# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

(Mark	One)

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended:	September	30,	2006

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

# Hologic,	Inc.

(Exact	Name	of	Registrant	as	Specified	in	Its	Charter)

Delaware

(State	or	Other	Jurisdiction	of	Incorporation	or	Organization)

(IRS	Employer	Identification	No.)

35	Crosby	Drive,	Bedford,	Massachusetts	01730

(Address	of	Principal	Executive	Offices,	Including	Zip	Code)

(Registrant's	Telephone	Number,	Including	Area	Code)

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

Common	Stock,	$.01	par	value

Rights	to	Purchase	Preferred	Stock

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

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

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

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

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		x Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer.	See	definition	of	"accelerated	filer	and large	accelerated	filer"	in	Rule	12b-2	of	the	Exchange	Act.				Large	Accelerated	Filer		x				Accelerated	Filer		¨				Non-Accelerated	Filer		¨

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

The	aggregate	market	value	of	the	registrant's	Common	Stock	held	by	non-affiliates	of	the	registrant	as	of	March	25,	2006	was	$2,500,502,598	based	on	the	price of	the	last	reported	sale	on	the	Nasdaq	National	Market	on	that	date.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	registrant's	Proxy	Statement	for	the	registrant's	annual	meeting	of	stockholders	to	be	filed	within	120	days	of	the	end	of	its	fiscal	year	ended September	30,	2006	are	incorporated	into	Part	III	(Items	10,	11,	12,	13	and	14)	of	this	Annual	Report	on	Form	10-K	where	indicated.

# SPECIAL	NOTE	REGARDING	FORWARD-LOOKING	STATEMENTS

Some	of	the	statements	contained	in	this	report	are	forward-looking	statements	within	the	meaning	of	Section	27A	of	the	Securities	Act	of	1933	and	Section	21E of	the	Securities	Exchange	Act	of	1934.	These	statements	involve	known	and	unknown	risks,	uncertainties	and	other	factors	which	may	cause	our	or	our	industry's actual	results,	performance	or	achievements	to	be	materially	different	from	any	future	results,	performance	or	achievements	expressed	or	implied	by	the	forward-looking statements.	Forward-looking	statements	include,	but	are	not	limited	to	statements	regarding:

•	 our	goal	of	expanding	our	market	positions;

•the	development	of	new	competitive	technologies	and	products;

•regulatory	approval	and	clearances	for	our	products;

•	 production	schedules	for	our	products;

•the	anticipated	development	of	our	markets	and	the	success	of	our	products	in	these	markets;

•the	anticipated	performance	and	benefits	of	our	products;

•	 business	strategies;

•	 dependence	on	significant	or	sole	source	suppliers;

•	 our	ability	to	maintain	effective	internal	controls;

•the	impact	and	anticipated	benefits	of	recently	completed	acquisitions	and	acquisitions	we	may	complete	in	the	future;

•the	impact	and	costs	and	expenses	of	any	litigation	we	may	be	subject	to	now	or	in	the	future;

•compliance	with	covenants	contained	in	our	credit	facility	and	long	term	leases;

•anticipated	trends	relating	to	our	financial	condition	or	results	of	operations;	and

•	 our	capital	resources	and	the	adequacy	thereof.

In	some	cases,	you	can	identify	forward-looking	statements	by	terms	such	as	"may,"	"will,"	"should,"	"could,"	"would,"	"expects,"	"plans,"	"anticipates," "believes,"	"estimates,"	"projects,"	"predicts,"	"potential"	and	similar	expressions	intended	to	identify	forward-looking	statements.	These	statements	are	only	predictions and	involve	known	and	unknown	risks,	uncertainties,	and	other	factors	that	may	cause	our	actual	results,	levels	of	activity,	performance,	or	achievements	to	be materially	different	from	any	future	results,	levels	of	activity,	performance,	or	achievements	expressed	or	implied	by	such	forward-looking	statements.	Given	these uncertainties,	you	should	not	place	undue	reliance	on	these	forward-looking	statements.	Also,	these	forward-looking	statements	represent	our	estimates	and	assumptions only	as	of	the	date	of	this	report.	Except	as	otherwise	required	by	law,	we	expressly	disclaim	any	obligation	or	undertaking	to	release	publicly	any	updates	or	revisions	to any	forward-looking	statement	contained	in	this	report	to	reflect	any	change	in	our	expectations	or	any	change	in	events,	conditions	or	circumstances	on	which	any	of our	forward-looking	statements	are	based.	Factors	that	could	cause	or	contribute	to	differences	in	our	future	financial	results	include	those	discussed	in	the	Risk	Factors set	forth	in	Part	I	Item	1A	below	as	well	as	those	discussed	elsewhere	in	this	report.	We	qualify	all	of	our	forward-looking	statements	by	these	cautionary	statements.

# PART	I

# Item	1. Business

# Overview

We	are	a	leading	developer,	manufacturer	and	supplier	of	diagnostic	and	medical	imaging	systems	primarily	dedicated	to	serving	the	healthcare	needs	of	women. We	focus	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.

Our	core	women's	healthcare	business	units	are	focused	on	mammography	and	breast	care,	and	osteoporosis	assessment.	Our	mammography	and	breast	care products	include	a	broad	product	line	of	breast	imaging	and	related	products,	including	film-based	and	digital	mammography	systems,	computer-aided	detection	(CAD), breast	biopsy	systems	and	breast	biopsy	and	tissue	extraction	devices.	Our	Lorad	line	of	mammography	systems	and	our	bone	densitometry	product	line	are	premier brands	in	their	markets.	Our	newly	acquired	product	lines	from	R2	Technology,	Inc.	(R2)	CAD	and	Suros	Surgical	Systems,	Inc.	(Suros)	breast	biopsy	devices	and tissue	extraction	product	lines	also	hold	positions	of	industry	prominence	in	their	areas	of	application.	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	which	are	manufactured	by	an	original	equipment	manufacturer	and,	our photoconductor	coating	business,	which	we	acquired	in	connection	with	our	acquisition	of	AEG	Electrofotografie	GmbH	and	its	group	of	related	companies	(AEG).	Our customers	include	hospitals,	imaging	clinics	and	private	practices,	many	of	the	leading	healthcare	organizations	in	the	world	and	major	pharmaceutical	companies utilizing	our	products	in	conducting	clinical	trials.

We	were	founded	on	and	remain	committed	to	the	principle	of	applying	superior	technology	to	medical	imaging	challenges.	We	achieved	our	first	market	and technology	position	shortly	after	the	first	commercial	shipment	of	our	initial	product	targeting	bone	densitometry	in	1987.	Our	proprietary	technology	remains	a	leading bone	densitometry	assessment	tool,	offering	superior,	cost-effective	accuracy	and	reliability.	Over	the	years	we	have	expanded	and	diversified	our	business	through	a number	of	strategic	acquisitions,	including	the	following:

•In	1996	we	acquired	Fluoroscan	Imaging	Systems,	a	market	leader	for	low	intensity,	real-time	mini	C-arm	x-ray	imaging	devices	that	address	the	trend towards	minimally	invasive	surgery.

•In	June	1999,	we	acquired	Direct	Radiography	Corp.,	or	DRC,	from	Sterling	Diagnostic	Imaging	and	have	continued	to	invest	in	the	development	of	their direct-to-digital	x-ray	technology,	DirectRay,	with	an	emphasis	on	mammography	applications.

•In	September	2000	we	acquired	certain	U.S.	assets	of	Trex	Medical	Corporation,	which	included	the	Lorad	product	line	of	mammography	and	minimally invasive	breast	biopsy	image	guidance	systems	used	to	diagnose	breast	cancer.	We	estimate	that	over	14,000	Lorad	mammography	systems	have	been	sold worldwide.	Our	Selenia	full	field	digital	mammography	system	was	developed	through	the	successful	integration	of	our	DirectRay	technology	into	the	Lorad mammography	product	line.

Fiscal	2006	was	a	significant	year	for	us	as	we	further	expanded	and	diversified	our	business	through	additional	strategic	acquisitions.

•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,	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	coating	of	our	digital	detectors.

•	 On	July	13,	2006,	we	completed	the	acquisition	of	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.

•	 On	July	27,	2006,	we	completed	the	acquisition	of	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.

We	believe	our	latest	acquisitions	allow	us	to	offer	our	customers	a	broader	array	of	breast	imaging	and	diagnostic	products.	Our	Fischer	acquisition	broadens	our technology	base	in	digital	mammography	and	breast	biopsy	systems.	Our	AEG	acquisition	provides	us	with	control	over	the	coating	for	our	digital	detectors,	a	critical step	in	our	detector	manufacturing	process.	We	believe	that	this	acquisition	should	allow	us	to	more	efficiently	manage	our	supply	chain,	improve	manufacturing margins	and	facilitate	further	manufacturing	efficiencies	and	research	and	development	of	new	detector	products.	The	R2	acquisition	adds	a	line	of	CAD	systems	for both	screen-film	and	digital	mammography	to	our	portfolio	of	products.	Suros	brings	a	full	line	of	breast	biopsy	devices	for	use	with	stereotactic,	ultrasound,	or	MRI guidance	systems.

We	are	continuing	to	focus	on	expanding	our	market	position	in	mammography,	including	the	growing	field	of	digital	mammography.	To	that	end,	in	October 2002,	we	received	approval	from	the	U.S.	Food	and	Drug	Administration,	known	as	the	FDA,	to	commence	marketing	activities	with	respect	to	our	Lorad	Selenia	full field	digital	mammography	system.	Following	this	approval	we	began	to	focus	on	the	expansion	of	our	direct	sales	and	service	forces	in	the	United	States.	In	late	fiscal 2003	we	began	to	de-emphasize	sales	of	our	lower	margin	digital	end-use	general	radiography	systems	and	in	fiscal	2004,	we	terminated	sales	of	these	systems.	We	are continuing	to	evaluate	new	marketing	programs	to	expand	market	share	in	our	core	markets,	to	assess	new	distribution	channels	for	our	product	portfolio	and	to	pursue business	relationships	and	acquisitions	that	would	allow	us	to	further	leverage	our	technology	base.	In	particular,	we	are	continuing	our	development	of	a	new	digital mammography	product	platform	capable	of	providing	tomosynthesis	images,	or	3-D	views	of	the	breast.	We	expect	tomosynthesis	to	be	a	major	new	advance	in	breast care,	with	the	potential	to	improve	cancer	detection	rates	and	reduce	patient	recall.

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.	We	view	our	operations	and	manage	our	business	in	three	principal	operating 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.

Hologic	and	the	Hologic	Logo	are	registered	trademarks	of	Hologic,	Inc.	Other	trademarks,	logos	and	slogans	registered	or	used	by	Hologic	and	its	divisions	and subsidiaries	in	the	United	States	and	other	countries	include:	Acclaim,	Affinity,	Affinity	Platinum,	Alexia,	"At	LORAD,	Every	Month	is	Breast	Cancer	Awareness Month,"	Auto	Film	ID,	Backtrack,	CADfx,	"Clarity	of	Vision,"	Contour,	Dataport,	Delphi,	Digispot,	Direct	Radiography,	DirectRay	and	the	DirectRay	signal	profile logo,	Discovery,	Dual	Hip,	EPEX,	EPEX	ER,	EPEX	Symphony,	Exam	Coach,	Explorer,	Express	BMD,	Express	Exam,	Fluoroscan,	HiBrite,	HTC,	Image	Pro,	Instant Vertebral	Assessment,	IRIS,	IVA,	IVA	Works,	LORAD,	"LORAD	A	Hologic	Company,"	LORAD	DSM,	LORAD	Elite,	M-IV,	M-IV	Platinum,	MultiCare,	Omniflex, One	Time,	OnePage	Dx,	OnePage	Fx,	OnePass,	Permagrid,	Physicians	Report	Writer,	Physicians	Viewer,	Picturing	Life,	Premier,	Premier	Encore,	QDR,	QDR-1000, QDR-4500,	RADEX,	Radiological	Vertibral	Assessment,	RVA,	Sahara,	ScoutMarc,	SecurLook,	SecurView,	SecurView	DX,	SecurView	RT,	Selenia,	SenoLase,

SenoScan,	SenoSound,	Senoview,	Senoview

Plus,	SmartWindow,	StereoLoc,	SureLock,	Tech	Tips,	UBA,	and	XRE.	With	our	AEG	acquisition,	we	acquired	a	license	to	the	trademark	"AEG",	as	used	for	selenium and	other	photoconductors.	In	July	2006,	we	acquired	Suros.	and	R2.,	including	the	following	marks:	ATEC,	Suros	Compassionate	Technologies,	One	System,	The Complete	Solution,	The	One	Minute	Breast	Biopsy,	Suros	and	the	Suros	logo,	R2	and	the	R2	logo,	Gold	Standard	CAD,	Citra	PE,	Peerview,	OmniCad,	the	Digital	Now logo,	Earlier.Smarter.Better,	Imagechecker,	R2	Technology,	AutoPoint,	CheckMate,	EmphaSize,	RightOn	and	Malc.

# Available	Information

Our	Internet	website	address	is	http://www.hologic.com.	Through	our	website,	we	make	available,	free	of	charge,	our	annual	report	on	Form	10-K,	quarterly reports	on	Form	10-Q,	current	reports	on	Form	8-K	and	any	amendments	to	those	reports,	as	soon	as	reasonably	practicable	after	we	electronically	file	such	material with,	or	furnish	it	to,	the	SEC.	These	SEC	reports	can	be	accessed	through	the	investor	relations	section	of	our	website.	The	information	found	on	our	website	is	not	part of	this	or	any	other	report	we	file	with	or	furnish	to	the	SEC.

# Products

Our	core	women's	healthcare	business	units	are	focused	on	mammography	and	breast	care,	and	osteoporosis	assessment.	In	addition,	we	develop,	manufacture and	supply	mini	C-arm	imaging	products,	distribute	the	Esaote	extremity	MRI	system	and	manufacture	and	sell	AEG	photoconductor	materials	for	a	variety	of electrophotographic	applications.

# Mammography	and	Breast	Care	Products

Our	breast	cancer	detection	business	offers	a	broad	line	of	breast	imaging	products,	including	our	Direct	Ray	digital	detector	technology,	the	Selenia	full	field digital	mammography	system,	a	series	of	screen-film	mammography	systems,	CAD	systems	for	both	screen-film	and	digital	mammography,	and	a	range	of	breast biopsy	image	guidance	systems	and	breast	biopsy	products.	Our	mammography	and	breast	care	products	include	the	following:

# Direct	Ray	Digital	Detector

Digital	radiography	technologies	can	be	divided	into	two	classes:	those	that	employ	direct	methods	to	convert	x-ray	energy	into	an	electrical	charge	and	those	that use	indirect	methods.	Technologies	using	direct-conversion	flat-panel	digital	detectors,	such	as	our	DirectRay	flat	panel	detector,	use	a	semiconductor	coating— amorphous	selenium	(a-Se)—to	directly	convert	x-ray	photons	into	an	electrical	charge.	No	intensifying	screens	or	additional	processes	are	required	to	capture	and convert	the	x-ray	energy.	Digital	radiography	technologies	using	indirect	conversion	detectors	employ	a	two-step	process	for	x-ray	detection.	Scintillator	coatings,	such as	cesium	iodide	or	gadolinium	oxysulfide,	capture	x-ray	energy	and	convert	it	to	light.	An	array	of	thin-film	diodes	then	converts	the	light	energy	to	electrical	signals. We	believe	that	other	digital	x-ray	imaging	technologies	that	use	light	compromise	image	sharpness	because	light	scatter	can	blur	the	image.

DirectRay	amorphous	selenium	coated	detectors	developed	and	manufactured	by	our	Direct	Radiography	Corp.	subsidiary	are	particularly	well	suited	for	high- quality	digital	imaging	because	selenium	has	high	x-ray	absorption	efficiency,	high	intrinsic	resolution	and	low	noise.	We	believe	that	amorphous	selenium	technology results	in	high	quality	digital	images	across	a	wide	range	of	general	radiographic	applications	and	is	particularly	valuable	for	mammography,	which	has	high-resolution requirements.	The	wide	dynamic	range	inherent	in	Hologic	DirectRay	direct-to-digital	detectors	allows	a	radiologist	to	adjust	the	image	electronically	at	a	workstation	to enhance	the	desired	anatomical	view	and	gain	more	diagnostic	information	compared	to	traditional	screen-film	technology.	Amorphous	selenium	deposition	is	a	well- developed	technology.	It	has	been	used	for	decades	in	photocopiers,	in	photocells	and	exposure	meters	for	photographic	use,	as	well	as	in	solar	cells.	It	is	also	used	as	a photographic	toner	and	as	an	additive	in	the	glass	and	stainless	steel	industries.

In	digital	mammography	and	radiography,	direct-to-digital	imaging	technology	provides	the	opportunity	for	more	expedient	patient	exam	flow,	fewer	repeat exams	and	increased	room	utilization.	Because	radiography	systems	utilizing	direct	radiography	technology	capture	and	convert	x-ray	images	into	a	digital	format	within seconds	of	exposure,	the	technologist	can	quickly	preview	the	digitized	image	for	quality	assurance	prior	to	completion	of	a	patient's	examination.	The	digital	image	can then	be	transmitted	electronically	for	reviewing	on	a	diagnostic	workstation,	printing	on	film,	and	electronic	storage.

