743,281 and 128,707,272 in 2005 and 2004, respectively                                                                  |  |              |           |   |      |   |          |  
|Outstanding 115,273,391 and 113,428,233 in 2005 and 2004, respectively                                                             |  |              | 1,327     |   |      |   | 1,287    |  
|Additional paid-in capital                                                                                                          |  |              | 545,761   |   |      |   | 467,265  |  
|Treasury stock, at cost: 17,469,890 and 15,279,039 shares in 2005 and 2004, respectively                                            |  |              | (207,503  | ) |      |   | (157,447 | )
|Accumulated other comprehensive income                                                                                              |  |              | 2,048     |   |      |   | 3,108    |  
|Retained earnings                                                                                                                   |  |              | 286,718   |   |      |   | 173,232  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total stockholders equity                                                                                                          |  |              | 628,351   |   |      |   | 487,445  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                          |  | $            | 1,039,879 |   |      | $ | 809,350  |  
|                                                                                                                                    |  |              |           |   |      |   |          |  



The accompanying notes are an
integral part of these consolidated financial statements.



F-3



---

##### Table of Contents



CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)



|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|---------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                                                                 |  | Years Ended December 31,
|                                                                 |  | 2005                     |         |   | 2004 |   |         | 2003
|                                                                 |  |                          |        
|Net sales                                                        |  | $                        | 508,251 |   |      | $ | 393,593 |      |  | $ | 303,060
|Cost of sales                                                    |  |                          | 107,149 |   |      |   | 82,523  |      |  |   | 57,420 
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Gross profit                                                     |  |                          | 401,102 |   |      |   | 311,070 |      |  |   | 245,640
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Operating expenses:                                              |  |                          |         |   |      |   |         |      |  |   |        
|Research and development                                         |  |                          | 32,330  |   |      |   | 20,820  |      |  |   | 14,724 
|In-process research and development                              |  |                          |        |   |      |   | 19,100  |      |  |   |       
|Sales and marketing                                              |  |                          | 131,346 |   |      |   | 102,011 |      |  |   | 79,547 
|General and administrative                                       |  |                          | 45,298  |   |      |   | 35,274  |      |  |   | 28,008 
|Arbitration decision                                             |  |                          | 7,807   |   |      |   |        |      |  |   |       
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Total operating expenses                                         |  |                          | 216,781 |   |      |   | 177,205 |      |  |   | 122,279
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Income from operations                                           |  |                          | 184,321 |   |      |   | 133,865 |      |  |   | 123,361
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Other (expense) income, net:                                     |  |                          |         |   |      |   |         |      |  |   |        
|Interest income                                                  |  |                          | 3,280   |   |      |   | 2,418   |      |  |   | 2,425  
|Interest expense                                                 |  |                          | (7,168  | ) |      |   | (5,376  | )    |  |   |       
|Other                                                            |  |                          | (1,715  | ) |      |   | (510    | )    |  |   | 197    
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Total other (expense) income, net                                |  |                          | (5,603  | ) |      |   | (3,468  | )    |  |   | 2,622  
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Income before provision for income taxes                         |  |                          | 178,718 |   |      |   | 130,397 |      |  |   | 125,983
|Provision for income taxes                                       |  |                          | 65,232  |   |      |   | 56,809  |      |  |   | 49,763 
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Net income                                                       |  | $                        | 113,486 |   |      | $ | 73,588  |      |  | $ | 76,220 
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Net income per common and potential common share:                |  |                          |         |   |      |   |         |      |  |   |        
|Basic                                                            |  | $                        | 1.00    |   |      | $ | 0.66    |      |  | $ | 0.69   
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Diluted                                                          |  | $                        | 0.94    |   |      | $ | 0.63    |      |  | $ | 0.68   
|                                                                 |  |                          |         |   |      |   |         |      |  |   |        
|Weighted average common and potential common shares outstanding: |  |                          |         |   |      |   |         |      |  |   |        
|Basic                                                            |  |                          | 113,528 |   |      |   | 111,148 |      |  |   | 110,983
|Diluted                                                          |  |                          | 125,446 |   |      |   | 121,922 |      |  |   | 112,807



The accompanying notes are an
integral part of these consolidated financial statements.



F-4



---

##### Table of Contents



CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---------------- | ----------- | - | -------------------------- | - | ----- | - | ------------- | - | ----------------------- | - |  | ------------------------------------ | -------- | - |  | - | -------------------------- | - |  | - | ------ | - |  | - | ------- |  | - | ------- | -
|                                                                                    |  |                      |         |   | Common Stock     |             |   | Additional Paid-in Capital |   |       |   |               |   | Deferred Compen- sation |   |  | Accumulated OtherComprehensiveIncome |          |   |  |   | Total Stockholders Equity |  
|                                                                                    |  | Comprehensive Income |         |   | Number of Shares |             |   | Value                      |   |       |   | TreasuryStock |   |                         |   |  | RetainedEarnings                     |         
|                                                                                    |  |                      |         |   |                  |             |   |                            |  
|Balance, January 1, 2003                                                            |  |                      |        |   |                  | 123,179,055 |   |                            | $ | 1,232 |   |               | $ | 392,253                 |   |  | $                                    | (92,717  | ) |  | $ | (240                       | ) |  | $ | 776    |   |  | $ | 23,424  |  | $ | 324,728 |  
|Exercise of common stock options                                                    |  |                      |        |   |                  | 1,340,984   |   |                            |   | 13    |   |               |   | 5,558                   |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 5,571   |  
|Issuance of shares under employee stock purchase plan                               |  |                      |        |   |                  | 137,018     |   |                            |   | 2     |   |               |   | 1,193                   |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 1,195   |  
|Issuance of shares under directors and executive stock plans                       |  |                      |        |   |                  | 68,522      |   |                            |   |      |   |               |   | 887                     |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 887     |  
|Repurchase of 5,520,362 shares of common stock                                      |  |                      |        |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      | (63,050  | ) |  |   |                           |   |  |   |       |   |  |   |        |  |   | (63,050 | )
|Stock-based compensation to consultant and related amortization                     |  |                      |        |   |                  |            |   |                            |   |      |   |               |   | (78                     | ) |  |                                      |         |   |  |   | 198                        |   |  |   |       |   |  |   |        |  |   | 120     |  
|Amortization of and adjustments to deferred compensation for Pro-Duct stock options |  |                      |        |   |                  |            |   |                            |   |      |   |               |   | (18                     | ) |  |                                      |         |   |  |   | 42                         |   |  |   |       |   |  |   |        |  |   | 24      |  
|Tax benefit from stock options exercised                                            |  |                      |        |   |                  |            |   |                            |   |      |   |               |   | 6,033                   |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 6,033   |  
|Comprehensive income:                                                               |  |                      |        |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Net income                                                                          |  | $                    | 76,220  |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   | 76,220  |  |   | 76,220  |  
|Other comprehensive income, net                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Unrealized loss on securities                                                       |  |                      | (188    | ) |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | (188   | ) |  |   |        |  |   | (188    | )
|Translation adjustments                                                             |  |                      | 2,091   |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | 2,091  |   |  |   |        |  |   | 2,091   |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Comprehensive income                                                                |  | $                    | 78,123  |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   |        |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Balance, December 31, 2003                                                          |  |                      |        |   |                  | 124,725,579 |   |                            |   | 1,247 |   |               |   | 405,828                 |   |  |                                      | (155,767 | ) |  |   |                           |   |  |   | 2,679  |   |  |   | 99,644  |  |   | 353,631 |  
|Exercise of common stock options                                                    |  |                      |        |   |                  | 3,832,697   |   |                            |   | 39    |   |               |   | 46,074                  |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 46,113  |  
|Issuance of shares under employee stock purchase plan                               |  |                      |        |   |                  | 128,687     |   |                            |   | 1     |   |               |   | 1,915                   |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 1,916   |  
|Issuance of shares under directors and executive stock plans                       |  |                      |        |   |                  | 20,309      |   |                            |   |      |   |               |   | 309                     |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 309     |  
|Repurchase of 135,000 shares of common stock                                        |  |                      |        |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      | (1,680   | ) |  |   |                           |   |  |   |       |   |  |   |        |  |   | (1,680  | )
|Tax benefit from stock options exercised                                            |  |                      |        |   |                  |            |   |                            |   |      |   |               |   | 13,139                  |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 13,139  |  
|Comprehensive income:                                                               |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Net income                                                                          |  | $                    | 73,588  |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   | 73,588  |  |   | 73,588  |  
|Other comprehensive income, net                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Unrealized loss on securities                                                       |  |                      | (322    | ) |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | (322   | ) |  |   |        |  |   | (322    | )
|Translation adjustments                                                             |  |                      | 751     |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | 751    |   |  |   |        |  |   | 751     |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Comprehensive income                                                                |  | $                    | 74,017  |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   |        |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Balance, December 31, 2004                                                          |  |                      |        |   |                  | 128,707,272 |   |                            |   | 1,287 |   |               |   | 467,265                 |   |  |                                      | (157,447 | ) |  |   |                           |   |  |   | 3,108  |   |  |   | 173,232 |  |   | 487,445 |  
|Exercise of common stock options                                                    |  |                      |        |   |                  | 3,942,453   |   |                            |   | 40    |   |               |   | 62,326                  |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 62,366  |  
|Issuance of shares under employee stock purchase plan                               |  |                      |        |   |                  | 146,555     |   |                            |   | 1     |   |               |   | 2,936                   |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 2,937   |  
|Issuance of shares under directors and executive stock plans                       |  |                      |        |   |                  | 19,247      |   |                            |   |      |   |               |   | 473                     |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 473     |  
|Retirement of common stock                                                          |  |                      |        |   |                  | (72,246     | ) |                            |   | (1    | ) |               |   | (1,224                  | ) |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | (1,225  | )
|Repurchase of 2,190,851 shares of common stock                                      |  |                      |        |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      | (50,056  | ) |  |   |                           |   |  |   |       |   |  |   |        |  |   | (50,056 | )
|Tax benefit from stock options exercised                                            |  |                      |        |   |                  |            |   |                            |   |      |   |               |   | 13,985                  |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   | 13,985  |  
|Comprehensive income:                                                               |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Net income                                                                          |  | $                    | 113,486 |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   | 113,486 |  |   | 113,486 |  
|Other comprehensive income, net                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Unrealized gain on securities                                                       |  |                      | 208     |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | 208    |   |  |   |        |  |   | 208     |  
|Translation adjustments                                                             |  |                      | (1,268  | ) |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   | (1,268 | ) |  |   |        |  |   | (1,268  | )
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Comprehensive income                                                                |  | $                    | 112,426 |   |                  |            |   |                            |   |      |   |               |   |                        |   |  |                                      |         |   |  |   |                           |   |  |   |       |   |  |   |        |  |   |        |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  
|Balance, December 31, 2005                                                          |  |                      |         |   |                  | 132,743,281 |   |                            | $ | 1,327 |   |               | $ | 545,761                 |   |  | $                                    | (207,503 | ) |  | $ |                           |   |  | $ | 2,048  |   |  | $ | 286,718 |  | $ | 628,351 |  
|                                                                                    |  |                      |         |   |                  |             |   |                            |   |       |   |               |   |                         |   |  |                                      |          |   |  |   |                            |   |  |   |        |   |  |   |         |  |   |         |  



The accompanying notes are an
integral part of these consolidated financial statements.



