##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number: 0-22885
      TRIPATH IMAGING, INC.
 (exact name of registrant as
    specified in its charter)
  Delaware(State or other
    jurisdiction of
    incorporation or organization)

56-1995728(I.R.S. Employer
    Identification Number)   780
    Plantation Drive, Burlington, North Carolina 27215 (Address
    of Principal Executive Offices including Zip
    Code)
  Registrants
    telephone number, including area code:
 (336) 222-9707
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
   Common
    Stock, $0.01 Par Value (Title
    of each class)
  o þ
  þ o
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 



TriPath
    Imaging, Inc.
  Table of
    Contents
  
  Part I.Item 1.

Business


2Item 1A.

Executive Officers
    of the Registrant


32Item 2.

Properties


33Item 3.

Legal
    Proceedings


33Item 4.

Submission of
    Matters to a Vote of Security Holders


33Part II.Item 5.

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


34Item 6.

Selected Financial
    Data


34Item 7.

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


35Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk


60Item 8.

Financial
    Statements and Supplementary Data


60Item 9.

Changes In and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


61Item 9A.

Controls and
    Procedures


61Part III.Item 10.

Directors and
    Executive Officers of the Registrant


62Item 11.

Executive
    Compensation


62Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Shareholder Matters


62Item 13.

Certain
    Relationships and Related Transactions


62Item 14.

Principal
    Accountant Fees and Services


62Part IV.Item 15.

Exhibits and
    Financial Statement Schedules


63Signatures


66Ex-10.30Ex-10.31Ex-21.1Ex-23.1Ex-31.1Ex-31.2Ex-32Ex-99.1      Note Regarding
    Trademarks
  ® ® ® ® ® ® ® ® ® ® tm tm tm tm tm




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##### Table of Contents



PART I  Item 1.
    Business  Form 10-K Form 10-K.
  www.tripathimaging.com. Form 10-K. Form 10-K, Form 10-Q, Form 8-K, Form 10-K,
  The
    Company
         2




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##### Table of Contents



Our
    Products
  Cervical
    Cytology Product Line
    The
    SurePath Test Pack
  SurePath Test Pack
  PrepStain
    Slide Processor
  PrepStain Slide Processor ®
  PrepMate
 3




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tm . out-of-vial tm .
  FocalPoint
    Imaging System
  FocalPoint Imaging System
  FocalPoint Slide Profiler
  FocalPoint GS Imaging System
  Molecular
    Diagnostics Products
   4




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Our
    Developing Molecular Oncology Pipeline
  Release Date/EstimatedApplication

Format

Target DateReagentsMicroscopic Slide
    BasedMelanoma

ASR


2003
*Cervical Cancer

RUO


2004
*Breast Cancer

RUO


2004
*ProEx C

ASR


2005
*ProEx Br

ASR


2005
*Cervical Cancer Staging

Assay Kit (Outside U.S.)


2005
*SurePath Molecular Pap

IUO


2005
*Breast Cancer Staging

IUO


2005
*ProEx C

Class I IHC


2006SurePath Molecular Pap

IVD Assay Kit (U.S.) in clinical
    trials


2007Breast Cancer Staging

IVD Assay Kit (U.S.) in clinical
    trials


2007Blood BasedOvarian Cancer

RUO


2005
*Breast Cancer

RUO


2007Prostate Cancer

RUO


2008Ovarian Cancer Screening

IVD Assay Kit


2008Breast Cancer Screening

IVD Assay Kit


2009Prostate Cancer Screening

IVD Assay Kit


2010Reagent Enabling
    ProductsSureDetect General Purpose Reagents

U.S. (included in Outside
    U.S. kit)


2005
*SMS 3600 Automated Stainer

U.S. & Outside U.S.


2005
*Imaging PlatformsInteractive Histology Imager

ER/PR 510(k)


2005
*HER-2/Neu 510(k)


2005
*Ki-67 510(k)


2006Additional known
    markers


2006Breast Staging IUO


2005
*Other Applications


2006     Microscopic
    Slide Based Reagents
  ProEx C
 5




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##### Table of Contents



ProEx Br
  Cervical Staging Assay
  SurePath Molecular Pap follow-up
  Breast Cancer Staging Assay
    tm
   6




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Blood-Based
    Reagents
    Reagent
    Enabling Products
    Molecular
    Imaging Systems
  Interactive Histology Imaging System
  The
    Cancer Market
  1-in-3
 7




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##### Table of Contents



Womens
    Cancers
    2006 Cancer Estimates (U.S.)
  Estimated 2006
    Incidence


Estimated 2006
    MortalityAll Cancers


679,510



273,560TriPath Imaging Targeted Cancers:Breast


212,920



40,970Ovarian


20,180



15,310Malignant Melanoma


27,930



2,890Cervical


9,710



3,700     Source:
    American Cancer Society, Facts & Figures, 2006  1995-2001:
  Five Year
    Disease  Free Survival
    by Stage at Diagnosis
  TriPath Imaging Targeted
    Cancers:

Localized Disease (%)


Regional Spread (%)


Distant Metastases (%)Breast


98



80



26Ovarian


94



69



29Malignant Melanoma


98



60



16Cervical


92



53



17     Source:
    American Cancer Society, Facts & Figures, 2006       8




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Cervical
    Cancer
    and/or
  Screening
    for Cervical Cancer
     9




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and/or follow-up
    Human
    Papillomavirus
     10




---



##### Table of Contents



ASCUS/LSIL Triage Study for Cervical Cancer
    (ALTS) follow-up
        Breast
    Cancer
     11




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Breast
    Cancer Screening
    follow-up
  Breast
    Cancer Staging and Treatment
      and/or
  Breast
    Cancer Post-Therapy Recurrence
    (CA15-3),
 12




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Ovarian
    Cancer
      Ovarian
    Cancer Screening
  and/or
    
    Women considered at high risk for developing ovarian
    cancer.  and/or
  
    Presence of adnexal (ovarian) or pelvic mass.  and/or
  and/or
  Malignant
    Melanoma
   13




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Melanoma
    Staging and Treatment
        Marketing
    and Sales
  Marketing
    Strategy
    Clinician/OB-GYN
  peer-to-peer
 14




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Clinical
    Laboratory
      in vitro
  
    significantly reduce labor costs;
    drive improved standardization, reproducibility and quality
    control;
    enhance the efficiency of treatment by increasing the accuracy
    and precision of diagnosis; and,
    provide an opportunity to collect digitized information to
    facilitate the development of highly specific and targeted
    outcome patient care programs.    Cervical
    Cytology Product Line
        Large commercial laboratories.
 15




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Academic Centers of Excellence.
  Medium and small clinical laboratories.
  Third-party payors.
  Molecular
    Diagnostic Products
   16




---



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fee-per-use
  Sales
    Strategy
  Cervical
    Cytology Product Line
  and/or
       17




---



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Molecular
    Diagnostic Reagents and Imaging Systems
  fee-per-use
  Marketing
    and Sales Organizations
         18




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Manufacturing
  SurePath
    and PrepStain
      FocalPoint
      Molecular
    Diagnostics Reagents
    Imaging
    Systems
  off-the-shelf
 19




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##### Table of Contents



off-the-shelf
  Lean
    Manufacturing Strategy
    Our
    Suppliers
    Manufacturing
    Standards
       20




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Research
    and Development (dollar amounts in thousands)
    
    development of molecular diagnostic products for malignant
    melanoma and cancer of the cervix, breast, ovary, and prostate,
    continued improvement of the FocalPoint Imaging System,
    PrepStain System and reagents and disposables,
    development of molecular imaging systems.    Development
    of Molecular Diagnostic Products
             21




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22




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tm
    Improvement
    of FocalPoint Imaging System, PrepStain System, Reagents and
    Disposables
    Development
    of Molecular Imaging Systems
      Third-Party
    Reimbursement
  Cervical
    Cytology Product Line
   23




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##### Table of Contents



CPT Code


Description

NLA88164


Cytopathology smears, cervical or
    vaginal (Bethesda System reporting); manual screening under
    physician supervision

$
14.7688147


Cytopathology smears, cervical or
    vaginal; screening by automated system under physician
    supervision

$
15.9088148


Cytopathology smears, cervical or
    vaginal; screening by automated system with manual re-screening
    under physician supervision

$
21.2388142


Cytopathology, cervical or vaginal
    (any reporting system), collected in preservative fluid,
    automated thin layer preparation; manual screening under
    physician supervision