In	prior	years	we	offered	DirectRay	digital	detectors	in	Hologic	designed,	manufactured,	installed	and	serviced	general	radiography	systems	and	we	also	sold	to systems	Original	Equipment	Manufacturers	(OEMs),	to	incorporate	into	their	own	equipment.	In	fiscal	2006	we	moved	away	from	selling	systems	and	panels	for	general radiography	use	and	began	to	shift	resources	to	our	core	women's	health	products	mammography	systems.	In	January	2006	we	ceased	sales	of	digital	systems	for	general radiography,	and	on	October	1,	2006	we	ceased	manufacture	of	general	radiography	panels.	We	continue	to	sell	digital	mammography	panels	to	Siemens.

# Selenia	Full	Field	Digital	Mammography	System

The	Selenia	full	field	digital	mammography	system	is	the	industry's	first	U.S.	FDA	approved	digital	mammography	system	based	on	direct	conversion technology.	Its	technology	is	based	on	our	proprietary,	amorphous	selenium	DirectRay	digital	detector,	which	as	described	above,	preserves	image	quality	by	using amorphous	selenium	to	directly	convert	x-rays	to	electronic	signals,	without	first	converting	them	to	light,	a	step	required	in	systems	using	indirect	conversion	detectors. This	direct	conversion	process	completely	eliminates	light	diffusion	and	preserves	image	sharpness,	for	exceptional	digital	images.

The	Selenia	has	a	number	of	other	features	designed	to	improve	image	quality,	enhance	patient	comfort,	and	streamline	patient	throughput.	For	example,	the system's	detector	size	of	24	x	29	cm,	accommodates	almost	all	breast	sizes	with	a	single	exposure	per	view.	The	system	enables	intra-department	connectivity	and	image management,	including	bi-directional	communication	and	networking	between	workstations.	In	addition,	the	open	architecture	of	the	system's	design	provides	for	full integration	with	existing	enterprise	Picture	Archiving	and	Communications	Systems	(PACS)	and	Radiology	Information	Systems	(RIS).

# Screen-Film	Mammography	Systems

Our	screen-film	mammography	systems	include	our	LORAD	M-IV	and	LORAD	Affinity	product	lines.	Our	LORAD	M-IV	screen-film	mammography	system have	sold	over	5,500	units	worldwide.	Features	of	the	LORAD	M-IV	include	a	bi-angular	x-ray	tube,	dual	filter	capability,	auto	filter	mode,	three-cell	Automatic Exposure	Control	(AEC)	sensor,	fully	automatic	collimation	and	isocentric	C-arm	rotation.	The	M-IV	Platinum	incorporates	our	Fully	Automatic	Self-adjusting	Tilt (FAST)	Paddle,	and	our	High	Transmission	Cellular	(HTC)	Grid	which	was	recognized	by	Frost	&	Sullivan	in	connection	with	LORAD's	receipt	of	the	2001	Frost	& Sullivan	Technology	Innovation	Award,	as	one	of	the	most	effective	contrast	improvements	in	20	years	of	breast	imaging.	The	patented	HTC	technology	reduces	x-ray scatter	in	two	dimensions,	delivering	high	quality	contrast	and	resolution	without	an	increase	in	radiation	dose.	The	LORAD	Affinity	is	a	high-performance	screen-film mammography	system	specifically	developed	to	fill	a	market	need	for	a	cost-effective	product,	with	performance	characteristics	similar	to	high-end	systems.	Affinity can	be	used	with	other	LORAD	innovations	to	improve	image	quality,	including	our	HTC	and	FAST	Paddle	technology.

# SecurView

In	2005	we	focused	our	product	development	activities	on	improving	digital	workflow	in	the	breast-imaging	suite.	To	this	end,	we	released	SecurView DX ,	a	breast imaging	softcopy	workstation	approved	for	interpretation	of	digital	mammograms	from	all	vendors	as	well	as	images	from	other	diagnostic	modalities.	To	complement this	product,	we	also	released	SecurView RT ,	a	technologist	workstation	enabling	bi-directional	exchange	of	electronic	communications	between	the	reviewer	and	the technologist.	An	additional	configuration	was	added	to	the	Selenia

acquisition	workstation	to	allow	incorporation	of	a	second	monitor	and	computer,	providing	all	functionalities	of	the	SecurView RT 	within	the	exam	room.	This configuration	is	called	Selenia	with	TechMate.	In	2006	we	released	two	new	products	extending	the	functionality	of	our	SecurView DX :	an	Advanced	Multimodality Package	which	allows	simultaneous	display	and	interpretation	of	digital	mammograms,	as	well	as	breast	images	from	other	modalities,	such	as	ultrasound	and	MR (magnetic	resonance);	and	MR-CADWorks™,	a	sophisticated	software	package	for	advanced	display,	analysis,	and	interpretation	of	breast	MR	exams.

# CAD	Systems

In	July	2006,	we	acquired	R2,	which	develops	CAD	systems	for	a	variety	of	imaging	modalities	and	disease	states.	CAD	is	used	by	an	increasing	number	of radiologists	as	"a	second	pair	of	eyes"	when	reading	a	woman's	mammogram.	The	technology	has	the	potential	to	detect	findings	that	might	otherwise	be	overlooked during	the	review	process,	thus	increasing	cancer	detection.	R2's	CAD	technology	assists	physicians	in	the	detection	of	breast	cancer,	actionable	lung	nodules	and	other lung	abnormalities.	R2	Technology	pioneered	the	use	of	CAD	for	mammography	when	its	ImageChecker	system	became	the	first	CAD	system	approved	by	the	FDA	for film	based	mammography	in	1998	and	for	digital	mammography	in	2001.	More	than	2,500	ImageChecker	mammography	CAD	systems	have	been	sold	worldwide	for both	film	based	and	digital	mammography	systems.	In	2004,	the	FDA	approved	the	use	of	R2's	ImageChecker	CAD	technology	customized	for	our	Selenia	full	field digital	mammography	system.	We	estimate	that	this	year	approximately	ten	million	women	will	have	their	mammograms	interpreted	with	the	aid	of	R2	technology.

R2's	mammography	applications	software	tools,	such	as	Citra,	are	being	integrated	into	the	Hologic	line	of	multi-modality	breast	imaging	workstations.	Citra brings	physicians	a	universal	and	'CAD-intelligent'	system	for	reviewing	digital	mammography	images	and,	if	needed,	comparing	them	with	digitized	prior	film	images. For	analog	facilities,	R2	has	developed	a	product	for	those	mammography	facilities	that	may	upgrade	to	digital	mammography	in	the	future.	DigitalNow	allows	users	to build	a	library	of	digitized	prior	mammograms,	to	help	facilitate	a	seamless	transition	to	softcopy	review	when	the	facility	transitions	to	digital.

# Stereotactic	Breast	Biopsy	Systems

We	provide	clinicians	with	the	flexibility	of	choosing	from	either	upright	or	prone	systems	for	breast	biopsy	by	offering	two	minimally	invasive	stereotactic breast	biopsy	guidance	systems,	the	MultiCare	Platinum	dedicated,	prone	breast	biopsy	table	and	the	StereoLoc	II	upright	attachment.	The	StereoLoc	II	is	used	in conjunction	with	our	M-IV	series	of	screen-film	mammography	systems.	These	systems	provide	an	alternative	to	open	surgical	biopsy,	and	can	be	performed	as	an outpatient	procedure	under	local	anesthesia,	allowing	shorter	recovery	times	and	reduced	morbidity.

# Breast	Biopsy	Products

In	July	2006,	we	acquired	Suros,	an	Indiana-based	manufacturer	of	minimally	invasive	interventional	products	for	breast	biopsy,	tissue	removal	and	biopsy	site marking.	Its	technology,	which	includes	a	patented	fluid	management	system,	allows	the	removal	of	tissue	or	biopsy	samples	in	a	fast,	safe	and	simple	manner	using stereotactic	x-ray,	ultrasound	and	MRI	systems.	Suros	designs,	manufactures	and	markets	patient-focused	and	physician-inspired	"Compassionate	Technologies" through	its	ATEC^® 	(Automated	Tissue	Excision	and	Collection)	product	line,	including	percutaneous,	automatic	vacuum-assisted	breast	biopsy	collection	systems,	a disposable	handpiece	used	to	collect	samples,	and	biopsy	site	markers.	The	ATEC	line	of	products	is	designed	to	accommodate	a	broad	range	of	clinical	and	patient presentations.	Since	its	introduction	in	2002,	more	than	650	ATEC	consoles	have	been	installed	and	200,000	disposable	handpieces	have	been	sold	in	North	America and	the	European	Union.

# 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.	We	have	sold	over	1,600	bone densitometer	system	upgrades	worldwide.

QDR	x-ray	Bone	Densitometers.	We	introduced	the	QDR	system,	our	first	product	serving	the	bone	densitometry	market	in	1986,	began	commercial	shipments	in 1987,	and	quickly	gained	recognition	for	our	superior	technology.	Since	our	first	commercial	shipment,	we	have	sold	more	than	12,000	QDR	systems.	Our	patented dual-energy	x-ray	technology	remains	a	leading	bone	densitometry	assessment	tool,	offering	superior,	cost-effective	accuracy	and	reliability.	We	believe	that	advantages of	our	QDR	systems	include	high	precision,	low	patient	radiation	exposure	equivalent	to	1/10th	of	a	conventional	chest	x-ray,	a	relatively	fast	scanning	time,	low operating	cost,	and	the	ability	to	measure	bone	density	of	the	most	important	fracture	sites,	the	spine	and	hip.	Our	studies	and	those	of	independent	investigators	have demonstrated	that	the	systems	can	detect	a	change	in	spine	bone	density	with	a	precision	error	of	less	than	one	percent.

In	November	1999,	we	introduced	our	Delphi	QDR	Series	bone	densitometer.	Delphi	was	the	first	bone	densitometer	to	offer	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,	Hologic's	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.	The	high-resolution,	single-energy	images	obtained	with	IVA	visually	reveal	spinal	fractures,	which	substantially increase	the	risk	of	future	fracture,	and	thereby	affect	a	clinician's	therapeutic	decisions.	Prior	to	the	introduction	of	IVA,	spine	fractures	were	rarely	evaluated	in	clinical osteoporosis	assessment,	primarily	due	to	the	inconvenience	and	high	radiation	dose	associated	with	obtaining	conventional	x-ray	films.	IVA	provides	a	simple,	point	of care	tool	for	vertebral	assessment,	with	only	1%	of	the	radiation	dose	of	standard	radiographic	assessment.	The	combination	of	bone	mineral	density	assessment	and spine	fracture	assessment	improves	the	clinician's	ability	to	accurately	target	therapy	to	those	who	can	benefit	most.	The	ability	to	conduct	these	two	diagnostic procedures	with	one	system	enables	doctors	to	cost-effectively	improve	fracture	risk	assessment	and	to	capture	greater	reimbursement	fees.	IVA	has	been	widely embraced	by	the	medical	community,	and	we	have	installed	over	4,000	systems	worldwide	with	IVA	capabilities.	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.	Discovery	reduces	bone density	scan	times	providing	bone	density	and	IVA	scans	in	just	ten	seconds.	Discovery's	CADfx	feature	automates	the	classification	of	spine	fractures,	and	our	Express Exam	feature	completely	automates	the	patient	examination	procedure.	Discovery	also	offers	workflow	and	connectivity	enhancements,	including	complete	electronic integration	with	hospital	information	systems.	Discovery	systems	are	modular	in	design,	allowing	customers	to	add	features	and	capabilities,	while	protecting	their investment	in	equipment	and	patient	data.	Discovery	is	available	in	six	different	configurations.

An	important	feature	of	our	most	advanced	Discovery	models,	the	Discovery	A	and	SL	systems,	is	their	ability	to	perform	lateral,	side-to-side	scans	of	the	spine, without	turning	the	patient	on	her	side,	in	addition	to	back-to-front	measurements.	These	systems	are	capable	of	producing	high	quality	images	of	the	spine,	lateral	spine, hip	and	other	skeletal	sites.	A	motorized	rotating	scan	arm	allows	for	multiple	scan	views	without	patient	repositioning.	By	using	either	of	the	A	or	SL	systems,	high- quality	IVA	images	of	the	entire	spine	can	be	obtained	in	as	little	as	ten	seconds.

In	February	of	2004,	we	began	shipments	of	our	Explorer	Series	bone	densitometer.	Explorer	is	an	entry-level	x-ray	bone	densitometer	targeted	at	cost	conscious practitioners,	particularly	in	international	markets.	Like	Discovery,	Explorer	is	a	fan-beam	system	that	utilizes	a	high-density	array	of	detectors,	and	can	acquire	a	2- dimensional	x-ray	in	a	single	linear	scan	motion.	Older	generation	lower-cost	systems	required	scanning	in	a	rectilinear	pattern,	which	lengthens	scan	times	and decreases	image	resolution.	Explorer's	design	is	based	on	the	Discovery	platform,	and	offers	Discovery's	workflow	and	connectivity	enhancements.	In	fiscal	2004,	we completed	the	phase-out	of	our	older	product	lines	and	fully	transitioned	to	the	Discovery	and	Explorer	product	lines.

In	June	of	2005,	we	introduced	the	Discovery	P,	the	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 essentially	doubled	the	resolution	of	imaging	performed	on	the	Discovery	system	improving	diagnostic	confidence.	We	also	introduced	a	lower	resolution	version	of IVA	on	our	Explorer	line,	making	IVA	an	essential	component	on	all	of	Hologic's	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	killers	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	gold	standard	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.	Since	our	introduction	of	the	Sahara,	over	4,100	Sahara	systems	have	been	sold	worldwide.

# Other	Products

Our	other	business	unit	includes	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.

Our	primary	products	in	our	other	business	unit	include	the	following:

# 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	well	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.

In	December	2002,	we	introduced	the	Premier	Encore	system,	replacing	our	original	Premier	system	which	was	introduced	in	1998.	Premier	Encore	streamlines system	operation	using	a	touch	screen	interface,	configurable	physician	preference	pre-sets,	complete	DICOM	connectivity	software	capabilities,	and	CD	image	storage. The	Premier	Encore	system	is	available	with	a	laser-positioning	pointer	and	offers	60-degree	monitor	rotation	for	maximum	operating	room	flexibility.

In	September	2005,	we	introduced	the	Fluoroscan	Insight,	a	new	premium	level	mini	C-arm	designed	for	orthopedic	extremity	surgery.	The	Insight	utilizes	a	new higher	resolution	digital	imaging	chain,	along	with	the	industry's	first	flat	panel	display	on	a	mini	C-arm.	The	flat	panel	display	is	positioned	on	an	extendable,	swiveled arm	that	allows	the	surgeon	to	physically	bring	the	image	far	closer	to	their	work	in	the	surgical	field	further	easing	the	task	of	fluoroscopic	imaging	during	a	surgical procedure.	The	Insight	also	utilizes	the	latest	computer	advances	in	multi-language	graphical	user	interfaces	ideal	for	international	distribution.

# Extremity	MRI

In	September	2005,	we	entered	into	an	agreement	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	min	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.	Under	our	agreement	with	Esaote	we	have	certain minimum	inventory	purchase	obligations	for	the	initial	term,	which	are	subject	to	renegotiation	after	the	first	eighteen-month	period	in	the	event	of	any	unforeseen changes	in	the	market	dynamics.	The	agreement	is	for	an	initial	term	of	three	years,	with	automatic	one-year	renewal	options.

# 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.

# Marketing	and	Sales

We	sell	and	service	our	products	through	a	combination	of	a	direct	sales	and	service	force	and	a	network	of	independent	distributors.	In	early	fiscal	2002,	we centralized	our	management	of	these	sales	channels	for	all	of	our	product	lines.	In	fiscal	2006,	2005	and	2004,	no	customer	accounted	for	more	than	10%	of	our consolidated	revenues.

As	of	November	17,	2006	our	direct	sales	and	service	force,	consisted	of	over	107	people,	which	includes	our	Suros	sales	force	as	a	result	of	this	recent acquisition,	and	173	field	service	engineers,	plus	internal	technical	support	and	associated	administrative	functions.	Our	sales	force	is	comprised	of	full	line	modality account	managers	selling	mammography	and	bone	densitometry	products,	assisted	by	women's	health	and	CAD	specialists.	The	Suros	account	managers	team	sell	with our	modality	accounts	managers	leveraging	the	strong	market	presence	of	Hologic	in	women's	health.	Other	specialty	sales	groups	consist	of	primary	care,	targeting densitometry	sales	to	doctors	offices,	MRI	specialists	and	mini	C-arm	sales	agents	selling	into	orthopedics.	Our	United	States	medical	marketing	efforts	also	include	the use	of	two	national	account	managers	which	are	focused	on	obtaining	purchasing	contracts	from	large	purchasing	entities,	such	as	managed	care	organizations, integrated	delivery	networks	(IDN)	and	government	healthcare	facilities.	As	of	November	17,	2006	we	had	purchasing	contracts	with	Consorta,	Broadlane/Kaiser, HealthTrust	Purchasing	Group,	Med	Assets,	Novation,	Premier,	U.S.	Department	of	Veterans	Affairs	and	the	Defense	Supply	Center	of	Philadelphia	(DSCP).