F-5



---

##### Table of Contents



CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                 |  | Years Ended December 31, |         
|                                                                                 |  | 2005                     |          |   | 2004 |   |          | 2003 | 
|Cash flows from operating activities:                                            |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                       |  | $                        | 113,486  |   |      | $ | 73,588   |      |  | $ | 76,220   |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                          |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                    |  |                          | 24,058   |   |      |   | 16,412   |      |  |   | 8,747    |  
|Loss on disposal of fixed assets                                                 |  |                          | 187      |   |      |   |         |      |  |   |         |  
|Provision (benefit) for doubtful accounts                                        |  |                          | 608      |   |      |   | (399     | )    |  |   | (242     | )
|Acquired in-process research and development                                     |  |                          |         |   |      |   | 19,100   |      |  |   |         |  
|Amortization of deferred financing costs                                         |  |                          | 1,543    |   |      |   | 1,157    |      |  |   |         |  
|Compensation expense related to issuance of stock to directors and executives    |  |                          | 473      |   |      |   | 309      |      |  |   | 1,007    |  
|Compensation expense related to stock options assumed in acquisition             |  |                          |         |   |      |   |         |      |  |   | 24       |  
|Change in deferred income taxes                                                  |  |                          | 23,333   |   |      |   | 22,750   |      |  |   | 8,085    |  
|Changes in assets and liabilities, excluding effects of acquisitions:            |  |                          |          |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                              |  |                          | (18,497  | ) |      |   | (13,785  | )    |  |   | (6,695   | )
|Inventories .                                                                    |  |                          | (5,863   | ) |      |   | 4,485    |      |  |   | (1,771   | )
|Prepaid expenses and other current assets                                        |  |                          | (322     | ) |      |   | (1,242   | )    |  |   | (42      | )
|Accounts payable                                                                 |  |                          | 152      |   |      |   | (4,469   | )    |  |   | 1,131    |  
|Accrued expenses                                                                 |  |                          | 20,718   |   |      |   | 5,787    |      |  |   | (3,768   | )
|Deferred revenue                                                                 |  |                          | 2,140    |   |      |   | 793      |      |  |   | (1,381   | )
|Tax benefit from exercise of stock options                                       |  |                          | 13,985   |   |      |   | 13,139   |      |  |   | 6,033    |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                        |  |                          | 176,001  |   |      |   | 137,625  |      |  |   | 87,348   |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                            |  |                          |          |   |      |   |          |      |  |   |          |  
|Acquisition of Proxima Therapeutics, Inc., net of cash acquired                  |  |                          | (161,830 | ) |      |   |         |      |  |   |         |  
|Acquisition of Novacept, net of cash acquired                                    |  |                          |         |   |      |   | (309,330 | )    |  |   |         |  
|Decrease (increase) in other assets                                              |  |                          | 60       |   |      |   | (1,051   | )    |  |   | 4,189    |  
|Increase in equipment under customer usage agreements                            |  |                          | (27,270  | ) |      |   | (28,501  | )    |  |   | (10,906  | )
|Purchases of property and equipment                                              |  |                          | (13,360  | ) |      |   | (32,753  | )    |  |   | (12,312  | )
|Purchases of investment securities                                               |  |                          | (72,143  | ) |      |   | (141,008 | )    |  |   | (140,023 | )
|Proceeds from sales and maturities of investment securities                      |  |                          | 122,188  |   |      |   | 100,968  |      |  |   | 158,071  |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities .                                          |  |                          | (152,355 | ) |      |   | (411,675 | )    |  |   | (981     | )
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                            |  |                          |          |   |      |   |          |      |  |   |          |  
|Proceeds from issuance of convertible notes, net of issuance costs               |  |                          |         |   |      |   | 242,284  |      |  |   |         |  
|Proceeds from exercise of stock options                                          |  |                          | 61,141   |   |      |   | 46,113   |      |  |   | 5,571    |  
|Proceeds from issuance of shares under employee stock purchase plan              |  |                          | 2,937    |   |      |   | 1,916    |      |  |   | 1,195    |  
|Purchase of treasury shares                                                      |  |                          | (50,056  | ) |      |   | (1,680   | )    |  |   | (63,050  | )
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                              |  |                          | 14,022   |   |      |   | 288,633  |      |  |   | (56,284  | )
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash                                          |  |                          | (477     | ) |      |   | 97       |      |  |   | 2,263    |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase in cash and cash equivalents                                        |  |                          | 37,191   |   |      |   | 14,680   |      |  |   | 32,346   |  
|Cash and cash equivalents, beginning of year                                     |  |                          | 86,277   |   |      |   | 71,597   |      |  |   | 39,251   |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of year                                           |  | $                        | 123,468  |   |      | $ | 86,277   |      |  | $ | 71,597   |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash flow information:                                |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for income taxes                                                       |  | $                        | 26,662   |   |      | $ | 22,233   |      |  | $ | 41,749   |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                           |  | $                        | 5,625    |   |      | $ | 2,703    |      |  | $ |         |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of non-cash items:                                       |  |                          |          |   |      |   |          |      |  |   |          |  
|Unrealized holding gain (loss) on investment securities, net of tax              |  | $                        | 208      |   |      | $ | (322     | )    |  | $ | (188     | )
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  
|Increase in patents and developed technology included in accrued expenses        |  | $                        | 773      |   |      | $ |         |      |  | $ |         |  
|                                                                                 |  |                          |          |   |      |   |          |      |  |   |          |  



The accompanying notes are an
integral part of these consolidated financial statements.



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##### Table of Contents



CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005



(1) The Company

Cytyc Corporation and subsidiaries (Cytyc or
the Company) is a diversified womens health company that designs, develops, manufactures, and markets innovative and clinically effective products. Cytyc products cover a range of womens health applications, including
cervical cancer screening, treatment of excessive menstrual bleeding, radiation treatment of early-stage breast cancer and breast cancer risk assessment. The Companys goal is to become the market leader in providing innovative technologies
that improve womens health.



The Company operates its business in three segments:
domestic diagnostic products, domestic surgical products and international. Cytycs product lines primarily include: the ThinPrep® System, the NovaSure® System, the MammoSite® Radiation Therapy System
and the GliaSite® Radiation Therapy System.



The ThinPrep System is an automated system for the preparation and screening of cervical specimens and
non-gynecological samples on microscope slides. The ThinPrep System consists of any one or more of the following: the ThinPrep 2000 Processor, ThinPrep 3000 Processor, ThinPrep Imaging System, and related reagents, filters, and other supplies, such
as the ThinPrep Pap Test and the Companys proprietary ThinPrep PreservCyt®
Solution. The ThinPrep System also provides the platform from which the Company launched its expansion into breast cancer risk assessment with the FirstCyte® Breast Test.



In March 2004, the Company acquired Novacept (see Note 4), which is a wholly-owned subsidiary of Cytyc Corporation and manufactures and markets the NovaSure System, an innovative endometrial ablation device to treat
menorrhagia, or excessive menstrual bleeding. In March 2005, the Company acquired Proxima Therapeutics, Inc. (Proxima) (see Note 4), which is a wholly-owned subsidiary of Cytyc Corporation and develops and markets the MammoSite System, a
delivery system for the treatment of early-stage breast cancer, and the GliaSite System, a delivery system for the treatment of malignant brain tumors.



(2) Summary of Significant Accounting Policies

The accompanying
consolidated financial statements reflect the application of certain significant accounting policies, as discussed below and elsewhere in the notes to the consolidated financial statements. The preparation of these consolidated financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.



(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.



(b) Foreign Currency Translation

The accounts of the Companys foreign subsidiaries are translated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation. The Company has determined that the functional currency of its subsidiaries should be their local currencies, with the exception of its subsidiary in Costa Rica, whose functional currency is the US
dollar. For all except the Costa Rica subsidiary, assets and liabilities of the foreign subsidiaries are translated at the rates of exchange in effect at year-end. Revenues and expenses are translated using exchange rates in effect during the year.
As a result, gains and losses from foreign currency translation are included in accumulated other comprehensive income within stockholders equity in the accompanying consolidated balance sheets. Foreign currency transaction gains



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



or losses are recorded immediately to income. The Company had combined realized and unrealized net foreign currency transaction losses of approximately $(1.5) million
in 2005 and gains of $0.1 million in 2004 and 2003.



(c) Financial Instruments

The estimated fair market values of the Companys financial instruments, which include
marketable securities, accounts receivable and accounts payable, approximate their carrying values due to the short-term nature of these instruments. Financial instruments that potentially subject the Company to concentrations of credit risk are
principally cash, cash equivalents, investment securities and accounts receivable. Investments are placed in highly-rated financial institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to
whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. No customer represented
more than 10% of the accounts receivable balance as of December 31, 2005. One customer represented approximately 13% of the accounts receivable balance as of December 31, 2004. No other customers represented more than 10% of the
accounts receivable balance as of December 31, 2004.



(d) Cash and Cash Equivalents

Cash equivalents consist of money market mutual funds, commercial paper, corporate bonds,
municipal bonds and U.S. Government securities with original maturities, at date of purchase, of three months or less.



(e) Investment Securities

The Company
follows the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investment securities are classified as available-for-sale and recorded at fair value with the unrealized gains and losses reported
as a component of accumulated other comprehensive income in stockholders equity (see Note 2 (r)). At December 31, 2005 and 2004, investment securities consist of municipal bonds, U.S. Government and agency securities, corporate bonds,
commercial paper and auction rate securities (ARS).



At
December 31, 2005 and 2004, investment securities consisted of $65.1 million and $62.5 million, respectively, of ARS classified as available-for-sale. Although the ARS generally have original maturities in excess of one year from date of
purchase, the underlying interest rates on these securities typically reset within one month. Therefore, these ARS are priced and subsequently traded as investment securities because of remarketing and the interest rate reset feature. Prior to
January 1, 2005, the balances of ARS were previously classified as cash equivalents due to the Companys intent and ability to quickly liquidate these securities to fund current operations and due to the pricing reset feature. With
respect to evolving views regarding the accounting for ARS, the Company has reclassified the accompanying December 31, 2004 consolidated balance sheet to no longer report ARS as cash equivalents. Such investments are now reported within
the investment securities balance.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



At December 31, 2005, the
available-for-sale debt securities had contractual maturities that expire at various dates through March 2007. The fair value of available-for-sale securities was determined based on quoted market prices at the reporting date for those securities.
Available-for-sale securities are shown in the consolidated financial statements at fair market value. The Company has the ability and intent to hold securities when fair value is less than cost. At December 31, 2005 and 2004, the amortized
cost basis, aggregate fair value, gross unrealized holding gains and losses and average months to maturity, by major security type, are as follows:



|                                                                       |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|---------------------------------------------------------------------- |  | -------------- | ------- | --------------------------- | - | ---------------------------- |  | - | ---------- | - |  | - | -------
|                                                                       |  | AmortizedCost  |         | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  |   | Fair Value
|                                                                       |  | (in thousands)
|December 31, 2005                                                      |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|Municipal Bonds (average maturity of 5.2 months)                       |  | $              | 32,152  |                             | $ |                             |  | $ | (76        | ) |  | $ | 32,076 
|Auction Rate Securities (average interest rate reset of 0.6 months)    |  |                | 65,075  |                             |   |                             |  |   |           |   |  |   | 65,075 
|                                                                       |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|                                                                       |  | $              | 97,227  |                             | $ |                             |  | $ | (76        | ) |  | $ | 97,151 
|                                                                       |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|December 31, 2004                                                      |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|Municipal Bonds (average maturity of 8.6 months)                       |  | $              | 59,590  |                             | $ | 1                            |  | $ | (168       | ) |  | $ | 59,423 
|U.S. Government and Agency securities (average maturity of 4.9 months) |  |                | 14,153  |                             |   | 14                           |  |   | (33        | ) |  |   | 14,134 
|Corporate Bonds (average maturity of 6.0 months)                       |  |                | 9,788   |                             |   |                             |  |   | (27        | ) |  |   | 9,761  
|Commercial Paper (average maturity of 1.5 months)                      |  |                | 250     |                             |   |                             |  |   |           |   |  |   | 250    
|Auction Rate Securities (average interest rate reset of 0.7 months)    |  |                | 62,450  |                             |   |                             |  |   |           |   |  |   | 62,450 
|                                                                       |  |                |         |                             |   |                              |  |   |            |   |  |   |        
|                                                                       |  | $              | 146,231 |                             | $ | 15                           |  | $ | (228       | ) |  | $ | 146,018
|                                                                       |  |                |         |                             |   |                              |  |   |            |   |  |   |        



(f) Allowance
for Doubtful Accounts

The Company maintains reserves for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. These reserves are determined based upon historical experience and any specific customer collection issues that have been identified. Historically, the Company has not experienced significant credit losses related to an
individual customer or groups of customers in any particular industry or geographic area.



(g) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist
of materials, labor and manufacturing overhead.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(h) Property
and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance
are charged to expense when incurred and additions or improvements are capitalized. The Company provides for depreciation and amortization by charges to operations, on a straight-line basis, in amounts estimated to allocate the cost of the assets
over their estimated useful lives as follows:



|                                          |  |                             
|----------------------------------------- |  | ----------------------------
|Asset Classification                      |  | Estimated Useful Life       
|                                          | 
|Equipment                                 |  | 3-7 Years                   
|Equipment under customer usage agreements |  | 3-8 Years                   
|Computer equipment and software           |  | 3-5 Years                   
|Furniture and fixtures                    |  | 3-10 Years                  
|Building                                  |  | 40 Years                    
|Leasehold improvements                    |  | Lesser of life or lease term



The Company offers usage
agreements to its customers whereby the Company installs its equipment (for example, a ThinPrep Processor or a ThinPrep Imaging System) at customer sites and customers commit to purchasing minimum quantities of disposable supplies over a defined
contract term. Under these arrangements, the equipment remains the Companys property and the cost of the equipment is depreciated to cost of sales over a period of three to eight years, depending on the nature of the equipment under the usage
agreement.



In January 2005, the Company revised its estimate of the
useful lives of its equipment under customer usage agreements from the specific contract terms (which are generally between three to five years) to a period of three to eight years, as discussed above. This change in estimate was based on an
assessment of historical usage patterns and the useful lives of similar devices and has been reflected in operating results beginning on January 1, 2005 and will continue to be reflected prospectively. Net income would have been approximately
$2.4 million lower in 2005 had this change in estimate not occurred.



(i) Intangible Assets

Goodwill and intangible assets with indefinite lives are not amortized but, instead, are measured for
impairment at least annually, or whenever events indicate that there may be an impairment. Other identifiable intangible assets are amortized over their estimated useful lives and reviewed for impairment if circumstances warrant.



The Company has selected July in which to perform its annual evaluation of goodwill for
impairment. As of July 31, 2005 and 2004, it was determined that the carrying amount of goodwill did not exceed its fair value and, accordingly, no impairment loss existed. There were no indicators of impairment subsequent to this annual review
that require further assessment. Other intangible assets, such as acquired patents and developed technology, are being amortized over their estimated useful lives, which range from 3 years to 25 years. Impairment of these other intangible assets is
determined as described in Note 2(k).



