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Article by DailyStocks_admin    (08-13-08 04:42 AM)

Hologic Inc. CEO JOHN W CUMMING bought 50000 shares on 8-07-2008 at $20.01

BUSINESS OVERVIEW

Overview

We are a diversified medical technologies company specializing in diagnostic imaging products and interventional devices dedicated to serving the healthcare needs of women. Historically, we have developed, manufactured and marketed products focused on mammography, breast care and osteoporosis assessment. In October 2007, we completed our business combination with Cytyc Corporation (also referred to in this document as “Cytyc”), a company that develops, manufactures and markets complementary products covering a range of cancers and women’s health indications, including cervical cancer screening, prenatal diagnostics and partial breast radiation therapy.

We have historically focused our resources on developing systems and subsystems offering superior image quality and diagnostic accuracy, which has enabled us to capture significant market share and customer loyalty, despite the presence of large competitors. As a result of our combination with Cytyc we intend to expand our focus to further utilize Cytyc’s strengths in the fields of obstetrics, gynecology, radiation oncology and minimally invasive surgery.

Our mammography and breast care products include a broad portfolio of breast imaging and related products, including digital and film-based mammography systems, computer-aided detection (CAD), breast biopsy guidance systems, minimally invasive breast biopsy and tissue extraction devices and our recently acquired MammoPad breast cushion. Our osteoporosis assessment products primarily consist of dual-energy X-ray bone densitometry systems and an ultrasound-based osteoporosis assessment product. Our other business unit includes our Fluoroscan mini C-arm imaging products, our Esaote line of extremity MRI (Magnetic Resonance Imaging) systems that are manufactured by an original equipment manufacturer, and our photoconductor coating business, an ancillary business that we acquired as part of our acquisition of AEG Elektrofotografie GmbH (“AEG”).

Cytyc’s product offerings have historically been divided between diagnostic and surgical products. Cytyc’s core diagnostic products are the ThinPrep System, which is primarily used in cytology testing applications, such as cervical cancer screening, and the Full Term Fetal Fibronectin Test, which offers clinical and cost benefits for the assessment of the risk of pre-term birth. Cytyc’s core surgical products include the NovaSure System, which enables physicians to treat women suffering from excessive menstrual bleeding in a minimally invasive manner in order to eliminate or reduce their bleeding, the MammoSite Radiation Therapy System, which is a single-use device for the treatment of early-stage breast cancer, the GliaSite Radiation Therapy System, which provides a full course of post-surgical radiation therapy using Iotrex, a proprietary, liquid radiation source for which Cytyc has an exclusive license, and the Adiana Complete Transcervical Sterilization System, which is a form of permanent female contraception intended as an alternative to tubal ligation and for which Cytyc is in the process of seeking a pre-market approval from the U.S. Food and Drug Administration (the “FDA”).

We were founded on and remain committed to the principle of applying superior technology to health care challenges facing women. Recently, we have expanded and diversified our business through a number of strategic acquisitions, including the following:


•

In September 2005, we acquired intellectual property relating to the mammography business and products of Fischer Imaging Corporation (Fischer), including the intellectual property relating to Fischer’s Mammotest prone breast biopsy and Senoscan digital mammography systems. In July 2006, we sold to Siemens all of the intellectual property we acquired from Fischer relating to the Mammotest system, and retained a royalty-free, non-exclusive, perpetual, irrevocable, worldwide right and license to use that intellectual property for current and future products.



In May 2006, we acquired AEG Elektrofotografie GmbH (“AEG”), headquartered in Warstein, Germany, with manufacturing operations in Germany and China. AEG specializes in the manufacture of photoconductor materials for use in a variety of electro-photographic applications, including the selenium coating of our digital detectors.


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In July 2006, we completed the acquisition of R2 Technology, Inc. (“R2”), then located in Sunnyvale, California, a leader in the development and commercialization of CAD, an innovative technology that assists radiologists in the early detection of breast cancer.


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In July 2006, we completed the acquisition of Suros Surgical Systems, Inc. (“Suros”), located in Indianapolis, Indiana. Suros develops, manufactures and sells minimally invasive interventional breast biopsy technology and products for biopsy, tissue removal and biopsy site marking.


•

In September 2007, we completed the acquisition of BioLucent, Inc. (“BioLucent”), previously located in Aliso Viejo, California. BioLucent develops and markets, the MammoPad breast cushion, which is designed to decrease the discomfort associated with the breast compression required during a mammography.


•

On October 22, 2007, we consummated our largest transaction to date, our business combination with Cytyc Corporation.

We believe our business combination with Cytyc will provide us with a stronger financial base and a more diversified and balanced product portfolio, while reinforcing our focus on women’s health. Additionally, we believe that the significantly increased scale and scope of our operations will better enable us to take advantage of growth opportunities and will create a strong platform for further expanding our operations through product development, cross-selling opportunities and complementary strategic transactions.

We were incorporated in Massachusetts in October 1985 and reincorporated in Delaware in March 1990. Unless the context otherwise requires, references to us, Hologic or our company refer to Hologic, Inc. and each of its consolidated subsidiaries. During fiscal year 2007, we viewed our operations and managed our business in three principal reporting segments: mammography and breast care products, osteoporosis assessment products and all other which includes our mini C-arm imaging products, extremity MRI, AEG photoconductor coatings, and general radiography products. We have provided financial information concerning these segments in Note 14 of the Notes to our Consolidated Financial Statements included in this report. In fiscal 2008 we expect that our reporting segments will be reconfigured to reflect the inclusion of Cytyc and the integration of our combined businesses.

CAD Systems

Osteoporosis Assessment Products

Our osteoporosis assessment products include a family of QDR x-ray bone densitometers and the Sahara Clinical Bone Sonometer, a low-cost ultrasound device that assesses the bone density of the heel. In addition to sales of new bone densitometry systems, we also offer upgrade opportunities to purchasers of many of our earlier generation systems.

QDR x-ray Bone Densitometers. We began commercial shipments of our first QDR dual-energy x-ray bone densitometry system in 1987. Since that introduction, dual-energy x-ray technology became and remains a leading bone densitometry assessment tool. We believe that the advantages of dual-energy x-ray systems include high precision, and the ability to measure bone density of the most important fracture sites, the spine and hip.

In November 1999, we introduced our Delphi QDR Series bone densitometer. Delphi is a bone densitometer that offers physicians the ability to simultaneously assess two of the strongest risk factors for osteoporotic fracture: existing fractures of the spine and low bone density. Using high-resolution fan beam x-ray imaging technology, our Instant Vertebral Assessment, or IVA, technology enables clinicians to perform a rapid, low-dose evaluation of the spine in a single office visit during a routine bone densitometry exam. In May 2001, we received the 2001 Frost & Sullivan Technology Innovation Award in the osteoporosis diagnostics market, given for technical superiority within the industry.

In December of 2002, we introduced our next generation of bone densitometers, the Discovery QDR series of bone densitometers. The Discovery systems reduce bone density scan times providing bone density and IVA scans in just ten seconds. The Discovery’s CADfx software feature automates the classification of spine fractures, and our Express Exam feature automates the patient examination procedure.

In February of 2004, we began shipments of our Explorer series bone densitometer. The Explorer system is an entry-level x-ray bone densitometer targeted at cost conscious practitioners, particularly in international markets.

In June of 2005, we introduced the Discovery P system, our first system specifically configured for primary care physicians, including the capability of integrating bone density information with the patient’s electronic medical record. In November 2005, we introduced High Definition Instant Vertebral Assessment (IVA-HD), which improved the resolution of imaging performed on the Discovery system. We also introduced a lower resolution version of IVA on our Explorer line, making IVA a component on all of our bone densitometry systems.

In May 2006, we received FDA pre-market clearance for the visualization of Abdominal Aortic Calcification (AAC) using our IVA imaging technology. The presence of moderate or severe AAC has been prospectively demonstrated to predict cardiovascular disease a leading cause of death of women over age 65 years.

Ultrasound. In addition to our QDR x-ray bone densitometers, we have developed and sell a lightweight, portable ultrasound bone analyzer, called Sahara, that assesses the bone density of the heel. Clinical trials of ultrasound systems have indicated a significant association of low ultrasonic bone measurements of the heel and the risk of fracture. Since ultrasound devices do not use x-rays in making their measurements, they do not require x-ray licensed or registered operators. However, because ultrasound bone measurements currently are not as precise as x-ray and other measurements, they are less reliable for monitoring small changes in bone density or for assessing the response to therapies. In addition, they are generally limited to measurements at peripheral skeletal sites, not the spine or hip, which are considered the optimal sites for the diagnosis of osteoporosis. We believe that our Sahara ultrasound system represents a relatively low cost, portable, easy-to-use, non-ionizing measurement technique to assist in initial screening for osteoporosis.