$
28.3188174


Cytopathology, cervical or vaginal
    (any reporting system), collected in a preservative fluid,
    automated thin layer preparation; with screening by automated
    system, under physician supervision

$
29.8588175


Cytopathology, cervical or vaginal
    (any reporting system), collected in a preservative fluid,
    automated thin layer preparation; with screening by automated
    system and manual re-screening, under physician supervision

$
37.0188112


Cytopathology, selective cellular
    enhancement technique with interpretation (e.g., liquid-based
    slide preparation) except cervical or vaginal

$
120.0088342


Immunohistochemistry /
    Immunocytochemistry (including tissue immunoperoxidase), each
    antibody. For morphometric analysis of IHC or ICC

$
90.00       Molecular
    Diagnostic Products and Imaging Systems
   24




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cervical screening assay
  Proprietary
    Technology and Intellectual Property
       25




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® ® ® ® ® ® ® ® ® ® tm tm tm tm tm
  Competition
  Commercial
    Operations
      ®
   26




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Molecular
    Diagnostic Reagents
  in vitro
    in situ
    Government
    Regulation
   27




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United
    States FDA Approval
      in vitro
 28




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##### Table of Contents



qui tam
      
    refuse to review or clear applications to market our products in
    the United States;
    refuse to allow us to enter into government supply contracts;
    withdraw approvals already granted;
    require that we notify users regarding newly found risks;
    request repair, refund or replacement of faulty devices;
    request corrective advertisements, recalls or temporary
    marketing suspension; 29




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##### Table of Contents




    impose administrative civil penalties; and
    initiate legal proceedings to detain or seize products, enjoin
    future violations, or assess civil or criminal penalties against
    us, our officers or employees.      Clinical
    Laboratory Improvement Act of 1988 (CLIA) and State Laboratory
    Laws
      Environmental,
    Health, Safety and Other Regulations
    Foreign
    Regulatory Approval
   30




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and/or
  In vitro and/or
  in vitro
    Product
    Liability
   31




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##### Table of Contents



Employees
    Item 1A.
    Executive
    Officers of the Registrant    Name

Age

PositionPaul R. Sohmer, M.D.


57


President, Chief Executive Officer
    and Chairman of the BoardStephen P. Hall


55


Senior Vice-President, Chief
    Financial OfficerRay W. Swanson


50


Senior Vice-President, Commercial
    OperationsJohnny D. Powers, Ph.D.


44


Senior Vice-President and General
    Manager, TriPath Oncology   Paul R. Sohmer, M.D.
  Stephen P. Hall
  Ray W. Swanson e-Business
  Johnny D. Powers, Ph.D.
 32




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##### Table of Contents



Item 2.
    Properties    Item 3.
    Legal
    Proceedings  1:03-CV-11142-DPW.
  Item 4.
    Submission
    of Matters to a Vote of Security Holders   33




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##### Table of Contents



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


LowYear ended December 31,
    2004:First Quarter

$
10.95


$
7.70Second Quarter

$
10.45


$
8.36Third Quarter

$
9.49


$
7.00Fourth Quarter

$
9.52


$
6.19Year ended December 31,
    2005:First Quarter

$
9.20


$
6.85Second Quarter

$
8.97


$
6.15Third Quarter

$
9.45


$
6.54Fourth Quarter

$
7.84


$
5.55     Dividend
    Policy
    Item 6.
    Selected
    Financial Data  Form 10-K.
  2001


2002


2003


2004


2005(In thousands, except per share
    data)Statement of Operations
    Data:Revenues

$
27,017


$
37,485


$
53,764


$
68,504


$
85,961Gross profit


13,921



22,563



35,387



47,274



59,926Research and development(1)


7,828



10,259



14,295



15,162



15,755Selling, general and administrative


28,777



30,786



30,011



31,778



37,992Operating income/(loss)


(22,684
)


(18,482
)


(8,919
)


334



6,179Net income/(loss)


(21,680
)


(18,064
)


(8,538
)


605



6,500Earnings/(loss) per share(2)Basic

$
(0.61
)

$
(0.48
)

$
(0.23
)

$
0.02


$
0.17Diluted

$
(0.61
)

$
(0.48
)

$
(0.23
)

$
0.02


$
0.17Weighted-average shares outstandingBasic


35,467



37,438



37,626



38,006



38,218Diluted


35,467



37,438



37,626



39,151



39,270   34




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##### Table of Contents



December 31,2001


2002


2003


2004


2005(In thousands)Balance Sheet Data:Cash, cash equivalents, and
    short-term investments

$
55,976


$
32,571


$
20,954


$
18,949


$
22,457Working capital


62,898



38,837



33,446



35,909



42,261Total assets


96,748



73,951



65,928



67,534



76,968Long-term obligations


5,001



220



8







98Total stockholders equity


77,291



59,177



52,371



58,546



65,959     (1)
    
    Includes regulatory expenses.(2)
    
    See Note 2 of Notes to our consolidated financial
    statements for information concerning the computation of
    earnings/(loss) per share and shares used in computing
    earnings/(loss) per share.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations
    (amounts in thousands, except share and per share
    amounts)  Form 10-K.
  Overview
         35




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
    Our agreements with Quest Diagnostics and LabOne, recently
    acquired by Quest Diagnostics, contributed significantly to
    increased penetration of the large commercial laboratory segment
    in the U.S., a market segment to which we had only limited
    access prior to 2005.
    Our expanded U.S. sales force enabled us to leverage the
    opportunity for growth that has been created by our growing
    relationships with the large commercial laboratories as the
    number of SurePath liquid based Pap tests sold in the
    U.S. grew 41% from the prior year.
    We continued to gain momentum outside the U.S. as SurePath
    liquid based Pap tests sold outside the U.S. grew 26% from
    2004.
    We received FDA approval for expanded claims for our SurePath
    liquid-based Pap test to include processing of pre-coated slides
    with the PrepStain Slide Processor.
    We received several clearances from the FDA, including a 510(k)
    clearance for processing of the Ventana estrogen and
    progesterone receptor tests on our interactive histology imager
    and a 510(k) clearance from the FDA for the VIAS when used with
    tissues stained for HER-2/neu.
    The results of external research studies of both our cervical
    and breast staging biomarkers confirmed previously reported
    results from in-house studies.
    We introduced ASRs and reagent enabling products into the
    marketplace.
    We transitioned our microscopic slide based assays for cervical
    screening and breast cancer staging into clinical trials;
    We completed development of our ELISA formatted blood based RUO
    reagents for ovarian screening.
    We saw the early commercialization of our VIAS resulting from a
    worldwide agreement with Ventana to sell and distribute a
    Ventana branded version of our interactive histology imager.  Challenges
         36




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out-of-vial tm . HPV-related
       37




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Results
    of Operations
  Non-GAAP Financial
    Measures
    Shares Subject


Exercise Price


WarrantWarrant

to Warrants


(per share)


Expiration Date


Vesting StatusFirst Tranche


800,000


$
9.25



May 2007


Currently ExercisableSecond Tranche


200,000


$
10.18



May 2007


Currently ExercisableThird Tranche


500,000


$
10.64



May 2007


Currently ExercisableFourth Tranche


1,000,000


$
11.56



May 2008


Exercisable Upon Achievement of
    Sales MilestoneFifth Tranche


1,500,000


$
12.03



May 2008


Exercisable Upon Achievement of
    Sales Milestone   lock-up
   First
    Tranche Warrants
  Accounting for Consideration Given by a Vendor to
    a Customer (Including a Reseller of the Vendors
    Products),
   Sales-Based
    Milestone Warrants
   38




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##### Table of Contents



 Second
    and Third Tranche Warrants
  96-18, Accounting for Equity Instruments That Are Issued to
    Other Than Employees for Acquiring, or in Conjunction with
    Selling, Goods or Services
     Summary
    period-to-period
  Year Ended December 31,
    2005Reconciliation: AddBack Non-Cash SalesGAAP


Discount

Non-GAAP(In thousands, except per share
    data)Revenues

$
85,961


$1,278

$
87,239Gross profit


59,926


1,278


61,204Net income


6,500


1,278


7,778Earnings per share:Basic

$
0.17


$1,278 to revenues
    used in calculation

$
0.20Diluted

$
0.17


$1,278 to revenues
    used in calculation

$
0.20   39




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##### Table of Contents



Year Ended December 31,
    2004Reconciliation: AddBack Non-Cash SalesGAAP


Discount

Non-GAAP(In thousands, except per share
    data)Revenues

$
68,504


$519

$
69,023Gross profit


47,274


519


47,793Net income


605


519


1,124Earnings per share:Basic

$
0.02


$519 to revenues
    used in calculation

$
0.03Diluted

$
0.02


$519 to revenues
    used in calculation

$
0.03   Years
    ended December 31, 2005 and 2004
    Commercial OperationsChange vs2005