The intangible assets the Company
acquired as part of its acquisitions of Novacept and Proxima, which primarily include patents and developed technology, are being amortized using the cash flow method over 15 years. Under the cash flow method, amortization is calculated and
recognized based upon the Companys estimated net cash flows over the life of the intangible asset, reflecting the pattern in which the economic benefits of the intangible asset are consumed in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Amortization expense related to
the identifiable intangible assets that will continue to be amortized was approximately $6.8 million, $3.1 million and $1.5 million for fiscal years 2005, 2004 and 2003, respectively. Estimated amortization expense related to identifiable
intangible assets is as follows:



|           |  |                |        
|---------- |  | -------------- | -------
|           |  | Amount        
|           |  | (in thousands)
|           | 
|2006       |  | $              | 10,895 
|2007       |  |                | 14,539 
|2008       |  |                | 17,326 
|2009       |  |                | 19,607 
|2010       |  |                | 19,194 
|Thereafter |  |                | 111,011
|           |  |                |        
|Total      |  | $              | 192,572
|           |  |                |        



(j) Other
Assets

Other assets consist primarily of unamortized deferred financing costs of $5.2 million and two private equity investments of
$1.2 million as of December 31, 2005. Other assets consist primarily of unamortized deferred financing costs of $6.7 million and one private equity investment of $0.5 million as of December 31, 2004. The unamortized deferred
financing costs are being amortized over the life of the expected five-year repayment period of the Companys $250 million convertible notes.



During 2005, the Company entered into a $5 million private equity investment commitment with a limited liability partnership, which may be paid over the next three
years. The Company is accounting for this investment under the cost method, since it does not have the ability to exercise significant influence and, as of December 31, 2005, holds less than three percent of the partnerships voting stock,
among other factors. The Companys determination of whether it has significant influence over an investment requires judgment. If at any time the investment exceeds three percent of the partnerships voting stock or the Company determines
that it has the ability to exercise significant influence over the partnership, among other factors, the Company will begin to account for its investment under the equity method. In addition, the Company will regularly review its investment for
impairment indicators. As of December 31, 2005, approximately $0.7 million of this investment has been paid and no impairment indicators have been identified relating to this investment.



(k) Long-lived Assets

The Company accounts for impairments of long-lived assets subject to amortization using SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires that companies (1) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (2) subsequently measure
an impairment loss as the difference between the carrying amount and fair value of the asset.



(l) Product Warranty Obligation

The Company records a liability for product warranty obligations at the
time of sale based upon historical warranty experience. The term of the warranty is generally twelve months. The Company also records an additional liability for specific warranty matters when they become known and are reasonably estimable. Product
warranty obligations are included in accrued expenses.



(m) Revenue Recognition

The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



determinable, and collectibility of the resulting receivable is reasonably assured. Revenue for contracts which contain multiple deliverables is allocated among the
separate units based upon their relative fair values. The Company generally recognizes revenue on product sales upon shipment or upon delivery, depending on the shipping terms of the transaction and when delivery is deemed to have occurred.
Provisions for estimated discounts and rebates are recorded as a reduction of net sales in the same period revenue is recognized. For equipment sales where the Company is obligated to perform installation or training that is deemed critical to the
equipments functionality, revenue is deferred until after installation or training has occurred.



The Company also sells disposable supplies (generally ThinPrep Pap Tests) under customer usage agreements. Under customer usage agreements, the Company installs its
equipment (for example, a ThinPrep Processor or a ThinPrep Imaging System) at customer sites and customers commit to purchasing minimum quantities of disposable supplies at a stated price (generally including a usage fee for the equipment) over a
defined contract term, which is typically between three and five years. Revenue is recognized over the term of the customer usage agreement as disposable supplies are delivered. Accordingly, no revenue is recognized upon delivery of the equipment.



Revenues from sales of service contracts are deferred and recognized
ratably over the service period. The Company also rents its equipment to customers. Revenues from rental agreements are recorded over the terms of the rental agreements.



Freight revenue billed to customers is included in net sales and expenses incurred for shipping products to customers are included in
cost of sales.



(n) Research and Development Costs

Research and development costs are charged to operations as incurred.



(o) Income Taxes

The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities, as measured by enacted tax rates anticipated
to be in effect when these differences reverse. A valuation allowance is provided to the extent realization of tax assets is not considered likely.



(p) Net Income Per Common Share

The
Company follows the provisions of SFAS No. 128, Earnings Per Share, which requires companies to report both basic and diluted per share data, for all periods for which a statement of operations is presented. Basic net income per share is
computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common shares and potential common shares from outstanding
stock options and convertible debt. Potential common shares for outstanding stock options are calculated using the treasury stock method and represent incremental shares issuable upon exercise of the stock options.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The following table provides a
reconciliation of the net income and weighted average common shares used in calculating basic and diluted net income per share for the years ended December 31, 2005, 2004 and 2003:



|                                                             |  |                                          |         |      |   |         |  |   |        
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                             |  | Years Ended December 31,                
|                                                             |  | 2005                                     |         | 2004 |   | 2003   
|                                                             |  | (in thousands, except per share amounts)
|Numerator:                                                   |  |                                          |         |      |   |         |  |   |        
|Net income, as reported, for basic earnings per share        |  | $                                        | 113,486 |      | $ | 73,588  |  | $ | 76,220 
|Interest expense, net of tax                                 |  |                                          | 4,552   |      |   | 3,333   |  |   |       
|                                                             |  |                                          |         |      |   |         |  |   |        
|Net income, as adjusted, for diluted earnings per share      |  | $                                        | 118,038 |      | $ | 76,921  |  | $ | 76,220 
|                                                             |  |                                          |         |      |   |         |  |   |        
|Denominator:                                                 |  |                                          |         |      |   |         |  |   |        
|Basic weighted average common shares outstanding             |  |                                          | 113,528 |      |   | 111,148 |  |   | 110,983
|Dilutive effect of assumed exercise of stock options         |  |                                          | 3,492   |      |   | 4,267   |  |   | 1,824  
|Dilutive effect of assumed conversion of convertible debt    |  |                                          | 8,426   |      |   | 6,507   |  |   |       
|                                                             |  |                                          |         |      |   |         |  |   |        
|Weighted average common shares outstanding assuming dilution |  |                                          | 125,446 |      |   | 121,922 |  |   | 112,807
|                                                             |  |                                          |         |      |   |         |  |   |        
|Basic net income per common share                            |  | $                                        | 1.00    |      | $ | 0.66    |  | $ | 0.69   
|                                                             |  |                                          |         |      |   |         |  |   |        
|Diluted net income per common and potential common share     |  | $                                        | 0.94    |      | $ | 0.63    |  | $ | 0.68   
|                                                             |  |                                          |         |      |   |         |  |   |        



Diluted weighted average shares
outstanding excludes 2,595,931, 4,219,596 and 11,812,217 potential common shares from stock options outstanding for the years ended December 31, 2005, 2004 and 2003, respectively, because the exercise prices of such stock options were higher
than the average closing price of the Companys common stock as quoted on The NASDAQ National Market during the periods mentioned and, accordingly, their effect would be anti-dilutive.



(q) Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation, as amended, addresses the financial accounting and reporting standards for stock or other
equity-based compensation arrangements. The Company elected to continue to use the intrinsic value-based method to account for employee stock option awards under the provisions of APB Opinion No. 25 and provides disclosures based on the fair
value method in the notes to the financial statements (see Note 9) as permitted by SFAS No. 123.



Prior to October 2003, pro forma compensation cost for the Companys stock options was calculated using the Black-Scholes model based on a single-option
valuation approach using the straight-line method of amortization. In October 2003, the Company revised the assumptions utilized by the Black-Scholes model in determining pro forma compensation cost based on updated historical data of option
exercise behavior, such that the cost is determined based on the multiple-option valuation approach. As a result, beginning in October 2003, the Company has calculated pro forma compensation cost for all outstanding unvested stock options and any
stock options granted since that time using the accelerated amortization method prescribed in Financial Accounting Standards Board (FASB) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans.



The underlying assumptions used in the
Black-Scholes model are as follows:



|                         |  |              |  |       |  |      
|------------------------ |  | ------------ |  | ----- |  | -----
|                         |  | December 31,
|                         |  | 2005         |  | 2004  |  | 2003 
|                         |  |              | 
|Risk-free interest rate. |  | 3.79%        |  | 2.84% |  | 2.64%
|Expected dividend yield. |  |             |  |      |  |     
|Expected life (in years) |  | 3.50         |  | 3.49  |  | 4.00 
|Expected volatility.     |  | 56%          |  | 69%   |  | 84%  



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Utilizing these assumptions,
pro forma net income and net income per common and potential common share would have been the following if compensation cost for the Companys stock option plans had been determined consistent with SFAS No. 123:



|                                            |  |                                         |         |      |   |        |  |   |       
|------------------------------------------- |  | --------------------------------------- | ------- | ---- | - | ------ |  | - | ------
|                                            |  | December 31                            
|                                            |  | 2005                                    |         | 2004 |   | 2003  
|                                            |  | (in thousands, except per shareamounts)
|                                            |  |                                         |        
|Net income, as reported                     |  | $                                       | 113,486 |      | $ | 73,588 |  | $ | 76,220
|Assumed stock compensation cost, net of tax |  |                                         | 25,677  |      |   | 39,716 |  |   | 43,802
|                                            |  |                                         |         |      |   |        |  |   |       
|Pro forma net income                        |  | $                                       | 87,809  |      | $ | 33,872 |  | $ | 32,418
|                                            |  |                                         |         |      |   |        |  |   |       
|Net income per common share:                |  |                                         |         |      |   |        |  |   |       
|Basicas reported                           |  | $                                       | 1.00    |      | $ | 0.66   |  | $ | 0.69  
|                                            |  |                                         |         |      |   |        |  |   |       
|Basicpro forma                             |  | $                                       | 0.77    |      | $ | 0.30   |  | $ | 0.29  
|                                            |  |                                         |         |      |   |        |  |   |       
|Dilutedas reported                         |  | $                                       | 0.94    |      | $ | 0.63   |  | $ | 0.68  
|                                            |  |                                         |         |      |   |        |  |   |       
|Dilutedpro forma                           |  | $                                       | 0.74    |      | $ | 0.29   |  | $ | 0.29  
|                                            |  |                                         |         |      |   |        |  |   |       



The weighted average fair market
value of the stock options as of the date of grant for the years ended December 31, 2005, 2004 and 2003, was $10.53, $10.76 and $7.50, respectively.



(r) Comprehensive Income

SFAS
No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity including such items as unrealized holding gains (losses) on securities classified as available-for-sale and foreign currency translation adjustments, reflected net of tax. The Company has chosen to disclose
comprehensive income in the accompanying consolidated statements of stockholders equity.



The components of accumulated other comprehensive income are as follows:



|                                                     |  |                                 |        |   |                                                         |   |      |                                     |  |   |        |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------------------------------- | - | ---- | ----------------------------------- |  | - | ------ | -
|                                                     |  | CumulativeTranslationAdjustment |        |   | Unrealized Gain (Loss) onAvailable-for- sale Securities |   |      | AccumulatedOtherComprehensiveIncome | 
|                                                     |  | (in thousands)                  |       
|                                                     |  |                                 |       
|Balance as of January 1, 2003                        |  | $                               | 522    |   |                                                         | $ | 254  |                                     |  | $ | 776    |  
|Comprehensive income changes during year, net of tax |  |                                 | 2,091  |   |                                                         |   | (188 | )                                   |  |   | 1,903  |  
|                                                     |  |                                 |        |   |                                                         |   |      |                                     |  |   |        |  
|Balance as of December 31, 2003                      |  |                                 | 2,613  |   |                                                         |   | 66   |                                     |  |   | 2,679  |  
|Comprehensive income changes during year, net of tax |  |                                 | 751    |   |                                                         |   | (322 | )                                   |  |   | 429    |  
|                                                     |  |                                 |        |   |                                                         |   |      |                                     |  |   |        |  
|Balance as of December 31, 2004                      |  |                                 | 3,364  |   |                                                         |   | (256 | )                                   |  |   | 3,108  |  
|Comprehensive income changes during year, net of tax |  |                                 | (1,268 | ) |                                                         |   | 208  |                                     |  |   | (1,060 | )
|                                                     |  |                                 |        |   |                                                         |   |      |                                     |  |   |        |  
|Balance as of December 31, 2005                      |  | $                               | 2,096  |   |                                                         | $ | (48  | )                                   |  | $ | 2,048  |  
|                                                     |  |                                 |        |   |                                                         |   |      |                                     |  |   |        |  





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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(s) Segment
and Enterprise-Wide Reporting

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, requires certain
financial and supplementary information to be disclosed for each reportable operating segment of an enterprise, as defined. Prior to the fourth quarter of fiscal year 2005, the Company operated its business in two segments, worldwide diagnostic
products and worldwide surgical products. Beginning in the fourth quarter of fiscal year 2005, the Company changed its management structure as a result of the growth in its international business and began to operate its business in three reportable
segments. Financial information for these segments is included below for all periods presented and each segment is described as follows:



Domestic Diagnostic Products This segment develops and markets the ThinPrep System in the United States primarily for use in diagnostic cytology
testing applications focused on womens health. The ThinPrep System is widely used for cervical cancer screening and is the platform from which the Company launched its expansion into breast cancer risk assessment with the FirstCyte Breast
Test. The ThinPrep System consists of any one or more of the following: the ThinPrep 2000 Processor, ThinPrep 3000 Processor, ThinPrep Imaging System, and related reagents, filters, and other supplies, such as the ThinPrep Pap Test and the
Companys proprietary ThinPrep PreservCyt Solution.