Other Products

Our other product offerings include our mini C-arm imaging products, our Esaote line of extremity MRI systems, which are manufactured by an original equipment manufacturer, and, our photoconductor coating business, which we acquired in connection with our acquisition of AEG.

Mini C-arm Imaging

We manufacture and distribute Fluoroscan mini C-arm imaging systems. Mini C-arms provide low intensity, real-time x-ray imaging, with high-resolution images at radiation levels and at a cost below those of conventional x-ray and fluoroscopic equipment. Mini C-arm systems are used primarily by orthopedic surgeons to perform minimally invasive surgical procedures on a patient’s extremities, such as the hand, wrist, knee, foot and ankle.

Extremity MRI

In September 2005, we entered into an agreement, as amended in November 2007, with Esaote of Genoa, Italy for the exclusive distribution and service in the United States of extremity MRI systems manufactured by Esaote. Distribution for this line is effected by a small team of specialists complemented by leads generated by our primary care bone densitometry and mini C-arm sales organizations. The target markets for these products are rheumatology (C-Scan), with specific emphasis on the early detection of rheumatoid arthritis and orthopedics (E-Scan), with an emphasis on orthopedic interventions and surgical planning.

In 2007, we began to distribute the Opera extremity MRI product for the orthopedic market which is designed to open up a wider array of diagnostic possibilities with complete imaging of all extremities, including hip and shoulder applications. The Opera product uses real time positioning to speed set up and significantly reduce exam time.

Photoconductor Coatings

On May 2, 2006, we acquired AEG, with plants in Warstein, Germany, and Shanghai, China. AEG is our sole supplier of the amorphous selenium photoconductor coatings employed in our Selenia full-field digital mammography detectors. AEG also develops, manufactures, and sells non-medical selenium and organic photoconductor materials for use in a variety of other electro photographic applications, including copying and printing. It is one of only two companies which produce selenium drums for high-speed printers. It also develops and sells organic photoconductor coatings for use in low speed copier and laser printer cartridges sold in the aftermarket. AEG sells primarily to assemblers of aftermarket laser printer cartridges, who sell to users for replacement use.

Cytyc’s Diagnostic Products

Cytyc diagnostic product offerings include the ThinPrep System used primarily for cytology testing applications, such as cervical cancer screening, and as a result of Cytyc’s acquisition of Adeza in March 2007, the FullTerm Fetal Fibronectin Test for the assessment of the risk of pre-term birth.

Thin Prep 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 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 Cytyc’s proprietary ThinPrep PreservCyt Solution.

The 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 Cytyc’s clinical trial data, which indicated a 59.7% increase in the detection of high grade lesions with the ThinPrep System. The ThinPrep System offers significantly improved specimen quality over that of the conventional Pap smear method.

The ThinPrep System also serves as a platform for additional gynecological applications using residual patient specimen collected in ThinPrep PreservCyt Solution. Cytyc’s PreservCyt Solution has been approved by the FDA as a transport medium in testing for sexually transmitted infections such as Chlamydia trachomatis and Neisseria gonorrhea directly 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, Cytyc’s PreservCyt Solution has been approved by the FDA as a transport medium for testing for the human papillomavirus (“HPV”) using Qiagen N.V.’s, formerly Digene Corporation, Hybrid Capture ® II HPV DNA Assay. Cytyc has also obtained approval of two pre-market approval supplements from the FDA: (i) 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 (ii) 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. 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, Cytyc believes 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.

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 Cytyc’s proprietary PreservCyt Solution. This enables most 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 Cytyc’s 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 staining and microscopic examination.

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 normal cells. With 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. In addition to acting as a replacement for the conventional Pap smear, the ThinPrep System also can be used 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).

FullTerm Fetal Fibronectin Test

In connection with Cytyc’s acquisition of Adeza Biomedical Corporation, Cytyc acquired a patented diagnostic test, the FullTerm Fetal Fibronectin Test, that utilizes a single-use, disposable cassette and is analyzed on Adeza’s patented instrument, the TLiIQ System. This test is approved by the FDA, for broad use in assessing the risk of preterm birth and is branded as the FullTerm Fetal Fibronectin Test. The FullTerm Test designed to Fetal Fibronectin objectively determine a woman’s risk of preterm birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. Adeza began selling its single-use, disposable FullTerm Fetal Fibronectin test in 1999 and launched its second-generation system, the TLiIQ System, in 2001.

Gestiva

In connection with its acquisition of Adeza, Cytyc also acquired Gestiva (17 alpha-hydroxyprogesterone caproate injection 250 mg/ml), a pharmaceutical product candidate to prevent preterm birth in women at risk of preterm delivery. A New Drug Application, or NDA, has been submitted with the FDA for Gestiva. In January, 2007, Adeza was notified by the Office of Orphan Products Development of the FDA that it had granted Orphan Drug designation covering Gestiva. In October 2007, a third party filed a petition challenging this Orphan Drug designation. If Gestiva is approved, and the challenge rejected, Orphan Drug designation provides the opportunity for seven years of U.S. market exclusivity.

Cytyc’s Surgical Products

Cytyc’s surgical product offerings include the NovaSure System, the MammoSite Radiation Therapy System, the GliaSite Radiation Therapy System, and, as a result of Cytyc’s acquisition of Adiana Inc., in March, 2007, the Adiana Complete Transcervical Sterilization System (“TCS”), which is a form of permanent female contraception intended as an alternative to tubal ligation and for which we are in the process of seeking a pre-market approval from the FDA.

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.

The NovaSure System provides physicians and patients with a fast, simple, safe and effective treatment for excessive menstrual bleeding. The system 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 in the hospital, ambulatory surgery center or physician’s office. Based on pivotal clinical trial data used to obtain initial U.S. regulatory approval, the NovaSure System was demonstrated to have a success rate (returning a woman’s menstrual flow to normal) 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.

CEO BACKGROUND

Mr. Cumming was appointed as Chief Executive Officer and director in July 2001. From November 2002 until October 2007, Mr. Cumming also served as our Chairman. Mr. Cumming served as our President from July 2001 through September 2003. Prior to July 2001 and since joining our company, Mr. Cumming held the position of Senior Vice President and President, Lorad. Prior to joining us, Mr. Cumming served as President and Managing Director of Health Care Markets Group, a strategic advisory and investment banking firm that he founded in 1984.



Mr. Muir, a certified public accountant, was appointed to our Board in July 2001, and has held the positions of Executive Vice President, Finance and Administration and Treasurer since September 2000. Prior to that, Mr. Muir served as our Vice President of Finance and Treasurer since February 1992 and Controller since joining us in October 1988. Mr. Muir has been our Chief Financial Officer since 1992. Mr. Muir received an M.B.A. from the Harvard Graduate School of Business Administration in 1986.



Mr. LaVance has been one of our directors since December 2002. Since 1997, Mr. LaVance has served as President of Century Capital Associates LLC, an investment banking firm that he founded specializing in biosciences fields. From 1995 to 1997, Mr. LaVance was Managing Director for KPMG Health Ventures, leading the life sciences consulting practice of the KMPG accounting firm. Mr. LaVance currently serves as Chairman of the Board of Directors, CEO and President of Scivanta Medical Corporation (SCVM.OB) (previously known as Medi-Hut Co., Inc.).



Ms. Leaming has been one of our directors since September 2003. Ms. Leaming, an independent consultant, was the Chief Executive Officer and President of Tufts Health Plan, a provider of healthcare insurance, from 2003 to 2005. Prior to that, Ms. Leaming served as Tufts Health Plan’s President and Chief Operating Officer from 1998 to 2003, the Chief Operating Officer from 1995 to 1998 and the Chief Operating Officer/Chief Financial Officer from 1986 to 1995. Ms. Leaming currently serves as chair of the Board of the American Red Cross of Massachusetts Bay and as a director of Edgewater Technology, Inc., The Jacobson Group, the Massachusetts Taxpayer Foundation, Biogen Idec Inc. (BIIB) and the Boston Chamber of Commerce.



Mr. Levy has been one of our directors since December 2005. Mr. Levy has been Senior Counsel at Brown Rudnick Berlack Israels LLP, an international law firm, since February, 2005 and, for more than 30 years before that, had been a Partner at Brown Rudnick, specializing in Corporate and Securities Law. Mr. Levy served as our Secretary from our formation in 1985 until December 2005. Mr. Levy is also a director of Option N.V. of Belgium, Scivanta Medical Corporation and the Facing History and Ourselves National Foundation. Mr. Levy received a B.A. from Yale University and a LLB from Harvard Law School.