We	sell	in	international	markets	through	a	network	of	independent	distributors,	as	well	as	a	direct	sales	and	service	force	in	Belgium	(and	Germany	for	AEG products).	In	October	2003,	we	expanded	our	sales	and	service	presence	in	Belgium	by	acquiring	the	mammography	distribution	business,	including	key	service	and application	personnel,	inventory	and	other	related	assets,	from	our	independent	distributor	VH	Services	NV.	We	offer	our	broad	range	of	products	in	Latin	America, including	Argentina,	Brazil	and	Chile,	and	into	Pacific	Rim	countries,	including	Japan,	Australia,	South	Korea,	Thailand	and	Taiwan,	by	working	with	local	sales representatives	and	distributors	or	entering	into	strategic	marketing	alliances	in	those	territories.	In	fiscal	2006,	2005	and	2004	foreign	sales	accounted	for	approximately 28%,	33%	and	39%	of	our	product	sales,	respectively.	See	Note	14	of	Notes	to	Consolidated	Financial	Statements	for	geographical	information	concerning	those	sales.

# Competition

The	healthcare	industry	in	general,	and	the	market	for	diagnostic	imaging	and	osteoporosis	assessment	products	in	particular,	is	highly	competitive	and characterized	by	continual	change	and	improvement	in	technology,	and	multiple	technologies	that	have	been	or	are	under	development.	A	number	of	companies	have developed,	or	are	expected	to	develop	products	that	compete	or	will	compete	with	our	products.	Many	of	these	competitors	offer	a	range	of	products	in	areas	other	than those	in	which	we	compete,	which	may	make	such	competitors	more	attractive	to	hospitals,	radiology	clients,	group	purchasing	organizations	and	other	potential customers.	In	addition,	many	of	our	competitors	and	potential	competitors	are	larger	and	have	greater	financial	resources	than	we	do	and	offer	a	range	of	products broader	than	our	products.	Some	of	the	companies	with	whom	we	compete	have	or	may	have	more	extensive	research,	marketing	and	manufacturing	capabilities	and significantly	greater	technical	and	personnel	resources	than	we	do,	and	may	be	better	positioned	to	continue	to	improve	their	technology	in	order	to	compete	in	an evolving	industry.	The	companies	that	have	significantly	greater	resources	and	product	breadth	than	we	do	include	General	Electric	Medical	Systems	(GE),	Siemens, Philips,	Fuji,	Kodak	and	Toshiba.	Competitors	may	develop	superior	products	or	products	of	similar	quality	for	sale	at	the	same	or	lower	prices.	Moreover,	our	products could	be	rendered	obsolete	by	new	industry	standards	or	changing	technology.	We	cannot	assure	that	we	will	be	able	to	compete	successfully	with	existing	or	new competitors.

Our	mammography	and	related	products	and	subsystems	compete	on	a	worldwide	basis	with	products	offered	by	a	number	of	competitors,	including	GE, Siemens,	Philips,	PlanMed,	Agfa,	Kodak,	Fuji,	IMS	Giotto,	Sectra	and	Toshiba.	Our	FDA	approved	Selenia	full	field	digital	mammography	system	competes	with products	such	as	GE's	and	Siemens	full	field	digital	mammography	system.	Siemens	has	adopted	our	DirectRay	direct-to-digital	detectors	for	use	in	their	digital mammography	system.	In	2006,	Fuji	received	FDA	clearance	to	market	its	Computed	Radiography	(CR)	mammography	system,	a	lower	priced	alternative	to	digital mammography.	CR	requires	the	use	of	an	analog	or	film	based	mammography	system,	where	instead	of	film,	a	phosphor	plate	is	used	to	capture	a	facsimile	of	the image.	It	then	requires	an	extra	step	of	having	the	plate	is	processed	on	a	specialized	reader	to	create	a	digital	image.	In	addition,	Kodak	has	filed	with	the	FDA	to	have its	CR	mammography	product	cleared	for	use.	Agfa,	Kodak	and	Cedara	and	Sectra	have	introduced	approved	mammography	workstations	and	are	marketing	these	in competition	with	our	line	of	radiologist	review	stations.	Other	companies	are	marketing	digital	mammography	systems	or	technologies	in	Europe	and	other	international markets	and	have	or	our	expected	to	apply	for	FDA	clearance	in	the	U.S.	In	addition,	the	FDA	is	considering	reclassifying	full	field	digital	mammography	systems	from Class	III	to	Class	II	devices.	If	this	reclassification	is	implemented,	these	systems	will	be	cleared	for	commercialization	through	the	510(k)	process	rather	than	the	more rigorous	pre-market	approval	process,	which	may	increase	the	number	of	competitors	entering	the	United	States	market.	The	Company	anticipates	that	competition	in the	digital	mammography	market	will	intensify.	While	we	offer	a	broad	product	line	of	breast	imaging	products,	we	compete	most	effectively	in	the	high-end	segment	of the	mammography	market.	We	believe	that	our	continued	success	will	depend	upon	the	continued	success	of	our	Selenia	full	field	digital	mammography	system,	as	well as	our	ability	to	maintain	our	technology	leadership	through	product	enhancements	and	the	development	of	new	products	and	technologies.	Although	Selenia	systems are	priced	higher	than	competing	technologies,	we	believe	Selenia	provides	outstanding	performance	in	aiding	physicians	in	the	early	detection	of	breast	cancer	due	to	its image	quality	and	workflow	features	and	functionality.	Our	MultiCare	breast	biopsy	guidance	systems	compete	with	products	offered	by	GE,	Siemens,	PlanMed,	IMS Giotto	and	with	conventional	surgical	biopsy	procedures.	We	expect	that	Siemens	will	also	enter	this	market	in	the	near	future.	We	believe	that	competition	for	our mammography	and	related	systems	is	based	largely	on	image	quality,	product	features,	ease	of	use,	product	reliability	and	reputation	as	well	as	price	and	quality	of service.

The	primary	competitor	for	our	recently	acquired	Suros	biopsy	and	tissue	extraction	product	line	is	Ethicon,	a	Johnson	&	Johnson	company.	There	are	many companies	in	the	biopsy	device	market,	but	other	principal	competitors	would	include	SenoRx	and	Bard.	In	addition,	emerging	companies	like	Sanarus,	Rubicor	and Intact	Medical	all	share	some	smaller	portion	of	the	biopsy	device	market.	We	believe	that	competition	for	our	biopsy	and	tissue	extraction	product	line	is	based	largely on	tissue	sampling	quality,	product	features,	ease	of	use,	product	reliability	and	price.

The	primary	competitor	for	our	recently	acquired	CAD	product	line	is	iCAD,	Inc.	Although	Kodak	has	introduced	a	CAD	product,	its	acceptance	has	been limited.	We	believe	that	competition	for	our	CAD	product	line	is	based	largely	on	performance	measurements	of	sensitivity	and	specificity,	product	features,	ease	of	use and	price.	In	addition,	R2's	potential	OEM	customers	that	seek	to	incorporate	CAD	into	their	digital	mammography	products	which	compete	with	our	mammography products	may	choose	to	incorporate	CAD	products	of	our	competitors	as	a	result	of	our	competition	with	them.

International	clinical	guidelines	recognize	spine	and	hip	bone	density	measurements	as	the	standard	for	diagnosis	of	osteoporosis.	GE	is	our	primary	competitor	in the	osteoporosis	assessment	market	with	bone	density	of	the	hip	and	spine	systems.	Other	companies	have	developed	lower	priced	x-ray	and	ultrasound	based	systems that	assess	bone	status	of	peripheral	skeletal	sites,	such	as	the	heel,	hand	or	wrist.	Measurements	of	bone	density	at	peripheral	sites	are	utilized	for	screening	for osteoporosis	risk,	and	patients	identified	as	at	risk	by	peripheral	testing	are	commonly	referred	for	spine	and	hip	bone	density	testing.	We	believe	that	competition	in	the field	of	osteoporosis	assessment	bone	densitometry	systems	is	based	upon	product	versatility	and	features,	price,	precision,	speed	of	measurement,	reputation,	cost	and ease	of	operation,	product	reliability	and	quality	of	service.	While	we	are	generally	not	the	lowest	cost	provider	of	dual-energy	x-ray	systems,	we	believe	that	we	have been	able	to	compete	effectively	because	of	our	advanced	technology	and	product	features,	including	Vertebral	Assessment	imaging.	We	offer	our	Explorer™	system for	the	more	price	sensitive	segment	of	the	x-ray	based	osteoporosis	assessment	market,	and	our	Sahara™	ultrasound	bone	analyzer	for	screening	applications.	We believe	that	competition	in	the	field	of	osteoporosis	assessment	ultrasound	systems	is	based	on	price,	precision,	speed	of	measurement,	cost	and	ease	of	operation, reputation,	product	reliability	and	quality	of	service.	Because	ultrasound	systems	can	only	measure	peripheral	skeletal	sites	and	do	not	have	the	precision	of	dual-energy x-ray	systems,	we	believe	dual-energy	x-ray	systems	will	continue	to	be	the	predominant	means	of	diagnosis	and	monitoring	of	bone	density	changes	for	patients	being treated	for	osteoporosis.

Our	mini	C-arm	products	compete	directly	with	mini	C-arms	manufactured	and	sold	by	a	limited	number	of	companies	including	GE.	We	also	compete	with manufacturers	of	conventional	C-arm	image	intensifiers	including	Philips,	Siemens	and	GE.	We	believe	that	competition	for	our	mini	C-arm	systems	is	based	largely	on price,	quality,	reputation,	service	and	production	capabilities.	We	believe	that	advantages	of	our	mini	C-arm	systems	include	low	levels	of	radiation,	image	quality	or resolution,	low	product	life	cycle	costs,	mobility,	quality	and	durability.

Our	Esaote	MRI	line	of	extremity	MRI	systems	compete	with	MRI	products	manufactured	and	sold	by	a	limited	number	of	companies	including	ONI	Medical Systems.	There	is	limited	competition	in	our	areas	of	emphasis	for	our	Esaote	extremity	MRI	systems.	Primary	competition	to	date	has	come	from	GE,	Esaote's	former distributor	for	this	product	line,	selling	off	inventory	after	exiting	the	business.	We	do	not	anticipate	this	to	continue	in	the	future.	In	addition,	ONI	Medical	Systems participates	in	the	orthopedic	segment	of	this	market,	but	with	a	much	higher	priced	product.	We	believe	the	Esaote	extremity	MRI	systems	are	ideally	suited	for	the rheumatology	and	extremity	orthopedic	markets,	based	on	features,	image	quality	and	price.	Although	limited,	we	also	believe	the	Esaote	extremity	MRI	system	may compete	with	whole-body,	general	purpose	systems,	including	those	provided	by	GE,	Siemens	and	Philips,	but	generally	not	in	the	office-based	segment	of	the	market which	we	actively	compete.

The	primary	competitors	for	our	recently	acquired	AEG	photoreceptor	drum	business	include	Mitubishi,	Fuji,	Hanp,	Sinonar,	and	a	large	number	of	smaller competitors.	These	markets	are	generally	characterized	by	intense	competition	based	upon	price	and	image	quality.	AEG	has	responded	to	competitive	trends	by	shifting nearly	all	laser	printer	drum	production	to	its	Chinese	facility,	by	seeking	to	manage	its	product	mix	to	minimize	margin	erosion,	and	by	accelerating	development	of coatings	for	higher	margin	color	printers.

# Manufacturing

We	manufacture	our	mammography	and	breast	biopsy	systems	at	our	manufacturing	facilities	in	Danbury,	Connecticut.	We	manufacture	our	osteoporosis assessment	and	mini	C-arm	imaging	systems	at	our	headquarters	in	Bedford,	Massachusetts	and	are	in	the	process	of	transitioning	our	R2	CAD	manufacturing	line	from

California	to	our	plant	in	Bedford.	We	continue	to	develop	our	software	for	our	CAD	products	at	our	R2	Santa	Clara,	California	facility.	Manufacturing	operations	for our	systems	consist	primarily	of	assembly,	test,	burn-in	and	quality	control.	We	purchase	a	major	portion	of	the	parts	and	peripheral	components	for	these	products,	and manufacture	some	subsystems,	such	as	high-voltage	x-ray	power	supply,	from	raw	materials.	Parts	and	materials	for	these	systems	are	generally	readily	available	from several	supply	sources.	However,	we	rely	on	one	supplier	for	the	HTC	grid,	an	important	component	for	our	more	advanced	mammography	systems.

We	acquired	Suros	in	July	2006;	this	company	specializes	in	breast	biopsy	devices.	The	systems'	control	consoles	are	manufactured	by	a	third	party,	with	quality control	performed	by	our	employees.	The	piece	parts	related	to	the	disposable	device	are	outsourced	and	then	assembled	at	our	facility	in	Indianapolis,	where	they	are also	tested	and	packaged.	We	rely	on	one	or	a	limited	number	of	suppliers	for	key	components	of	the	Suros	console	and	devices,	including	certain	cannulas,	plastic components	and	tubing.	While	we	believe	that	such	components	would	be	available	from	alternative	sources,	tooling	and	qualifying	such	alternative	sources	could require	significant	lead	times,	and	we	could	not	assure	that	we	would	be	able	to	obtain	such	components	on	terms	comparable	to	our	current	arrangements.	As	a	result,	a delay	or	interruption	of	supply	of	components	from	our	sole	or	limited	suppliers	of	the	Suros	product	line	could	materially	harm	our	Suros	breast	biopsy	equipment business.

We	manufacture	our	direct	radiography	detectors	at	our	manufacturing	facility	in	Newark,	Delaware.	The	manufacturing	of	detectors	consists	primarily	of	vapor deposition	coatings	in	clean	rooms,	microelectronics	fabrication,	assembly,	test,	burn-in	and	quality	control.	We	rely	on	one	or	only	a	limited	number	of	suppliers	for	key components	or	subassemblies	for	our	plates.	In	particular,	we	have	only	a	limited	number	of	suppliers	for	our	thin-film	transistors	(TFT).	The	manufacturing	of	our direct	radiography	detectors	is	highly	complex	requiring	precision,	assembly	and	process	control.	Product	design	changes	and	process	improvements,	along	with	new capital	equipment	have	allowed	us	to	increase	our	production	rates	while	reducing	scrap	and	improving	yields.

AEG	is	our	sole	source	provider	for	selenium	coatings	used	in	our	detectors.	AEG's	manufacturing	operations	are	located	in	Germany	and	China.	We	believe	the technology	transfer	between	both	AEG	and	DRC	will	help	us	improve	our	product	design,	manufacturing	processes	and	lead	to	improved	yields	and	reduced	costs,	while increasing	our	build	rates.	However,	because	AEG	is	a	sole	source	provider	for	a	critical	component,	the	failure	of	AEG	to	provide	us	with	acceptable	quantities	of selenium	coatings	on	a	timely	basis	could	materially	harm	our	business	and	results	of	operations.	AEG's	operations	are	subject	to	additional	risks	and	challenges	because of	its	international	operations,	including	those	related	to	integration	of	operations	across	different	cultures	and	languages,	currency	risk	the	volatile	nature	of	its photoconductor	business,	and	the	particular	economic,	legal,	political	and	regulatory	risks	associated	with	specific	countries,	as	more	fully	described	in	"Risk	Factors" in	Item	1A	below.

# Backlog

Our	backlog	as	of	November	19,	2006	totaled	$184.7	million	and	as	of	November	17,	2005	totaled	$128.4	million.	Backlog	consists	of	customer	orders	for	which a	delivery	schedule	within	the	next	twelve	months	has	been	specified.	Orders	included	in	backlog	may	be	canceled	or	rescheduled	by	customers	without	significant penalty.	Backlog	as	of	any	particular	date	should	not	be	relied	upon	as	indicative	of	our	net	revenues	for	any	future	period.

# Research	and	Development

Our	research	and	development	efforts	are	focused	on	enhancing	our	existing	products	and	developing	new	products.	Our	current	emphasis	is	further	development of	digital	detectors,	the	engineering	and	design	of	new	end	use	systems,	and	software	and	hardware	improvements	for	our	existing	products.	This	research	and development	includes	continuing	engineering	and	new	product	development	of	technologies	that	benefit	our	full	field	digital	mammography	system,	and	in	particular	the development	of	systems	to	perform	breast

tomosynthesis	which	is	a	3-dimensional	x-ray	imaging	technique.	In	addition	to	product	development,	our	research	and	development	personnel	play	an	active	role	in	the review	of	product	specifications,	clinical	protocols	and	FDA	submissions.	Our	research	and	product	development	expenses	were	approximately	$28.3	million	in	fiscal 2006,	$18.6	million	in	fiscal	2005	and	$16.7	million	in	fiscal	2004.

# Patents	and	Proprietary	Rights

We	rely	primarily	on	a	combination	of	trade	secrets,	patents,	copyright	and	trademark	laws,	and	confidentiality	procedures	to	protect	our	technology.	Due	to	the rapid	technological	change	that	characterizes	the	medical	device	industry,	we	believe	that	the	improvement	of	existing	products,	reliance	upon	trade	secrets	and unpatented	proprietary	know-how	and	the	development	of	new	products	are	generally	as	important	as	patent	protection	in	establishing	and	maintaining	a	competitive advantage.	Nevertheless,	we	have	obtained	patents	and	will	continue	to	make	efforts	to	obtain	patents,	when	available,	in	connection	with	our	product	development program.