Domestic
Surgical Products This segment manufactures the NovaSure System, an innovative endometrial ablation device to treat menorrhagia, or excessive menstrual bleeding, the MammoSite Radiation Therapy System, a device for the treatment of
early-stage breast cancer, and the GliaSite Radiation Therapy System for the treatment of malignant brain tumors and markets these products in the Unites States.



International This segment markets the Companys diagnostic and surgical products outside of the United States
through the Companys subsidiaries, branch office and distributors. Products sold by the Companys international segment are manufactured at domestic and international manufacturing locations.



The Companys chief decision maker, who is the Chief Executive Officer, regularly
evaluates the operating team of each segment on their ability to generate net sales and gross profit. Selling, general and administrative functions, as well as the treasury function, are administered on a global basis and therefore these expenses
are currently recorded where disbursed. As such, the Company does not currently allocate these expenses across its three segments. The Companys operating results, by segment, are as follows:



|                             |  |                          |         |      |   |         |  |   |        
|---------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                             |  | Years Ended December 31,
|                             |  | 2005                     |         | 2004 |   | 2003   
|                             |  | (in thousands)          
|Net sales:                   |  |                          |         |      |   |         |  |   |        
|Domestic diagnostic products |  | $                        | 311,318 |      | $ | 289,543 |  | $ | 271,259
|Domestic surgical products   |  |                          | 143,870 |      |   | 62,479  |  |   |       
|International                |  |                          | 53,063  |      |   | 41,571  |  |   | 31,801 
|                             |  |                          |         |      |   |         |  |   |        
|Total net sales              |  | $                        | 508,251 |      | $ | 393,593 |  | $ | 303,060
|                             |  |                          |         |      |   |         |  |   |        



|                             |  |   |         |  |   |         |  |   |        
|---------------------------- |  | - | ------- |  | - | ------- |  | - | -------
|Gross profit and net income: |  |   |         |  |   |         |  |   |        
|Domestic diagnostic products |  | $ | 243,573 |  | $ | 232,282 |  | $ | 224,681
|Domestic surgical products   |  |   | 120,543 |  |   | 48,547  |  |   |       
|International                |  |   | 36,986  |  |   | 30,241  |  |   | 20,959 
|                             |  |   |         |  |   |         |  |   |        
|Total gross profit           |  |   | 401,102 |  |   | 311,070 |  |   | 245,640
|Corporate expenses           |  |   | 287,616 |  |   | 237,482 |  |   | 169,420
|                             |  |   |         |  |   |         |  |   |        
|Net income                   |  | $ | 113,486 |  | $ | 73,588  |  | $ | 76,220 
|                             |  |   |         |  |   |         |  |   |        



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



SFAS No. 131 also requires
that certain enterprise-wide disclosures be made related to products and services, geographic areas and significant customers. During 2005, 2004 and 2003, the Company derived its sales from the following geographies (as a percentage of net sales):



|              |  |                          |  |      |  |     
|------------- |  | ------------------------ |  | ---- |  | ----
|              |  | Years Ended December 31,
|              |  | 2005                     |  | 2004 |  | 2003
|              |  |                          | 
|United States |  | 90%                      |  | 89%  |  | 90% 
|International |  | 10%                      |  | 11%  |  | 10% 
|              |  |                          |  |      |  |     
|              |  | 100%                     |  | 100% |  | 100%
|              |  |                          |  |      |  |     



In 2005 and 2004, sales to one
customer within the Companys domestic diagnostic products business represented approximately 11% and 17%, respectively, of consolidated net sales. In 2003, sales to two customers within the Companys domestic diagnostic products business
represented approximately 22% and 10%, respectively, of consolidated net sales. No other customer represented 10% or more of consolidated net sales during these periods.



The Company operates manufacturing facilities in the United States and Costa Rica and has several offices, primarily for sales and
distribution, throughout the world. Property and equipment is primarily located within the domestic diagnostic products segment in the United States.



The following table summarizes the Companys intangible assets, by segment:



|                             |  |                                    |         |          |   |                        |  |   |        
|---------------------------- |  | ---------------------------------- | ------- | -------- | - | ---------------------- |  | - | -------
|                             |  | Patents andDevelopedTechnology,net |         | Goodwill |   | Total IntangibleAssets
|                             |  | (in thousands)                    
|December 31, 2005            |  |                                    |         |          |   |                        |  |   |        
|Domestic diagnostic products |  | $                                  | 13,982  |          | $ | 91,098                 |  | $ | 105,080
|Domestic surgical products   |  |                                    | 178,590 |          |   | 298,287                |  |   | 476,877
|                             |  |                                    |         |          |   |                        |  |   |        
|                             |  | $                                  | 192,572 |          | $ | 389,385                |  | $ | 581,957
|                             |  |                                    |         |          |   |                        |  |   |        
|December 31, 2004            |  |                                    |         |          |   |                        |  |   |        
|Domestic diagnostic products |  | $                                  | 14,679  |          | $ | 91,098                 |  | $ | 105,777
|Domestic surgical products   |  |                                    | 82,029  |          |   | 201,102                |  |   | 283,131
|                             |  |                                    |         |          |   |                        |  |   |        
|                             |  | $                                  | 96,708  |          | $ | 292,200                |  | $ | 388,908
|                             |  |                                    |         |          |   |                        |  |   |        



During 2005, the Company
acquired $101.9 million and $97.2 million of patents and developed technology and goodwill, respectively, as part of the Proxima acquisition. These amounts, net of amortization expense recorded during 2005 relating to the patents and developed
technology, are included within the domestic surgical products balances above. During 2005, the Company acquired a patent and licensed patented technology for a total of $773,059, which is included within the domestic diagnostic products balance
above.



Amortization expense related to identifiable intangible assets
that will continue to be amortized within domestic diagnostic products was approximately $1.5 million in each of fiscal years 2005, 2004 and 2003. Amortization expense related to identifiable intangible assets that will continue to be amortized
within domestic surgical products was approximately $5.3 million, $1.6 million and zero in fiscal years 2005, 2004 and 2003, respectively.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(t) Recent
Accounting Pronouncement

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This standard is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, in March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107 which discusses topics related to the implementation of SFAS No. 123R and provides interpretations of items such as the valuation models, expected volatility, expected option term, income tax
effects, classification and capitalization of stock-based compensation expense, as well as certain disclosure requirements. In October and November 2005, the FASB issued FASB Staff Position Nos. 123R-2 and 123R-3, respectively, which provide further
guidance regarding the adoption and application of SFAS No. 123R. The Company adopted SFAS No. 123R on January 1, 2006, as required, and will continue to evaluate the impact of such adoption on the Companys financial position
and results of operations. As a result of adopting the provisions of SFAS No. 123R, the Company expects stock-based compensation expense in fiscal year 2006 to reduce diluted net income per common share by approximately $0.12 to $0.14. However,
this estimate will be affected by the future market price of the Companys common stock, as well as the actual results of certain assumptions used to value the equity awards, including the related tax impact. These assumptions include, but are
not limited to, the volatility of the Companys common stock during fiscal 2006 and the number of stock options to be issued, forfeited and exercised by employees. In order to value the equity awards, the Company has used the Black-Scholes
option pricing model and will recognize stock-based compensation expense for future grants on a straight-line basis over the requisite service period of the award.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(3) Other Balance Sheet
Information

Components of selected captions in the consolidated balance sheets at December 31 consist of:



|                                               |  |                |         |      |   |        
|---------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                               |  | 2005           |         | 2004
|                                               |  | (in thousands)
|Inventories                                    |  |                |         |      |   |        
|Raw materials                                  |  | $              | 9,000   |      | $ | 8,287  
|Work-in-process                                |  |                | 3,436   |      |   | 1,566  
|Finished goods                                 |  |                | 11,597  |      |   | 7,457  
|                                               |  |                |         |      |   |        
|                                               |  | $              | 24,033  |      | $ | 17,310 
|                                               |  |                |         |      |   |        
|Property and Equipment                         |  |                |         |      |   |        
|Equipment                                      |  | $              | 46,144  |      | $ | 31,354 
|Equipment under customer usage agreements      |  |                | 66,832  |      |   | 42,380 
|Computer equipment and software                |  |                | 20,894  |      |   | 15,752 
|Furniture and fixtures                         |  |                | 4,773   |      |   | 4,029  
|Building                                       |  |                | 8,573   |      |   | 8,581  
|Leasehold improvements                         |  |                | 10,844  |      |   | 9,146  
|Land                                           |  |                | 579     |      |   | 579    
|Construction-in-process                        |  |                | 9,797   |      |   | 25,599 
|                                               |  |                |         |      |   |        
|                                               |  |                | 168,436 |      |   | 137,420
|Lessaccumulated depreciation and amortization |  |                | 54,826  |      |   | 45,908 
|                                               |  |                |         |      |   |        
|                                               |  | $              | 113,610 |      | $ | 91,512 
|                                               |  |                |         |      |   |        
|Accrued Expenses                               |  |                |         |      |   |        
|Accrued compensation                           |  | $              | 20,999  |      | $ | 16,764 
|Accrued acquisition (Proxima earn-out)         |  |                | 20,906  |      |   |       
|Accrued sales and marketing                    |  |                | 4,463   |      |   | 3,158  
|Accrued taxes                                  |  |                | 8,860   |      |   | 2,444  
|Accrued royalties                              |  |                | 2,550   |      |   | 1,757  
|Accrued arbitration panel decision             |  |                | 9,098   |      |   |       
|Other accruals                                 |  |                | 7,415   |      |   | 5,906  
|                                               |  |                |         |      |   |        
|                                               |  | $              | 74,291  |      | $ | 30,029 
|                                               |  |                |         |      |   |        



Changes in the product warranty obligations,
included in accrued expenses, for the years ended December 31, 2005 and 2004 are as follows:



|                           |  |                |      |   |      |   |        |  
|-------------------------- |  | -------------- | ---- | - | ---- | - | ------ | -
|                           |  | 2005           |      |   | 2004 |  
|                           |  | (in thousands) |     
|                           |  |               
|Balance, beginning of year |  | $              | 397  |   |      | $ | 925    |  
|New warranties             |  |                | 363  |   |      |   | 409    |  
|Payments                   |  |                | (290 | ) |      |   | (1,055 | )
|Adjustments                |  |                | (44  | ) |      |   | 118    |  
|                           |  |                |      |   |      |   |        |  
|Balance, end of year       |  | $              | 426  |   |      | $ | 397    |  
|                           |  |                |      |   |      |   |        |  



F-18



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(4) Acquisition Activity

(a) Acquisition of Proxima

On March 7, 2005, the Company acquired Proxima, a privately held company located in Alpharetta, Georgia, in a non-taxable transaction (the Merger). As a result of the Merger, all of Proximas fully-diluted equity
immediately prior to the Merger was automatically converted into the right to receive an initial cash payment of approximately $160 million, plus contingent earn-out payments tied to future performance milestones. The contingent earn-out payments
are based on incremental sales growth in the breast-related products during 2005 and 2006, are subject to an aggregate cap of $65 million and are recorded as additional goodwill when paid. At December 31, 2005, the Company has accrued $20.9
million for the contingent earn-out payments relating to incremental sales growth in the breast-related products during 2005.



The initial purchase price payment was paid with Cytycs available cash. Pursuant to the merger agreement, $15.8 million of the purchase price was placed in
escrow to satisfy potential claims. The purchase price was supported by estimates of future revenue and earnings of Proxima, as well as the value of sales force and other projected synergies.



The aggregate purchase price for Proxima, including the contingent earn-out payments
relating to 2005 performance milestones, was $184.0 million, of which $180.9 million represented cash payable to Proxima shareholders and $3.1 million represented acquisition-related fees and expenses. The acquisition has been accounted for as a
purchase in accordance with SFAS No. 141, Business Combinations, and accordingly, the results of operations of Proxima have been included in the accompanying consolidated statement of income from the date of the acquisition.