Ms. Ullian has been one of our directors since October 22, 2007. Since 1996, Ms. Ullian has served as President and Chief Executive Officer of Boston Medical Center, the successor of Boston University Medical Center Hospital. In April 1994, Ms. Ullian was appointed President and Chief Executive Officer of Boston University Medical Center Hospital. From January 1987 to March 1994, Ms. Ullian held the position of President and Chief Executive Officer of Faulkner Corporation/Faulkner Hospital. She holds two academic appointments: Associate Professor at Boston University School of Medicine; lecturer at Harvard University School of Public Health. Ms. Ullian also serves as a director of Vertex Pharmaceuticals and ThermoFisher Scientific. Ms. Ullian had previously served as one of our directors from 1996 to 2003.



Mr. Sullivan has served as our Executive Chairman and one of our directors since our merger with Cytyc on October 22, 2007, having previously served Cytyc as Chief Executive Officer and a director since March 1994, Vice Chairman of the Board of Directors since January 2001, Chairman-elect since January 2002 and Chairman since May 2002. From March 1994 to January 2002 and from July 2002 to October 2007, Mr. Sullivan also served as President of Cytyc and from January 1991 to March 1994, as Vice President of Sales and Marketing of Cytyc. Prior to joining Cytyc, Mr. Sullivan was employed in several senior marketing positions for five years by Abbott Laboratories, a diversified healthcare company, and was a consultant with McKinsey and Company, an international management consulting firm. Mr. Sullivan is a graduate, with distinction, of the United States Naval Academy and received an M.B.A., with distinction, from Harvard University.



Ms. Crawford became one of our directors effective upon our merger with Cytyc on October 22, 2007, having previously served as a director of Cytyc since January 1998. From April 1985 until January 1997, Ms. Crawford served as Chief Operating Officer of Healthsource, Inc., a publicly held managed care organization headquartered in New Hampshire. During her tenure at Healthsource, Inc., Ms. Crawford held a variety of positions and responsibilities, including leading that company’s Northern Region operations and marketing efforts. Since January 1997, Ms. Crawford has been a health care consultant in New Hampshire. Ms. Crawford serves as a director of Universal American, Exact Sciences Corporation and CombinatoRx, Inc. (CRXX).



Mr. Wilson became one of our directors effective upon our merger with Cytyc on October 22, 2007, having previously served as a director of Cytyc since July 2003. A certified public accountant, Mr. Wilson has been an independent business advisor since September 2002. From January 1998 to September 2002, Mr. Wilson served as President and Chief Operating Officer and from August 1995 to January 1998, he served as Senior Vice President, Chief Operating Officer and Chief Financial Officer, of PC Connection, Inc., a direct marketer of information technology products and services. From June 1986 to August 1995, he was a partner in the Assurance and Advisory Services practice of Deloitte & Touche LLP. Mr. Wilson also serves as a director of Edgewater Technology, Inc.



Mr. Levangie became one of our directors effective upon our merger with Cytyc on October 22, 2007, having previously served as a director of Cytyc since July 2003. He served as Executive Vice President and President of Cytyc Surgical Products, from July 2006 to October 2007. Prior to that, Mr. Levangie served as Cytyc’s Executive Vice President, Commercial Operations from August 2003 to June 2006. From August 2002 to July 2003, Mr. Levangie served as President and Chief Executive Officer of Cytyc Health Corporation, a wholly-owned subsidiary of Cytyc. From January to July 2002, he served as President and Chief Operating

Officer of Cytyc. From 1994 to 2002 Mr. Levangie held a variety of executive positions and responsibilities with Cytyc. Prior to joining Cytyc, Mr. Levangie was employed in several sales and marketing positions for seventeen years by Abbott Laboratories, a diversified healthcare company. Mr. Levangie received a B.S. in Pharmacy from Northeastern University. Mr. Levangie serves as a director of Dune Medical Devices Ltd., a privately held medical device company and ev3 Inc., a publicly traded medical device company.



Mr. McDaniel became one of our directors effective upon our merger with Cytyc on October 22, 2007, having previously served as a director of Cytyc since April 1987 and served as a consultant to Cytyc from March 1995 to February 1997. In January 2001, he was named Vice Chairman of the Board of Directors and be served as Cytyc’s Lead Independent from 2004 until our merger with Cytyc. Mr. McDaniel served as a consultant to and a director of CP Ventures, Inc., a venture capital firm, from April 1995 to April 1996 and June 1996, respectively. From 1987 to March 1995, Mr. McDaniel was the President and a director of CP Ventures, Inc.

MANAGEMENT DISCUSSION FROM LATEST 10K

Inventory

Our inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. As a designer and manufacturer of high technology medical equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures on products and prices, reliability and replacement of and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future. If inventory is determined to be overvalued, we would be required to recognize such costs as cost of goods sold at the time of such determination. Although every effort is made to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant negative impact on the value of our inventory and our reported operating results. Additionally, purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value.

Provisions for excess or obsolete inventory are primarily based on our estimates of forecasted net sales and service usage levels. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. We record provisions for excess or obsolete inventory as cost of sales.

Accounts Receivable Reserves

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectability of our trade receivables based on a combination of factors, which may include dialogue with the customer to determine the cause of non-payment, the use of collection agencies, and/or the use of litigation. In the event it is determined that the customer may not be able to meet its full obligation to us, we record a specific allowance to reduce the related receivable to the amount that we expect to recover given all information present. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and our assessment of the customer’s current credit worthiness. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

We also record a provision for estimated sales returns and allowances on product and service related sales in the same period as the related revenues are recorded. These estimates are based on the specific facts and circumstances of particular orders, analysis of credit memo data and other known factors. If the data we use to calculate these estimates do not properly reflect reserve requirements, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be adversely affected.

Our accounts receivable reserves were $4.6 million, $3.7 million and $2.6 million in fiscal 2007, 2006 and 2005, respectively. The increase in the reserves in fiscal 2006 was primarily due to the addition of $852,000 of reserves as a result of our acquisitions of AEG, R2 Technology, Inc. and Suros Surgical Systems, Inc. during fiscal 2006. Also contributing to the increased reserves, but to a lesser extent, was our increase in sales during fiscal 2006. The increase in reserves in fiscal 2007 was primarily due to our increase in revenues during the year. Accounts receivable reserve has decreased as a percentage of sales as a result of our historical collection experience.

Valuation of Business Combinations

We record tangible and intangible assets acquired and liabilities assumed in recent business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the dates of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. The valuation of purchased research and development represents the estimated fair value at the dates of acquisition related to in-process projects. Our purchased research and development represents the value of in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of acquisition. We expense the value attributable to these in-process projects at the time of the acquisition. If the projects are not successful or completed in a timely manner, we may not realize the financial benefits expected for these projects, or for the acquisitions as a whole.

We use the income approach to determine the fair values of our purchased research and development. This approach determines fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value. We base our revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions by competitors. In arriving at the value of the in-process projects, we consider, among other factors, the in-process projects’ stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the expected introduction date and the estimated useful life of the technology. We base the discount rate used to arrive at a present value as of the date of acquisition on the time value of money and medical technology investment risk factors. For the in-process projects we acquired in connection with our fiscal 2006 acquisitions, we used risk-adjusted discount rates to discount our projected cash flows, ranging from 14% to 35%. We believe that the estimated purchased research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the projects. We did not acquire in-process research and development in connection with the fiscal 2007 acquisition of BioLucent.

We have also used the income approach, as described above, to determine the estimated fair value of certain other identifiable intangibles assets including developed technology, customer relationships and tradenames. Developed technology represents patented and unpatented technology and know-how. Customer relationships represent established relationships with customers, which provides a ready channel for the sale of additional products and services. Tradenames represent acquired product names that we intend to continue to utilize.

Goodwill and Intangible Assets

Goodwill and intangible assets that have indefinite useful lives are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We record intangible assets at historical cost. We amortize our intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization is recorded over the estimated useful lives ranging from 4 to 20 years. We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, we will write-down the carrying value of the intangible asset to its fair value in the period identified. We generally calculate fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. In connection with sale of certain intellectual property, previously acquired from Fischer to Siemens AG, we recorded an impairment charge of approximately $1.4 million during the fourth quarter of fiscal 2006. The impairment charge was the result of a higher carrying value of such assets as compared to their fair value. The charge is a component of the net gain on sale of intellectual property of $5.1 million and is classified as part of the mammography segment.

Consistent with prior years, we conducted our annual impairment test of goodwill during the second quarter of fiscal 2007. In performing the test, we utilize the two-step approach prescribed under FASB Statement No. 142, Goodwill and Other Intangible Assets . The first step requires a comparison of the carrying value of the reporting units, as defined, to the fair value of these units. We considered a number of factors to determine the fair value of a reporting unit, including an independent valuation to conduct this test. The valuation is based upon expected future discounted operating cash flows of the reporting unit as well as analysis of recent sales or offerings of similar companies. If the carrying value of a reporting unit exceeds its fair value, we will perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. Since the adoption of Statement No. 142, we have not performed the second step of the impairment test because the fair value of each reporting unit has exceeded its respective carrying value. There were no impairment indicators identified during the remainder of fiscal 2007 that required a re-assessment of the annual impairment test.