2004


2004


% Change(In thousands)Revenues

$
84,157


$
67,862


$
16,295



24.0
%Cost of revenues


24,981



21,072



3,909



18.6
%Gross profit


59,176



46,790



12,386



26.5
%Operating expenses:Research and development


2,004



2,005



(1
)


0.0
%Regulatory


2,450



3,263



(813
)


(24.9
)%Sales and marketing


23,926



18,126



5,800



32.0
%General and administrative


8,721



8,652



69



0.8
%37,101



32,046



5,055



15.8
%Operating income

$
22,075


$
14,744


$
7,331



49.7
%   TriPath OncologyChange vs2005


2004


2004


% Change(In thousands)Revenues

$
1,804


$
642


$
1,162



181.0
%Cost of revenues


1,054



158



896



567.1
%Gross profit


750



484



266



55.0
%Operating expenses:Research and development


10,348



9,275



1,073



11.6
%Regulatory


953



619



334



54.0
%Sales and marketing


514



514







0.0
%General and administrative


4,831



4,486



345



7.7
%16,646



14,894



1,752



11.8
%Operating loss

$
(15,896
)

$
(14,410
)

$
(1,486
)


10.3
%  40




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##### Table of Contents



Revenues
  Total Revenues. fee-per-use
  Commercial Operations Revenues.
  fee-per-use fee-per-use fee-per-use fee-per-use
  fee-per-use fee-per-use
  TriPath Oncology Revenues. fee-per-use
  Gross
    Margin
  Total Gross Margin.
 41




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Commercial Operations Gross Margin.
  TriPath Oncology Gross Margin.
  Research
    and Development
  Total Research and Development.
  Commercial Operations Research and
    Development.
  TriPath Oncology Research and Development.
  Regulatory
  Total Regulatory.
  Commercial Operations Regulatory.
  TriPath Oncology Regulatory.
  Sales
    and Marketing
  Total Sales and Marketing.
  Commercial Operations Sales and
    Marketing. year-over-year
 42




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##### Table of Contents



TriPath Oncology Sales and Marketing.
  General
    and Administrative
  Total General and Administrative.
  Commercial Operations General and
    Administrative.
  TriPath Oncology General and
    Administrative. Total General and Administrative
  Operating
    Income/Loss
  Total Operating Income.
  Commercial Operations Operating
    Income.
  TriPath Oncology Operating Loss.
  Interest
    Income and Expense
  Total Interest Income and Expense.
 43




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##### Table of Contents



Income
    Taxes
  Total Income Taxes.
  Net
    Income
  Total Net Income.
  Years
    ended December 31, 2004 and 2003
    Commercial OperationsChange vs2004


2003


2003


% Change(In thousands)Revenues

$
67,862


$
53,631


$
14,231



26.5
%Cost of revenues


21,072



18,361



2,711



14.8
%Gross profit


46,790



35,270



11,520



32.7
%Operating expenses:Research and development


2,005



2,319



(314
)


(13.5
)%Regulatory


3,263



4,763



(1,500
)


(31.5
)%Sales and marketing


18,126



17,318



808



4.7
%General and administrative


8,652



7,264



1,388



19.1
%32,046



31,664



382



1.2
%Operating income

$
14,744


$
3,606


$
11,138



308.9
%   TriPath OncologyChange vs2004


2003


2003


% Change(In thousands)Revenues

$
642


$
133


$
509



382.7
%Cost of revenues


158



16



142



887.5
%Gross profit


484



117



367



313.7
%Operating expenses:Research and development


9,275



6,542



2,733



41.8
%Regulatory


619



671



(52
)


(7.7
)%Sales and marketing


514



1,006



(492
)


(48.9
)%General and administrative


4,486



4,423



63



1.4
%14,894



12,642



2,252



17.8
%Operating loss

$
(14,410
)

$
(12,525
)

$
(1,885
)


15.0
%  44




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##### Table of Contents



Revenues




Total Revenues. fee-per-use




Commercial Operations Revenues.




fee-per-use fee-per-use fee-per-use fee-per-use




fee-per-use fee-per-use




TriPath Oncology Revenues.


45



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##### Table of Contents



Gross
    Margin




Total Gross Margin.




Commercial Operations Gross Margin.




TriPath Oncology Gross Margin.




Research
    and Development




Total Research and Development.




Commercial Operations Research and
    Development.




TriPath Oncology Research and Development.




Regulatory




Total Regulatory.




Commercial Operations Regulatory.


46



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##### Table of Contents



TriPath Oncology Regulatory.




Sales
    and Marketing




Total Sales and Marketing.




Commercial Operations Sales and
    Marketing. year-over-year




TriPath Oncology Sales and Marketing.




General
    and Administrative




Total General and Administrative.




Commercial Operations General and
    Administrative.




TriPath Oncology General and
    Administrative.




Operating
    Income/(Loss)




Total Operating Income/(Loss).


47



---



##### Table of Contents







Commercial Operations Operating
    Income.




TriPath Oncology Operating Loss.




Interest
    Income and Expense




Total Interest Income and Expense.




Net
    Income/(Loss)




Total Net Income/(Loss).




Liquidity
    and Capital Resources
















|                          |  |                |        |   |      |   |        |      |  |   |               |   |  |               |       |   |          |  |       |          |  |   |        |   |  |  |        |   
|------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------------- | - |  | ------------- | ----- | - | -------- |  | ----- | -------- |  | - | ------ | - |  |  | ------ | --
|                          |  |                |        |   |      |   |        |      |  |   | 2005 vs. 2004 |   |  | 2004 vs. 2003 |      
|                          |  | 2005           |        |   | 2004 |   |        | 2003 |  |   | $ Change      |   |  | % Change      |       |   | $ Change |  |       | % Change | 
|                          |  | (In thousands) |       
|                         
|Cash Flow Type            |  |                |        |   |      |   |        |      |  |   |               |   |  |               |       |   |          |  |       |          |  |   |        |   |  |  |        |   
|Operating                 |  | $              | 4,553  |   |      | $ | (1,900 | )    |  | $ | (12,534       | ) |  | $             | 6,453 |   |          |  | 339.6 | %        |  | $ | 10,634 |   |  |  | (84.8  | )%
|Investing                 |  |                | (1,612 | ) |      |   | (1,541 | )    |  |   | 50            |   |  | $             | (71   | ) |          |  | 4.6   | %        |  | $ | (1,591 | ) |  |  | (3,182 | )%
|Financing                 |  |                | 836    |   |      |   | 1,186  |      |  |   | 843           |   |  | $             | (350  | ) |          |  | (29.5 | )%       |  | $ | 343    |   |  |  | 40.7   | % 
|Cash and cash equivalents |  |                | 22,457 |   |      |   | 18,949 |      |  |   | 20,954        |   |  | $             | 3,508 |   |          |  | 18.5  | %        |  | $ | (2,005 | ) |  |  | (9.6   | )%



48



---



##### Table of Contents



Operating
  2005
    versus 2004
        2004
    versus 2003
    Investing
   49




---



##### Table of Contents



Financing
  2005
    versus 2004
    2004
    versus 2003
    Litigation
  1:03-CV-11142-DPW.
  Financing
    Arrangements
     50




---



##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodLess Than


1-3


3-5


More ThanContractual
    Obligations

Total


1 Year


Years


Years


5 YearsOperating and capital lease
    obligations

$
11,949


$
2,252


$
2,557


$
1,499


$
5,641Total contractual obligations

$
11,949


$
2,252


$
2,557


$
1,499


$
5,641   Off-Balance
    Sheet Arrangements
    Outlook
    (amounts in thousands, except per share amounts)
         51




---



##### Table of Contents



52




---



##### Table of Contents



and/or fee-per-use
  fee-per-use
  Certain
    Factors Which May Affect Future Operations and Results
   53