Purchase Price Allocation

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (Original Amount) and includes
the contingent earn-out payments relating to 2005 performance milestones, for an aggregate purchase price of approximately $184.0 million, including acquisition costs:



|                                     |  |                |         |   |                            |   |                              |  |   |         |  
|------------------------------------ |  | -------------- | ------- | - | -------------------------- | - | ---------------------------- |  | - | ------- | -
|                                     |  | OriginalAmount |         |   | ContingentEarn-outPayments |   | Amount as ofDecember 31,2005 | 
|                                     |  | (in thousands) |        
|                                     |  |                |        
|Current assets                       |  | $              | 6,622   |   |                            | $ |                             |  | $ | 6,622   |  
|Property and equipment               |  |                | 379     |   |                            |   |                             |  |   | 379     |  
|Patents and developed technology     |  |                | 101,900 |   |                            |   |                             |  |   | 101,900 |  
|Goodwill                             |  |                | 76,279  |   |                            |   | 20,906                       |  |   | 97,185  |  
|Other assets                         |  |                | 507     |   |                            |   |                             |  |   | 507     |  
|Current liabilities                  |  |                | (4,143  | ) |                            |   |                             |  |   | (4,143  | )
|Long-term liabilities                |  |                | (587    | ) |                            |   |                             |  |   | (587    | )
|Net deferred tax liabilitylong-term |  |                | (17,827 | ) |                            |   |                             |  |   | (17,827 | )
|                                     |  |                |         |   |                            |   |                              |  |   |         |  
|                                     |  | $              | 163,130 |   |                            | $ | 20,906                       |  | $ | 184,036 |  
|                                     |  |                |         |   |                            |   |                              |  |   |         |  



As part of the purchase price
allocation, all tangible and intangible assets and liabilities were identified and valued. Of the total purchase price, the Company allocated $2.8 million to acquired net tangible assets. The net deferred tax liability of $17.8 million is primarily
comprised of $21.5 million of deferred tax assets, net of a $1.1 million valuation allowance, relating to acquired net operating losses and tax credits and deferred tax liabilities of $39.3 million relating to patents and developed technology. The
Company determined the fair value of Proximas tangible assets and liabilities based on a review of Proximas historical and then current financial statements and an understanding of the ongoing nature of the assets and liabilities.



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CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The Company also allocated
$101.9 million to the acquired patents and developed technology (primarily associated with MammoSite). The acquired patents expire at various dates through 2023. Based on the average life of the patent portfolio, the remaining economic life of
the developed technology is expected to be approximately 15 years. The Company is amortizing the patents and developed technology over this period using the cash flow method, under which amortization is calculated and recognized based upon the
Companys estimated net cash flows over the life of the intangible asset, reflecting the pattern in which the economic benefits of the intangible asset are consumed in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. The Company believes the patents provide sufficient coverage for differentiated products to sustain some competitive advantage in the marketplace over the average remaining life of the patents.



The Company valued the intangible assets acquired, including the portfolio of patents
and technologies associated with the MammoSite and GliaSite products, based on present value calculations of income using a risk-adjusted cash flows for each product, an analysis of company accomplishments, an assessment of overall contributions, as
well as project risks. The projections used in the valuation are based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its
competitors, as well as estimates of cost of sales, operating expenses, and income taxes resulting from the acquired products. In addition, the projections reflect the Companys expectation that improvements to the current devices will continue
to be made over the life cycle of the product lines. As a result, the completed technology that existed as of the acquisition date was assumed to represent a declining percentage of the devices technological composition over time.



The rate utilized to discount the net cash flows to their present value was based on
estimated weighted-average cost of capital calculations. A discount rate of 25% was used to value the acquired intangible assets. This discount rate is higher than the Companys weighted-average cost of capital due to the early-stage life cycle
of the acquired products and related inherent uncertainties surrounding the successful commercialization and development of the acquired intangible assets, the useful life of such technology, the profitability levels of such technology, and the
uncertainty of technological advances that were unknown at that time.



The projections used to value the tangible assets and liabilities, as well as identifiable intangible assets, reflected no material change in historical pricing, margins or expense levels specifically associated with these acquired net
assets. There have been no variations from the Companys underlying projections and assumptions as compared to actual operating results that would have had a material impact on the valuation.



Goodwill

The excess of the purchase price, including contingent earn-out payments relating to 2005 performance milestones, over the fair value of tangible and identifiable
intangible net assets was allocated to goodwill, which is non-deductible for tax purposes and totaled $97.2 million. In accordance with SFAS No. 142, this amount will not be systematically amortized. Instead, the Company will perform an annual
assessment for impairment by applying a fair-value-based test.



(b) Acquisition of Novacept

On March 24, 2004, Cytyc acquired Novacept, a privately held California corporation, in a
non-taxable transaction. The aggregate purchase price for Novacept was $325.8 million, of which $321.4 million represented cash payable to Novacept shareholders and $4.4 million represented acquisition-related fees and expenses. To satisfy certain
claims as provided in the merger agreement, $27.5 million of the purchase price was placed in escrow. The acquisition was accounted for as a purchase in accordance with SFAS No. 141 and accordingly, the results of operations of Novacept were
included in the consolidated statement of operations from the date of the acquisition.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Purchase Price Allocation

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, at the date of acquisition, for an
aggregate purchase price of approximately $325.8 million including acquisition costs.



|                                    |  |                |         |  
|----------------------------------- |  | -------------- | ------- | -
|                                    |  | Amount         |        
|                                    |  | (in thousands) |        
|                                    | 
|Current assets                      |  | $              | 27,418  |  
|Property and equipment              |  |                | 2,556   |  
|Patents and developed technology    |  |                | 83,700  |  
|Goodwill                            |  |                | 201,102 |  
|Net deferred tax assetlong-term    |  |                | 1,007   |  
|Other assets                        |  |                | 121     |  
|Current liabilities                 |  |                | (9,179  | )
|In-process research and development |  |                | 19,100  |  
|                                    |  |                |         |  
|                                    |  | $              | 325,825 |  
|                                    |  |                |         |  



As part of the purchase price
allocation, all tangible and intangible assets and liabilities were identified and valued. Of the total purchase price, the Company allocated $20.9 million to acquired net tangible assets. The net deferred tax asset of $1.0 million is primarily
comprised of $31.4 million of deferred tax assets, net of a $7.0 million valuation allowance, relating to acquired net operating losses and tax credits and deferred tax liabilities of $32.6 million relating to patents and developed technology. The
Company determined the fair value of Novacepts tangible assets and liabilities based on a review of Novacepts historical and then current financial statements and an understanding of the ongoing nature of the assets and liabilities.



The Company also allocated $83.7 million to the acquired patents and
developed technology. The acquired patents expire at various dates through 2022. Based on the average life of the patent portfolio, the remaining economic life of the developed technology is expected to be approximately 15 years. The Company is
amortizing the patents and developed technology over this period using the cash flow method. The Company believes the patents provide sufficient coverage for differentiated products to sustain some competitive advantage in the marketplace over the
average remaining life of the patents.



The Company allocated $19.1
million of the purchase price to an in-process research and development project. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the complete and incomplete research and development activities. The
incomplete research and development activities primarily were associated with an upgrade to the RF Controller. The RF Controller delivers radio frequency energy and is one of the two primary components of the NovaSure System. The upgrade to the RF
Controller was necessary to replace the existing power supply, a critical component of the RF Controller which was being discontinued by its supplier.



As of the date of acquisition, the upgrade to the RF Controller was under design review, the remaining costs to complete the project were not material and the
project was anticipated to be, and actually was, completed in late-2004 with net cash inflows commencing at that time. Accordingly, the acquired in-process research and development was charged to expense as of the date of the acquisition and
included in the Companys statement of income in fiscal year 2004. Since the acquisition date, there have been no additional significant, ongoing activities associated with the in-process research and development project and there were no other
significant acquired projects.



The Company valued the intangible assets
acquired, including the portfolio of patents and technologies and the in-process research and development project, based on present value calculations of income using a



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



risk-adjusted cash flow, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The
value assigned to the in-process research and development project was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the net cash flows resulting from the project, and discounting
the net cash flows to their present value, as well as determining the importance of the upgraded RF Controller to sustaining uninterrupted sales of the NovaSure System. As of the acquisition date, the remaining costs to complete the project were not
material.



The projections used to value the acquired intangible assets
and the in-process research and development project were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its
competitors, as well as estimates of cost of sales, operating expenses, and income taxes from the acquired products and in-process research and development project. In addition, the projections reflect the Companys expectation that
improvements to the current devices would continue to be made over the life cycle of the product lines. As a result, the completed technology that existed as of the acquisition date was assumed to represent a declining percentage of the
devices technological composition over time.



The rates utilized to
discount the net cash flows to their present value were based on estimated weighted-average cost of capital calculations. Discount rates in the range of 15% to 20% were used to value the acquired intangible assets and the in-process research and
development project. The discount rates were higher than the Companys weighted-average cost of capital due to the early-stage life cycle of the acquired products, the inherent uncertainties surrounding the outcome of the upgrade project and
successful commercialization and development of the acquired intangible assets, the useful life of the acquired technology, the profitability levels of such technology and the uncertainty of technological advances that were unknown at that time.



The projections the Company used to value the acquired tangible and
intangible assets and liabilities, as well as the in-process research and development project, reflected no material change in historical pricing, margins or expense levels specifically associated with the acquired net assets and the upgrade
project. There have been no variations from the Companys underlying projections and assumptions as compared to actual operating results that would have had a material impact on the valuation of the in-process research and development project.



(c) Pro Forma results

The following unaudited pro forma financial information for fiscal year 2005 presents the combined results of operations of Cytyc and Proxima as if the acquisition
had occurred as of January 1, 2005. The unaudited pro forma financial information for fiscal year 2004 presents the combined results of operations of Cytyc, Novacept and Proxima as if the acquisitions had occurred as of January 1, 2004.
The pro forma results for 2005 include $2.8 million of transaction fees and expenses incurred by Proxima, prior to the acquisition, related to the Merger. The pro forma results for 2004 include $5.6 million of transaction fees and expenses incurred
by Novacept related to the merger with Cytyc, but exclude $19.1 million of in-process research and development costs. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The
unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of the Company that would have been reported had the acquisitions been completed as of the dates
presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Pro forma results were as
follows:



|                             |  |                                          |         |      |   |        
|---------------------------- |  | ---------------------------------------- | ------- | ---- | - | -------
|                             |  | 2005                                     |         | 2004
|                             |  | (in thousands, except per share amounts)
|                             |  |                                         
|Net sales                    |  | $                                        | 512,446 |      | $ | 422,237
|Net income                   |  | $                                        | 110,077 |      | $ | 81,625 
|Net income per common share: |  |                                          |         |      |   |        
|Basic                        |  | $                                        | 0.97    |      | $ | 0.73   
|                             |  |                                          |         |      |   |        
|Diluted                      |  | $                                        | 0.91    |      | $ | 0.70   
|                             |  |                                          |         |      |   |        



|(5) |  | Allowance for Doubtful Accounts
|--- |  | -------------------------------

A summary of the allowance for
doubtful accounts activity is as follows:



|                           |  |                |       |   |      |   |       |      |  |   |       |  
|-------------------------- |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                           |  | December 31,   |      
|                           |  | 2005           |       |   | 2004 |   |       | 2003 | 
|                           |  | (in thousands) |      
|                           |  |                |      
|Balance, beginning of year |  | $              | 1,152 |   |      | $ | 1,744 |      |  | $ | 2,103 |  
|Provision (benefit)        |  |                | 608   |   |      |   | (399  | )    |  |   | (242  | )
|Amounts written off        |  |                | (168  | ) |      |   | (193  | )    |  |   | (117  | )
|                           |  |                |       |   |      |   |       |      |  |   |       |  
|Balance, end of year       |  | $              | 1,592 |   |      | $ | 1,152 |      |  | $ | 1,744 |  
|                           |  |                |       |   |      |   |       |      |  |   |       |  



|(6) |  | Income Taxes
|--- |  | ------------

The components of the
provision for income taxes are as follows:



|                                 |  |                          |        |      |   |        |  |   |       
|-------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                 |  | Years Ended December 31,
|                                 |  | 2005                     |        | 2004 |   | 2003  
|Current:                         |  |                          |        |      |   |        |  |   |       
|Federal                          |  | $                        | 48,415 |      | $ | 28,951 |  | $ | 37,202
|Foreign                          |  |                          | 440    |      |   | 218    |  |   | 401   
|State                            |  |                          | 5,793  |      |   | 4,890  |  |   | 4,075 
|                                 |  |                          |        |      |   |        |  |   |       
|                                 |  |                          | 54,648 |      |   | 34,059 |  |   | 41,678
|                                 |  |                          |        |      |   |        |  |   |       
|Deferred:                        |  |                          |        |      |   |        |  |   |       
|Federal                          |  |                          | 10,241 |      |   | 22,067 |  |   | 7,640 
|State                            |  |                          | 343    |      |   | 683    |  |   | 445   
|                                 |  |                          |        |      |   |        |  |   |       
|                                 |  |                          | 10,584 |      |   | 22,750 |  |   | 8,085 
|                                 |  |                          |        |      |   |        |  |   |       
|Total provision for income taxes |  | $                        | 65,232 |      | $ | 56,809 |  | $ | 49,763
|                                 |  |                          |        |      |   |        |  |   |       



A reconciliation of the federal statutory rate
to the Companys effective income tax rate is as follows:



|                                                                              |  |              |   |  |      |   |  |      |  
|----------------------------------------------------------------------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|                                                                              |  | December 31, |  
|                                                                              |  | 2005         |   |  | 2004 |   |  | 2003 |  
|                                                                              |  |              |  
|Income tax provision at federal statutory rate                                |  | 35.0         | % |  | 35.0 | % |  | 35.0 | %
|In-process research and development write-off related to Novacept acquisition |  |             |   |  | 5.1  |   |  |     |  
|State tax provision, net of federal benefit                                   |  | 2.2          |   |  | 2.8  |   |  | 2.3  |  
|Other                                                                         |  | (0.7         | ) |  | 0.7  |   |  | 2.2  |  
|                                                                              |  |              |   |  |      |   |  |      |  
|Effective tax rate                                                            |  | 36.5         | % |  | 43.6 | % |  | 39.5 | %
|                                                                              |  |              |   |  |      |   |  |      |  