The estimate of fair value requires significant judgment. Any loss resulting from an impairment test would be reflected in operating income in our consolidated statements of income. The annual impairment testing process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded.

Pension Liabilities

In connection with our acquisition of AEG, we sponsor defined benefit pension plans covering the employees of our AEG German subsidiary. On September 29, 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit post-retirement plan’s overfunded status or a liability for a plan’s underfunded status, measure a defined benefit post-retirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit post-retirement plan in comprehensive income in the year in which changes occur. SFAS 158 does not change the amount of net periodic benefit cost included in net income or address the various measurement issues associated with post-retirement benefit plan accounting. As required by SFAS No. 158, we used a prospective approach in our adoption of SFAS No. 158. As of September 29, 2007, we recognized the unfunded status of its deferred benefit pension plan. The adoption of SFAS No. 158 did not impact our compliance with our debt covenants under its credit agreements, cash position or results of operations. As of September 29, 2007, we have recorded a pension liability, based upon an actuarial valuation, of approximately $7.6 million as a component of accrued expenses in the accompanying consolidated financial statements. The selection of the assumptions used to determine pension expense or income involves significant judgment. Our actuarial assumptions and discount rate assumptions are considered the key variables in determining pension expense or income. The discount rate assumption was determined by using a model consisting of theoretical bond portfolios that closely match the various durations of that of our pension liability. The discount rate assumption we used for our German pension benefits plans was 5.5%. The discount rate is dependent on the participation level of the particular countries covered within the plans. Therefore, the discount rate is consistent with the fact that the pension is 100% German-based.

Revenue Recognition

We recognize product revenue upon shipment, provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding acceptance, the sales price is fixed or determinable, no rights of return exist and collection of the resulting receivable is probable. Generally, our product arrangements are multiple element arrangements, including services such as installation and training. Beginning in the fourth quarter of fiscal 2003, we began accounting for these arrangements in accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Based on the terms and conditions of the product arrangements, we have concluded that these services and undelivered products can be accounted for separately from the delivered product element as our delivered product has value to our customers on a stand-alone basis and we have objective and reliable evidence of the fair value of such services and undelivered products. Accordingly, service revenue representing the fair value of services not yet performed at the time of product shipment is deferred and recognized as such services are performed. The fair value of the undelivered products is also deferred at the time of product shipment and recognized when these products are delivered. The residual revenue under the product arrangement will be recognized as product revenue upon shipment. There are no customer right of return in our sales agreements.

We recognize product revenue upon the completion of installation for products whose installation is essential to its functionality, primarily related to our digital imaging systems. A provision is made at that time for estimated warranty costs to be incurred.

Service revenues primarily consist of amounts recorded under service and maintenance contracts and repairs not covered under warranty, installation and training revenues and shipping and handling costs billed to customers. Service and maintenance contract revenues are recognized ratably over the term of the contract. Other service revenues are recorded when the services are delivered.

Although our products contain operating and application software, we have determined that for all of our products, except for those recently obtained with the acquisition of R2 Technology, Inc., the software element is incidental in accordance with AICPA SOP 97-2, Software Revenue Recognition , (SOP 97-2) and EITF Issue No. 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Softwar e.

We have determined that the provisions of SOP 97-2 apply to revenue transactions for those CAD products recently acquired from R2 Technology, Inc. SOP No. 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multi-element arrangements is allocated to each element of the arrangement using the residual method based on the fair value of the undelivered elements. Our determination of fair value of the undelivered elements in the multi-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so for an element not yet sold separately. The Company recognizes revenue on CAD product sales upon completion of installation at which time the only remaining undelivered element is post contract support.

The Company recognizes revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. The allocated fair value of revenues pertaining to contractual maintenance obligations are classified as a current liability, since they are typically for the twelve-month period subsequent to the balance sheet date.

For multi-element arrangements where VSOE of fair value for post contract support has not been established, we would recognize revenue ratably over the contractual term of the support. For multi-element arrangements where VSOE of fair value of post contract support has been established, we recognize revenue using the residual method at the time all other revenue recognition criteria have been met. Amounts attributable to post contract support are recorded as deferred revenue and recognized ratably over the contractual term of the support.

In accordance with the EITF Issue No. 00-10, Accounting for Shipping and Handling Fees , the Company classifies the reimbursement by customers of shipping and handling costs as revenue and the associated cost as cost of revenue. The Company also records reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and service in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14). For the fiscal 2007, 2006, and 2005, shipping and handling costs and reimbursable out-of-pocket expenses were not material.

Product Warranties

Products sold are generally covered by a warranty for a period of one year. We accrue a warranty reserve at the time of revenue recognition for estimated costs to provide warranty services. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased or decreased warranty claim activity or increased or decreased costs associated with servicing those claims, our warranty accrual will increase or decrease, respectively, resulting in decreased or increased gross profit. Our warranty accrual was approximately $12.1 million, $9.0 million and $6.7 million in fiscal 2007, 2006 and 2005, respectively. The increase in the warranty accrual in fiscal 2007 is primarily attributable to the increase in the number of digital mammography systems sold. The increase in the warranty accrual in fiscal 2006 is primarily attributable to an increase in the number of digital mammography systems sold as well $941,000 of acquired reserve amounts as a result of our acquisitions in fiscal 2006.

Stock-Based Compensation

On December 16, 2004 the FASB issued SFAS Statement No. 123(R) (SFAS 123(R)), Share-Based Payment , which is a revision of SFAS Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation . SFAS 123(R) supersedes APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees , and amends SFAS No. 95, Statement of Cash Flows . Generally, the approach under SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS 123(R) must be adopted for fiscal years starting after June 15, 2005. As a result, we have adopted SFAS 123(R) starting in our fiscal first quarter of 2006, which began on September 25, 2005.

As permitted by SFAS 123, we historically accounted for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. We have adopted the “modified prospective” method alternative outlined in SFAS 123(R). A “modified prospective” method is one in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. As a result, we are amortizing the unamortized stock-based compensation expense related to unvested option grants issued prior to the adoption of SFAS 123(R), whose fair value was calculated utilizing a Black-Scholes Option Pricing Model. For options granted after our adoption of SFAS 123(R), we have elected to use a bi-nomial model to determine the weighted average fair value of options, rather than the Black-Scholes model, which we had previously used. In addition, SFAS 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS 123. As a result, we have applied an estimated forfeiture rate of 9.4% in fiscal 2007 and a range between 9.4% and 10.6% in fiscal 2006, for stock option awards, in determining the expense recorded in our consolidated statement of income. For further information regarding the assumptions we used in determining our stock-based compensation expense, see Note 2 to our financial statements.

During the year ended September 29, 2007 we recorded $6.1 million of stock-based compensation expense for employee equity awards. The stock-based compensation expense for employee equity awards included $695,000 in cost of revenues, $828,000 in research and development, $602,000 in selling and marketing and $4.0 million in general and administrative expense for the year ended September 29, 2007. The compensation expense reduced both basic earnings per share by $0.07 and diluted earnings per share by $0.08. In accordance with the modified-prospective transition method of SFAS 123(R), results for prior periods have not been restated. As of September 29, 2007, there was $13.6 million of unrecognized compensation expense related to non-vested market-based stock option awards that we expect to recognize over a weighted-average period of 3.09 years. As of September 29, 2007, there was $2.2 million of unrecognized compensation expense related to non-vested restricted stock units that we expect to recognize over a weighted average period of 1.6 years

Income Taxes

We account for income taxes under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes . This statement requires that we recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carry forwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

In fiscal 2007, we recorded approximately $21.9 million of tax benefit associated with deductions generated by excess stock based compensation deductions expected to be utilized on our fiscal 2007 U.S. tax return. This full amount was recorded as an increase to additional paid in capital. Additionally, we recorded a decrease of approximately $280,000 to our valuation allowance against certain federal and state net operating losses acquired in the Suros and R2 acquisitions with a corresponding reduction to goodwill. The remaining change in valuation allowance is attributable to the decrease in valuation allowance on certain state tax assets generated through 2007. We believe it is more likely than not that these state tax assets will be realized.

We establish tax reserves based on our assessment of exposure associated with permanent tax differences and tax credits. These tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve. Based on the annual evaluations of tax positions, we believe we have appropriately filed our tax returns and accrued for possible exposures. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, our effective tax rate in a given financial period might be materially impacted. During the fourth quarter of fiscal 2005, we received notification that the Joint Committee on Taxation had no exceptions with the Internal Revenue Service’s conclusions on several tax returns under examination. Therefore, we released $750,000 of tax reserves related to these returns further reducing our effective tax rate for fiscal 2005.