As	of	November	17,	2006,	we	own	57	patents	relating	to	our	mammography	business	(of	these	16	patents	were	purchased	as	part	of	the	Suros	acquisition	and	14 were	purchased	in	the	R2	acquisition),	46	United	States	patents	relating	to	our	bone	densitometry	technology,	42	patents	relating	to	our	direct	radiography	technology and	5	patents	relating	to	our	mini	C-arm	technology.	Also,	we	license	patents	from	others	on	a	variety	of	terms,	and	own	approximately	64	additional	U.S.	patents relating	to	technology	currently	not	being	used	by	the	Company.	One	patent	will	expire	in	2007,	and	three	patents	will	expire	in	2008,	all	relating	to	other	matters.	We	do not	believe	that	any	of	these	expirations	will	have	a	material	effect	on	our	business.	Our	other	patents	have	expiration	dates	ranging	from	2009	to	2025.	In	addition,	we have	applied	for	approximately	127	additional	U.S.	patents	on	our	technologies.	We	have	also	obtained	or	applied	for	corresponding	patents	in	selected	foreign countries.	Our	patent	portfolio	includes	issued	patents	and	applications	transferred	to	Hologic	through	our	acquisition	of	AEG,	Suros,	R2	and	mammography	intellectual property	of	Fischer	during	fiscal	2006.	In	July	2006,	we	sold	to	Siemens	all	of	the	intellectual	property	we	acquired	from	Fischer	relating	to	the	Mammotest	system, including	12	US	patents	and	applications	relating	to	the	Mammotest	system,	subject	to	our	retention	of	a	royalty-free,	non-exclusive,	perpetual,	irrevocable,	worldwide right	and	license	to	use	that	intellectual	property.

There	has	been	substantial	litigation	regarding	patent	and	other	intellectual	property	rights	in	the	medical	device	and	related	industries.	In	the	early	1990s,	we were	involved	in	extensive	patent	litigation	with	Lunar	Corporation,	which	has	since	been	acquired	by	GE.	This	litigation	was	settled	by	agreement	dated	November	22, 1995.	The	agreement	provided	that	neither	party	would	engage	the	other	party	in	patent	litigation	respecting	bone	densitometry	for	a	period	of	ten	years,	regardless	of	the infringement	claimed	and	regardless	of	whether	the	technology	in	question	currently	existed	at	the	time	or	was	developed	or	acquired	by	the	other	party	in	the	future. Neither	party	was	required	to	disclose	to	the	other	any	of	its	technology.	During	the	last	fiscal	year,	we	entered	into	an	eight-year	extension	of	this	agreement	through September	26,	2013.	Upon	expiration	of	this	period	on	September	26,	2013,	there	will	be	no	restrictions	by	either	party	on	the	assertion	of	an	infringement	claim	against the	other.

The	companies	we	have	purchased	have	also	been	involved	in	litigation.	In	2005,	Suros	sued	a	competitor,	SenoRx,	for	patent	infringement.	In	May	2006,	Suros and	SenoRx	settled	the	case	and	SenoRx	agreed	to	discontinue	making,	or	selling	instruments	which	employ	the	alleged	infringing	cutter	design	for	as	long	as	the	patent remains	in	force.	In	return,	Suros	agreed	to	dismiss	the	litigation	without	prejudice,	reserving	its	right	to	refile	if	SenoRx	breaches	the	Agreement.	By	agreements	dated September	5,	2003,	R2.	and	iCAD,	Inc.	settled	and	dismissed	a	lawsuit	involving	three	patents	that	R2	controlled	and	one	patent	that	iCAD	controlled.	The	settlement included	payments	to	R2,	licenses	and	mutual	releases	under	certain	patent	rights,	and	an	undertaking	to	resolve	by	arbitration	any	patent-based	disputes	that	arise	in	the next	five	years.	R2	and	iCAD	resolved	a	subsequent	patent	dispute	by	an	arbitration	proceeding	that	R2	commenced	on	May	9,	2005	and	that	concluded	with	an arbitration	award	issued	on	April	17,	2006	holding	that	the	involved	patents	of	both	parties	were	not	infringed	and	that	iCAD	did	not	have	an	implied	license	under	an R2	patent.

We	are	engaged	in	intellectual	property	litigation	as	described	in	Item	3,	Legal	Proceedings,	and	may	be	notified	in	the	future,	that	we	may	be	infringing intellectual	property	rights	possessed	by	other	third	parties.	In	connection	with	any	such	litigation	or	if	any	claims	are	asserted	against	us	or	our	products,	we	may	seek	to enter	into	royalty	or	licensing	arrangements.	There	is	a	risk	in	these	situations	that	no	license	will	be	available	or	that	a	license	will	not	be	available	on	reasonable	terms. Alternatively,	we	may	decide	to	litigate	such	claims	or	to	design	around	the	patented	technology.	These	actions	could	be	costly	and	would	divert	the	efforts	and	attention of	our	management	and	technical	personnel.	As	a	result,	any	infringement	claims	by	third	parties	or	other	claims	for	indemnification	by	customers	resulting	from infringement	claims,	whether	or	not	proven	to	be	true,	may	harm	our	business	and	prospects.

# Regulation

The	medical	devices	manufactured	and	marketed	by	us	are	subject	to	regulation	by	the	FDA	and,	in	many	instances,	by	foreign	governments.	Under	the	Federal Food,	Drug	and	Cosmetic	Act,	known	as	the	FD&C	Act,	manufacturers	of	medical	devices	must	comply	with	certain	regulations	governing	the	design,	testing, manufacturing,	packaging,	servicing	and	marketing	of	medical	devices.	Some	of	our	products	are	also	subject	to	the	Radiation	Control	for	Health	and	Safety	Act, administered	by	the	FDA,	which	imposes	performance	standards	and	record	keeping,	reporting,	product	testing	and	product	labeling	requirements	for	devices	that	emit radiation,	such	as	x-rays.

The	FDA	generally	must	clear	the	commercial	sale	of	new	medical	devices.	Commercial	sales	of	our	medical	devices	within	the	United	States	must	be	preceded by	either	a	premarket	notification	filing	pursuant	to	Section	510(k)	of	the	FD&C	Act	or	the	granting	of	a	premarket	approval.	The	510(k)	notification	filing	must	contain information	that	establishes	the	device	to	be	substantially	equivalent	to	a	device	commercially	distributed	prior	to	May	28,	1976.

The	premarket	approval	procedure	involves	a	more	complex	and	lengthy	testing	and	review	process	by	the	FDA	than	the	510(k)	premarket	notification	procedure and	may	require	several	years	to	obtain.	We	may	need	to	first	obtain	an	investigational	device	exemption,	known	as	an	IDE,	for	the	product	to	conduct	extensive	clinical testing	of	the	device	to	obtain	the	necessary	clinical	data	for	submission	to	the	FDA.	The	FDA	will	thereafter	only	grant	premarket	approval	if,	after	evaluating	this clinical	data,	it	finds	that	the	safety	and	effectiveness	of	the	product	has	been	sufficiently	demonstrated.	This	approval	may	restrict	the	number	of	devices	distributed	or require	additional	patient	follow-up	for	an	indefinite	period	of	time.	We	received	premarket	approval	of	our	Selenia	full	field	digital	mammography	system	in	October 2002.	This	premarket	approval	permitted	us	to	begin	marketing	efforts	in	the	United	States	and	launch	our	commercialization	efforts	with	respect	to	this	product.

On	February	15,	2006	the	FDA	published	a	proposed	rule	to	reclassify	bone	sonometer	devices	from	Class	III	into	Class	II,	subject	to	special	controls.	Also	on that	date	the	FDA	announced	the	availability	of	a	draft	guidance	for	industry	and	FDA	staff	entitled	"Class	II	Special	Controls	Guidance	Document:	Bone	Sonometers." The	reclassification	would	result	in	sonometers	being	cleared	for	commercialization	through	the	510(k)	process,	which	is	less	rigorous,	than	the	present	PMA	process. This	may	result	in	more	competitors	entering	the	United	States	market.	It	is	not	possible	to	predict	when	the	actual	reclassification	will	occur.

On	May	23,	2006	the	FDA	Radiological	Devices	Panel	recommended	the	reclassification	of	full	field	digital	mammography	systems	from	Class	III	to	Class	II devices.	The	reclassification	would	result	in	these	systems	being	cleared	for	commercialization	through	the	510(k)	process.	This	may	result	in	more	competitors	entering the	United	States	market.	The	FDA	has	not	taken	any	additional	steps	to	act	on	the	panel's	recommendations	and	it	is	not	possible	to	predict	if	and	when	the reclassification	will	occur.

Our	systems	are	also	subject	to	approval	by	certain	foreign	regulatory	and	safety	agencies.	Some	of	our	technology	is	governed	by	the	International	Traffic	in Arms	Regulations	of	the	United	States	Department	of	State.	As	a	result,	the	export	of	some	of	our	systems	to	some	countries	may	be	limited	or	prohibited.

Our	manufacturing	processes	and	facilities	are	subject	to	continuing	review	by	the	FDA	and	foreign	governments	or	their	representatives.	Adverse	findings	could result	in	various	actions	against	us,	including	withdrawal	of	approvals	and	product	recall.

We	cannot	assure	that	the	FDA	or	foreign	regulatory	agencies	will	give	the	requisite	approvals	or	clearances	for	any	of	our	medical	devices	under	development	on a	timely	basis,	if	at	all.	Moreover,	after	clearance	is	given,	these	agencies	can	later	withdraw	the	clearance	or	require	us	to	change	the	device	or	its	manufacturing	process or	labeling,	to	supply	additional	proof	of	its	safety	and	effectiveness,	or	to	recall,	repair,	replace	or	refund	the	cost	of	the	medical	device,	if	it	is	shown	to	be	hazardous	or defective.	The	process	of	obtaining	clearance	to	market	products	is	costly	and	time-consuming	and	can	delay	the	marketing	and	sale	of	our	products.

As	a	manufacturer	of	medical	devices,	we	are	subject	to	additional	FDA	regulations,	including	the	Radiation	Control	for	Health	and	Safety	Act	of	1968,	which specifically	regulates	radiation-emitting	products.	Most	states	and	many	other	foreign	countries	monitor	and	require	licensing	of	x-ray	devices.	Federal,	state	and	foreign regulations	regarding	the	manufacture	and	sale	of	medical	devices	are	subject	to	future	change.	We	cannot	predict	what	impact,	if	any,	such	changes	might	have	on	our business.

# Reimbursement

In	the	United	States,	the	Centers	for	Medicare	&	Medicaid	Services	(formerly	the	Health	Care	Financing	Administration),	known	as	CMS,	establishes	guidelines for	the	reimbursement	of	healthcare	providers	treating	Medicare	and	Medicaid	patients.	Under	current	CMS	guidelines,	varying	reimbursement	levels	have	been established	for	bone	density	assessment,	mammography	and	other	imaging	and	diagnostic	procedures	performed	by	our	products.	The	actual	reimbursement	amounts	are determined	by	individual	state	Medicare	carriers	and,	for	non-Medicare	and	Medicaid	patients,	private	insurance	carriers.	There	are	often	delays	between	the reimbursement	approvals	by	CMS	and	by	a	state	Medicare	carrier	and	private	insurance	carriers.	Moreover,	states	as	well	as	private	insurance	carriers	may	choose	not	to follow	the	CMS	reimbursement	guidelines.	The	use	of	our	products	outside	the	United	States	is	similarly	affected	by	reimbursement	policies	adopted	by	foreign regulatory	and	insurance	carriers.

In	November	2006,	CMS	announced	2007	reimbursement	rates	for	physician,	hospital	and	ambulatory	surgical	center	payments.	Reimbursement	rates	now	factor in	a	Sustainable	Growth	Rate	("SGR")	cut	which	requires	that	reimbursement	rates	factor	in	a	5.0%	reduction	in	physician	payments	under	the	physician	fee	schedule	as determined	by	the	SGR	formula.	The	CMS	also	implemented	provisions	of	the	Deficit	Reduction	Act	of	2005	("DRA")	related	to	certain	medical	imaging	procedures. The	changes	that	affect	us	include	the	following:	a	modest	single	digit	decline	(ranging	from	approximately	1%	to	6%)	in	digital	and	analog	mammography	screening and	diagnostic	reimbursement	rates,	primarily	due	to	the	SGR	cut;	an	approximately	16%	decline	in	reimbursement	for	CAD	in	2007,	which	increases	to	an approximately	50%	decline	over	four	years	due	to	reduced	technical	component	payments;	an	approximately	10%	decline	in	2007	in	reimbursement	for	vacuum	assisted (Suros)	biopsy,	which	increases	to	an	approximately	15%	decline	over	4	years,	due	to	reduced	technical	and	professional	component	payments;	an	approximately	30% decline	in	2007	in	reimbursement	for	stereotactic	biopsy,	which	increases	to	an	approximately	63%	decline	over	4	years,	due	to	reduced	technical	component	payments; and	an	approximately	40%	decline	in	2007	in	reimbursement	for	osteoporosis	(DXA)	testing,	which	increases	to	an	approximately	70%	decline	over	4	years,	due	to significant	cuts	in	technical	and	professional	component	payments.

For	the	past	four	years,	Congress	has	overridden	some	or	all	of	the	SGR	reductions	proposed	for	that	year.	However,	we	cannot	assure	that	Congress	will	override any	part	of	the	recent	proposed	SGR	reductions.	The	significant	reductions	in	reimbursement	rates	proposed	for	the	use	of	many	of	our	products	may	have	a	material adverse	affect	on	the	sales	of	those	products.

# Employees

As	of	November	17,	2006,	we	had	1,617	full-time	employees,	including	590	in	manufacturing	operations,	219	in	research	and	development,	606	in	marketing, sales	and	support	services,	and	202	in	finance	and	administration.	Except	for	AEG's	non-management	employees	in	Germany,	none	of	our	employees	are	represented	by a	union.	AEG's	approximately	200	non-management	German	employees	were	subject	to	collective	bargaining	agreements	negotiated	on	a	national	and	regional	basis between	Unternehmens-Verband	Südöstliches	Westfalen	e.V.,	the	Employers	Association	of	North	Rhine-Westphalia,	and	the	German	Metal	Workers	Union, IndustrieGewerkschaft	Metall.	In	addition,	AEG's	German	employees	are	represented	by	a	works	council,	a	Betriebsrat,	with	respect	to	various	shop	agreements	for social	matters	and	working	conditions.	By	Chinese	law,	all	labor	contracts	of	the	85	non-management	employees	of	AEG's	Chinese	subsidiary	are	registered	at	the	labor department	of	the	local	authorities,	but	are	currently	not	members	of	the	labor	union.	We	believe	that	our	relationship	with	our	employees	is	good.	Except	as	described herein,	none	of	our	other	employees	are	represented	by	a	union.

# Item	1A.				RiskFactors

This	report	contains	forward-looking	statements	that	involve	risks	and	uncertainties,	such	as	statements	of	our	objectives,	expectations	and	intentions.	The cautionary	statements	made	in	this	report	should	be	read	as	applicable	to	all	forward-looking	statements	wherever	they	appear	in	this	report.	Our	actual	results	could differ	materially	from	those	discussed	herein.	Factors	that	could	cause	or	contribute	to	such	differences	include	those	discussed	below,	as	well	as	those	discussed elsewhere	in	this	report.

# Risks	Relating	to	Acquisitions

# Our	business	may	be	harmed	by	our	recently	completed	acquisitions.

We	have	acquired	related	businesses,	technologies,	product	lines,	and	products	from	Suros	Surgical	Systems,	Inc.,	R2	Technology,	Inc.	and	AEG Elektrofotografie	GmbH.	The	success	of	these	acquisitions	will	depend	on	our	ability	to	realize	the	anticipated	benefits	from	combining	the	acquired	businesses	with	our own.	We	may	fail	to	realize	these	anticipated	benefits	for	a	number	of	reasons,	including	the	following:

•	 problems	may	arise	with	our	ability	to	successfully	integrate	the	acquired	businesses,	which	may	result	in	the	combined	companies	not	operating	as effectively	and	efficiently	as	expected,	which	problems	may	include:

•	 diversion	of	management	time,	as	well	as	a	shift	of	focus	from	operating	the	businesses	to	issues	related	to	integration	and	administration;

•failure	to	retain	and	motivate	key	employees;

•failure	to	successfully	manage	relationships	with	customers,	distributors	and	suppliers;

•failure	of	customers	to	accept	new	products;

•failure	to	effectively	coordinate	sales	and	marketing	efforts;

•failure	to	combine	product	offerings	and	product	lines	quickly	and	effectively;

•failure	to	effectively	enhance	acquired	technology	and	products	or	develop	new	products	relating	to	the	acquired	businesses;

•	 potential	difficulties	and	inefficiencies	in	managing	and	operating	businesses	in	multiple	locations	or	operating	businesses	in	which	we	have	either limited	or	no	direct	experience;

•	 potential	difficulties	integrating	financial	reporting	systems;	and

•	 potential	difficulties	in	implementing	controls,	procedures	and	policies	appropriate	for	a	larger	public	company	at	companies	that	prior	to	our acquisition	had	lacked	such	controls,	procedures	and	policies;

•	 we	may	not	be	able	to	achieve	the	expected	synergies	from	an	acquisition	or	it	may	take	longer	than	expected	to	achieve	those	synergies; •an	acquisition	may	involve	unexpected	costs	or	liabilities,	or	the	effects	of	purchase	accounting	may	be	different	from	our	expectations;	and

•the	acquired	businesses	may	be	adversely	affected	by	future	legislative,	regulatory,	or	tax	changes	as	well	as	other	economic,	business	and/or	competitive factors.