---



##### Table of Contents




    we may be unable to increase sales and revenues at our
    historical rates;
    we may not receive revenues when or in the amounts anticipated;
    we may not be able to maintain profitability;
    we may have to reflect non-cash sales discounts in connection
    with warrants held by Quest Diagnostics for different financial
    periods than we expect, depending upon if and when it becomes
    probable that certain sales-based milestones may be met in
    connection with our agreement with Quest Diagnostics;
    we may not be able to increase our penetration of the very
    competitive large commercial laboratories to the extent we
    expect, and we may not be able to maintain and grow our business
    within our traditional customer base to the extent we expect;
    we may not achieve revenues to the degree expected from our
    relationship with Ventana and the sale of analyte-specific
    reagents and research use only products derived from our
    molecular oncology development program;
    our expanded sales and marketing presence may not have the
    expected impact, and we may face attrition issues customary for
    such an expansion;
    we may incur greater expenses than we expect generally and with
    our clinical trials and sales and marketing efforts specifically;
    our clinical trials may take longer to complete than we expect
    and may be unsuccessful;
    we may not receive FDA approval for our FocalPoint GS and
    HPV-related
    applications;
    we may not receive FDA clearance for processing additional
    Ventana assays on the interactive histology imager on schedule
    or at all, and we may be required to obtain additional FDA and
    other regulatory approvals for the interactive histology imager,
    along with approvals for processing the assays, which we may not
    receive in a timely manner or at all;
    revenues from our agreement with Ventana may not materialize to
    the extent we expect;
    we may not be successful in selling TriPath Oncologys
    pre-IVD (in-vitro diagnostic) products and services;
    sales of our stock by Roche Holdings, Inc., which owns
    approximately 20% of our stock, may significantly impact our
    stock price;
    we may need to obtain additional financing in the future;
    we may be unable to obtain and maintain adequate patent and
    other proprietary rights protection of our products and services;
    our products may not receive regulatory, pricing and
    reimbursement approval when we expect, if at all;
    we may be unable to comply with the extensive domestic and
    international governmental regulatory, pricing and reimbursement
    approval and review procedures and other regulatory requirements
    to which the manufacture and sale of our products are subject,
    or lack the financial resources to bear the expense associated
    with such compliance;
    our products may not be accepted by the market to the extent we
    expect and the frequency of use of our screening products may
    decline;
    TriPath Oncology may be unable to successfully develop and
    commercialize molecular diagnostic oncology products when
    anticipated, if at all;
    external studies of our product candidates may not come to the
    conclusions we expect;
    TriPath Oncology may be unable to license markers needed to
    optimize its product candidates; 54




---



##### Table of Contents




    we may be unable to establish and maintain licenses, strategic
    collaborations and distribution arrangements;
    we and laboratories using our products may not obtain adequate
    levels of third-party reimbursement for our products;
    we may lack the financial resources necessary to further develop
    our marketing and sales capabilities domestically and
    internationally or to expand our manufacturing capability;
    competition and technological, scientific and medical, changes
    may make our products or potential products and technologies
    less attractive, used less frequently, or obsolete;
    our promotional discounts, sales and marketing programs and
    strategies may not have their expected effect; and
    uncertainties resulting from the initiation and continuation of
    our litigation with a competitor could have a material adverse
    effect on our ability to continue our operations.  Form 10-K
  Income
    Taxes and Tax Loss Carryforwards
          Critical
    Accounting Policies
   55




---



##### Table of Contents



Revenue
    Recognition
  and/or
              Allowance
    for Doubtful Accounts
   56




---



##### Table of Contents



Liquidity and Capital
    Resources  Operating
  Inventory
  first-in,
     57




---



##### Table of Contents



Valuation
    of long-lived and intangible assets
    (fee-per-use).
    Income
    taxes and valuation allowances
          Recently
    Issued Accounting Standards
   58




---



##### Table of Contents



and/or
   59




---



##### Table of Contents



No. 05-6, No. 05-6). No. 05-6 states No. 05-6 No. 05-6.
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk    Item 7. Managements Discussion and Analysis
    of Financial Condition and Results of Operations Liquidity and Capital Resources
  Item 8.
    Financial
    Statements and Supplementary Data  page F-1 Form 10-K.
 60




---



##### Table of Contents



Item 9.
    Changes
    In and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Rule 13a-15(e)
  Managements
    Report on Internal Control over Financial
    Reporting
  Rule 13a-15(f)
    Changes
    in Internal Control
  Rule 13a-15(f)
 61




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##### Table of Contents



PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Form 10-K,
  Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   62




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##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements
    Financial Statement Schedule
    Exhibits
    Exhibits
  3
.1

Restated Certificate of
    Incorporation of the Company. Filed as Exhibit 3.1 to our
    Form 10-Q
    for the quarter ended June 30, 2002 (File
    No. 0-22885)
    and incorporated herein by reference.3
.2

Amended and Restated By-laws of
    the Company. Filed as Exhibit 3.2 to our
    Form 10-Q
    for the quarter ended June 30, 2002 (File
    No. 0-22885)
    and incorporated herein by reference.4
.1

Specimen of Common Stock
    Certificate. Filed as Exhibit 4.1 to our Registration
    Statement on
    Form S-1
    (File
    No. 333-30227)
    and incorporated herein by reference.10
.1*

Amended and Restated 1996 Equity
    Incentive Plan. Filed as Exhibit 10.2 to the Companys
    Form 10-Q
    for the quarter ended June 30, 2004 (File No.
    0-22885) and
    incorporated herein by reference.10
.2*

Amended and Restated
    1997 Director Stock Option Plan. Filed as Exhibit 10.3
    to the Companys
    Form 10-Q
    for the quarter ended June 30, 2004 (File
    No. 0-22885)
    and incorporated herein by reference.10
.3*

Form of Indemnification Agreement
    between the Company and its Directors and Executive Officers.
    Filed as Exhibit 10.11 to the Companys Registration
    Statement on
    Form S-1
    (File
    No. 333-30227)
    and incorporated herein by reference.10
.4

Lease Agreement dated as of
    July 28, 1997 by and between Carolina Hosiery Mills, Inc.
    and the Company. Filed as Exhibit 10.12 to the
    Companys Registration Statement on
    Form S-1
    (File
    No. 333-30227)
    and incorporated herein by reference.10
.5

Lease Agreement dated
    June 12, 1998 by and between Carolina Hosiery Mills, Inc.
    and AutoCyte, Inc. Filed as Exhibit 10.1 to the
    Companys
    Form 10-Q
    for the quarter ended June 30, 1998 (File
    No. 0-22885)
    and incorporated herein by reference.10
.6

Amendment dated March 2, 1999
    to Lease Agreement dated July 28, 1997 by and between
    Carolina Hosiery Mills, Inc. and AutoCyte, Inc. Filed as
    Exhibit 10.1 to the Companys
    Form 10-Q
    for the quarter ended March 31, 1999 (File
    No. 0-22885)
    and incorporated herein by reference.10
.7

Intellectual Property Purchase
    Agreement dated as of April 24, 1999 by and between
    NeoPath, Inc. and AutoCyte, Inc. Filed as Exhibit 10.21 to
    the Amendment No. 2 to the Companys
    S-1 (File
    No. 333-82121)
    and incorporated herein by reference.10
.8

Loan and Security Agreement dated
    as of January 31, 2000 (the Loan and Security
    Agreement) by and between Silicon Valley Bank and TriPath
    Imaging, Inc. Filed as Exhibit 10.2 to the Companys
    Form 10-Q
    for the quarter ended March 31, 2000 (File
    No. 0-22885)
    and incorporated herein by reference.10
.9

Securities Purchase Agreement
    dated as of July 31, 2001 by and between the Company and
    Becton, Dickinson and Company. Filed as Exhibit 10.1 to the
    Companys
    Form 10-Q
    for the quarter ended June 30, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.10

License and Intellectual Property
    Access Agreement dated as of July 31, 2001 by and between
    the Company and Becton, Dickinson and Company. Filed as
    Exhibit 10.3 to the Companys
    Form 10-Q
    for the quarter ended June 30, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.11

Development and License Agreement
    dated as of July 31, 2001 by and among the Company, Becton,
    Dickinson and Company and TriPath Oncology, Inc. Filed as
    Exhibit 10.4 to the Companys
    Form 10-Q
    for the quarter ended June 30, 2001 (File
    No. 0-22885)
    and incorporated herein by reference. 63




---



##### Table of Contents



10
.12

Sublicense Agreement dated as of
    July 31, 2001 by and among the Company, Becton, Dickinson
    and Company and TriPath Oncology, Inc. Filed as
    Exhibit 10.5 to the Companys
    Form 10-Q
    for the quarter ended June 30, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.13