RESULTS OF OPERATIONS

Fiscal Year Ended September 29, 2007 Compared to Fiscal Year Ended September 30, 2006

In fiscal 2007 our product sales increased 62% compared to fiscal 2006 primarily due to an increase in revenues from our mammography/breast care products, led by an increase in the number of Selenia digital mammography systems sold, and to a lesser extent, increased breast biopsy sales from Suros, acquired in the fourth quarter of fiscal 2006. Also contributing to the increase was an increase in our other product sales, primarily attributable to the inclusion for the full year of sales from AEG, acquired during the third quarter of fiscal 2006 and an increase in sales of mini C-arm systems. Partially offsetting these increases was a decrease in osteoporosis assessment sales in fiscal 2007.

Mammography/Breast Care product sales increased 74% in fiscal 2007 compared to fiscal 2006 primarily due to a $178.0 million increase in digital mammography system sales, an increase of $50.1 million in breast biopsy device sales from Suros and a $8.4 million increase in CAD product sales from R2. Suros and R2 are entities we acquired in the fourth quarter of fiscal 2006. Prior to our acquisition of R2 we had sold CAD products together with our digital mammography systems, primarily from R2 as a distributor. The increase in CAD product sales represents the additional CAD sales made without our digital mammography systems. These increases were partially offset by an $8.6 million decrease in MultiCare stereotactic table sales and an $8.3 million decrease in analog mammography systems sales. The increase in our digital mammography product sales was primarily attributable to an increase in the number of Selenia systems and related components sold, primarily in the United States. In fiscal 2007, we sold 1,189 digital mammography systems compared to 555 systems in fiscal 2006. This revenue was partially offset by a decrease in average selling prices primarily attributable to increased competition, higher dealer sales, changes in product configuration and increased multi-system sales. We attribute the increase in digital mammography system sales primarily to the growing acceptance of our Selenia mammography system and of digital mammography in general. The decrease in MultiCare stereotactic tables was primarily attributable to a decrease in the number of systems sold worldwide in the current fiscal year compared to fiscal 2006 due in part to higher demand in 2006 related to increased sales activity following our acquisition of Fischer’s mammography intellectual property in September 2005 and, to a lesser extent, a decrease in average selling prices primarily in the United States. The decrease in sales of our analog mammography systems was primarily attributable to a decrease in the number of systems sold worldwide and, to a lesser extent, a decrease in average selling prices. We believe that this decrease in analog system sales was primarily due to the shift in product sales to digital systems. We expect sales for analog systems to continue to decrease in fiscal 2008.

Osteoporosis assessment product sales decreased 25% in fiscal 2007 compared to fiscal 2006. This decrease was primarily due to a $13.9 million decrease in product sales in the United States primarily due to a decrease in the number of bone densitometry systems sold and, to a lesser extent, a decrease in the average selling prices. We believe this decrease in our domestic unit sales reflect a decline in market conditions due to a reduction in reimbursement for osteoporosis assessment exams.

Other product sales increased 105% in fiscal 2007 compared to fiscal 2006. This increase was primarily due to the addition of $29.6 million of sales from AEG, acquired during the third quarter of fiscal 2006, and an $8.7 million increase in our mini C-arm system sales. The increase in mini C-arm revenue is primarily the result of an increase in the number of systems sold in the United States and Europe.

In fiscal 2007, approximately 75% of product sales were generated in the United States, 15% in Europe, 5% in Asia, and 5% in other international markets. In fiscal 2006, approximately 72% of product sales were generated in the United States, 17% in Europe, 7% in Asia, and 4% in other international markets. We believe the higher growth in sales dollars to the United States market is primarily due to an increase in demand for our Selenia digital mammography system as adoption of digital mammography is occurring at an increased rate in the United States as compared to international markets.

Service and other revenue is primarily comprised of revenue generated from our field service organization to provide ongoing service, installation and repair of our products. Service and other revenue increased 47% in fiscal 2007 compared to fiscal 2006. This increase was primarily due to an increase in service contract revenues of $30.7 million from an increase in the number of service contracts sold and, to a lesser extent, an increase of $3.1 million in training revenues in our mammography/breast care segment. We believe that these increases reflect the continued growth in our installed base of products, especially Selenia, and from the addition of service and other revenues from R2 and Suros which we acquired in the fourth quarter of fiscal 2006.

Cost of product sales decreased as a percentage of product sales to 42% in fiscal 2007 from 48% in fiscal 2006. These costs decreased as a percentage of product sales primarily due to increased revenues and improved profitability associated with the shift in mammography product sales to Selenia and, to a lesser extent, the lower cost of CAD as a result of our acquisition of R2. The Selenia systems have significantly higher selling prices, more than offsetting the higher costs of the product, when compared to analog mammography. In addition, fiscal 2007 includes results of the recently acquired R2 and Suros product lines for the entire year which have lower costs as a percentage of sales. Our higher Selenia sales resulted in an improved absorption of fixed manufacturing costs. These improvements were partially offset by fewer bone densitometry systems sold, primarily in the United States, which negatively impacted the absorption of fixed overhead and a reduction in the average selling prices for these systems. Fiscal 2006 includes $4.1 million of additional costs related to the sales of acquired AEG, R2 and Suros inventory that was written up to fair value for purchase accounting purposes as of the date of each acquisition.

Costs of Product Sales—Amortization of Intangible Assets increased primarily due to the increase in acquired intangible assets as a result of the acquisitions of AEG, R2, Suros and the intangible assets acquired from Fischer Imaging during fiscal 2006, as well as, the acquisition of BioLucent in fiscal 2007. The underlying intangible assets substantially relate to acquired developed technology and know-how. These intangible assets are being amortized over their estimated useful lives of between 8.5 and 13 years.

Cost of service and other revenue increased in absolute dollars primarily related to additional personnel and other costs to expand our service capabilities, especially in the United States, to support our growing installed base of products and increased warranty costs. We expect our costs of service and other revenue to remain relatively high as a percentage of service and other revenue, reflecting our need to employ the required personnel for warranty, non-warranty and installation activities to service our growing installed base of products. We also expect a continued increase in customers entering into service agreements in connection with our transition to digital mammography and direct service coverage.

Research and Development Expenses. Research and development expenses increased 57% in fiscal 2007 compared to fiscal 2006. The increase was primarily due to $11.4 million of additional expenses as a result of the AEG, R2 and Suros acquisitions. Also contributing to the increase was an increase in mammography related expenses of $3.7 million primarily related to our tomosynthesis development project.

Selling and Marketing Expenses. Selling and marketing expenses increased 52% in fiscal 2007 compared to fiscal 2006. The dollar increase was primarily due to increased selling and marketing costs related to the acquisitions of AEG, R2 and Suros of $18.8 million. In the current fiscal year, commission expense related to our direct sales force increased approximately $7.4 million due to the increased product sales in direct territories and increased $5.5 million related to distributor commissions due to increased product sales through these channels. Salaries, benefit and travel expenses increased approximately $8.6 million as a result of increased personnel to support our increased product sales and as a result of the acquisitions of AEG, R2 and Suros. Also contributing to the increase was $1.2 million of additional tradeshow and marketing related expenses as compared to the prior year.

General and Administrative Expenses. General and administrative expenses increased 48% in fiscal 2007 compared to fiscal 2006. The increase was primarily due to an increase of $13.4 million in compensation and related benefits primarily due to an increase in personnel including $10.7 million from the increased headcount as a result of the acquisitions of AEG, R2 and Suros and an increase of $1.4 million of stock-based compensation. Also contributing to the increase was $2.2 million in accounting and tax expenses and an additional $1.0 million of additional depreciation expense associated with the recently acquired entities.

Amortization of Acquired Intangible Assets. The Company incurred amortization expense for acquired intangible assets of $5.6 million in fiscal 2007 primarily due to the acquisitions of AEG, R2, Suros and the intangible assets acquired from Fischer Imaging during fiscal 2006, as well as, BioLucent in fiscal 2007. The underlying intangible assets substantially relate to acquired customer relationships and tradenames. These intangible assets are being amortized over their estimated useful life of between 8.5 and 16 years.

Net Gain on Sale of Intellectual Property. The Company recognized a net gain of $5.1 million for the sale of Mammotest intellectual property to Siemens in fiscal 2006 for $6.5 million. This gain consisted of the $6.5 million proceeds from the sale partially offset by the $1.4 million impairment charge for the related intangible assets.

Acquired In-Process Research and Development Expenses. We incurred charges for acquired in-process research and development of $19.9 million in fiscal 2006. The charges included $4.2 million in connection with our acquisition of Fischer Imaging’s intellectual property relating to its digital mammography product on September 29, 2005, $600,000 in connection with our acquisition of AEG on May 2, 2006, $10.2 million in connection with our acquisition of R2 on July 13, 2006 and $4.9 million in connection with the acquisition of Suros on July 27, 2006. The projects are described in further detail in our discussion of these acquisitions. There was no charge for acquired in-process research and development related to the fiscal 2007 acquisition of BioLucent.