Our	acquisition	of	AEG	Elektrofotografie,	which	conducts	its	business	worldwide,	with	headquarters	in	Germany	and	manufacturing	operations	in	Germany	and China,	is	subject	to	the	additional	challenges	and	risks	associated	with	volatility	in	the	market	for	organic	photoconductor	coatings	used	for	laser	printer	cartridges,	and the	company's	international	operations,	including	those	related	to	integration	of	operations	across	different	cultures	and	languages,	currency	risk	and	the	particular economic,	legal,	political	and	regulatory	risks	associated	with	specific	countries.

# The	market	price	of	our	common	stock	may	decline	as	a	result	of	our	recent	acquisitions.

The	market	price	of	our	common	stock	may	decline	as	a	result	of	our	recent	acquisitions	for	a	number	of	reasons,	including	the	following:

•	 we	have	expended	significant	funds,	incurred	significant	debt	and	issued	a	substantial	number	of	additional	shares	of	our	common	stock	in	connection	with these	acquisitions,	which	may	negatively	affect	our	results	of	operations	and	be	dilutive	to	our	stockholders;

•the	perceived	benefits	we	anticipate	of	the	acquisitions	may	not	be	consistent	with	those	perceived	by	financial	or	industry	analysts	or	by	investors;

•the	combined	companies	may	not	achieve	the	expected	benefits	of	the	acquisitions	as	rapidly	or	to	the	extent	anticipated	by	financial	or	industry	analysts	or by	investors;

•the	effect	of	the	acquisitions	on	our	financial	results	may	not	be	consistent	with	the	expectations	of	financial	or	industry	analysts	or	of	investors;	and

•	 our	significant	stockholders,	or	stockholders	of	the	acquired	entities	may	decide	to	dispose	of	their	shares	of	our	common	stock.

# Our	business	may	be	harmed	by	acquisitions	we	complete	in	the	future.

Our	identification	of	suitable	acquisition	candidates	involves	risks	inherent	in	assessing	the	values,	strengths,	weaknesses,	risks	and	profitability	of	acquisition candidates,	including	the	effects	of	the	possible	acquisition	on	our	business,	diversion	of	our	management's	attention	and	risks	associated	with	unanticipated	problems or	latent	liabilities.	If	we	are	successful	in	pursuing	future	acquisitions,	we	will	be	required	to	expend	significant	funds,	incur	additional	debt	or	issue	additional securities,	which	may	negatively	affect	our	results	of	operations	and	be	dilutive	to	our	stockholders.	If	we	spend	significant	funds	or	incur	additional	debt,	our	ability	to obtain	financing	for	working	capital	or	other	purposes	could	decline,	and	we	may	be	more	vulnerable	to	economic	downturns	and	competitive	pressures.	We	cannot guarantee	that	we	will	be	able	to	finance	additional	acquisitions	or	that	we	will	realize	any	anticipated	benefits	from	acquisitions	that	we	complete.	Should	we	acquire another	business,	the	process	of	integrating	acquired	operations	into	our	existing	operations	may	result	in	unforeseen	operating	difficulties	and	may	require	significant financial	resources	that	would	otherwise	be	available	for	the	ongoing	development	or	expansion	of	our	existing	business.

We	may	incur	significant	additional	and	unforeseen	expenses	and	costs	to	defend	or	pursue	litigation,	investigations	or	other	inquiries	in	connection	with	acquisitions that	we	complete.

We	may	become	subject	to	litigation,	investigations	or	inquiries	in	connection	with	acquisitions	that	we	complete,	which	may	cause	us	to	incur	significant additional	and	unforeseen	costs	to	defend	or	pursue	litigation

or	investigations	or	other	inquiries	relating	to	the	acquisition.	In	connection	with	our	acquisition	in	September	2005	of	the	mammography	intellectual	property	assets from	Fischer,	including	the	rights	to	their	SenoScan	digital	mammography	and	MammoTest	stereotactic	breast	biopsy	systems,	we	became	subject	to	a	non-public Federal	Trade	Commission	investigation	to	determine	if	the	acquisition	of	certain	of	those	assets	may	be	anticompetitive	and	in	violation	of	Section	7	of	the	Clayton	Act or	Section	5	of	the	FTC	Act.	In	July	2006,	we	entered	into	a	consent	agreement	with	the	FTC	to	resolve	our	dispute	with	the	FTC	regarding	our	acquisition	of	the MammoTest	stereotactic	breast	biopsy	system	intellectual	property	acquired	as	part	of	the	mammography	intellectual	property	assets	purchased	from	Fischer.	As	part	of the	consent	agreement,	we	agreed	to	sell	and	license	back,	on	a	royalty-free	nonexclusive	basis,	all	of	the	intellectual	property	relating	to	the	Mammotest	system	to Siemens	AG.	The	consent	agreement	and	agreement	with	Siemens	received	final	approval	from	the	FTC	on	August	9,	2006.

# Risks	relating	to	our	business

The	markets	for	our	direct-to-digital	full-field	mammography	products	are	relatively	new	and	may	not	develop	as	expected.

We	cannot	assure	that	the	markets	for	our	direct-to-digital	full-field	mammography	products	will	continue	to	develop.	There	is	a	significant	installed	base	of conventional	screen-film	mammography	products	in	hospitals	and	radiological	practices.	The	use	of	our	direct-to-digital	mammography	products	in	many	cases	would require	these	potential	customers	to	either	modify	or	replace	their	existing	x-ray	imaging	equipment.	Moreover,	as	direct-to-digital	mammography	products	are	generally more	expensive	than	conventional	screen-firm	mammography	products,	we	believe	that	a	major	factor	in	the	market's	acceptance	of	direct-to-digital	mammography products	has	been	and	will	continue	to	be	based	upon	the	benefits	direct-to-digital	technology	as	compared	to	less	expensive	technologies.	As	a	result,	the	market	for	our direct-to-digital	mammography	products	has	and	will	continue	to	be	affected	by	published	studies	and	reports	relating	to	the	comparative	efficacy	of	digital mammography	products,	and	the	publication	of	an	adverse	study	could	significantly	impair	the	adoption	of	this	technology	and	harm	our	business.	The	implementation of	digital	mammography	technology	is	also	affected	by	the	trend	toward	transition	by	the	healthcare	industry	from	conventional	film	archiving	systems	to	hospital Picture	Archiving	and	Communications	Systems,	known	as	PACS,	to	store	x-ray	images	electronically.	Because	the	benefits	of	our	direct-to-digital	mammography technology	may	not	be	fully	realized	by	customers	until	they	install	a	PACS	platform,	a	large	potential	market	for	these	products	may	not	develop	until	PACS environments	are	more	widely	used.	Because	the	markets	for	these	products	are	relatively	new,	it	is	likely	that	our	evaluation	of	the	potential	markets	for	these	products will	materially	vary	with	time.

We	depend	on	third	party	reimbursement	to	our	customers	for	market	acceptance	of	our	products.	Failure	of	third	party	payors	to	provide	appropriate	levels	of reimbursement	for	use	of	our	products	could	harm	our	business	and	prospects.

Sales	of	medical	products	largely	depend	on	the	reimbursement	of	patients'	medical	expenses	by	government	healthcare	programs	and	private	health	insurers.	The costs	of	our	products	are	substantial,	and	market	acceptance	of	our	products	depends	upon	our	customers'	ability	to	obtain	appropriate	levels	of	reimbursement	from third-party	payors	for	use	of	our	products.	In	the	United	States,	the	Centers	for	Medicare	&	Medicaid	Services,	known	as	CMS,	establishes	guidelines	for	the reimbursement	of	healthcare	providers	treating	Medicare	and	Medicaid	patients.	Under	current	CMS	guidelines,	varying	reimbursement	levels	have	been	established	for mammography,	breast	biopsy,	CAD	and	bone	density	assessment	and	other	imaging	and	diagnostic	procedures	performed	by	our	products.	The	actual	reimbursement amounts	are	determined	by	individual	state	Medicare	carriers	and,	for	non-Medicare	and	Medicaid	patients,	private	insurance	carriers.	There	are	often	delays	between	the reimbursement	approvals	by	CMS	and	by	a	state	Medicare	carrier	and	private	insurance	carriers.	Moreover,	states	as	well	as	private	insurance	carriers	may	choose	not	to follow	the	CMS	reimbursement	guidelines.	The	use	of	our	products	outside	the	United	States	is	similarly	affected	by	reimbursement	policies	adopted	by	foreign regulatory	and	insurance	carriers.	In	November	2006,	the	CMS

announced	reductions	to	the	2007	reimbursement	levels	for	bone	density	assessments,	CAD,	breast	biopsy	and	digital	and	analog	mammography	screening	and diagnostics.	The	most	significant	reductions	were	an	approximately	40%	decline	in	2007	in	reimbursement	for	osteoporosis	(DXA)	testing,	which	increases	to	an approximately	70%	decline	over	4	years,	an	approximately	30%	decline	in	2007	in	reimbursement	for	stereotactic	biopsy,	which	increases	to	an	approximately	63% decline	over	4	years,	an	approximately	16%	decline	in	reimbursement	for	CAD	in	2007,	which	increases	to	an	approximately	50%	decline	over	four	years,	and	an approximately	10%	decline	in	2007	in	reimbursement	for	vacuum	assisted	(Suros)	biopsy,	which	increases	to	an	approximately	15%	decline	over	4	years.	These reductions	or	any	other	reduction	or	other	adverse	change	in	reimbursement	policies	for	the	use	of	our	products	could	harm	our	business	and	prospects.

If	we	fail	to	achieve	and	maintain	the	high	manufacturing	standards	that	our	direct	radiography	products	require,	we	will	not	be	successful	in	developing	and	marketing those	products.

The	manufacture	of	our	direct	radiography	detectors	is	highly	complex	and	requires	precise	high	quality	manufacturing	that	is	difficult	to	achieve.	We	have	in	the past	and	may	in	the	future	experience	difficulties	in	manufacturing	these	detectors	in	commercial	quantities,	primarily	related	to	delays	and	difficulties	in	obtaining critical	components	for	these	detectors	that	meet	our	high	manufacturing	standards.	Our	initial	difficulties	have	led	to	increased	delivery	lead-times	and	increased	costs of	manufacturing	these	products.	Our	failure,	including	the	failure	of	our	contract	manufacturers,	to	achieve	and	maintain	the	required	high	manufacturing	standards could	result	in	further	delays	or	failures	in	product	testing	or	delivery,	cost	overruns,	product	recalls	or	withdrawals,	or	other	problems	that	could	harm	our	business	and prospects.

# Interruptions,	delays,	shutdowns	or	damage	at	our	manufacturing	facilities	could	harm	our	business.

We	manufacture	our	products	at	our	manufacturing	facilities	in	Danbury,	Connecticut,	Bedford,	Massachusetts,	Newark,	Delaware,	and,	with	our	recent acquisition	of	AEG,	we	manufacture	the	selenium	coatings	used	in	the	digital	x-ray	image	capture	radiographic	systems	in	Germany.	We	also	manufacture	selenium	and organic	photoconductor	coatings	for	other	uses	in	Germany	and	China.	An	interruption	in	manufacturing	capabilities	at	any	of	these	facilities,	as	a	result	of	equipment failure	or	other	reasons,	could	reduce,	delay	or	prevent	the	production	of	our	products.	Our	manufacturing	facilities	are	subject	to	the	risk	of	catastrophic	loss	due	to unanticipated	events,	such	as	fires,	earthquakes,	explosions,	floods	or	weather	conditions.	We	may	experience	plant	shutdowns	or	periods	of	reduced	production	as	a result	of	equipment	failures,	loss	of	power,	gray	outs,	delays	in	deliveries	or	extensive	damage	to	any	of	our	facilities,	which	could	have	a	material	adverse	effect	on	our business,	results	of	operations	or	financial	condition.	In	addition,	our	AEG	manufacturing	operations	in	Germany	and	China	are	subject	to	additional	challenges	and	risks associated	with	international	operations.

# The	uncertainty	of	healthcare	reform	could	harm	our	business	and	prospects.

In	recent	years,	the	healthcare	industry	has	undergone	significant	change	driven	by	various	efforts	to	reduce	costs,	including	efforts	at	national	healthcare	reform, trends	toward	managed	care,	cuts	in	Medicare,	consolidation	of	healthcare	distribution	companies	and	collective	purchasing	arrangements	by	office-based	healthcare practitioners.	Healthcare	reform	proposals	and	medical	cost	containment	measures	in	the	United	States	and	in	many	foreign	countries	could:

•limit	the	use	of	our	products;

# •reduce	reimbursement	available	for	such	use;	or

•adversely	affect	the	use	of	new	therapies	for	which	our	products	may	be	targeted.

These	reforms	or	cost	containment	measures,	including	the	uncertainty	in	the	medical	community	regarding	their	nature	and	effect,	could	harm	our	business	and prospects	and	make	it	difficult	for	us	to	raise	additional	capital	on	advantageous	terms,	if	at	all.

# Our	success	depends	on	new	product	development.

We	have	a	continuing	research	and	development	program	designed	to	develop	new	products	and	to	enhance	and	improve	our	products.	We	are	expending significant	resources	on	the	development	of	digital	x-ray	imaging	products,	including	the	development	of	a	digital	mammography	product	to	perform	breast tomosynthesis,	a	3-dimensional	imaging	technique.	The	successful	development	of	these	products	and	product	enhancements	are	subject	to	numerous	risks,	both	known and	unknown,	including:

•	 unanticipated	delays;

•access	to	capital;

•	 budget	overruns;

•technical	problems;	and

•	 other	difficulties	that	could	result	in	the	abandonment	or	substantial	change	in	the	design,	development	and	commercialization	of	these	new	products, including,	for	example,	changes	requested	by	the	FDA	in	connection	with	pre-market	approval	applications	for	our	products	or	510(k)	notification.

Given	the	uncertainties	inherent	with	product	development	and	introduction,	we	cannot	assure	that	any	of	our	product	development	efforts	will	be	successful	on	a timely	basis	or	within	budget,	if	at	all.	Our	failure	to	develop	new	products	and	product	enhancements	on	a	timely	basis	or	within	budget	could	harm	our	business	and prospects.

Our	business	could	be	harmed	if	our	products	contain	undetected	errors	or	defects	or	do	not	meet	customer	specifications.

We	are	continuously	developing	new	products	and	improving	our	existing	products.	Newly	introduced	products	can	contain	undetected	errors	or	defects.	In addition,	these	products	may	not	meet	their	performance	specifications	under	all	conditions	or	for	all	applications.	If,	despite	our	internal	testing	and	testing	by	our customers,	any	of	our	products	contain	errors	or	defects	or	any	of	our	products	fail	to	meet	customer	specifications,	then	we	may	be	required	to	enhance	or	improve those	products	or	technologies.	We	may	not	be	able	to	do	so	on	a	timely	basis,	if	at	all,	and	may	only	be	able	to	do	so	at	considerable	expense.	In	addition,	any significant	reliability	problems	could	result	in	adverse	customer	reaction,	negative	publicity	or	legal	claims	and	could	harm	our	business	and	prospects.

# Any	new	products	or	product	enhancements	developed	by	us	may	not	be	commercially	successful.

Even	if	we	are	successful	in	developing	a	new	product	or	a	product	enhancement,	we	cannot	assure	that	such	product	or	product	enhancement	will	be commercially	successful.	The	successful	commercialization	of	new	products	and	product	enhancements	are	subject	to	numerous	risks,	both	known	and	unknown, including:

•	 uncertainty	of	the	development	of	a	market	for	such	product	or	enhancement;

•	 product	performance,	perceived	or	actual;

•competition;	and

•	 other	technological	developments,

as	well	as	the	other	risks	relating	to	our	business	as	set	forth	herein.	Often,	the	development	of	a	significant	market	for	a	new	product	or	product	enhancement	will depend	upon	the	establishment	of	a	reimbursement	code	or	an	advantageous	reimbursement	level	for	use	of	the	product.	Moreover,	even	if	addressed,	such reimbursement	codes	or	levels	frequently	are	not	addressed	until	after	a	new	product	or	product	enhancement	is	developed	and	commercially	introduced,	which	can delay	the	successful	commercialization	of	a	new	product	or	product	enhancement.

Our	reliance	on	one	or	only	a	limited	number	of	suppliers	for	some	key	components	or	subassemblies	for	our	products	could	harm	our	business	and	prospects.

We	rely	on	one	or	only	a	limited	number	of	suppliers	for	some	key	components	or	subassemblies	for	our	products.	In	particular,	we	have	a	limited	number	of suppliers	for	the	panel	for	our	direct	radiography	products	and	AEG	is	our	sole	source	provider	for	Selenium	coatings.	In	addition,	we	have	only	limited	sources	of supply	for	some	key	components	used	in	our	mini	C-arm	systems	and	our	Suros	biopsy	systems.	Obtaining	alternative	sources	of	supply	of	these	components	could involve	significant	delays	and	other	costs,	and	may	not	be	available	to	us	on	reasonable	terms,	if	at	all.	The	failure	of	a	component	supplier	or	contract	assembler	to provide	acceptable	quality	and	timely	components	or	assembly	service	at	an	acceptable	price,	or	an	interruption	of	supplies	from	such	a	supplier	could	harm	our business	and	prospects.	Any	disruption	of	supplies	of	key	components	could	delay	or	reduce	shipments,	which	could	result	in	lost	or	deferred	sales.

Our	liquidity	and	financial	position	could	be	harmed	by	our	obligations	under	our	credit	facility	and	our	long-term	leases	for	our	headquarters	and	Lorad	facilities.