Lease Agreement between NeoPath,
    Inc. and Teachers Insurance & Annuity Association dated
    October 1, 1994 (the Lease Agreement) and all
    amendments thereto. Filed as Exhibit 10.25 to the
    Companys
    Form 10-K
    for the year ended December 31, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.14

Sixth Amendment dated
    September 30, 2003 to Lease Agreement between TriPath
    Imaging, Inc. (as
    successor-in-interest
    to NeoPath, Inc.) and Teachers Insurance & Annuity
    Association dated October 1, 1994. Filed as
    Exhibit 10.14 to the Companys
    Form 10-K
    for the year ended December 31, 2003 (File
    No. 0-22885)
    and incorporated herein by reference.10
.15

Sublease Agreement by and between
    NeoPath, Inc. and Antioch Bible Church dated as of
    August 31, 1999. Filed as Exhibit 10.26 to the
    Companys
    Form 10-K
    for the year ended December 31, 2001 (File No.
    0-22885) and
    incorporated herein by reference.10
.16

OEM Supply Agreement dated
    November 1, 2001 by and between Tecan Schweiz AG and the
    Company. Filed as Exhibit 10.28 to the Companys
    Form 10-K
    for the year ended December 31, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.17

Amendment dated December 1,
    2001 to Lease Agreement dated June 12, 1998 by and between
    Carolina Hosiery Mills, Inc. and TriPath Imaging, Inc. Filed as
    Exhibit 10.29 to the Companys
    Form 10-K
    for the year ended December 31, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.18

Lease Agreement dated as of
    February 6, 2002 by and between TBC Place Partners II,
    LLC and TriPath Oncology, Inc. Filed as Exhibit 10.31 to
    the Companys
    Form 10-K
    for the year ended December 31, 2001 (File No.
    0-22885) and
    incorporated herein by reference.10
.19

Lease Agreement dated as of
    July 1, 2002 by and between Banc of America
    Leasing & Capital, LLC and TriPath Imaging, Inc. Filed
    as Exhibit 10.24 to the Companys
    Form 10-K
    for the year ended December 31, 2002 (File
    No. 0-22885)
    and incorporated herein by reference.10
.20

Fourth Loan Modification Agreement
    to the Loan and Security Agreement effective as of
    January 31, 2003 by and between Silicon Valley Bank and
    TriPath Imaging, Inc. Filed as Exhibit 10.25 to the
    Companys
    Form 10-K
    for the year ended December 31, 2002 (File
    No. 0-22885)
    and incorporated herein by reference.10
.21

Fifth Loan Modification Agreement
    to the Loan and Security Agreement effective as of
    January 28, 2004 by and between Silicon Valley Bank and
    TriPath Imaging, Inc. Filed as Exhibit 10.21 to the
    Companys
    Form 10-K
    for the year ended December 31, 2003 (File
    No. 0-22885)
    and incorporated herein by reference.10
.22

Lease Agreement dated as of
    March 13, 2003 by and between General Electric Capital
    Corporation and TriPath Imaging, Inc. Filed as Exhibit 10.1
    to our
    Form 10-Q
    for the quarter ended March 31, 2003 (File No.
    0-22885) and
    incorporated herein by reference.10
.23

Addendum No. 1, dated
    September 1, 2003, to Sublease Agreement by and between
    NeoPath, Inc. and Antioch Bible Church dated as of
    August 31, 1999. Filed as Exhibit 10.23 to the
    Companys
    Form 10-K
    for the year ended December 31, 2003 (File
    No. 0-22885)
    and incorporated herein by reference.10
.24*

Form of the Companys
    Incentive Stock Option Certificate under the Companys
    Amended and Restated 1996 Equity Incentive Plan for all its
    employees, including its executive officers. Filed as
    Exhibit 10.1 to the Companys
    Form 10-Q
    for the quarter ended September 30, 2004 (File No.
    0-22885) and
    incorporated herein by reference.10
.25*

Form of the Companys
    Non-Statutory Stock Option Certificate under the Companys
    Amended and Restated 1996 Equity Incentive Plan for all its
    employees, including its executive officers, and its directors.
    Filed as Exhibit 10.2 to the Companys
    Form 10-Q
    for the quarter ended September 30, 2004 (File
    No. 0-22885)
    and incorporated herein by reference.10
.26*

Form of the Companys
    Non-Statutory Stock Option Agreement under the Companys
    1997 Director Stock Option Plan for its directors. Filed as
    Exhibit A to Appendix D to our Definitive Proxy
    Statement on Schedule 14A filed with the Commission on
    April 22, 2004 (File
    No. 0-22885)
    and incorporated herein by reference. 64




---



##### Table of Contents



10
.27*

Form of Director Option Agreement
    Amendment dated as of August 3, 2004 between the Company
    and Haywood D. Cochrane, Jr., Robert E. Curry, Ph.D.,
    Richard A. Franco, R. Ph., Arthur King, Ph.D. and Robert L.
    Sullivan. Filed as Exhibit 10.4 to the Companys
    Form 10-Q
    for the quarter ended June 30, 1998 (File
    No. 0-22885)
    and incorporated herein by reference.10
.28*

Change of Control Agreement dated
    as of August 3, 2004 between the Company and Paul R.
    Sohmer, M.D. Filed as Exhibit 10.5 to the
    Companys
    Form 10-Q
    for the quarter ended September 30, 2004 (File
    No. 0-22885)
    and incorporated herein by reference.10
.29*

Form of Change of Control
    Agreement dated as of August 3, 2004 between the Company
    and Stephen P. Hall, Johnny D. Powers, Ph.D. and Ray W.
    Swanson, Jr. Filed as Exhibit 10.6 to the
    Companys
    Form 10-Q
    for the quarter ended September 30, 2004 (File
    No. 0-22885)
    and incorporated herein by reference.10
.30*

TriPath Imaging, Inc. 2006 Bonus
    Plan, adopted by the Compensation Committee of the Board of
    Directors on January 26, 2006. Filed herewith.10
.31*

Director Compensation at
    March 31, 2006. Filed herewith.10
.32*

Amendment to Lease dated
    August 1, 2004 between Carolina Hosiery Mills, Inc. and our
    Company. Filed as Exhibit 10.32 to the Companys
    Form 10-K
    for the year ended December 31, 2004 (File
    No. 0-22885)
    and incorporated herein by reference.10
.33*

TriPath Imaging, Inc. 2001
    Employee Stock Purchase Plan. Filed as Appendix B to our
    Definitive Proxy Statement on Schedule 14A filed with the
    Commission on April 24, 2001 (File
    No. 0-22885)
    and incorporated herein by reference.10
.34*

Warrant Purchase Agreement between
    the Company and Quest Diagnostics Incorporated, dated as of
    May 5, 2004. Filed as Exhibit 10.1 to the
    Companys
    Form 10-Q
    for the quarter ended June 30, 2004 (File No.
    0-22885) and
    incorporated herein by reference.10
.35*

Amendment No. 1 dated
    July 27, 2005 to the Amended and Restated 1996 Equity
    Incentive Plan. Filed as Exhibit 10.1 to the Companys
    Form 10-Q
    for the quarter ended September 30, 2005 (File
    No. 0-22885)
    and incorporated herein by reference.10
.36*

Amendments dated May 24, 2005
    and May 31, 2005 to Amended and Restated 1997 Director
    Stock Option Plan, filed as Exhibit 10.1 to the
    Companys
    Form 10-Q
    for the quarter ended June 30, 2005 (File No. 0-22885)
    and incorporated herein by reference.14
.1

Code of Business Conduct and
    Ethics of the Company. Filed as Exhibit 14.1 to the
    Companys
    Form 10-K
    for the year ended December 31, 2003 (File
    No. 0-22885)
    and incorporated herein by reference.21
.1

List of all subsidiaries of the
    Company. Filed herewith.23
.1

Consent of Ernst & Young
    LLP, independent registered public accounting firm. Filed
    herewith.31
.1

Certification of Chief Executive
    Officer Pursuant to
    §240.13a-14
    or
    §240.15d-14
    of the Securities Exchange Act of 1934, as amended. Filed
    herewith.31
.2

Certification of Chief Financial
    Officer Pursuant to
    §240.13a-14
    or
    §240.15d-14
    of the Securities Exchange Act of 1934, as amended. Filed
    herewith.32


Certification pursuant to
    18 U.S.C. Section 1350. Filed herewith.99
.1

Factors Affecting Future Operating
    Results. Filed herewith.     *
    Indicates a management contract or compensatory plan.
    Certain confidential material contained in the document has been
    omitted and filed separately with the Securities and Exchange
    Commission pursuant to both Rule 406 of the Securities Act
    of 1933, as amended, and
    Rule 24b-2
    of the Securities Exchange Act of 1934, as amended, as
    applicable. Omitted information is identified with asterisks in
    the appropriate places in the agreement. 65




---



##### Table of Contents



SIGNATURES      By:
    /s/  Paul
    R. Sohmer        Signature

Title/s/  Paul
    R. SohmerPaul
    R. Sohmer, M. D

President, Chief Executive Officer
    and Director
    (Principal Executive Officer)/s/  Stephen
    P. HallStephen
    P. Hall

Senior Vice-President and Chief
    Financial Officer
    (Principal Financial Officer and
    Principal Accounting Officer)/s/  Haywood
    D. Cochrane, Jr.Haywood
    D. Cochrane, Jr.