In fiscal 2007, these expenses consisted primarily of the interest costs and fees on our unsecured revolving line of credit entered into on July 24, 2006 (and amended on September 25, 2006) of $1.5 million as well as interest costs on notes payable assumed with the acquisition of AEG in the amount of $963,000. These expenses were partially offset by other income of $857,000. The most significant item of other income related to the increase in the cash surrender value of life insurance contracts related to our SERP. In fiscal 2006, these expenses were primarily comprised of the interest costs and fees on our unsecured revolving line of credit of $738,000 as well as interest costs related to AEG’s notes payable of $309,000. To the extent that foreign currency exchange rates fluctuate in the future, we may be exposed to continued financial risk. Although we have established a borrowing line of credit denominated in the foreign currency, the euro, in which our subsidiaries currently conduct business to minimize this risk, we cannot assure that we will be successful or can fully hedge our outstanding exposure.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Our results of operations for the first nine months of fiscal 2008 include the results of Cytyc’s operations for the ten week period in the first quarter, following the completion of our business combination with Cytyc on October 22, 2007, and for the full thirteen week period in the current quarter and for 36 of the 39 weeks in the current nine month period. Cytyc’s results of operations are not included in our comparative three and nine months of fiscal 2007.

As a result of the Cytyc merger, we reassessed our segment reporting based on the operating and reporting structure of the combined company. Beginning in fiscal 2008, we combined our previously reported Other business segment with our Breast Health (formerly Mammography/Breast Care) and Skeletal Health (formerly Osteoporosis) segments, to better reflect how we view our operations and manage our business. Our Other business segment previously included AEG, mini C-arm, extremity MRI, conventional general radiography service and digital general radiography systems businesses. The AEG business is now part of Breast Health while the remaining reporting units are part of Skeletal Health.

In addition, we are reporting two new operating segments: Diagnostics and GYN Surgical. Diagnostics includes the ThinPrep ® Products and the FullTerm Fetal Fibronectin test, acquired as part of Cytyc’s purchase of Adeza in March 2007, and GYN Surgical includes the NovaSure system and the Adiana ® TCS system under development. The MammoSite ® Radiation Therapy system, previously part of Cytyc’s surgical reporting segment, which is a single-use device for the treatment of early-stage breast cancer, is now part of our Breast Health segment. Third Wave, which was acquired in July of 2008, will be reported as part of our Diagnostics segment.

We now report our business as four segments; Breast Health, Diagnostics, GYN Surgical and Skeletal Health. Prior periods have been restated to conform to this presentation.

All dollar amounts in tables are presented in thousands.

In the current three and nine month periods, our product sales increased 136% and 142% compared to the corresponding periods in the prior year, primarily due to the additional revenues from Cytyc’s Diagnostics segment of approximately $123.7 million and $343.8 million, respectively; Cytyc’s GYN Surgical segment of approximately $55.9 million and $160.1 million, respectively; and an increase in revenues from our Breast Health products of approximately $39.5 million and $142.0 million, respectively.

Breast Health product sales increased 27% in the current quarter compared to the corresponding period in the prior year, primarily due to a $21.1 million increase in worldwide digital mammography system sales, the addition of $8.6 million of product sales of the MammoSite ® Radiation Therapy System, a $6.3 million increase in breast biopsy device sales from Suros and the addition of $5.7 million of product sales of the MammoPad ® breast cushion. Partially offsetting these increases was a decrease of $4.2 million in digital array sales to an OEM as we phase out of selling these arrays to third parties. The MammoSite ® system was acquired in connection with our business combination with Cytyc in October 2007 and the MammoPad ® cushion was acquired by us in connection with our BioLucent acquisition in September 2007. The increase in our digital mammography product sales was primarily attributable to an increase in the number of Selenia™ systems and related components sold, including our R2 CAD software. In the current quarter we sold 429 digital mammography systems compared to 328 systems in the third quarter of fiscal 2007. We attribute the increase in digital mammography system sales primarily to the growing acceptance of our Selenia™ mammography system and of digital mammography in general.

For the current nine month period Breast Health product sales increased 35% compared to the corresponding period in the prior year, primarily due to an $80.4 million increase in worldwide digital mammography system sales, the addition of $25.8 million of product sales of the MammoSite ® Radiation Therapy System, an $18.6 million increase in breast biopsy device sales from Suros and the addition of $16.7 million of product sales of the MammoPad ® cushion. The increase in our digital mammography product sales was primarily attributable to an increase in the number of Selenia™ systems and related components sold, including our R2 CAD software. In the current nine month period we sold 1,231 digital mammography systems compared to 838 systems in the first nine months of fiscal 2007.

Diagnostics product sales were $123.7 million and $343.8 million in the three and nine month periods ended June 28, 2008, respectively, due to the inclusion of Cytyc results for the full thirteen week period in the current quarter and for 36 of the 39 weeks in the current nine month period. These sales include our ThinPrep ® and FullTerm products.

GYN Surgical product sales were $55.9 million and $160.1 million in the three and nine month periods ended June 28, 2008, respectively, due to the inclusion of Cytyc results for the full thirteen week period in the current quarter and for 36 of the 39 weeks in the current nine month period. These sales include our NovaSure system.

Skeletal Health product sales increased 11% in the current quarter compared to the third quarter of fiscal 2007, primarily due to a $2.0 million increase in mini C-arm sales and a $0.8 million increase in bone densitometry product sales partially offset by a $0.8 million decrease in extremity MRI sales. The increase in mini C-arm sales was primarily due to an increase in the number of units sold worldwide and, to a lesser extent, an increase in the average selling prices related to the commercialization of a new and enhanced product version. The increase in densitometry sales was due to an increase in the number of bone densitometry systems sold worldwide, partially offset by a slight decrease in the average selling prices. The decrease in extremity MRI sales was due to a decrease in the number of systems sold.

For the current nine month period, Skeletal Health product sales increased 10% compared to the corresponding period in the prior year, primarily due to a $9.1 million increase in mini C-arm sales worldwide, partially offset by a $2.5 million decrease in extremity MRI sales and a $1.4 million decrease in bone densitometry product sales. The increase in mini C-arm sales was primarily due to an increase in the number of units sold and, to a lesser extent, an increase in the average selling prices related to the commercialization of a new and enhanced product version. The decrease in extremity MRI sales was due to a decrease in the number of systems sold. The decrease in bone densitometry sales was primarily due to a decrease in the number of used bone densitometry systems and upgrades sold and a decrease in the average selling prices of our bone densitometry systems in the United States, partially offset by an increase in the number of bone densitometry systems sold internationally. We believe the decrease in our domestic osteoporosis assessment average selling prices reflected a decline in market conditions due to a reduction in reimbursement for osteoporosis assessment exams.

In the first nine months of fiscal 2008, approximately 80% of product sales were generated in the United States, 12% in Europe, 4% in Asia, and 4% in other international markets. In the first nine months of fiscal 2007, approximately 74% of product sales were generated in the United States, 15% in Europe, 6% in Asia, and 5% in other international markets. The increase in the percentage of product sales generated in the United States in fiscal 2008 is primarily due to the additional product sales from Cytyc, which had a higher percentage of its product sales from the United States than our historical businesses.

Service and other revenue is primarily comprised of revenue generated from our field service organization to provide ongoing service, installation and repair of our products. Service and other revenue increased 60% and 57% in the current three and nine month periods, respectively, compared to the corresponding periods of the prior year. The increases in service and other revenue in the three and nine month periods were primarily due to an increase in service revenues of $13.7 million and $36.0 million, respectively, in our Breast Health segment, primarily due to an increase in service contract revenues, and the inclusion of service revenue of $2.8 million and $7.5 million, respectively, from the Diagnostics segment, as a result of the inclusion of Cytyc results for the full thirteen week period in the current quarter and for 36 of the 39 weeks in the current nine month period. We believe that the increase in our Breast Health service and other revenue reflects the continued growth in our installed base of systems and detectors.

The cost of product sales increased 60% in the current quarter and 86% in the current nine month period compared to the corresponding periods in the prior year primarily due to the addition of $26.8 million and $116.5 million of cost of product sales, respectively, from the Cytyc products included in our results since October 22, 2007 and, to a lesser extent, increased product sales of our historical products discussed above. Included in the additional Cytyc cost of product sales in the nine month period ended June 28, 2008 is approximately $42.3 million of additional costs related to sales of acquired Cytyc inventory that was written up to fair value for purchase accounting purposes as of the date of acquisition.