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The
approximate income tax effect of each type of temporary difference and carryforward is as follows:



|                                                            |  |                |         |   |      |   |         |  
|----------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                            |  | December 31,   |        
|                                                            |  | 2005           |         |   | 2004 |  
|                                                            |  | (in thousands) |        
|Deferred tax assets:                                        |  |                |         |   |      |   |         |  
|Net operating loss carryforwards                            |  | $              | 23,574  |   |      | $ | 16,573  |  
|Research and development and other tax credit carryforwards |  |                | 4,771   |   |      |   | 3,527   |  
|Capitalized research and development expenses               |  |                |        |   |      |   | 54      |  
|Amortization of acquisition-related charges                 |  |                |        |   |      |   | 667     |  
|Warranty reserve                                            |  |                | 74      |   |      |   | 125     |  
|Deferred income                                             |  |                | 342     |   |      |   | 379     |  
|Bad debt reserve                                            |  |                | 482     |   |      |   | 282     |  
|Inventory reserve                                           |  |                | 1,063   |   |      |   | 1,132   |  
|Employee benefit related reserves                           |  |                | 508     |   |      |   | 190     |  
|Other temporary differences                                 |  |                | 1,797   |   |      |   | 1,575   |  
|                                                            |  |                |         |   |      |   |         |  
|                                                            |  |                | 32,611  |   |      |   | 24,504  |  
|                                                            |  |                |         |   |      |   |         |  
|Deferred tax liabilities:                                   |  |                |         |   |      |   |         |  
|Acquired technology know-how                                |  |                | (74,231 | ) |      |   | (37,007 | )
|Original issuance discount on convertible notes             |  |                | (7,880  | ) |      |   | (3,351  | )
|Depreciation                                                |  |                | (7,108  | ) |      |   | (645    | )
|Other                                                       |  |                | (1,177  | ) |      |   | (1,906  | )
|                                                            |  |                |         |   |      |   |         |  
|                                                            |  |                | (90,396 | ) |      |   | (42,909 | )
|                                                            |  |                |         |   |      |   |         |  
|                                                            |  |                | (57,785 | ) |      |   | (18,405 | )
|Valuation allowance                                         |  |                | (8,050  | ) |      |   | (7,000  | )
|                                                            |  |                |         |   |      |   |         |  
|Net deferred tax liabilities                                |  | $              | (65,835 | ) |      | $ | (25,405 | )
|                                                            |  |                |         |   |      |   |         |  



The Company has research and development tax
credit carryforwards of approximately $4.8 million at December 31, 2005 that will expire at various dates beginning in 2006 and through 2020 if not utilized. The Company, through its acquisition of Novacept, has net operating losses for federal
income tax purposes of approximately $33.0 million at December 31, 2005 that will expire at various dates beginning in 2009 and through 2024 if not utilized. The Company, through its acquisition of Proxima, has net operating losses for federal
income tax purposes of approximately $34.3 million at December 31, 2005 that will expire at various dates beginning in 2010 and through 2025 if not utilized. The net operating loss and research and development tax credit carryforwards are
subject to review by the Internal Revenue Service. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of these tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount
of the annual limitation is determined based on the value immediately prior to the ownership change.



|(7) |  | Long-Term Debt
|--- |  | --------------

On March 22, 2004, the Company completed the sale
(the Offering) of $250 million aggregate principal amount of its 2.25% convertible notes due 2024. The convertible notes were sold to qualified institutional buyers pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended. The Company used the proceeds from the Offering along with existing cash to finance the acquisition of Novacept. Total proceeds from the private placement were $242.3 million, net of debt issuance costs of $7.7
million.



The notes bear interest at a rate of 2.25% per year on the principal
amount, payable semi-annually in arrears in cash on March 15 and September 15 of each year, beginning September 15, 2004. In addition, if the average



F-24



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



trading price of a note for the five trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of
such note, the Company will also pay contingent interest during any six-month period from March 15 to September 14, and from September 15 to March 14, with the initial six-month period commencing March 15, 2009. During any
interest period when contingent interest shall be payable, the contingent interest payable per note will equal 0.25% of the average trading price of the notes during the five trading days immediately preceding the first day of the applicable
six-month interest period.



The holders of the notes may convert the notes into shares of
the Companys common stock at a conversion rate of 33.7041 shares per $1,000 principal amount of notes, which represents a conversion price of $29.67 per share, subject to adjustment, prior to the close of business on March 15, 2024,
subject to prior redemption or repurchase of the notes, under any of the following circumstances: (1) during any calendar quarter commencing after June 30, 2004 if the closing sale price of the Companys common stock exceeds 120% of
the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter (if the specified threshold is met, the notes will thereafter be convertible at any time at the
option of the holder prior to the close of business on March 15, 2024); (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of
such period was less than 98% of the product of the closing sale price of the Companys common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes; (3) if the notes have been called for
redemption; or (4) upon the occurrence of specified corporate events.



Holders may
require the Company to repurchase the notes on March 15 of 2009, 2014 and 2019 at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any, to,
but excluding, the repurchase date. The Company may redeem any of the notes beginning March 20, 2009, by giving holders at least 30 days notice. The Company may redeem the notes either in whole or in part at a redemption price equal to
100% of their principal amount, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any, to, but excluding, the redemption date.



The notes will be the Companys senior unsecured obligations and will rank equally with all of the Companys existing and future senior
unsecured debt and prior to all future subordinated debt. The notes will be effectively subordinated to any future secured indebtedness to the extent of the collateral securing such indebtedness, and to all indebtedness and other liabilities
(including trade payables) of the Companys subsidiaries.



Interest expense relating
to these notes, including amortization of deferred financing costs, was $7.2 million and $5.4 million during fiscal years 2005 and 2004, respectively. Future interest payments relating to these notes will be $5.6 million in each of fiscal years
2006, 2007 and 2008 and will be $2.8 million in fiscal year 2009 assuming these notes will be redeemed at the earliest redemption date of March 5, 2009.



|(8) |  | Stockholders Equity
|--- |  | --------------------

(a)
Common Stock Reserved

As of December 31, 2005, the Company has reserved common stock for issuance as follows (in thousands):



|                                            |  |                 
|------------------------------------------- |  | ----------------
|                                            |  | Number of Shares
|                                            | 
|Employee and Director stock incentive plans |  | 24,519          
|Employee stock purchase plan                |  | 1,853           
|Convertible debt                            |  | 8,426           
|                                            |  |                 
|                                            |  | 34,798          
|                                            |  |                 



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(b) Stock
Repurchase Program

During the second quarter of 2005, the Company reactivated its stock repurchase program to repurchase shares of Cytycs
common stock through open market purchases. In May and June 2005, the Company repurchased 2.2 million shares, which had a value of $50.1 million, including $0.1 million of commissions. No other shares were repurchased from January 2004 through
September 30, 2005. During the fourth quarter of 2005, the Companys Board of Directors terminated the existing stock repurchase program and approved a new stock repurchase program. Under the new program, the Company is authorized to
repurchase up to $200 million of its common stock through open market purchases or private transactions that will be made from time to time as market conditions allow. The stock repurchase program is expected to be in effect for a maximum of four
years. Shares repurchased under this program will be held in the Companys treasury. The stock repurchase program may be suspended or discontinued at any time without prior notice. No shares were repurchased during the fourth quarter of 2005
under the new or prior stock repurchase program. As of December 31, 2005 and 2004, the Company had repurchased 17,469,890 and 15,279,039 shares, respectively, under the previous stock repurchase program, with an aggregate cost of $207.5 million
and $157.4 million, respectively. All of these shares are held in treasury.



(c) Preferred Stock

The Companys charter authorizes 5,000,000 shares of $0.01 par value Preferred Stock, none
of which were outstanding in the years ended December 31, 2005 and 2004. The Board of Directors has designated 200,000 shares of preferred stock as the Companys Series A Junior Participating preferred stock. The Board of Directors has the
authority to issue such shares in one or more series and to fix the relative rights and preferences without further vote or action by the stockholders.



(d) Stockholders Rights Plan

On
August 6, 1997 the Board of Directors declared a dividend of one Preferred Stock purchase right for each outstanding share of the Companys common stock to stockholders of record at the close of business on September 5, 1997. Each
right entitles the holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.01 par value, at a purchase price of $110 per unit, subject to adjustment. The rights are
not exercisable or transferable apart from the common stock until (a) 10 days after the public announcement that a person or group (an Acquiring Person) has acquired 15% or more of the Companys common stock, (b) 10
business days after the commencement of, or the first public announcement of the intention to commence, a tender offer which would increase the beneficial ownership of a person or group to 15% or more of the Companys common stock or
(c) 10 business days after the determination by the Companys board of directors that a person is an Adverse Person. After any person or group has become an Acquiring Person or Adverse Person, except as provided in the Rights Agreement and
amendments thereto (the Rights Agreement), each right entitles the holder (other than the Acquiring Person or the Adverse Person) to purchase, at the exercise price, that number of shares of common stock of the Company having a market
price of two times the exercise price. If the Company is acquired in a merger or other business combination transaction, except as provided in the Rights Agreement, each exercisable right entitles the holder (other than the Acquiring Person or the
Adverse Person) to purchase, at the exercise price, that number of shares of common stock of the acquiring company having a market price of two times the exercise price of the right.



The Board of Directors may redeem the rights for $0.01 per right at any time before the tenth day following the public announcement by
either the Company or an Acquiring Person that a person or group has become an Acquiring Person. However, the rights may not be redeemed if the Board of Directors of the Company determines that a person or group has become an Adverse Person. The
rights expire on September 5, 2007.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(9) Stock Ownership Plans

(a) Employee and Director Stock Incentive Plans

The Cytyc Corporation 2004 Omnibus Stock Plan (the 2004 Omnibus Plan), which is the Companys primary plan for grants of equity, provides for the
issuance of up to 12,250,000 shares of the Companys common stock, no more than 8,200,000 of which shares may be issued as awards other than stock options or stock appreciation rights. The 2004 Omnibus Plan provides for grant of various
incentives, including stock options and other stock- based awards. At December 31, 2005, 7,808,565 shares were available for future grant under the 2004 Omnibus Plan. Prior to the approval of the 2004 Omnibus Plan, the Company had various
employee and director equity compensation plans, including the 1998 Stock Plan, the 1995 Stock Plan, the 1995 Non-Employee Director Stock Option Plan and the 2001 Non-Employee Director Stock Plan. These plans were terminated with the adoption of the
2004 Omnibus Plan and no further awards may be issued under these plans.



The following table summarizes options outstanding, by stock plan, as of December 31, 2005:



|                                             |  |           
|-------------------------------------------- |  | ----------
|2004 Omnibus Plan                            |  | 4,414,847 
|1995 Stock Plan                              |  | 11,182,750
|1998 Stock Plan                              |  | 5,307     
|1995 Non-Employee Director Stock Option Plan |  | 180,000   
|2001 Non-Employee Director Stock Option Plan |  | 928,000   
|                                             |  |           
|                                             |  | 16,710,904
|                                             |  |           



The following schedule
summarizes the activity under the Companys stock plans for the years ended December 31, 2005, 2004 and 2003:



|                               |  |                  |   |  |                         |  |                                          |      
|------------------------------ |  | ---------------- | - |  | ----------------------- |  | ---------------------------------------- | -----
|                               |  | Number of Shares |   |  | Range ofExercise Prices |  | Weighted Average Exercise Priceper share
|                               |  |                  |  
|Outstanding, January 1, 2003   |  | 19,389,667       |   |  | $0.14    $29.52        |  | $                                        | 16.24
|Granted                        |  | 4,944,555        |   |  | 9.52      15.34        |  |                                          | 12.49
|Exercised                      |  | (1,340,984       | ) |  | 0.14      12.17        |  |                                          | 4.27 
|Canceled                       |  | (1,988,050       | ) |  | 2.44      29.52        |  |                                          | 17.53
|                               |  |                  |   |  |                         |  |                                          |      
|Outstanding, December 31, 2003 |  | 21,005,188       |   |  | 0.14      28.45        |  |                                          | 15.99
|Granted                        |  | 3,459,647        |   |  | 0.00      28.20        |  |                                          | 21.32
|Exercised                      |  | (3,832,697       | ) |  | 0.14      26.69        |  |                                          | 12.07
|Canceled                       |  | (2,125,104       | ) |  | 7.09      27.52        |  |                                          | 17.69
|                               |  |                  |   |  |                         |  |                                          |      
|Outstanding, December 31, 2004 |  | 18,507,034       |   |  | 0.14      28.45        |  |                                          | 17.61
|Granted                        |  | 3,492,450        |   |  | 21.20      28.45       |  |                                          | 24.08
|Exercised                      |  | (3,942,453       | ) |  | 0.14      26.95        |  |                                          | 15.56
|Canceled                       |  | (1,346,127       | ) |  | 7.30      28.20        |  |                                          | 20.48
|                               |  |                  |   |  |                         |  |                                          |      
|Outstanding, December 31, 2005 |  | 16,710,904       |   |  | $0.44    $28.45        |  | $                                        | 19.20
|                               |  |                  |   |  |                         |  |                                          |      
|Exercisable, December 31, 2005 |  | 9,206,763        |   |  | $0.44    $28.45        |  | $                                        | 18.70
|                               |  |                  |   |  |                         |  |                                          |      
|Exercisable, December 31, 2004 |  | 10,303,340       |   |  | $0.14    $28.45        |  | $                                        | 17.97
|                               |  |                  |   |  |                         |  |                                          |      
|Exercisable, December 31, 2003 |  | 10,132,604       |   |  | $0.14    $28.45        |  | $                                        | 16.61
|                               |  |                  |   |  |                         |  |                                          |      