Director/s/  Robert
    E. CurryRobert
    E. Curry, Ph.D.

Director/s/  Richard
    FrancoRichard
    Franco

Director/s/  Arthur
    T. KingArthur
    T. King, Ph.D.

Director/s/  Gail
    F. LiebermanGail
    F. Lieberman

Director/s/  Robert
    L. SullivanRobert
    L. Sullivan

Director  66




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##### Table of Contents



TRIPATH
    IMAGING, INC.
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of
    Independent Registered Public Accounting Firm on the Financial
    Statements

F-2Report of
    Independent Registered Public Accounting Firm on Internal
    Control over Financial Reporting

F-3Consolidated
    Balance Sheets as of December 31, 2005 and 2004

F-4Consolidated
    Statements of Operations for the Years Ended December 31,
    2005, 2004, and 2003

F-5Consolidated
    Statements of Stockholders Equity for the Years Ended
    December 31, 2005, 2004, and 2003

F-6Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2005, 2004, and 2003

F-7Notes to
    Consolidated Financial Statements

F-8  F-1




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##### Table of Contents



TRIPATH
    IMAGING, INC.
  REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON THE
    FINANCIAL STATEMENTS
           Internal Control-Integrated Framework
      F-2




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON INTERNAL CONTROL OVER FINANCIAL REPORTING  Form 10-K
                F-3




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2005


2004(In thousands, except share and
    per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
22,457


$
18,949Accounts and notes receivable, net


15,647



12,976Net investment in sales-type leases


828



667Inventory, net


12,564



10,723Other current assets


1,676



1,582Total current assets


53,172



44,897Customer use assets, net


8,044



7,688Property and equipment, net


4,556



3,290Other assets


2,362



2,734Net investment in sales-type
    leases, net of current portion


1,807



1,043Patents, less accumulated
    amortization of $4,433 and $3,752 at December 31, 2005 and
    2004, respectively


5,111



5,792Other intangible assets, less
    accumulated amortization of $1,427 and $1,229 at
    December 31, 2005 and 2004, respectively


1,916



2,090Total assets

$
76,968


$
67,534LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,459


$
3,668Accrued expenses


5,323



3,750Deferred revenue and customer
    deposits


1,106



1,551Obligations under capital lease


23



Current portion of debt






19Total current liabilities


10,911



8,988Long-term portion of obligations
    under capital lease


98



Commitments and contingencies
    (Note 11)Stockholders equity:Preferred stock, $0.01 par
    value; 1,000,000 shares authorized; none issued and
    outstanding






Common stock, $0.01 par
    value; 98,000,000 shares authorized; 38,324,632 and
    38,127,501 shares issued and outstanding at
    December 31, 2005 and 2004, respectively


383



381Additional paid-in capital


291,561



290,114Deferred compensation






(11
)Accumulated deficit


(225,915
)


(232,415
)Accumulated other comprehensive
    income


11



477Treasury stock, at cost,
    10,000 shares and 0 shares at December 31, 2005
    and 2004, respectively


(81
)


Total stockholders equity


65,959



58,546Total liabilities and
    stockholders equity

$
76,968


$
67,534    F-4




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2005


2004


2003(In thousands, exceptper share amounts)Revenues

$
85,961


$
68,504


$
53,764Cost of revenues


26,035



21,230



18,377Gross profit


59,926



47,274



35,387Operating expenses:Research and development


12,352



11,280



8,861Regulatory


3,403



3,882



5,434Sales and marketing


24,440



18,640



18,324General and administrative


13,552



13,138



11,68753,747



46,940



44,306Operating income/(loss)


6,179



334



(8,919
)Interest income


605



289



413Interest expense


(9
)


(18
)


(32
)Income/(loss) before income taxes


6,775



605



(8,538
)Income taxes


275







Net income/(loss)

$
6,500


$
605


$
(8,538
)Earnings/(loss) per common shareBasic

$
0.17


$
0.02


$
(0.23
)Diluted

$
0.17


$
0.02


$
(0.23
)    F-5




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  AccumulatedAdditional








Other





TotalPaid-In


Deferred


Accumulate


Comprehensive





StockholdersCommon Stock


Capital


Compensation


Deficit


Income/(Loss)


Treasury Stock


Equity(In thousands)Balance at January 1, 2003

$
375


$
283,396


$
(78
)

$
(224,482
)

$
(34
)





$
59,177Exercise of options and warrants


3



1,232



















1,235Issuance of common stock under
    employee stock purchase plan


1



358



















359Re-pricing of stock options






49



















49Amortization of deferred
    compensation










26















26Foreign currency translation


















63







63Net loss














(8,538
)










(8,538
)Comprehensive loss


























(8,475
)Balance at December 31, 2003


379



285,035



(52
)


(233,020
)


29







52,371Exercise of options and warrants


2



967



















969Issuance of common stock under
    employee stock purchase plan






246



















246Issuance of warrants as
    consideration under incentive sales agreement






3,896



















3,896Adjustment to deferred compensation






(30
)


30















Amortization of deferred
    compensation










11















11Foreign currency translation


















448







448Net income














605











605Comprehensive income


























1,053Balance at December 31, 2004


381



290,114



(11
)


(232,415
)


477







58,546Exercise of options and warrants


2



713



















715Issuance of common stock under
    employee stock purchase plan






235



















235Issuance of warrants as
    consideration under incentive sales agreement






499



















499Amortization of deferred
    compensation










11















11Purchase of Company stock






















(81
)


(81
)Foreign currency translation


















(466
)






(466
)Net income














6,500











6,500Comprehensive income


























6,034Balance at December 31, 2005

$
383


$
291,561


$



$
(225,915
)

$
11



(81
)

$
65,959    F-6




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2005


2004


2003(In thousands)OPERATING ACTIVITIESNet income/(loss)

$
6,500


$
605


$
(8,538
)Adjustments to reconcile net
    income/(loss) to net cash provided by (used in) operating
    activities:Depreciation


4,394



4,097



3,539Amortization of intangible assets


879



830



817Amortization of deferred
    compensation


11



11



26Provision for doubtful accounts


50



3



180Reserve for obsolete and
    slow-moving inventory


(308
)


75



400Non-cash equity compensation










49Amortization of non-cash sales
    discount


1,278



519



Amortization of deferred research
    and development






(207
)


(2,479
)Loss on disposal of fixed assets






24



13Provision for income taxes


91







Changes in operating assets and
    liabilities:Accounts, notes and lease
    receivables


(2,994
)


196



(4,363
)Inventory


(5,941
)


(3,588
)


(3,522
)Other current assets


(102
)


702



(1,011
)Other long-term assets


(1,170
)


(692
)


443Accounts payable and accrued
    expenses


2,309



(4,521
)


3,927Deferred revenue and customer
    deposits


(444
)


46



395Other current liabilities










(2,410
)Net cash provided by (used in)
    operating activities


4,553



(1,900
)


(12,534
)INVESTING ACTIVITIESPurchases of property and equipment


(1,588
)


(1,215
)


(146
)Additions to other intangible assets


(24
)


(319
)


Other






(7
)


196Net cash (used in) provided by
    investing activities


(1,612
)


(1,541
)


50FINANCING ACTIVITIESIssuance of common stock under
    employee stock purchase plan


235



246



359Proceeds from exercise of stock
    options and warrants


715



969



1,235Purchase of Company stock


(81
)






Proceeds from debt






365



633Payment of capital lease obligations


(14
)Payments on debt and leases


(19
)


(394
)


(1,384
)Net cash provided by financing
    activities


836



1,186



843Effect of exchange rate changes on
    cash


(269
)