The cost of product sales as a percentage of product revenue in the third quarter and the first nine months of fiscal 2008 was 28% and 33%, respectively, as compared to 41% and 42%, respectively, in the corresponding periods in the prior year. These costs as a percentage of product sales decreased, primarily due to the higher gross margins earned on Cytyc product sales compared to our historical products, partially offset by the additional charges for the write-up to fair value for the Cytyc inventory sold as noted above. Also contributing to the decrease in cost of product sales as a percentage of product revenue was increased revenues and improved profitability associated with the shift in mammography product sales to our Selenia™ full field digital mammography systems. Our higher Selenia™ system sales resulted in an improved absorption of fixed manufacturing costs. Partially offsetting the decreases in costs as a percentage of product sales was a reduction in the average selling prices for bone densitometry systems sold into the primary care market in the United States and charges associated with a MRI inventory impairment charge and related purchase obligations totaling $4.0 million in the first nine months of fiscal 2008.

CONF CALL

Jack Cumming

Well, Wendy, Glenn is going to go second, and this is Jack Cumming's, so welcome everybody here today. Thank you for attending our third quarter fiscal 2008 conference call. Joining me on the call this morning is Rob Cascella, our President and COO; Howard Doran, our President, the Diagnostics Group; and Glenn Muir, our Chief Financial Officer.

Before proceeding, I want to remind everybody the Safe Harbor Statement accompanying our press release and that applies to the comments made during this call. We are very pleased to share with you our fiscal third quarter financials results for the period ending June 28, 2008, and as is my usual custom, I will briefly touch on the highlights and then let Glenn provide you with further details on our operational progress, give you some guidance for the remainder of fiscal 2008, and then, of course, we will open it up for questions.

Let's start with quarterly performance. This has been, the third quarter, our 18th consecutive quarter, where Hologic achieved record earnings, posting $85 million in non-GAAP adjusted net income. That represents a 209% increase compared to our non-GAAP adjusted net income of $27 million in the third quarter of fiscal '07. On a GAAP basis, we reported net income of $61 million or $0.24 per diluted share, which included one-time non-recurring and other charges, which Glenn is going to go into detail.

Consistency breeds success and as stated 18 consecutive quarters of earnings growth is no small task. Our focus on judiciously managing cost and improving operating efficiencies continues to pay off obviously by our performance. As stated in our press release, fiscal '08 third quarter revenues totaled $429 million, which represented a 124% increase over the third quarter of fiscal '07 and the increase was primarily due to the contribution of Diagnostics and GYN Surgical business acquired from Cytyc last year.

The company's backlog for orders of Selenia was 501 systems, was a digital systems in total and a total backlog for all products of $378 million. We experienced two major hit in sales for this quarter. First, our primary detected customers accelerated their migration to another supplier, as we face out of selling to third parties. We will plan on a continue decline from third party sales over the remaining course of the contract, which expires in July of next year.

Secondly, Selenia revenue for the quarter was less than our initial expectation, and not because of unit sales, as we set a record for the number sold. It was primarily due to the configurations of Selenia's installed in the quarter. As indicated in last quarter, when we experienced the opposite effect, there was a lower concentration of our digital mammography workstations and communication mangers, included with each Selenia sale in the quarter.

We believe this is largely due to a couple of key factors. One, a disproportionally higher volume of sales not requiring our proprietary workstation, since customers are simply purchasing additional Selenia Gantry's to add to their existing systems. Number two, a higher mix of de-featured domestic Selenias installed in the quarter to sites that perform screening mammographies only, as customers expand to broader scope of their distributed mammography systems. These configuration changes occurred in mid-quarter and had the effect of reducing incremental revenue per system, which would have appear as a lower mathematically calculated ASP.

With exception of Q2, the configuration of systems realized in Q3, is more inline with previous quarters. Therefore, we believe we will be returning to a more normalized mix over the next few quarters, which of course, Rob will be happy to talk about during the Q&A.

As an additional point of information in Q3, we had our largest order booking quarter ever, normalizing for Q4 '07, when we had a 40 system domestic order from one customer. Additionally, we could have eclipsed that number in Q4. International orders were again extremely strong showing the second highest order volume in our history. On the competitive front, we recently received from NEMA, an analysis of quarterly mammography orders recorded for all manufacturers in the US.

Selenia orders represented slightly over 60% of total digital mammography orders. Overall, Breast Health revenues were $219.5 million for the third quarter, which represents a 32% increase over the $166.3 million for the same period in the fiscal '07.

On the GYN Surgical front, we are very pleased with the results of the group, as sales of NovaSure exceeded expectations with revenues of $56.3 million in our fiscal third quarter versus $55.2 million in our fiscal second quarter. As you may remember from last quarters call, we acknowledge slowing in NovaSure growth in the US, which resulted in an overhang of inventory.

We give guidance that our Q2 to Q3 NovaSure revenue would be down and flat for the full fiscal year, as we continue to implement a shift in the selling strategy including continuing to move more of our customers to standing orders to normalize the order patterns and to manage inventory better, continuing to focus on driving underline procedure growth by convincing physicians to use NovaSure sooner as a superior therapeutic alternative, when women with heavy bleeding fail on hormonal therapy.

Continuing to drive the use of NovaSure in the Physician Office, where we believe there is additional growth and some of the metrics worth noting for the quarter that 78 of the hospitals and the ambulatory surgical centers the decreased inventory over the quarter over the course of this quarter. We took an inventory in July and we match that up with the inventory, we had taken at the end of Q2 and there was a 78% reduction for hospitals and ASCs.

There was a 62% decrease in inventory in the offices. Only 4% of the offices and 5% of the hospitals had inventories of greater than 1.5 month. So, we are certainly getting there. We feel very good. We had a strong quarter and relative to our strategy of promoting a monthly standing order program among our customer base, the compliance is going along very well. 86% of the primary physicians are compliant with the monthly standing orders.

The compliance as a revenue is over 100%. So, the number of offices is 86%, but the number of revenue is 100% of what has been committed for. In the hospital business, which represent some 70% of our business it is over 100% of the total. As a matter of fact, we are $7 million over the contracted value. So, we are extremely happy with that.

As our fiscal Q3 results give us confidence on the strategy, we believe its working. We believe we will put NovaSure back on the firm footing with strong growth prospects. All three objectives had been met or exceeded. We have increased sales driving both the burn off of existing inventories in new orders; we increased the backlog and monthly standing orders from $16 million at the end of Q2 to $36 million at the end of Q3. We have decreased the field inventory then we have made significant progress in normalizing inventory levels and our customers and we expect the majority accounts will be at par with desired inventory levels by the end of this current quarter.

For the Diagnostics Group, their revenues totaled a $126.6 million, which is the 5% increase over Q3 of '07. We are very excited about the closing of the acquisition of Third Wave on July 24th. We have conducted numerous onsite meetings with the Third Wave team and the integration of business systems and processes have begun. More importantly all hands are on deck and working toward FDA approval for their various HPV submissions.

The synergies between Hologic's Diagnostics Research, Engineering and Manufacturing team in Marlborough and Third Wave Group in Madison will help drive current as well as future product developments. Sales training of the Hologic laboratory sales team is taking twice beginning next week in Madison. The Third Wave sales team will be integrated into our Hologic laboratory sales group combining to make a team of approximately 50 people moving forward.

The train of our entire Physician Office sales team will take place at our National Sales Meeting in the fall that will add another 90 sales professionals to promote the Third Wave products and strength of the combined product offerings from the expanded diagnostics group. The HPV launch plan is being refined. Sales collateral and material is being developed to maximize our opportunity upon FDA approval in the United States.

It is our plan however to launch our HPV products internationally during Q1 of FY '09. The HPV psychology combination is very exciting and we believe it will be a growth driver, as we leveraged the two technologies to gain a competitive advantage in the marketplace. There are currently 10 million HPV tests being performed in the US representing a $200 million market and growth in excess of 40% in each of the past five years. Hologic believes the global market for HPV testing will increase to $800 million in the next few years.

I also would like to give you an update on Tomosynthesis. We mentioned in our press release that we received a letter yesterday from the FDA. The FDA's request for additional information in connection with our PMA application for Tomosynthesis is appropriate and it is appropriate, given the fact that we are the only company to have filed for approval of this breakthrough technology.

I can tell you, we are obviously highly disappointed that we have received the letter at this late time, as the 180 days has expired. However, I would also add that the FDA is under tremendous pressure as they are understaffed. They do not have the resources and personnel to be able to adequately, I think react to the number of filings that are in there.

We are very confident, that we can respond in a short period of time to their questions, as our database of information has grown substantially, since our initial submission. The types of questions they have asked, basically are questions relative to taking the data, that we have submitted to them and clarifying it, basically from a different perspective. They have formats and different, that they would like to see our data end.

They want us to reanalyze our current numbers. They have not asked us to do any additional clinical work unless to take the numbers. So, we will working internally and external the Biostatistician and we will provide them in the format that they have asked, answers to the data clarifications, whether it would be something like a dose calculation or it would be something that simple as software development policies, which was one of their questions.

We are very confident. We will get back to them very soon. We are now expecting approval to market this product in the US, in the first calendar of 2009 and that is of course, assuming that the FDA would be able to respond effectively to our response.