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The following table summarizes
information about stock options outstanding at December 31, 2005:



|                         |  |                     |  |                                                      |  |                                          |  |                  |  |                                         
|------------------------ |  | ------------------- |  | ---------------------------------------------------- |  | ---------------------------------------- |  | ---------------- |  | ----------------------------------------
|Options Outstanding      |  | Options Exercisable
|Range of Exercise Prices |  | Number of Shares    |  | Weighted AverageRemainingContractual Life (in years) |  | Weighted AverageExercise Price per Share |  | Number of Shares |  | Weighted AverageExercise Price per share
|                         |  |                     |  |                                                      | 
|$  0.44  $10.80         |  | 2,199,575           |  | 3.48                                                 |  | $  8.88                                  |  | 1,461,668        |  | $  8.20                                 
|10.81    12.46          |  | 520,246             |  | 6.04                                                 |  | 11.46                                    |  | 384,339          |  | 11.44                                   
|12.52    12.65          |  | 2,004,963           |  | 3.90                                                 |  | 12.65                                    |  | 852,895          |  | 12.65                                   
|12.71    19.35          |  | 2,075,654           |  | 6.58                                                 |  | 16.45                                    |  | 1,103,174        |  | 15.87                                   
|19.38    21.75          |  | 1,853,778           |  | 5.93                                                 |  | 20.82                                    |  | 1,529,573        |  | 20.73                                   
|21.79    23.07          |  | 1,693,117           |  | 6.45                                                 |  | 22.18                                    |  | 796,001          |  | 21.97                                   
|23.19    24.31          |  | 2,466,732           |  | 6.05                                                 |  | 23.95                                    |  | 413,322          |  | 23.88                                   
|24.38    25.58          |  | 1,677,203           |  | 6.79                                                 |  | 24.68                                    |  | 1,250,740        |  | 24.53                                   
|25.60    26.69          |  | 1,826,486           |  | 3.85                                                 |  | 26.50                                    |  | 1,339,097        |  | 26.60                                   
|26.71    28.45          |  | 393,150             |  | 9.10                                                 |  | 27.67                                    |  | 75,954           |  | 27.36                                   
|                         |  |                     |  |                                                      |  |                                          |  |                  |  |                                         
|$  0.44   $28.45        |  | 16,710,904          |  | 5.45                                                 |  | $19.20                                   |  | 9,206,763        |  | $18.70                                  
|                         |  |                     |  |                                                      |  |                                          |  |                  |  |                                         



In 2006, pursuant to the
Companys adoption of SFAS No. 123R, the Company will record stock-based compensation expense relating to unvested outstanding and future grants of stock options (see Note 2(t)),



(b) Employee Stock Purchase Plan

During the first half of 2004, the Board of Directors and the stockholders of the Company approved the 2004 Employee Stock Purchase Plan, pursuant to which
2,000,000 shares of common stock may be issued. As a result, the 1995 Employee Stock Purchase Plan, which existed at that time, terminated effective November 30, 2004. The purchase price under the 2004 Employee Stock Purchase Plan is determined
by taking the lesser of 85% of the closing price on the first or last day of the period. During 2005, 146,555 shares of common stock were issued at purchase prices of $19.90 and $20.17 per share. At December 31, 2005, 1,853,445 shares were
available for future issuance under the 2004 Employee Stock Purchase Plan. During 2004, 128,687 shares of common stock were issued under the 1995 Employee Stock Purchase Plan at purchase prices of $19.00 and $11.25 per share. During 2003, 137,018
shares of common stock were issued under the 1995 Employee Stock Purchase Plan at purchase prices of $9.00 and $8.50 per share.



In 2006, pursuant to the Companys adoption of SFAS No. 123R (see Note 2(t)), the Company will record as stock-based compensation expense the fair value
of the shares to be purchased under the 2004 Employee Stock Purchase Plan, as a result of the discounted purchase price of the common stock as compared to its fair value on date of grant. The Company does not expect this will have a material effect
on its consolidated results of operations for 2006.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(10) Commitments and
Contingencies

(a) Lease Commitments

The Company leases its facilities and certain automobiles and office equipment under non-cancelable operating leases which have expiration dates ranging from 2006 through 2018. Future minimum annual lease payments under these
leases are as follows:



|           |  |                |       
|---------- |  | -------------- | ------
|           |  | Amount        
|           |  | (in thousands)
|           | 
|2006       |  | $              | 7,192 
|2007       |  |                | 7,544 
|2008       |  |                | 7,291 
|2009       |  |                | 6,856 
|2010       |  |                | 6,772 
|Thereafter |  |                | 43,261
|           |  |                |       
|           |  | $              | 78,916
|           |  |                |       



Rent expense under operating
leases totaled approximately $6.8 million, $4.0 million and $2.8 million in 2005, 2004 and 2003, respectively.



(b) Long-Term Supply Contracts

For
reasons of quality assurance, sole source availability or cost effectiveness, certain key components and raw materials are available only from a sole supplier. Working closely with its suppliers, the Company has entered into certain long-term supply
contracts to assure continuity of supply while maintaining high quality and reliability. In certain of these contracts, a minimum purchase commitment has been established.



As part of the acquisition of Proxima in March 2005, the Company assumed a non-cancelable supply agreement with one of its vendors to
provide the facility for the production of one of its products and its ongoing exclusive supply. The initial term of the agreement expires in 2008 and is subject to annual indexed price adjustments. As of December 31, 2005, the minimum annual
commitments under the agreement are $1 million in each year through 2008.



Future supply commitments under these contracts are as follows:



|           |  |                |       
|---------- |  | -------------- | ------
|           |  | Amount        
|           |  | (in thousands)
|           | 
|2006       |  | $              | 4,023 
|2007       |  |                | 4,000 
|2008       |  |                | 4,000 
|2009       |  |                | 3,000 
|2010       |  |                | 3,000 
|Thereafter |  |                | 6,000 
|           |  |                |       
|           |  | $              | 24,023
|           |  |                |       



Payments under these contracts
totaled approximately $5.5 million, $8.0 million and $7.8 million, in 2005, 2004 and 2003, respectively.



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(c)
Royalties and Contingent Earn-Out Payments

The Company is the exclusive licensee of certain patented technology used in the ThinPrep System,
NovaSure System, FirstCyte Breast Test and the GliaSite System. In connection with these licenses, royalty expense totaled $4.3 million, $1.7 million and $1.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.



Part of the purchase price for Proxima includes contingent earn-out
payments tied to future performance milestones (see Note 4). At December 31, 2005, $20.9 million was accrued for the contingent earn-out payments relating to incremental sales growth in the breast-related products during 2005.



(d) Private Equity Investment

During the third quarter of fiscal 2005, the Company entered into a $5 million private equity investment commitment which may be paid over the next three years. As
of December 31, 2005, $650,000 of this commitment was paid, which is recorded in Other Assets (see Note 2(j)).



(e) Litigation

On November 17, 2003,
DEKA Products Limited Partnership (DEKA) initiated arbitration proceedings against Cytyc alleging that Cytyc underpaid royalties due to DEKA pursuant to a cross-license agreement entered into in 1993 (the 1993 DEKA
Agreement). Under the 1993 DEKA Agreement, Cytyc is obligated to pay a one percent royalty on net sales of the ThinPrep 2000 and 3000 Processors plus any filter cylinder or similar disposable. The dispute concerned the
method of calculating royalties on the sale of the single use disposable ThinPrep Pap Test kit. The 1993 DEKA Agreement required disputes to be resolved through binding arbitration. The ThinPrep 2000 and 3000 Processors may be used to prepare both
gynecological and/or non-gynecological specimen slides. Cytycs gynecological product, the ThinPrep Pap Test, consists of four disposable components sold in a kit: Cytycs patented preservative solution and filter, a proprietary microscope
slide, and collection devices manufactured for Cytyc by third parties. With respect to the ThinPrep Pap Test, Cytyc formerly calculated the royalty owed to DEKA based only on the value of the filter, not the full kit. Specifically, Cytyc used a
cost-ratio method to derive the portion of ThinPrep Pap Test kit sales price attributable to the filter. DEKA, however, challenged Cytycs method of calculating the royalty and sought a one percent royalty on the entire Thin Prep Pap Test kit
rather than on just the filter. DEKA also made claims that Cytyc breached an implied covenant of good faith; engaged in deceptive trade practices; breached an alleged fiduciary duty; and sought treble damages.



In March 2005, the arbitration panel issued a partial final award in which it agreed
with DEKAs interpretation of the 1993 DEKA Agreement and on April 26, 2005, issued its final decision. According to the award, Cytyc is required to pay a one percent royalty on the net sales of all ThinPrep Pap Test disposable components,
both for the period from November 17, 2000 to December 31, 2004 (the Retroactive Royalties) as well as for future sales, plus interest related to the Retroactive Royalties. The panel determined that the applicable statute
of limitations limited the Retroactive Royalties to sales from November 17, 2000. The panel also awarded DEKA the recovery of audit costs related to the royalty audit conducted after the dispute arose, as well as reimbursement for a portion of
DEKAs legal fees and expenses related to the arbitration proceeding. As to DEKAs other claims, with the exception of certain equitable defenses, the arbitration panel found in favor of Cytyc.



The panel rejected DEKAs contentions of bad faith, finding that Cytyc did not act
irrationally or in a secretive manner, did not engage in deceptive trade practices and did not breach any fiduciary duties. In addition, the panel rejected DEKAs claim for treble damages. As a result of the arbitration panels decision,
Cytyc recorded a pre-tax charge in the three months ended March 31, 2005 in the amount of $7.8 million, which is in addition to the $1.3 million previously recorded. On May 5, 2005, the Company filed a motion to vacate the arbitration
award in the United States District Court for the District of Massachusetts as the Company



F-30



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



believes the award manifestly disregarded applicable law as well as the language of the underlying agreement. The Companys motion to vacate the arbitration award
was denied by the United States District Court on July 8, 2005. On August 5, 2005, Cytyc filed a notice of appeal in the United States Court of Appeals for the First Circuit, appealing the July 8, 2005 judgment of the
District Court. Oral arguments have been scheduled for February 8, 2006. Given the stage of the appeal proceeding, the Company is unable to reasonably estimate the ultimate outcome of this appeal.



On June 16, 2003, Cytyc filed a suit for Declaratory Judgment in United States
District Court for the District of Massachusetts asking the court to determine and declare that certain of TriPath Imaging, Inc.s (TriPath) patents are invalid and not infringed by the Companys ThinPrep Imaging System. On
June 17, 2003, TriPath announced that it had filed a lawsuit against the Company in the United States District Court for the Middle District of North Carolina alleging patent infringement, false advertising, defamation, intentional
interference, unfair competition, and unfair and deceptive trade practices. On October 30, 2003, an order was entered by the district court judge in North Carolina transferring the North Carolina action to Massachusetts, thereby
consolidating the cases into a single action to be heard in United States District Court for the District of Massachusetts. Additionally, on October 30, 2003, the district court judge in Massachusetts denied a motion by TriPath to have the
Companys Massachusetts case dismissed. The Massachusetts court has not yet set a trial date. On September 2, 2005 a joint motion for partial dismissal was filed dismissing each partys claims and counterclaims relative to seventeen
patent claims from two of the patents in suit. A so-called Markman or claim construction hearing took place from September 6, 2005 through September 8, 2005 and on November 28, 2005, the Court issued its claim construction
opinion and order. Based on the current case status, the Company anticipates that a trial will be scheduled to occur sometime in mid-to-late 2006. The Company believes that the claims against it are without merit and intends to vigorously defend
this suit. Given the stage and current status of the litigation, the Company is unable to reasonably estimate the ultimate outcome of this case.



The Company is also involved in ordinary, routine litigation incidental to its business. Although the outcomes of these other lawsuits and claims are uncertain,
management does not believe that, individually or in the aggregate, these other lawsuits and claims will have a material adverse effect on the Companys business, financial condition, results of operations or liquidity.



(11) Employee Benefit Plan

The Company maintains an employee benefit plan under Section 401(k) of the Internal Revenue Code. The plan allows for employees to defer a portion of their salary up to the
maximum allowed under IRS rules. The Company made contributions to the plan totaling $2.0 million, $1.9 million and $1.2 million related to the years ended December 31, 2005, 2004 and 2003, respectively.