250



24Net increase (decrease) in cash and
    cash equivalents


3,508



(2,005
)


(11,617
)Cash and cash equivalents at
    beginning of year


18,949



20,954



32,571Cash and cash equivalents at end of
    year

$
22,457


$
18,949


$
20,954SUPPLEMENTAL CASH FLOW
    INFORMATIONCash paid for interest

$
9


$
18


$
32Cash paid for income taxes


184







NON-CASH INVESTING AND FINANCING
    ACTIVITIESIssuance of warrants as
    consideration under incentive sales agreement

$
499


$
3,896


$
Capital lease obligations incurred


135







    F-7




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, except share and per share amounts)
  1.
    Background        2.
    Significant
    Accounting Policies  Principles
    of Consolidation
    Use of
    Estimates
    Reclassifications
    Revenue
    Recognition
  and/or
     F-8




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Deferred
    Revenue
    Cash
    and Cash Equivalents
    Trade
    Receivables
    Notes Receivable
  Trade Receivables
  Net
    investment in sales-type leases
  fee-per-use
  Inventory
  (first-in
 F-9




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Customer-Use
    Assets
  fee-per-use
    Property
    and Equipment
      Patents
    Other
    Intangible Assets
    Impairment
    of Long-Lived Assets and Recoverability of
    Intangibles
  Accounting for Impairment or Disposal of Long-Lived
    Assets.
  Product
    Warranty Obligation
   F-10




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2005


2004


2003Balance, beginning of year

$
(159
)

$
(387
)

$
(440
)Accruals


(222
)


(175
)


(311
)Settlements made


109



208



334Warranties expired/adjustments


139



195



30Balance, end of year

$
(133
)

$
(159
)

$
(387
)   Income
    Taxes
  ,
  Research
    and Development Costs
    Stock
    Based Compensation
       F-11




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year-Ended
    December 31,2005


2004


2003Net income/(loss), as reported

$
6,500


$
605


$
(8,538
)Stock-based compensation included
    in reported net income/(loss)


11



11



26Stock-based compensation expense
    under fair value based method for all plans


(10,469
)


(5,145
)


(3,536
)Pro forma net loss

$
(3,958
)

$
(4,529
)

$
(12,048
)Earnings/(loss) per common shareBasic:As reported

$
0.17


$
0.02


$
(0.23
)Pro forma

$
(0.10
)

$
(0.12
)

$
(0.32
)Diluted:As reported

$
0.17


$
0.02


$
(0.23
)Pro forma

$
(0.10
)

$
(0.12
)

$
(0.32
)   Recently Issued Accounting Standards
  Earnings/(Loss)
    Per Common Share
    Advertising
    Expense
    Foreign
    Currency Translation
   F-12




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Comprehensive
    Income/(Loss)
    Concentration
    of Credit Risk and Financial Instruments
    Recently
    Issued Accounting Standards
  
     F-13




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    and/or
    No. 05-6, No. 05-6). No. 05-6 states No. 05-6 No. 05-6.
   F-14




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    Financial
    Statement Information    December 31,2005


2004Accounts and notes receivableTrade accounts receivable

$
16,081


$
13,477Current portion of notes receivable


591



584Other accounts receivable


65



17716,737



14,238Allowance for doubtful accounts


(1,090
)


(1,262
)15,647



12,976InventoryStage of production:Raw materials

$
10,052


$
9,067Work-in-process


861



1,747Finished goods


4,355



3,01415,268



13,828Reserves for obsolete and slow
    moving inventory


(2,704
)


(3,105
)$
12,564


$
10,723Categories:Instruments

$
13,197


$
12,293Reagents and consumables


2,071



1,53515,268



13,828Reserves for obsolete and slow
    moving inventory


(2,704
)


(3,105
)$
12,564


$
10,723Other current assetsCurrent portion of deferred sales
    discount

$
779


$
779Other assets


897



803$
1,676


$
1,582Customer-use assetsCustomer-use systems

$
17,400


$
14,696Accumulated depreciation


(9,356
)


(7,008
)$
8,044


$
7,688 F-15




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,2005


2004Property and equipmentMachinery and equipment

$
4,574


$
4,051Demonstration equipment


4,172



3,490Furniture, fixtures and
    improvements


1,940



1,696Leasehold improvements


1,589



1,362Vehicles


10



10Computer equipment and software


5,407



5,257Machinery and equipment under
    capital lease


135



Total property and equipment


17,827



15,866Accumulated depreciation


(13,271
)


(12,576
)$
4,556


$
3,290Other assetsNotes receivable, net of current
    portion

$
750



110Deferred sales discount, net of
    current portion


1,819



2,597Deposits


27



27Allowance for doubtful accounts


(234
)


$
2,362


$
2,734Accrued expensesAccrued payroll and related
    benefits

$
3,689


$
2,488Accrued taxes


968



681Accrued warranty costs


133



159Other accrued expenses


533



422$
5,323


$
3,750  F-16




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Allowance
    for Doubtful Accounts    December 31,2005


2004


2003Balance, beginning of year

$
1,262


$
2,277


$
3,554Amounts charged to expense


50



3



180Amounts charged to allowance


(4
)


(1,018
)


(1,457
)Recoveries


16







Balance, end of year

$
1,324


$
1,262


$
2,277     5.
    Long-Term
    Obligations and Commitments  Working
    Capital Facility
    Leases
    and Lease Lines of Credit
     F-17




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        2006

$
2,2522007


1,5352008


1,0222009


8272010


672Thereafter


5,641$
11,949         2005


2004Total minimum rentals

$
3,188


$
2,206Less amounts representing
    estimated maintenance costs included in total minimum rentals


(532
)


(261
)Net minimum lease payments


2,656



1,945Estimated residual values of
    leased property (unguaranteed)


305



Less unearned income


(326
)


(235
)Net investment in sales-type leases

$
2,635


$
1,710       2006

$
1,1632007


1,0522008


6502009


2402010


83Thereafter


$
3,188  F-18




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Other
    Liabilities and Commitments
      6.
    Income
    taxes    2005


2004


2003Domestic

$
5,832


$
1,084


$
(8,721
)Foreign


943



(479
)


183Total

$
6,775


$
605


$
(8,538
)     2005


2004


2003Current provision:U.S. Federal

$
141


$



$
State


69







Foreign


65







Total current

$
275


$



$
Total deferred

$



$



$
Total income taxes

$
275


$



$
      F-19




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2005


2004Deferred tax assets:Federal and state net tax loss
    carryforwards

$
76,941


$
83,340Research and development credits


2,429



4,171Accrued vacation


133



149Accrued warranty costs


51



60Allowance for doubtful accounts


503



480Charitable contribution
    carryforwards


8



22Non-cash sales discounts


683



197Intangible assets, net of
    amortization


1,718



1,902Inventory


1,551



1,694AMT carryforwards


144



Other


192



161Total gross deferred tax assets


84,353



92,176Valuation allowance


(84,291
)


(91,968Net deferred tax asset


62



208Deferred tax liabilities:Property and equipment


(62
)


(208
)Net deferred tax asset

$



$
       2005


2004


2003Income tax provision at federal
    statutory rate


35.0
%


35.0
%


35.0
%State income tax, net


0.6



3.0



Foreign income or loss at federal
    statutory rate


(4.9
)


27.7



0.8Foreign taxes


1.0







Loss and credit carryforwards


81.6



(1,144.6
)


1.0Permanent items and other


4.1



52.3



18.0Change in valuation allowance


(113.3
)


1,026.6



(54.8
)Effective tax rate


4.1
%






  F-20




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   7.
    Stockholders
    Equity  Preferred
    Stock
    Common
    Stock
    Earnings/(Loss)
    Per Share
    2005


2004


2003Basic


38,218,333



38,005,626



37,626,268Assumed conversion of:Stock options


997,682



1,084,074



Warrants


53,754



61,058



Diluted


39,269,769



39,150,758



37,626,268     2005


2004


2003Stock options


3,313,189



1,931,148



3,827,347Warrants


1,500,000



800,000



223,2534,813,189



2,731,148



4,050,600   Equity
    Incentive Plans
     F-21




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              out-of-the-money
    Options OutstandingNumber of


Weighted-AverageShares


Exercise PriceOutstanding at December 31,
    2002


3,766,983


$
6.74Options granted


594,400



4.04Options exercised


(233,493
)


5.34Options canceled/expired


(300,543
)


7.19Outstanding at December 31,
    2003


3,827,347


$
6.37Options granted


1,315,849



9.02Options exercised


(197,197
)