Our	obligations	under	our	credit	facility	and	our	long-term	leases	for	our	headquarters	and	Lorad	facilities	could	adversely	affect	our	ability	to	obtain	additional financing	for	acquisitions,	working	capital	or	other	purposes	and	could	make	us	more	vulnerable	to	economic	downturns	and	competitive	pressures.	These	obligations could	also	adversely	affect	our	liquidity	and,	in	the	event	of	a	cash	shortfall,	we	could	be	forced	to	reduce	other	expenditures	to	be	able	to	meet	such	requirements. Moreover,	our	credit	facility	and	long-term	leases	contain	financial	and	other	covenants.	If	we	do	not	comply	with	our	covenants	our	obligations	could	be	accelerated and	our	liquidity	and	financial	position	could	be	harmed.	Our	ability	to	meet	our	obligations	under	our	credit	facility	and	leases	will	be	dependent	upon	our	future performance,	which	will	be	subject	to	financial,	business	and	other	factors	affecting	our	operations.	If	we	are	unable	to	generate	sufficient	cash	flow	from	operations	in the	future	to	service	our	debt	and	make	our	lease	payments,	we	may	be	required	to	refinance	all	or	a	portion	of	such	obligations,	or	obtain	additional	financing	and	our liquidity	and	financial	position	could	be	harmed.

# We	may	not	be	able	to	compete	successfully.

A	number	of	companies	have	developed,	or	are	expected	to	develop,	products	that	compete	or	will	compete	with	our	products.	Many	of	these	competitors	offer	a range	of	products	in	areas	other	than	those	in	which	we	compete,	which	may	make	such	competitors	more	attractive	to	hospitals,	radiology	clients,	general	purchasing organizations	and	other	potential	customers.	In	addition,	many	of	our	current	and	potential	competitors	such	as	Agfa,	Fuji,	GE,	Kodak,	Johnson	and	Johnson,	Siemens and	Toshiba,	are	larger	and	have	greater	financial	resources	than	us	and	offer	a	range	of	products	broader	than	our	products.	Some	of	the	companies	with	which	we	now compete	or	may	compete	in	the	future	have	or	may	have	more	extensive	research,	marketing	and	manufacturing	capabilities	and	significantly	greater	technical	and personnel	resources	than	us,	and	may	be	better	positioned	to	continue	to	improve	their	technology	in	order	to	compete	in	an	evolving	industry.	Our	failure	to	compete successfully	could	harm	our	business	and	prospects.

Recent	proposed	changes	to	reclassify	full	field	digital	mammography	to	permit	510(k)	clearance	could	increase	competition	for	our	digital	mammography	products.

On	May	23,	2006	the	US	FDA	Radiological	Devices	Panel	recommended	the	reclassification	of	full	field	digital	mammography	systems	from	Class	III	to	Class	II devices.	The	FDA	has	not	taken	any	additional	steps	act	on	the	panel's	recommendation.	If	the	FDA	implements	the	panel's	recommendation,	the	reclassification	would allow	full	field	digital	mammography	systems	to	be	cleared	for	commercialization	through	the	510(k)	process,	which	is	less	rigorous	than	the	present	pre-market approval	process.	If	and	when	implemented,	the	reclassification	for	full	field	digital	mammography	systems	from	Class	III	to	Class	II	devices	may	lower	barriers	of	entry into	the	digital	mammography	market,	may	result	in	more	competitors	entering	the	United	States	market	and	could	harm	sales	of	our	digital	mammography	systems.

# Our	success	depends	upon	our	ability	to	adapt	to	rapid	changes	in	technology	and	customer	requirements.

The	market	for	our	products	has	been	characterized	by	rapid	technological	change,	frequent	product	introductions	and	evolving	customer	requirements.	We believe	that	these	trends	will	continue	into	the	foreseeable	future.	Our	success	will	depend,	in	part,	upon	our	ability	to	enhance	our	existing	products,	successfully develop	new	products	that	meet	increasing	customer	requirements	and	gain	market	acceptance.	If	we	fail	to	do	so	our	products	may	be	rendered	obsolete	or uncompetitive	by	new	industry	standards	or	changing	technology.

Our	failure	to	manage	current	or	future	alliances	or	joint	ventures	effectively	may	harm	our	business	and	prospects.

We	have	entered	into	strategic	alliances	with	Siemens	and	Esaote.	We	are	also	exploring	other	potential	alliances,	joint	ventures	or	other	business	relationships. Siemens	and	Esaote	compete	with	us	in	some	of	our	business	segments,	and	are	competitors	or	potential	competitors	to	some	of	our	customers	or	potential	customers. Our	alliance	with	Siemens,	Esaote	or	any	other	person	could	enhance	their	business	to	our	detriment	or	make	it	more	difficult	for	us	to	enter	into	advantageous	business transactions	or	relationships	with	others.	Moreover,	we	may	not	be	able	to:

•identify	appropriate	candidates	for	alliances	or	joint	ventures;

•assure	that	any	alliance	or	joint	venture	candidate	will	provide	us	with	the	support	anticipated;

•successfully	negotiate	an	alliance	or	joint	venture	on	terms	that	are	advantageous	to	us;	or

•successfully	manage	any	alliance	or	joint	venture.

Furthermore,	any	alliance	or	joint	venture	may	divert	management	time	and	resources.	Entering	into	a	disadvantageous	alliance	or	joint	venture	or	failing	to manage	an	alliance	or	joint	venture	effectively	could	harm	our	business	and	prospects.

The	future	growth	of	our	bone	densitometry	business	depends	in	large	part	on	the	continued	development	and	more	widespread	acceptance	of	complementary	therapies as	well	as	our	ability	to	expand	into	the	primary	care	market.

Our	bone	densitometers	and	related	products	are	used	to	assist	physicians	in	diagnosing	patients	at	risk	for	osteoporosis	and	other	bone	disorders,	and	to	monitor the	effectiveness	of	therapies	to	treat	these	disorders.	As	a	result,	the	future	growth	of	the	market	for	these	products	and	of	this	business	will	in	large	part	be	dependent upon	the	development	and	more	widespread	acceptance	of	drug	therapies	to	prevent	and	to	treat	osteoporosis,	and	in	addition,	our	ability	to	expand	into	the	primary	care market.	Over	the	last	several	years,	the	FDA	has	approved	a	number	of	drug	therapies	to	treat	osteoporosis.	We	also	understand	that	a	number	of	other	drug	therapies	are under	development.	While	sales	of	our	bone	densitometry	products	have	benefited	from	the	increased	availability	and	use	of	these	therapies,	most	patients	who	are	at risk	for	osteoporosis	continue	to	go	untreated.	We	cannot	assure	that	any	therapies	under	development	or	in	clinical	trials	will	prove	to	be	effective,	obtain	regulatory approval,	or	that	any	approved	therapy	will	gain	widespread	acceptance,	or	that	we	will	be	able	to	expand	into	the	primary	care	market.	Even	if	these	therapies	gain widespread	acceptance,	we	cannot	assure	that	this	acceptance	will	increase	the	sales	of	our	products.

Reductions	in	revenues	could	harm	our	operating	results	because	a	high	percentage	of	our	operating	expenses	is	relatively	fixed.

A	high	percentage	of	our	operating	expenses	is	relatively	fixed.	We	likely	will	not	be	able	to	reduce	spending	to	compensate	for	adverse	fluctuations	in	revenues. As	a	result,	shortfalls	in	revenues	are	likely	to	harm	our	operating	results.

# Our	results	of	operations	are	subject	to	significant	quarterly	variation	and	seasonal	fluctuation.

Our	results	of	operations	have	been	and	may	continue	to	be	subject	to	significant	quarterly	variation.	The	results	for	a	particular	quarter	may	vary	due	to	a	number of	factors,	including:

•the	overall	state	of	healthcare	and	cost	containment	efforts

•reimbursement	levels	for	the	use	of	our	products;

•the	development	status	and	demand	for	our	products;

•the	development	status	and	demand	for	therapies	to	treat	breast	cancer	and	osteoporosis;

•economic	conditions	in	our	markets;

•foreign	exchange	rates;

•the	timing	of	orders;

•the	timing	of	expenditures	in	anticipation	of	future	sales;

•the	mix	of	products	we	sell;

•the	introduction	of	new	products	and	product	enhancements	by	us	or	our	competitors;	and

•	 pricing	and	other	competitive	conditions.

Customers	may	also	cancel	or	reschedule	shipments.	Production	difficulties	could	also	delay	shipments.	Any	of	these	factors	also	could	harm	our	business	and prospects.

Our	delay	or	inability	to	obtain	any	necessary	United	States	or	foreign	regulatory	clearances	or	approvals	for	our	products	could	harm	our	business	and	prospects.

Our	products	are	medical	devices	that	are	the	subject	of	a	high	level	of	regulatory	oversight.	Our	delay	or	inability	to	obtain	any	necessary	United	States	or foreign	regulatory	clearances	or	approvals	for	our	products	could	harm	our	business	and	prospects.	The	process	of	obtaining	clearances	and	approvals	can	be	costly	and time-consuming.	There	is	a	risk	that	any	approvals	or	clearances,	once	obtained,	may	be	withdrawn	or	modified.	Medical	devices	cannot	be	marketed	in	the	United States	without	clearance	or	approval	by	the	FDA.	Medical	devices	sold	in	the	United	States	must	also	be	manufactured	in	compliance	with	FDA	Good	Manufacturing Practices,	which	regulate	the	design,	manufacture,	packing,	storage	and	installation	of	medical	devices.	Moreover,	medical	devices	are	required	to	comply	with	FDA regulations	relating	to	investigational	research	and	labeling.	States	may	also	regulate	the	manufacture,	sale	and	use	of	medical	devices,	particularly	those	that	employ	x- ray	technology.	Our	products	are	also	subject	to	approval	and	regulation	by	foreign	regulatory	and	safety	agencies.

Fluctuations	in	the	exchange	rates	of	European	currencies	and	the	other	foreign	currencies	in	which	we	conduct	our	business,	in	relation	to	the	U.S.	dollar,	have harmed	and	could	continue	to	harm	our	business	and	prospects.

Foreign	sales	accounted	for	approximately	28%	of	our	product	sales	in	fiscal	2006,	33%	of	our	product	sales	in	fiscal	2005,	and	39%	of	our	product	sales	in	fiscal 2004.	We	maintain	a	sales	and	service	office	in	Belgium	and	a	support	office	in	France,	and	our	AEG	Elektrofotografie	subsidiary	conducts	its	business	worldwide,	with headquarters	in	Germany	and	manufacturing	operations	in	Germany	and	China.	The	expenses	of	these	offices	are	denominated	in	local	currencies,	and	our	foreign	sales may	be	denominated	in	local	currencies,	the	Euro	or	U.S.	dollars.	We	anticipate	that	foreign	sales	and	sales	denominated	in	foreign	currencies	will	continue	to	account for	a	significant	portion	of	our	total	sales.	Fluctuations	in	the	value	of	local	currencies	have	caused,	and	are	likely	to	continue	to	cause,	amounts	translated	into	U.S. dollars	to	fluctuate	in	comparison	with	previous	periods.	We	have	hedged	our	foreign	currency	exposure	by	borrowing	funds	in	local	European	currencies	to	pay	the expenses	of	our	foreign	offices.	In	addition,	our	recently	acquired	AEG	operation	has	engaged	in	hedging	activities,	such	as	currency	swaps,	to	hedge	its	foreign currency	exposure.	There	is	a	risk	that	any	hedging	activities	will	not	be	successful	in	mitigating	our	foreign	exchange	risk	exposure.

We	conduct	our	business	worldwide,	which	exposes	us	to	a	number	of	difficulties	in	coordinating	our	international	activities	and	dealing	with	multiple	regulatory environments.

We	sell	our	products	to	customers	throughout	the	world.	Our	worldwide	business	may	be	harmed	by:

•	 difficulties	in	staffing	and	managing	operations	in	multiple	locations;

•	 greater	difficulties	in	trade	accounts	receivable	collection;

•	 possible	adverse	tax	consequences;

•	 governmental	currency	controls;

•changes	in	various	regulatory	requirements;

•	 political	and	economic	changes	and	disruptions;

•export/import	controls;	and

•tariff	regulations.

Additionally,	as	a	result	of	our	acquisition	of	AEG	Elektrofotografie,	which	also	conducts	its	business	worldwide,	with	headquarters	in	Germany	and manufacturing	operations	in	Germany,	China	and	the	United	States,	we	may	experience	increased	difficulties	in	coordinating	international	activities	and	successfully integrating	and	operating	AEG	Elektrofotografie's	business.

# Our	business	could	be	harmed	if	we	are	unable	to	protect	our	proprietary	technology.

We	rely	primarily	on	a	combination	of	trade	secrets,	patents,	copyright	and	trademark	laws	and	confidentiality	procedures	to	protect	our	technology.	Despite	these precautions,	unauthorized	third	parties	may	infringe,	copy	or	reverse	engineer	portions	of	our	technology.	We	do	not	know	if	current	or	future	patent	applications	will	be issued	with	the	scope	of	the	claims	sought,	if	at	all,	or	whether	any	patents	issued	will	be	challenged	or	invalidated.	In	addition,	we	have	obtained	or	applied	for corresponding	patents	and	patent	applications	in	several	foreign	countries	for	some	of	our	patents	and	patent	applications.	There	is	a	risk	that	these	patent	applications will	not	be	granted	or	that	the	patent	or	patent	application	will	not	provide	significant	protection	for	our	products	and	technology.	Our	competitors	may	independently develop	similar	technology	that	our	patents	do	not	cover.	In	addition,	because	patent	applications	in	the	United	States	are	not	publicly	disclosed	until	the	patent	is	issued, applications	may	have	been	filed	which	relate	to	our	technology.	Moreover,	there	is	a	risk	that	foreign	intellectual	property	laws	will	not	protect	our	intellectual	property rights	to	the	same	extent	as	United	States	intellectual	property	laws.	In	the	absence	of	significant	patent	protection,	we	may	be	vulnerable	to	competitors	who	attempt	to copy	our	products,	processes	or	technology.

# Our	business	could	be	harmed	if	we	infringe	upon	the	intellectual	property	rights	of	others.

There	has	been	substantial	litigation	regarding	patent	and	other	intellectual	property	rights	in	the	medical	device	and	related	industries.	We	are	and	have	been engaged,	and	may	be	in	the	future,	notified	that	we	may	be	infringing	intellectual	property	rights	possessed	by	third	parties.	In	connection	with	such	litigation	or	if	any claims	are	asserted	against	our	intellectual	property	rights,	we	may	seek	to	enter	into	royalty	or	licensing	arrangements.	There	is	a	risk	in	these	situations	that	no	license will	be	available	or	that	a	license	will	not	be	available	on	reasonable	terms.	Alternatively,	we	may	decide	to	litigate	such	claims	or	to	design	around	the	patented technology.	These	actions	could	be	costly	and	would	divert	the	efforts	and	attention	of	our	management	and	technical	personnel.	As	a	result,	any	infringement	claims	by third	parties	or	claims	for	indemnification	by	customers	resulting	from	infringement	claims,	whether	or	not	proven	to	be	true,	may	harm	our	business	and	prospects.

# Our	future	success	will	depend	on	the	continued	services	of	our	key	personnel.

The	loss	of	any	of	our	key	personnel,	particularly	our	key	research	and	development	personnel,	could	harm	our	business	and	prospects.	Our	success	will	also depend	upon	our	ability	to	attract	and	retain	other	qualified

managerial	and	technical	personnel.	Competition	for	such	personnel,	particularly	software	engineers	and	other	technical	personnel,	is	intense.	We	may	not	be	able	to attract	and	retain	personnel	necessary	for	the	development	of	our	business.	We	do	not	have	any	key	man	life	insurance	for	any	of	our	officers	or	other	key	personnel.

We	are	exposed	to	potential	risks	and	we	will	continue	to	incur	increased	costs	as	a	result	of	the	internal	control	testing	and	evaluation	process	mandated	by Section	404	of	the	Sarbanes-Oxley	Act	of	2002.

We	assessed	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	September	30,	2006	and	assessed	all	deficiencies	on	both	an	individual	basis and	in	combination	to	determine	if,	when	aggregated,	they	constitute	a	material	weakness.	As	a	result	of	this	evaluation,	no	material	weaknesses	were	identified. Although	we	have	completed	the	documentation	and	testing	of	the	effectiveness	of	our	internal	control	over	financial	reporting	for	fiscal	2006,	as	required	by Section	404	of	the	Sarbanes-Oxley	Act	of	2002,	we	expect	to	continue	to	incur	costs,	including	increased	accounting	fees	and	increased	staffing	levels,	in	order	to maintain	compliance	with	that	section	of	the	Sarbanes-Oxley	Act.	We	continue	to	monitor	controls	for	any	weaknesses	or	deficiencies.	No	evaluation	can	provide complete	assurance	that	our	internal	controls	will	detect	or	uncover	all	failures	of	persons	within	the	company	to	disclose	material	information	otherwise	required	to	be reported.	The	effectiveness	of	our	controls	and	procedures	could	also	be	limited	by	simple	errors	or	faulty	judgments.	In	addition,	as	we	continue	to	expand	globally,	the challenges	involved	in	implementing	appropriate	internal	controls	will	increase	and	will	require	that	we	continue	to	improve	our	internal	controls.