F-31



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##### Table of Contents

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



(12) Summary of Quarterly
Data (Unaudited)

A summary of quarterly data follows (in thousands, except per share amounts):



|                       |  |                  |         |     |   |         |  |     |         |  |   |        
|---------------------- |  | ---------------- | ------- | --- | - | ------- |  | --- | ------- |  | - | -------
|                       |  | Fiscal Year 2005
|                       |  | 1st              |         | 2nd |   | 3rd     |  | 4th
|                       |  |                  |         |    
|Net sales              |  | $                | 113,405 |     | $ | 125,381 |  | $   | 130,824 |  | $ | 138,641
|Gross profit           |  |                  | 89,478  |     |   | 99,275  |  |     | 102,901 |  |   | 109,448
|Income from operations |  |                  | 34,482  |     |   | 46,119  |  |     | 50,442  |  |   | 53,278 
|Net income(1)          |  |                  | 20,891  |     |   | 28,035  |  |     | 31,143  |  |   | 33,417 
|Net income per share:  |  |                  |         |     |   |         |  |     |         |  |   |        
|Basic                  |  | $                | 0.18    |     | $ | 0.25    |  | $   | 0.28    |  | $ | 0.29   
|Diluted                |  | $                | 0.18    |     | $ | 0.23    |  | $   | 0.26    |  | $ | 0.27   



|                       |  |                  |        |     |   |        |  |     |         |  |   |        
|---------------------- |  | ---------------- | ------ | --- | - | ------ |  | --- | ------- |  | - | -------
|                       |  | Fiscal Year 2004
|                       |  | 1st              |        | 2nd |   | 3rd    |  | 4th
|                       |  |                  |        |    
|Net sales              |  | $                | 80,725 |     | $ | 99,474 |  | $   | 102,787 |  | $ | 110,607
|Gross profit           |  |                  | 65,542 |     |   | 77,819 |  |     | 81,453  |  |   | 86,256 
|Income from operations |  |                  | 14,511 |     |   | 36,314 |  |     | 41,278  |  |   | 41,762 
|Net income(2)          |  |                  | 1,536  |     |   | 21,876 |  |     | 24,762  |  |   | 25,414 
|Net income per share:  |  |                  |        |     |   |        |  |     |         |  |   |        
|Basic                  |  | $                | 0.01   |     | $ | 0.20   |  | $   | 0.22    |  | $ | 0.23   
|Diluted                |  | $                | 0.01   |     | $ | 0.19   |  | $   | 0.21    |  | $ | 0.21   

---

(1) The Company recorded a pre-tax charge of approximately $7.8
million in the first quarter of fiscal year 2005 in connection with the DEKA Products Limited Partnership arbitration panel decision (see Note 10).



(2) The Company incurred in-process research and development charges totaling approximately $19.1 million in the first quarter of fiscal year 2004 related to its acquisition of
Novacept (see Note 4).



F-32



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##### Table of Contents



Exhibits Index



|            |  |                                                                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                
|            | 
|2.1(16)     |  | Agreement and Plan of Merger, dated March 1, 2004, by and among Cytyc Corporation, Radio Acquisition Corp. and Novacept.                                                                                                                                                                                   
|            | 
|2.2(17)     |  | Amendment No. 1, dated March 22, 2004, to the Agreement and Plan of Merger by and among Cytyc Corporation, Radio Acquisition Corp. and Novacept.                                                                                                                                                           
|            | 
|2.6(32)     |  | Agreement and Plan of Merger and Reorganization among Cytyc Corporation, Polaris Acquisition Corp., Proxima Therapeutics, Inc. and a Stockholders Representative, dated February 9,
2005.                                                                                                                 
|            | 
|3.1(2)      |  | Fourth Restated Certificate of Incorporation of Cytyc Corporation.                                                                                                                                                                                                                                         
|            | 
|3.2(31)     |  | Second Amended and Restated By-Laws of Cytyc Corporation.                                                                                                                                                                                                                                                  
|            | 
|4.1(1)      |  | Specimen certificate representing the Common Stock.                                                                                                                                                                                                                                                        
|            | 
|4.2(3)      |  | Rights Agreement, dated as of August 27, 1997, between Cytyc Corporation and BankBoston, N.A (the Rights Agreement) which includes as Exhibit A the Form of Certificate of Designations,
as Exhibit B the Form of Rights Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred Stock.
|            | 
|4.3(4)      |  | Amendment No. 1 to Rights Agreement, dated as of June 22, 1998, between Cytyc Corporation and BankBoston, N.A., amending the Rights Agreement.                                                                                                                                                             
|            | 
|4.4(15)     |  | Amendment to the Rights Agreement, dated as of January 3, 2003, among Cytyc Corporation, BankBoston, N.A. and EquiServe Trust Company, N.A.                                                                                                                                                                
|            | 
|4.5(13)     |  | Amendment No. 2 to Rights Agreement, dated as of November 6, 2003, between Cytyc Corporation and EquiServe Trust Company, N.A., amending the Rights Agreement.                                                                                                                                             
|            | 
|4.6(18)     |  | Indenture, dated as of March 22, 2004, between Cytyc Corporation and U.S. Bank Trust National Association., including the form of Note.                                                                                                                                                                    
|            | 
|4.7(19)     |  | Registration Rights Agreement, dated as of March 22, 2004, among Cytyc Corporation and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Piper Jaffray &
Co.                                                                                                                              
|            | 
|4.8(20)     |  | Senior Debt Indenture, dated October 26, 2004, between Cytyc Corporation and The Bank of New York.                                                                                                                                                                                                         
|            | 
|4.9(21)     |  | Subordinated Debt Indenture, dated October 26, 2004, between Cytyc Corporation and The Bank of New York.                                                                                                                                                                                                   
|            | 
|10.1(1)*    |  | 1988 Stock Plan.                                                                                                                                                                                                                                                                                           
|            | 
|10.2(1)*    |  | 1989 Stock Plan.                                                                                                                                                                                                                                                                                           
|            | 
|10.3(1)*    |  | 1995 Stock Plan.                                                                                                                                                                                                                                                                                           
|            | 
|10.4(6)*    |  | Amended and Restated 1995 Non-Employee Director Stock Option Plan.                                                                                                                                                                                                                                         
|            | 
|10.5(7)*    |  | 1995 Employee Stock Purchase Plan, as amended.                                                                                                                                                                                                                                                             
|            | 
|10.6(1)#    |  | License Agreement between Cytyc Corporation and DEKA Products Limited Partnership dated March 22, 1993.                                                                                                                                                                                                    
|            | 
|10.7(1)     |  | Lease Agreement between Cytyc Corporation and BFA Realty Partnership, L.P. d/b/a BFA, Limited Partnership of February 1996.                                                                                                                                                                                
|            | 
|10.8(5)     |  | Amendment No. 1 to Lease Agreement dated as of February 1996 between Cytyc Corporation and BFA Realty Partnership, L.P. d/b/a BFA, Limited Partnership.                                                                                                                                                    
|            | 
|10.9(8)*    |  | 2001 Non-Employee Director Stock Plan.                                                                                                                                                                                                                                                                     
|            | 
|10.10(9)*   |  | Pro Duct Health, Inc. 1998 Stock Plan.                                                                                                                                                                                                                                                                     
|            | 
|10.11(10)#  |  | Supply Agreement between Cytyc Corporation, Whatman, Inc. and Whatman SA dated as of December 31, 2000, as amended October 16, 2001 and May 2, 2002                                                                                                                                                        



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##### Table of Contents



|            |  |                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                   
|            | 
|10.12(10)#  |  | Master Agreement between Cytyc Corporation and Laboratory Corporation of America Holdings dated February 1, 2000, as amended December 20, 2001                                                                                                
|            | 
|10.13(11)#  |  | Agreement for Purchase of Equipment Reagents and Supplies between Cytyc Corporation and Quest Diagnostics, Inc. dated as of May 1, 2003                                                                                                       
|            | 
|10.14(12)*  |  | Amended and Restated Director Compensation Method Plan                                                                                                                                                                                        
|            | 
|10.15(14)*  |  | Form of Change of Control Agreement entered between Cytyc Corporation and certain executive officers dated as of July 30, 2003.                                                                                                               
|            | 
|10.16(22)#  |  | Amendment No. 2, dated March 11, 2004, to the Master Agreement between Cytyc Corporation and Laboratory Corporation of America Holdings dated February 1, 2000, as amended
December 20, 2001.                                                 
|            | 
|10.17(23)*  |  | Cytyc Corporation 2004 Omnibus Stock Plan.                                                                                                                                                                                                    
|            | 
|10.18(24)*  |  | Cytyc Corporation 2004 Employee Stock Purchase Plan.                                                                                                                                                                                          
|            | 
|10.19(25)*  |  | Form of Indemnification Agreement between Cytyc and Certain Directors and Executive Officers                                                                                                                                                  
|            | 
|10.20(26)*  |  | Form of Incentive Stock Option Agreement for Executive Officers.                                                                                                                                                                              
|            | 
|10.21(27)*  |  | Form of Nonqualified Stock Option Agreement for Executive Officers.                                                                                                                                                                           
|            | 
|10.22(28)*  |  | Form of Nonqualified Stock Option Agreement for Non-Employee Directors.                                                                                                                                                                       
|            | 
|10.23(30)*  |  | Form of Restricted Stock Agreement.                                                                                                                                                                                                           
|            | 
|10.24(33)*  |  | Form of Restricted Stock Unit Agreement.                                                                                                                                                                                                      
|            | 
|10.25(29)#  |  | Master Agreement, dated October 15, 2004, between Cytyc Corporation and Laboratory Corporation of America.                                                                                                                                    
|            | 
|10.26 (19)  |  | Office Lease dated December 31, 2003 between Cytyc Corporation and Marlborough Campus Limited Partnership.                                                                                                                                    
|            | 
|10.27**     |  | Summary of Director Compensation.                                                                                                                                                                                                             
|            | 
|21.1**      |  | List of Our Subsidiaries.                                                                                                                                                                                                                     
|            | 
|23.1**      |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                             
|            | 
|24.1**      |  | Power of Attorney (see signature page hereto).                                                                                                                                                                                                
|            | 
|31.1**      |  | Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.             
|            | 
|31.2**      |  | Certification of Timothy M. Adams, Vice President, Chief Financial Officer and Treasurer, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1**      |  | Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                        
|            | 
|32.2**      |  | Certification of Timothy M. Adams, Vice President, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                           

---

(1) Incorporated herein by reference to the exhibits to our
Registration Statement on Form S-1 (File No. 333-00300).



(2) Incorporated herein by
reference to Exhibit 3.2 to our Current Report on Form 8-K, filed September 20, 2005.



(3) Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed August 29, 1997.



(4) Incorporated herein by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q, filed August 13, 1998.



(5) Incorporated herein by reference to Exhibit 10.9 to our Annual Report on Form 10-K, filed March 31, 1998.



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##### Table of Contents



(6) Incorporated herein by reference to Exhibit 10 to
our Quarterly Report on Form 10-Q, filed August 14, 2000.



(7) Incorporated herein
by reference to Exhibit 10.5 to our Registration Statement on Form S-1 (File No. 333-00300) and Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed August 8, 2001.



(8) Incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed August 8, 2001.



(9) Incorporated herein by reference to Exhibit 4 to our Registration Statement on Form S-8, filed
December 17, 2001 (File No. 333-75292).



(10) Incorporated herein by reference
to Exhibits to our Annual Report on Form 10-K, filed March 24, 2003.



(11)
Incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed May 13, 2003.



(12) Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed November 18, 2005.



(13) Incorporated herein by reference to Exhibit 4.4 to our Quarterly Report on Form 10-Q, filed November 12, 2003.



(14) Incorporated herein by reference to Exhibit 4.5 to our Quarterly Report on Form 10-Q, filed
November 12, 2003.



(15) Incorporated herein by reference to Exhibits to our Annual
Report on Form 10-K, filed January 30, 2004.



(16) Incorporated herein by reference
to Exhibit 2.1 to our Current Report on Form 8-K, filed March 5, 2004.



(17)
Incorporated herein by reference to Exhibit 2.2 to our Current Report on Form 8-K/A, filed April 27, 2004.



(18) Incorporated herein by reference to Exhibit 4.1 to our Registration Statement on Form S-3 (File No. 333-116237) filed June 7, 2004.



(19) Incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form S-3 (File
No. 333-116237) filed June 7, 2004.



(20) Incorporated herein by reference to
Exhibit 4.2 to our Registration Statement on Form S-3 (File No. 333-120013) filed October 18, 2004.



(21) Incorporated herein by reference to Exhibit 4.3 to our Registration Statement on Form S-3 (File No. 333-120013) filed October 18, 2004.



(22) Incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed May 6, 2004.



(23) Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 (File
No. 333-117812)



(24) Incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-8 (File No. 333-117812)



(25) Incorporated herein by reference
to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(26)
Incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(27) Incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed November 12, 2004.



(28) Incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q, filed
November 12, 2004.



(29) Incorporated herein by reference to Exhibit 10.5 to our
Quarterly Report on Form 10-Q, filed November 12, 2004.



(30) Incorporated herein by
reference to Exhibit 10.6 to our Current Report on Form 8-K, filed September 19, 2005.



(31) Incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed September 19, 2005.



(32) Incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed February 15, 2005.



(33) Incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed December 14, 2005.



* Indicates a management contract or any compensatory plan, contract or arrangement



** Filed herewith.



# Confidential treatment granted as to certain portions.