4.95Options canceled/expired


(372,361
)


10.10Outstanding at December 31,
    2004


4,573,638


$
6.89Options granted


1,641,648



8.60Options exercised


(165,867
)


4.27Options canceled/expired


(236,257
)


8.84Outstanding at December 31,
    2005


5,813,162


$
7.37   F-22




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Options Outstanding


Options ExercisableNumber


Weighted-Average





NumberOutstanding at


Remaining





Exercisable atDecember 31,


Contractual Life


Weighted-Average


December 31,


Weighted-AveragePrice Range

2005


(Years)


Exercise Price


2005


Exercise Price$ 0.20 - $ 0.21


65,556



0.9


$
0.20



65,556


$
0.201.99 -  2.81


340,300



7.1



2.48



236,297



2.473.05 -  4.57


582,802



4.9



4.25



543,265



4.254.67 -  7.00


1,378,931



4.8



5.40



1,347,384



5.377.01 - 10.00


2,830,215



8.7



8.77



2,827,221



8.7710.94 - 10.94


523,000



5.1



10.94



523,000



10.9416.45 - 16.45


92,358



2.2



16.45



92,358



16.45$ 0.20 - $16.45


5,813,162



6.8


$
7.37



5,635,081


$
7.48   Employee
    Stock Purchase Plan
    2005


2004


2003June


14,088



20,964



50,631December


25,561



13,235



22,94039,649



34,199



73,571   SFAS 123
    Year Ended
    December 31,2005


2004


2003Risk-free interest rate


3.75
%


3.23
%


2.45
%Expected dividend yield


0.00
%


0.00
%


0.00
%Expected lives


48 months



48 months



48 monthsExpected volatility


0.53



0.85



0.93Weighted-average fair value of
    grants


$8.60



$9.02



$4.04   Warrants
   F-23




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Hoffmann-La Roche
    Shares Subject to


Exercise Price


WarrantWarrant

Warrants


(per share)


Expiration Date


Vesting StatusFirst Tranche


800,000


$
9.25



May 2007


Currently ExercisableSecond Tranche


200,000


$
10.18



May 2007


Currently ExercisableThird Tranche


500,000


$
10.64



May 2007


Currently ExercisableFourth Tranche


1,000,000


$
11.56



May 2008


Exercisable Upon Achievement of
    Sales MilestoneFifth Tranche


1,500,000


$
12.03



May 2008


Exercisable Upon Achievement of
    Sales Milestone   lock-up
   First
    Tranche Warrants
  Accounting for Consideration Given by a Vendor to
    a Customer (Including a Reseller of the Vendors
    Products),
   Sales-Based
    Milestone Warrants
   F-24




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Second
    and Third Tranche Warrants
  Accounting for Equity
    Instruments That Are Issued to Other Than Employees for
    Acquiring, or in Conjunction with Selling, Goods or
    Services
     Summary
      Common
    Stock Reserved for Future Issuance
    December 31,2005Outstanding stock options


5,813,162Possible future issuance under
    equity incentive plans


436,204Possible future issuance under
    Employee Stock Purchase Plan


777,282Common stock warrants currently
    exercisable


1,622,670Common stock warrants exercisable
    upon achievement of sales-based milestone


2,500,000Total shares reserved


11,149,318   Deferred
    Compensation
   F-25




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Operations
    by Industry Segment and Geographic Area  Description
    of Products and Services by Segment
    Measurement
    of Segment Profit or Loss and Segment Assets
    Factors
    Management Used to Identify the Companys Reportable
    Segments
    Results
    by Segment
    2005CommercialOperations


TriPath Oncology


TotalRevenues

$
84,157


$
1,804


$
85,961Cost of revenues


24,981



1,054



26,035Gross profit


59,176



750



59,926Operating expenses:Research and development


2,004



10,348



12,352Regulatory


2,450



953



3,403Sales and marketing


23,926



514



24,440General and administrative


8,721



4,831



13,55237,101



16,646



53,747Operating income/(loss)

$
22,075


$
(15,896
)

$
6,179   2004CommercialOperations


TriPath Oncology


TotalRevenues

$
67,862


$
642


$
68,504Cost of revenues


21,072



158



21,230Gross profit


46,790



484



47,274Operating expenses:Research and development


2,005



9,275



11,280Regulatory


3,263



619



3,882Sales and marketing


18,126



514



18,640General and administrative


8,652



4,486



13,13832,046



14,894



46,940Operating income/(loss)

$
14,744


$
(14,410
)

$
334  F-26




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2003CommercialOperations


TriPath Oncology


TotalRevenues

$
53,631


$
133


$
53,764Cost of revenues


18,361



16



18,377Gross profit


35,270



117



35,387Operating expenses:Research and development


2,319



6,542



8,861Regulatory


4,763



671



5,434Sales and marketing


17,318



1,006



18,324General and administrative


7,264



4,423



11,68731,664



12,642



44,306Operating income/(loss)

$
3,606


$
(12,525
)

$
(8,919
)     2005


2004


2003InstrumentsCommercial Operations

$
6,929


$
7,029


$
7,528TriPath Oncology


1,157



130



Total instruments

$
8,086


$
7,159


$
7,528ReagentsCommercial Operations

$
68,238


$
52,683


$
39,013TriPath Oncology


33







Total reagents

$
68,271


$
52,683


$
39,013Fee-per-use
    and otherCommercial Operations

$
8,990


$
8,150


$
7,090TriPath Oncology


614



512



133Total
    fee-per-use
    and other

$
9,604


$
8,662


$
7,223Total revenuesCommercial Operations

$
84,157


$
67,862


$
53,631TriPath Oncology


1,804



642



133Total consolidated revenues

$
85,961


$
68,504


$
53,764    F-27




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2004


2003Depreciation and amortizationCommercial Operations

$
5,018


$
4,698


$
4,154TriPath Oncology


266



240



228Total consolidated depreciation
    and amortization

$
5,284


$
4,938


$
4,382Amortization of deferred R&D
    funding from BD recorded as an offset to R&D expense for
    TriPath Oncology

$



$
(207
)

$
(2,479
)Purchases of property and equipmentCommercial Operations

$
1,133


$
1,059


$
61TriPath Oncology


455



156



85Total consolidated purchases of
    property and equipment

$
1,588


$
1,215


$
146Additions to other intangible
    assetsTriPath Oncology

$
24


$
319


$
   2005


2004Segment assetsCommercial Operations

$
125,845


$
100,717TriPath Oncology


1,669



1,035Total segment assets

$
127,514


$
101,752Reconciling itemInter-segment loan account


(50,546
)


(34,218
)Total consolidated assets

$
76,968


$
67,534     Geographic
    Area Data
    2005


2004


2003United States

$
64,648



75
%

$
49,663



72
%

$
39,491



73
%International


21,313



25
%


18,841



28
%


14,273



27
%Total Revenues

$
85,961






$
68,504






$
53,764   F-28




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2005


2004


2003International RevenuesEurope

$
7,842


$
8,177


$
6,087Canada


7,719



6,425



5,524Asia


5,479



3,883



2,376Rest of world


273



356



286Total international revenues

$
21,313


$
18,841


$
14,273     9.
    Related
    Party Transactions    10.
    Employee
    Benefits      11.
    Contingencies    1:03-CV-11142-DPW.
 F-29




---



##### Table of Contents



TRIPATH
    IMAGING, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      12.
    Change in
    Accounting Estimate    13.
    Quarterly
    Results of Operations (Unaudited)  2005

March 31


June 30


September 30


December 31Revenues

$
19,327


$
21,253


$
21,525


$
23,856Gross profit


13,548



14,739



15,176



16,463Net income


925



1,515



1,779



2,281Earnings per common share (1)Basic

$
0.02


$
0.04


$
0.05


$
0.06Diluted

$
0.02


$
0.04


$
0.05


$
0.06   2004

March 31


June 30


September 30


December 31Revenues

$
15,510


$
16,721


$
18,028


$
18,245Gross profit


10,598



11,720



12,499



12,457Net (loss)/income


(884
)


203



978



308Earnings/(loss) per common share(1)Basic

$
(0.02
)

$
0.01


$
0.03


$
0.01Diluted

$
(0.02
)

$
0.01


$
0.02


$
0.01     (1)
    
    The sum of per share earnings by quarter may not equal earnings
    per share for the year due to changes in average share
    calculations. This is in accordance with prescribed reporting
    requirements. F-30