In	the	future,	if	we	fail	to	complete	the	Sarbanes-Oxley	404	evaluation	in	a	timely	manner,	or	if	our	independent	registered	public	accounting	firm	cannot	attest	in a	timely	manner	to	our	evaluation,	we	could	be	subject	to	regulatory	scrutiny	and	a	loss	of	public	confidence	in	our	internal	controls.	In	addition,	any	failure	to implement	required	new	or	improved	controls,	or	difficulties	encountered	in	their	implementation,	could	harm	our	operating	results	or	cause	us	to	fail	to	meet	our reporting	obligations.

Our	assessment	of	internal	controls	in	fiscal	2006	did	not	include	our	recently	acquired	entities	of	AEG,	R2	and	Suros.	Our	assessment	of	internal	controls	in fiscal	2007	will	include	these	entities.	We	expect	that	these	and	future	acquisitions	of	companies,	some	of	which	have	operations	outside	the	United	States,	will	provide us	with	additional	challenges	in	implementing	the	required	processes,	procedures	and	controls	in	our	acquired	operations.	Our	recently	acquired	companies	do	not	have disclosure	controls	and	procedures	or	internal	control	over	financial	reporting	that	are	as	thorough	or	effective	as	those	required	by	securities	law	applicable	to	public companies	in	the	United	States.	Although	we	intend	to	devote	substantial	time	and	incur	substantial	costs,	as	necessary,	to	ensure	ongoing	compliance,	we	cannot	be certain	that	we	will	be	successful	in	complying	with	Section	404.

There	is	a	risk	that	our	insurance	will	not	be	sufficient	to	protect	us	from	product	liability	or	other	claims,	or	that	in	the	future	liability	insurance	will	not	be	available	to us	at	a	reasonable	cost,	if	at	all.

Our	business	involves	the	risk	of	product	liability	and	other	claims	inherent	to	the	medical	device	business.	We	maintain	product	liability	insurance	subject	to deductibles	and	exclusions.	There	is	a	risk	that	our	insurance	will	not	be	sufficient	to	protect	the	company	from	product	and	other	liability	claims,	or	that	product liability	insurance	will	not	be	available	to	us	at	a	reasonable	cost,	if	at	all.	An	under-insured	or	uninsured	claim	could	harm	our	operating	results	or	financial	condition.

# We	use	hazardous	materials	and	products.

Our	research	and	development	involves	the	controlled	use	of	hazardous	materials,	such	as	toxic	and	carcinogenic	chemicals	and	various	radioactive	compounds. Although	we	believe	that	our	safety	procedures	for	handling	and	disposing	of	such	materials	comply	with	the	standards	prescribed	by	federal,	state	and	local	regulations, we	cannot	completely	eliminate	the	risk	of	accidental	contamination	or	injury	from	these	materials.	In	the	event	of	this	type	of	accident,	we	could	be	held	liable	for	any resulting	damages,	and	any	such	liability

could	be	extensive.	We	are	also	subject	to	substantial	regulation	relating	to	occupational	health	and	safety,	environmental	protection,	hazardous	substance	control,	and waste	management	and	disposal.	The	failure	to	comply	with	such	regulations	could	subject	us	to,	among	other	things,	fines	and	criminal	liability.

# Risks	relating	to	our	common	stock

Provisions	in	our	certificate	of	incorporation	and	bylaws	and	our	stockholder	rights	plan	may	have	the	effect	of	discouraging	advantageous	offers	for	our	business	or common	stock	and	limit	the	price	that	investors	might	be	willing	to	pay	in	the	future	for	shares	of	our	common	stock.

Our	certificate	of	incorporation,	bylaws	and	the	provisions	of	Delaware	corporate	law	include	provisions	that	may	have	the	effect	of	discouraging	or	preventing	a change	in	control.	In	addition,	we	have	a	stockholder	rights	plan	that	may	have	the	effect	of	discouraging	or	preventing	a	change	in	control.	These	provisions	could	limit the	price	that	our	stockholders	might	receive	in	the	future	for	shares	of	our	common	stock.

# Our	stock	price	is	volatile.

The	market	price	of	our	common	stock	has	been,	and	may	continue	to	be,	highly	volatile.	We	believe	that	a	variety	of	factors	could	cause	the	price	of	our common	stock	to	fluctuate,	perhaps	substantially,	including:

•announcements	and	rumors	of	developments	related	to	our	business,	including	changes	in	reimbursement	rates,	proposed	and	completed	acquisitions,	or	the industry	in	which	we	compete;

•	 quarterly	fluctuations	in	our	actual	or	anticipated	operating	results	and	order	levels;

•	 general	conditions	in	the	worldwide	economy;

•announcements	of	technological	innovations;

•	 new	products	or	product	enhancements	by	us	or	our	competitors;

•	 developments	in	patents	or	other	intellectual	property	rights	and	litigation;	and

•	 developments	in	relationships	with	our	customers	and	suppliers.

In	addition,	in	recent	years	the	stock	market	in	general	and	the	markets	for	shares	of	"high-tech"	companies,	have	experienced	extreme	price	fluctuations	which have	often	been	unrelated	to	the	operating	performance	of	affected	companies.	Any	such	fluctuations	in	the	future	could	adversely	affect	the	market	price	of	our common	stock,	and	the	market	price	of	our	common	stock	may	decline.

# Future	sales	of	our	common	stock	may	cause	our	stock	price	to	decline.

Substantially	all	of	our	outstanding	shares	of	common	stock	are	freely	tradable	without	restriction	or	registration.	Affiliates	must	sell	all	shares	they	own	in compliance	with	the	volume	and	other	requirements	of	Rule	144,	except	for	the	holding	period	requirements.	Sales	of	substantial	amounts	of	common	stock	by	our stockholders,	or	even	the	potential	for	such	sales,	may	cause	the	market	price	of	our	common	stock	to	decline	and	could	impair	our	ability	to	raise	capital	through	the sale	of	our	equity	securities.

# Item	1B.				UnresolvedStaff	Comments

# Item	2. Properties

We	own	and	lease	the	real	property	identified	below.	We	believe	that	we	have	adequate	space	for	our	anticipated	needs	and	that	suitable	additional	space	will	be available	at	commercially	reasonable	prices	as	needed.

# Owned	Real	Property

We	own	a	168,000	square	foot	research	and	development,	manufacturing	and	administrative	site	in	Newark,	Delaware	at	which	DRC	conducts	its	research	and development	and	plate	manufacture.	We	currently	occupy	approximately	63,000	square	feet	of	this	building,	which	houses	our	plate	manufacturing	facility,	including both	a	class	1	and	a	class	2	clean	room.	We	lease	approximately	105,000	square	feet	of	the	facility	to	Dade	Behring	under	a	lease	which	expires	in	April	2015.	Our	AEG subsidiary	owns	a	180,000	square	foot	facility	in	Warstein,	Germany	which	is	used	for	its	headquarters,	German	plant	and	primary	R&D	operation.	AEG	also	owns	a 55,000	square	foot	facility	in	Hamilton	Ohio,	which	was	used	for	its	recently	closed	US	production	facility	AEG	continues	to	use	a	portion	of	this	facility	for distribution.

# Leased	Real	Property

In	September	2002,	we	completed	a	sale/leaseback	transaction	for	our	200,000	square	foot	headquarters	and	manufacturing	facility	located	in	Bedford, Massachusetts	and	our	62,500	square	foot	LORAD	manufacturing	facility	in	Danbury,	Connecticut.	The	lease	for	these	facilities,	including	the	associated	land,	has	a term	of	20	years,	with	four-five	year	renewal	options.	We	also	sublease	approximately	11,000	square	feet	of	the	Bedford	facility	to	a	subtenant,	pursuant	to	a	sublease which	expires	in	February	2008.

We	also	lease	60,000	square	feet	of	office	and	manufacturing	space	in	Danbury,	Connecticut	near	our	Lorad	manufacturing	facility.	This	lease	expires	in December	2012.	R2	has	recently	moved	its	offices	and	research	facilities	to	Santa	Clara,	California	where	it	leases	40,362	square	feet.	Suros	leases	34,091	square	feet for	offices	and	manufacturing	in	the	Indianapolis,	Indiana	area.	Both	of	these	leases	expire	in	November	2011.	AEG's	Chinese	subsidiary	subleases	its	44,000	square foot	manufacturing	facility	in	Shanghai	from	Jaiding	Development	Group,	which	holds	the	underlying	land	from	the	Chinese	government	on	an	allocated	land	use	basis. This	sublease	expires	in	April	2014.

We	also	lease	a	sales	and	service	office	in	Belgium.

# Item	3. Legal	Proceedings

In	March	2005,	we	were	served	with	a	Complaint	filed	on	November	12,	2004	by	Oleg	Sokolov	with	the	United	States	District	Court	for	the	District	of Connecticut	alleging	that	our	HTC™	grid	infringes	U.S.	Patent	Number	5,970,118.	The	plaintiff	is	seeking	to	preliminarily	and	permanently	enjoin	us	from	infringing	the patent,	as	well	as	damages	resulting	from	the	alleged	infringement,	treble	damages	and	reasonable	attorney	fees,	and	such	other	and	further	relief	as	may	be	available. On	April	25,	2005,	we	filed	an	Answer	and	Counterclaims	in	response	to	the	complaint	in	which	we	denied	the	plaintiff's	allegations	and,	among	other	things,	sought declaratory	relief	with	respect	to	the	patent	claims	and	damages,	as	well	as	other	relief.	In	a	related	matter,	the	United	States	Patent	and	Trademark	Office	decided	in December	2005	to	re-examine	the	validity	of	Sokolov's	patent,	and	this	case	has	been	stayed	pending	completion	of	this	process.	We	do	not	believe	that	we	infringe	any valid	or	enforceable	patents	of	the	plaintiff.	However,	while	we	intend	to	vigorously	defend	our	interests,	ongoing	litigation	can	be	costly	and	time	consuming,	and	we cannot	guarantee	that	we	will	prevail.	On	October	28,	1998,	the	plaintiff	had	previously	sued	Lorad,	asserting,	among	other	things,	that	Lorad	had	misappropriated	the plaintiff's	trade	secrets	relating	to	the	HTC	Grid.	This	previous	case	was	dismissed	on	August	28,	2000.	The	dismissal	was	affirmed	by	the	Appellate	Court	of	the	State of	Connecticut,	and	the	United	States	Supreme	Court	refused	to	grant	Certiorari.

In	connection	with	our	acquisition	in	September	2005	of	the	mammography	intellectual	property	assets	from	Fischer,	including	the	rights	to	their	SenoScan	digital mammography	and	MammoTest	stereotactic	breast	biopsy	systems,	we	became	subject	to	a	non-public	Federal	Trade	Commission	investigation	to	determine	if	the 28

acquisition	of	certain	of	those	assets	may	be	anticompetitive	and	in	violation	of	Section	7	of	the	Clayton	Act	or	Section	5	of	the	FTC	Act.	On	July	7,	2006,	the	FTC issued	a	complaint	relating	to	this	investigation,	in	which	the	FTC	alleged	that	it	had	reason	to	believe	that	the	acquisition	violated	those	provisions.	On	the	same	day,	we entered	into	a	consent	agreement	with	the	FTC	to	resolve	this	dispute.	As	part	of	the	consent	agreement,	we	agreed	to	sell,	subject	to	FTC	approval	of	the	consent agreement	and	the	sale,	all	of	the	intellectual	property	relating	to	the	MammoTest	system	to	Siemens	AG	for	a	cash	payment	of	$6.5	million.	In	August	2006,	the	FTC approved	the	consent	agreement	and	the	sale.	We	have	retained	a	royalty-free,	non-exclusive,	perpetual,	irrevocable,	worldwide	right	and	license	to	use	the	intellectual property	relating	to	this	intellectual	property.	Our	rights	to	the	SenoScan	digital	mammography	intellectual	property	assets	purchased	by	us	from	Fischer	are	not	affected by	the	consent	agreement	or	Siemens	agreement.	We	will	continue	to	own	all	rights	to	those	assets.

We	are	a	party	to	various	other	legal	proceedings	arising	out	of	the	ordinary	course	of	our	business.	We	believe	that	there	are	no	proceedings	pending	against	us which,	if	determined	adversely,	would	have	a	material	adverse	effect	on	our	financial	condition	or	results	of	operations.

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

# PART	II

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

Market	Information.	Our	common	stock	is	traded	on	the	Nasdaq	Global	Select	Market	under	the	symbol	"HOLX."	We	began	trading	on	the	Nasdaq	Global	Select Market	on	July	3,	2006,	and	prior	to	that	traded	on	the	Nasdaq	National	Market.	The	following	table	sets	forth,	for	the	periods	indicated,	the	high	and	low	sales	prices per	share	of	our	common	stock,	as	reported	by	the	Nasdaq	Global	Select	Market	and	the	Nasdaq	National	Market.	This	stock	price	information	has	been	adjusted	to	give effect	for	the	stock	split	effected	on	November	30,	2005.

| Fiscal	Year	Ended	September	24,	2005 | High | Low |
| :--- | :--- | :--- |
| First\tQuarter | $14.50 | $8.89 |
| Second\tQuarter | \t 19.42 | \t 12.31 |
| Third\tQuarter | \t 20.36 | \t 14.77 |
| Fourth\tQuarter | \t 27.40 | \t 18.34 |

| Fiscal	Year	Ended	September	30,	2006 | High | Low |
| :--- | :--- | :--- |
| First\tQuarter | $40.01 | $24.52 |
| Second\tQuarter | \t 55.61 | \t 35.26 |
| Third\tQuarter | \t 56.71 | \t 35.36 |
| Fourth\tQuarter | \t 50.70 | \t 38.07 |

Number	of	Holders.	As	of	December	1,	2006,	there	were	approximately	1,516	holders	of	record	of	our	common	stock,	including	multiple	beneficial	holders	at depositaries,	banks	and	brokers	listed	as	a	single	holder	in	the	street	name	of	each	respective	depositary,	bank	or	broker.

Dividend	Policy.	We	have	never	declared	or	paid	cash	dividends	on	our	capital	stock	and	do	not	plan	to	pay	any	cash	dividends	in	the	foreseeable	future.	Our current	policy	is	to	retain	all	of	our	earnings	to	finance	future	growth.	In	addition,	our	$150	million	credit	facility	with	Bank	of	America	prohibits	us	from	declaring	or paying	any	cash	dividends.

Recent	Sales	of	Unregistered	Securities.	We	did	not	sell	unregistered	securities	during	the	fourth	quarter	of	fiscal	2006.

Issuer's	Purchases	of	Equity	Securities.	We	did	not	repurchase	any	of	our	equity	securities	during	the	fourth	quarter	of	fiscal	2006.

# Item	6. Selected	Financial	Data.

Included	in	the	fiscal	2002	financial	data	are	restructuring	costs	of	approximately	$2.1	million	related	to	closing	the	conventional	general	radiography manufacturing	facility	and	to	our	continued	efforts	to	streamline	operations.	In	the	fourth	quarter	of	2003,	we	adopted	Emerging	Issues	Task	Force	(EITF)	00-21, Revenue	Arrangements	with	Multiple	Deliverables,	as	a	cumulative	effect	adjustment	for	a	change	in	accounting	principle.	Accordingly,	the	revenue	representing	the	fair value	of	services	not	performed	at	the	time	of	product	shipment	such	as	installation	and	training	are	deferred	and	recognized	as	performed.	In	fiscal	2006	we	acquired	the intellectual	property	relating	to	Fischer	Imaging	Corporation's	mammography	business.	In	fiscal	2006	we	also	acquired	the	entities	of	AEG	Elektrofotografic	(AEG),	R2 Technology,	Inc.	(R2)	and	Suros	Surgical,	Inc.	(Suros).	We	used	the	purchase	method	of	accounting	in	accordance	with	SFAS	No.	141,	Business	Combinations	to account	for	acquired	entities.