Our launch internationally began in Q3, if you remember, with the soft launch out at the European Congress of Radiology in March, in Vienna. We clearly intent to ramp up our sales activities, as we move forward and international shipments will commence in our December quarter. As we said in our press release, we have sold ten dimensions. We expect CE Mark by the end of August, which will allow us to deliver units in the EU anytime thereafter. We certainly also allow to be able to sell units on a worldwide basis.

Certain markets require certain filings and approvals, FDA approval in some Asian markets. We can sell, but we can not deliver those. However, we feel, very confident in our ability to continue to aggressively move the Tomosynthesis project forward in the sales force.

So, in summary, we continue to focus on the overall strength of our operation. Our efforts clearly reflect the strong fundamentals of our business, including our competitive position in the marketplace and the momentum of our product offerings and our ability to execute.

We remain extremely optimistic about our opportunities and we believe, we are well position to realize the full potential of our expectation, is to close fiscal '08 with a strong finish, providing the momentum necessary to drive continued growth in '09 and next year represents several exciting advancements for us, the commercialization of Tomosynthesis, Adiana and Third Wave.

In addition, we had regained confidence in our positioning of NovaSure and believe the addition of Third Wave will infuse new life to our diagnostic franchise. Finally international will achieve ongoing growth for the company. As we reap the benefits of continued success of existing products and the opportunities afforded to us by our new technologies. We look forward to sharing our fiscal '09 guidance with you on next quarter's call.

With that I would like to turn the call over to Glenn. Glenn?

Glenn Muir

Thanks, Jack. I would like to now expand on the financial results of the quarter. My comments are also summarized in a PowerPoint accessed on the IR page of our corporate website at hologic.com. My presentation today includes certain non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP counterparts is set forth in the same PowerPoint presentation at hologic.com.

Third quarter earnings adjusted for acquisition cost increased again to a record high, and was a bit higher than our guidance in our last earnings call. Even though revenues were down slightly from last quarter Q2, they were up 13% year-over-year on a pro forma basis including Cytyc.

Our number one sales driver continues to be sales of Selenia. In this quarter, we sold a record 429 Digital Mammography Systems. Domestically, we shipped 348 Selenias, and internationally we shipped 81. Total Selenia revenues this quarter were just over $118 million.

Our challenge this quarter was Q2, the March quarter, which benefited from an unusual increase in SecurView Workstation and a favorable product mix, which was not repeatable. Q2 also included a one-quarter surge in Multicare table sales, as we sold 116 tables last quarter compared to the more normal 88 systems, we have sold this quarter. This alone was a $3 million difference. Digital detectors sold to an OEM, were expected to be down, but not quite the $3.5 million drop we ended up with this quarter, as we only sold 30.

Included in our GAAP results, our two acquisition-related charges that totaled $37 million for the amortization of intangible asset and the restructuring related to our acquisitions. Absent, these acquisition-related charges, our pretax earnings this quarter would be a $131.9 million and using our effective tax rate of 35.6% net income would be $84.9 million or $0.33 per share. Our consolidated gross margins, adjusted for the acquisition-related charges were 62.7% just over the 62% we were expecting.

Our operating expenses, again absent the acquisition-related charges were $124.5 million, a decrease to 29% of revenues and slightly below Q2's actual and below our guidance. The improvement in gross margins and decrease in operating expenses is directly related to our efforts in streamlining our businesses and leveraging our combined resources. This combination of higher gross margin dollars and lower operating expenses are what contributed to the better than expected bottom line result. As the reminder, our guidance was for non-GAAP adjusted pretax income of $120 million and EPS of $0.29.

Turning to the balance sheet, the $90 million term loan that existed at the end of March was completely paid off this quarter approximately two years ahead of our initial goal. On July 17th in connection with the acquisition of Third Wave, we borrowed $540 million consisting of a senior secured Tranche A term loan in the amount of $400 million at an interest rate of LIBOR plus 2.5% and a Tranche B in the amount of a $140 million at an interest rate of LIBOR plus 3.25%. We expect to pay this new term loan off over the next two and half years.

I would now like to switch to our guidance for the remainder of fiscal '08. For the fourth quarter of this year, which ends in September, we are expecting revenues to increase to $438 million to $439 million, approximately $10 million higher than this quarter from the inclusion of the recently acquired Third Wave results from which we are expecting a $6 million contribution and also a slight increase in each of our four reporting segments.

The number of Selenias sold is expected to increase to 434 systems, which would result in a total of 1,665 sold this fiscal year versus 1189 last year and up from our guidance last quarter of 1655. This would bring total fiscal 2008 revenues to approximately $1.67 billion.

Consolidated gross margins are expected to hold at the 62% level. On a comparative basis, excluding Third Wave, our operating expenses are expected to be approximately $126 million to a $127 million or 29% of revenue. This excludes the amortization of intangibles of approximately $7 million and is $2 million higher than Q3.

Third Wave's operating expenses are expected to be approximately $9 million to $10 million bringing our total operating expenses to between $135 million and $137 million. This guidance is absent the effect of merger or acquisition-related charges such as in-process R&D and the amortization intangibles.

With the new term loan of $540 million for the acquisition of Third Wave, our interest expense is expected to increase to approximately $19 million. Bottom line, we are expecting non-GAAP EPS excluding the amortization intangibles of $0.30 per diluted share. This includes the results of Third Wave, which are dilutive to adjusted EPS by about $0.03.

Next our outlook for fiscal 2008, which ends in September. We are looking for total consolidated revenues of $1.67 billion in our four reporting segments. In Breast Health, we are forecasting approximately $860 million in revenue representing approximately 28% growth over fiscal 2007. This is primarily attributable to an increase in Selenias. We are now projecting a year-over-year increase of 476 Selenias to 1665. As this is also an increase of 10 Selenias from last quarter's guidance.

In Diagnostics, we are forecasting $486 million in revenue representing approximately 14% growth over fiscal 2007 due to an increase in international ThinPrep sales, worldwide growth in imager revenue, full term adoption and now the inclusion of Third Wave. In GYN Surgical, we are forecasting $218 million in revenue flat with fiscal 2007, as we reposition this product in the primary care channel and continue our overseas expansion. In Skeletal Health, we are forecasting a $106 million in revenue.

For gross margins, we are looking for combined gross margins of approximately 62% on an adjusted non-GAAP reporting basis. As for operating expenses, including Third Wave, they are expected to be $500 million to $510 million for the year and also exclude the amortization of intangibles, which are expected to be $27 million, which would bring us in at approximately 30% of sales. This is $15 million less than expected last quarter, as we continue to streamline the businesses.

Included above are approximately $25 million of FAS 123R stock compensation charges. We have not backed him out of our guidance, but we will indicate what they are quarterly and disclose them in the press release, as we currently do.

Interest expense is expected to increase to $84 million for the year, just slightly higher than last quarter's guidance of $80 million due to adding the $540 million in term loans used to fund the Third Wave acquisition, offset in part by a more rapid pay down of our original term loan that was paid off in June.

Our effective tax rate for the year is expected to be 35.6% and we are expecting the shares outstanding to increase only slightly above our current $259 million in Q4. This should result in a weighted average number outstanding of 251 million shares for the year.

Based on all the above, we expect non-GAAP adjusted pretax income to increase to $460 million to $462 million and our EPS guidance for FY '08 on an adjusted basis were 251 million shares outstanding would be $1.18 per diluted share. This includes the dilutive effect of Third Wave and even still is at the high-end of our previous guidance of $1.15 to $1.18 per diluted share. This is absent the effect of merger-related charges such as in-process R&D and amortization of intangibles.

With that let me now return the call back to Jack.

Jack Cumming

Thank you very much Glen. Let me try to sum up very quickly here and that is that, for Q3 overall, the revenues were not up to our expectations and we felt that because of the mix of our peripherals etcetera. It would certainly took ahead on the revenue side and we expected to be more normalized over the next few quarters.

On the very positive side, we did have a record number of Selenia sold; we had a record number of Selenia orders taken. We had a growth part of gross margin improvement. We sold ten Tomos. We beat our EPS prognostication. Our operating margin was up and overall we thought it was a good quarter.

We also believe that looking at Q4, we anticipate we are going to set another record of Selenia units sold. We are going to set another record for taking Selenia orders. We are going to continue to sell strongly the Tomosynthesis product overseas. We are going to see a continued recovery from NovaSure with sequential growth in the quarter over Q3 and we see a double-digit growth in FY '09.

Through at the end of today, will be the end of July here, so far and at this point we have no pregnancies in our Adiana, a program on three years and will be filing that information to the FDA and looking forward to receiving approval from them.

Relative to Tomo, we have all the data onhand to answer the FDA's questions. We will be moving as quickly as possible and putting all of our resources against that and intent to meet with them over the course of the next month or so, based on our submission and trying to work with them to get a panel scheduled and finally get this approved.

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