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 | September	28,<br>2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands,\texcept\tper\tshare\tdata) |  |  |
| Consolidated\tStatement\tof\tIncome\tData |  |  |  |  |  |
| Revenues: |  |  |  |  |  |
| Product\tsales | $388,111 | $229,075 | $177,936 | $156,734 | $144,684 |
| Service\tand\tother\trevenue | 74,569 | 58,609 | 50,769 | 47,301 | 45,508 |
|  | 462,680 | 287,684 | 228,705 | 204,035 | 190,192 |
| Costs\tand\tExpenses: |  |  |  |  |  |
| Cost\tof\tproduct\tsales | 186,862 | 116,478 | 94,762 | 86,506 | 84,230 |
| Cost\tof\tproduct\tsales—amortization\tof\tintangible\tassets | 4,784 | 911 | 911 | 911 | 911 |
| Cost\tof\tservice\tand\tother\trevenue | 77,502 | 58,181 | 48,574 | 43,949 | 34,146 |
| Research\tand\tdevelopment | 28,294 | 18,617 | 16,659 | 18,381 | 20,362 |
| Selling\tand\tmarketing | 55,910 | 34,199 | 31,761 | 29,978 | 28,319 |
| General\tand\tadministrative | 42,551 | 26,667 | 23,452 | 21,285 | 17,997 |
| Amortization\tof\tacquired\tintangible\tassets | 1,631 | — | — | — | — |
| Net\tgain\ton\tsale\tof\tintellectual\tproperty | (5,093) | — | — | — | — |
| Acquired\tresearch\tand\tdevelopment | 19,900 | — | — | — | — |
| Restructuring\tand\trelocation | — | — | — | — | 2,070 |
|  | 412,341 | 255,053 | 216,119 | 201,010 | 188,035 |
| Income\tfrom\toperations | 50,339 | 32,631 | 12,586 | 3,025 | 2,157 |
| Interest\tincome | 4,082 | 2,219 | 540 | 685 | 573 |
| Interest/other\texpense | (1,198) | (155) | (199) | (445) | (2,980) |
| Income\t(loss)\tbefore\tprovision\t(benefit)\tfor\tincome\ttaxes\tand |  |  |  |  |  |
| cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | 53,223 | 34,695 | 12,927 | 3,265 | (250) |
| Provision\t(benefit)\tfor\tincome\ttaxes | 25,800 | 6,439 | 763 | 176 | (429) |
| Income\tbefore\tcumulative\teffect\tof\tchange\tin\taccounting\tprinciple | 27,423 | 28,256 | 12,164 | 3,089 | 179 |
| Cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | — | — | — | (207) | — |
| Net\tincome | $27,423 | $28,256 | $12,164 | $2,882 | $179 |

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 | September	27,<br>2003 | September	28,<br>2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands,\texcept\tper\tshare\tdata) | (In\tthousands,\texcept\tper\tshare\tdata) |  |  |
| Basic\tincome\tper\tcommon\tand\tcommon\tequivalent\tshare\t(1): |  |  |  |  |  |
| Income\tbefore\tcumulative\teffect\tof\tchange\tin\taccounting |  |  |  |  |  |
| principle | $0.59 | $0.66 | $0.30 | $0.08 | $0.00 |
| Cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | — | — | — | (0.01) | — |
| Net\tincome | $0.59 | $0.66 | $0.30 | $0.07 | $0.00 |
| Diluted\tincome\tper\tcommon\tand\tcommon\tequivalent\tshare\t(1): |  |  |  |  |  |
| Income\tbefore\tcumulative\teffect\tof\tchange\tin\taccounting |  |  |  |  |  |
| principle | $0.56 | $0.63 | $0.29 | $0.08 | $0.00 |
| Cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | — | — | — | (0.01) | — |
| Net\tincome | $0.56 | $0.63 | $0.29 | $0.07 | $0.00 |
| Weighted\taverage\tnumber\tof\tcommon\tshares\toutstanding\t(1):\nBasic | 46,512 | 42,824 | 40,516 | 39,258 | 36,837 |
| Diluted | 48,620 | 45,126 | 42,593 | 40,261 | 38,383 |
| Consolidated\tBalance\tSheet\tData |  |  |  |  |  |
| Working\tcapital | $115,743 | $172,615 | $118,238 | $102,699 | $97,738 |
| Total\tassets | 856,205 | 279,839 | 211,751 | 188,603 | 184,147 |
| Line\tof\tcredit | 55,000 | — | — | — | — |
| Long-term\tdebt | 6,163 | — | 472 | 1,550 | 2,268 |
| Total\tstockholders'\tequity | 605,750 | 217,834 | 166,275 | 148,927 | 142,409 |

(1) All	share	and	per	share	data	have	been	retroactively	restated	to	reflect	the	2-for-1	stock	split	effected	on	November	30,	2005.

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

The	following	discussion	and	analysis	should	be	read	in	conjunction	with	the	"Selected	Financial	Data"	and	the	Consolidated	Financial	Statements	included elsewhere	in	this	report	and	the	information	described	under	the	caption	"Risk	Factors"	below.

# CRITICAL	ACCOUNTING	POLICIES

The	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	upon	our	consolidated	financial	statements,	which	have	been	prepared	in accordance	with	accounting	principles	generally	accepted	in	the	U.S.	The	preparation	of	these	financial	statements	requires	us	to	make	estimates	and	judgments	that affect	the	reported	amounts	of	assets,	liabilities,	revenues	and	expenses,	and	related	disclosure	of	contingent	assets	and	liabilities.	On	an	on-going	basis,	we	evaluate	our estimates,	including	those	related	to	revenue	recognition	for	multiple	element	arrangements	and	product	warranties,	accounts	receivable	reserves,	inventory	and	related reserves,	expected	cash	flows	used	to	evaluate	the	recoverability	of	long-lived	assets,	estimated	fair	values	of	long-lived	assets	used	to	record	impairment	charges	related to	intangible	assets	and	goodwill,	amortization	periods,	certain	accrued	expenses,	restructuring	and	other	related	charges,	stock-based	compensation,	pension	liabilities, contingent	liabilities,	and	recoverability	of	our	net	deferred	tax	assets	and	related	valuation	allowance.	We	base	our	estimates	on	historical	experience	and	on	various other	assumptions

that	are	believed	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of	assets	and	liabilities that	are	not	readily	apparent	from	other	sources.	Actual	results	may	differ	from	these	estimates	under	different	assumptions	or	conditions.

We	believe	the	following	critical	accounting	policies	affect	our	more	significant	judgments	and	estimates	used	in	the	preparation	of	our	consolidated	financial statements.

# 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	in	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	$3.7	million,	$2.6	million	and	$2.8	million	in	fiscal	2006,	2005	and	2004,	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.	Accounts	receivable	reserve	has decreased	as	a	percentage	of	sales	as	a	result	of	our	historical	collection	experience.	The	decrease	in	the	reserves	in	fiscal	2005	was	primarily	attributable	to	our	write-off of	reserves	and	accounts	receivable	related	to	financed	sales	in	Latin	America.

# Valuation	of	Business	Combinations

We	record	intangible	assets	acquired	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	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	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	trademarks.	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.	Trademarks	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	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	2006.	We	considered	a	number	of	factors, including	a	valuation	to	conduct	this	test.	The	valuation	is	based	upon	expected	future	discounted	operating	cash	flows	of	the	mammography	reporting	unit	as	well	as analysis	of	recent	sales	or	offerings	of	similar	companies.	The	timing	and	size	of	impairment	charges	involve	the	application	of	management's	judgment	and	could significantly	affect	our	operating	results.	We	determined	that	it	met	all	of	the	criteria	under	SFAS	No.	142	to	carry-forward	the	prior	year	determination	of	reporting	unit fair	value	and	based	on	the	applicable	valuation	determined	that	no	impairment	exists.

# Pension	Liabilities

In	connection	with	our	acquisition	of	AEG,	we	sponsor	defined	benefit	pension	plans	covering	the	employees	of	our	AEG	German	subsidiary.	We	are	required	to account	for	these	pension	benefits	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	87,	Employers'	Accounting	for	Pensions	(SFAS	87),	which requires	that	amounts	recognized	in	the	financial	statements	be	determined	on	an	actuarial	basis.	As	of	September	30,	2006,	we	have	recorded	a	pension	liability,	based upon	an	actuarial	valuation,	of	approximately	$8.7	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	long-term	return	on	asset	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	4.5%.	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

Revenue.	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	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	based	on	the

consistency	of	prices	charged	when	these	elements	are	sold	separately.	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	undelivered	elements	of	service	to	be	performed	and	products	to	be	delivered	are	all	probable, perfunctory	in	nature	and	under	our	control.	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	shipments	that	require	more	than	perfunctory	obligations	at	the	time	of	shipment, specifically	for	certain	of	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,	shipping	and	handling	costs	billed	to	customers,	as	well	as	fee-per-scan	revenues.	Service	and	maintenance	contract	revenues	are	recognized	ratably	over	the term	of	the	contract.	Other	service	revenues	are	recorded	when	the	services	are	completed.

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	Software.

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	R2	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	EIFT	Issue	No.	01-14,

Income	Statement	Characterization	of	Reimbursements	Received	for	Out-of-Pocket	Expenses	Incurred	(EIFT	01-14).	For	the	fiscal	2006,	2005,	and	2004,	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	$9.0	million,	$6.7 million	and	$4.5	million	in	fiscal	2006,	2005	and	2004,	respectively.	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	recent	acquisitions.

# 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,	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%	to	10.6%	in	fiscal	2006	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	30,	2006	we	recorded	$3.9	million	of	stock-based	compensation	expense	for	employee	stock	options	as	a	result	of	the	adoption of	SFAS	123(R).	The	stock-based	compensation	expense	for	employee	stock	options	included	$481,000	in	cost	of	revenues,	$519,000	in	research	and	development, $351,000	in	selling	and	marketing	and	$2.6	million	in	general	and	administrative	expense	for	the	year	ended	September	30,	2006.	The	compensation	expense	reduced both	basic	and	diluted	earnings	per	share	by	$0.04.	In	accordance	with	the	modified-prospective	transition	method	of	SFAS	123(R),	results	for	prior	periods	have	not been	restated.	As	of	September	30,	2006,	there	was	$14.9	million	of	unrecognized	compensation	expense	related	to	non-vested	market-based	share	awards	that	we expect	to	recognize	over	a	weighted-average	period	of	3.38	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	2006	we	released	valuation	allowance	on	net	operating	losses	generated	by	excess	stock	based	compensation	deductions	expected	to	be	utilized	on	the fiscal	2006	US	tax	return.	Approximately	$10.6	million	of	tax	benefit	associated	with	these	net	operating	losses	was	recorded	as	an	increase	to	additional	paid	in	capital. Additionally,	we	recorded	an	approximate	$8.2	million	increase	to	valuation	allowance	against	certain	federal	and	state	net	operating	losses	acquired	in	the	Suros	and	R2 acquisitions.	This	increase	in	NOL	was	accounted	for	in	the	business	combination.	The	remaining	change	in	valuation	allowance	is	attributable	to	the	increase	in valuation	allowance	on	certain	state	tax	assets	generated	in	2006.	We	believe	it	is	more	likely	than	not	that	these	state	tax	assets	will	not	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.

# Legal	Contingencies

We	are	currently	involved	in	certain	legal	proceedings.	In	connection	with	these	legal	proceedings,	management	periodically	reviews	estimates	of	potential	costs to	be	incurred	by	us	in	connection	with	the	adjudication	or	settlement,	if	any,	of	these	proceedings.	These	estimates	are	developed	in	consultation	with	outside	counsel and	are	based	on	an	analysis	of	potential	litigation	outcomes	and	settlement	strategies.	In	accordance	with	Financial	Accounting	Standards	Board	(FASB)	Statement No.	5,	Accounting	for	Contingencies,	loss	contingencies	are	accrued	if,	in	the	opinion	of	management,	an	adverse	outcome	is	probable	and	such	outcome	can	be reasonably	estimated.	We	do	not	believe	that	these	proceedings	will	have	a	material	adverse	effect	on	our	financial	position;	however,	it	is	possible	that	future	results	for any	particular	quarter	or	annual	period	may	be	materially	affected	by	changes	in	our	assumptions	or	the	effectiveness	of	our	strategies	relating	to	these	proceedings.

We	are	engaged	primarily	in	the	development,	manufacture	and	distribution	of	proprietary	x-ray,	digital	x-ray	and	other	medical	imaging	systems	and	related products.	Our	businesses	are	reported	as	three	segments:	mammography/	breast	care;	osteoporosis	assessment;	and	other.

Our	mammography/	breast	care	products	include	a	broad	product	line	of	breast	imaging	and	related	products,	including	film-based	and	digital	mammography systems,	computer-aided	detection	(CAD)	and	breast

biopsy	systems.	These	products	are	inclusive	of	those	recently	acquired	from	R2	and	Suros.	Beginning	in	2006,	we	have	combined	our	digital	detector	business	with	our mammography	operating	segment	to	better	reflect	how	we	view	our	operations	and	manage	our	business.	Our	digital	detector	products	are	a	digital	component	for	our digital	mammography	equipment	and,	to	a	much	lesser	extent,	are	a	digital	component	for	original	equipment	manufacturers	to	incorporate	into	their	own	equipment. Our	osteoporosis	assessment	products	primarily	consist	of	dual-energy	X-ray	bone	densitometry	systems	and,	to	a	lesser	extent,	an	ultrasound-based	osteoporosis assessment	product.	Our	other	business	segment	includes	our	mini	C-arm,	extremity	MRI,	conventional	general	radiography	service,	digital	general	radiography	systems and	AEG	photoconductor	materials	businesses.

# ACQUISITIONS

During	fiscal	2006,	we	completed	a	number	of	acquisitions,	including	two	acquisitions	completed	in	the	fourth	quarter.

# Fischer

On	September	29,	2005,	we	acquired	intellectual	property	relating	to	Fischer	Imaging	Corporation's	mammography	business	and	products,	including	the intellectual	property	relating	to	its	Mammotest	prone	breast	biopsy	and	Senoscan	digital	mammography	systems.	The	purchase	price	for	the	intellectual	property	was	$32 million,	approximately	$26.9	million	of	which	was	paid	out	of	existing	cash	with	the	remaining	amount	paid	through	the	cancellation	of	the	principal	and	interest outstanding	under	a	$5	million	secured	loan	we	previously	provided	to	Fischer	Imaging	on	June	22,	2005.	We	incurred	a	charge	of	approximately	$4.2	million	to	write off	in-process	research	and	development	in	the	first	quarter	of	fiscal	2006.	As	a	result	of	the	FTC	investigation	in	the	fourth	quarter	of	2006,	we	sold,	to	Siemens	AG	for a	cash	payment	of	$6.5	million,	all	of	the	intellectual	property	we	acquired	from	Fischer	relating	to	the	Mammotest	system,	subject	to	our	retention	of	a	royalty-free,	non- exclusive,	perpetual,	irrevocable,	worldwide	right	and	license	to	use	that	intellectual	property.	In	connection	with	this	sale	we	recorded	an	impairment	charge	of approximately	$1.4	million	and	a	resulting	net	gain	of	approximately	$5.1	million	from	the	proceeds	on	the	sale	during	the	fourth	quarter	of	fiscal	2006.

# AEG	Elektrofotografie

On	May	2,	2006,	we	acquired	AEG	Elektrofotografie	and	its	group	of	related	companies.	AEG	was	a	privately	held	group	of	companies	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	for	the	coating	of	our	digital	detectors.	The	acquisition	of	AEG	allows	us	to	have	control	over	this	critical	step	in	our detector	manufacturing	process,	which	should	allow	us	to	more	efficiently	manage	our	supply	chain	and	improve	manufacturing	margins.	Our	acquisition	of	AEG should	also	facilitate	further	manufacturing	efficiencies	and	accelerate	research	and	development	of	new	detector	products.	The	results	of	AEG	operations	have	been included	in	our	consolidated	financial	statements	since	the	date	of	acquisition	and	is	a	component	of	our	other	business	segment.

The	aggregate	purchase	price	for	AEG	was	approximately	$31.3	million	(subject	to	adjustment)	consisting	of	EUR	24.1	and	110,000	shares	of	our	common	stock valued	at	$5.3	million,	and	approximately	$1.9	million	for	acquisition	related	fees	and	expenses.	These	110,000	shares	are	subject	to	contingent	put	options	pursuant	to which	the	holders	have	the	option	to	resell	the	shares	to	us	during	a	period	of	one	year	following	the	completion	of	the	acquisition	if	the	closing	price	of	our	stock	falls and	remains	below	a	threshold	price.	The	repurchase	price	would	be	the	closing	price	of	our	common	stock	on	the	date	of	exercise.	Our	maximum	aggregate	obligation under	these	put	options	would	be	approximately	$4.1	million	if	the	put	options	were	exercised	for	all	the	shares	covered	by	those	options	and	the	closing	price	of	our common	stock	on	the	date	of	exercise	equaled	the	maximum	threshold	price	permitting	the	exercise	of	the	option.	As	of	September	30,	2006,	the	shares	were	not	subject to	the	contingent	put	right	as	the	price	of	our	common	stock	exceeded	the	minimum	value.

The	acquisition	also	provides	for	a	one-year	earn	out	of	EUR	1.7	million	(approximately	$2.0	million	USD)	which	will	be	payable	in	cash	if	AEG	calendar	year 2006	earnings,	as	defined,	exceeds	a	pre-set	amount.	We

have	considered	the	provisions	of	EITF	Issue	No.	95-8,	Accounting	for	Contingent	Consideration	Paid	to	the	Shareholders	of	and	Acquired	Enterprise	in	a	Purchase Business	Combination,	and	concluded	that	this	contingent	consideration	would	represent	additional	purchase	price.	As	a	result,	goodwill	would	be	increased	by	the amount	of	such	additional	consideration,	if	any,	when	it	becomes	due	and	payable.

We	have	formulated	a	plan	to	restructure	certain	of	AEG's	historical	activities.	We	have	recorded	a	liability	of	approximately	$2.1	million	in	accordance	with EITF	Issue	No.	95-3,	Recognition	of	Liabilities	in	Connection	with	a	Purchase	Business	Combination,	related	to	the	termination	of	certain	employees	under	this	plan and	approximately	$1.0	million	has	been	paid	as	of	September	30,	2006.	We	believe	this	plan	will	be	finalized	within	one	year	from	the	acquisition	date	and	will	record any	additional	liabilities	at	such	time	resulting	in	an	increase	to	goodwill.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer lists,	trademarks	and	developed	technology	had	separately	identifiable	values.	The	fair	value	of	these	intangible	assets	was	determined	through	the	application	of	the income	approach.	Customer	lists	represent	customer	relationships	as	AEG	has	a	high	dependency	on	a	small	number	of	large	accounts.	AEG	markets	its	products through	distributors	as	well	as	directly	to	its	own	customers.	Trademarks	represent	the	AEG	product	names	that	the	we	intend	to	continue	to	use.	Developed	technology represents	currently	marketable	purchased	products	that	the	we	will	continue	to	resell	as	well	as	utilize	to	enhance	and	incorporate	into	our	existing	products.	The intangible	assets	are	expected	to	be	amortized	on	a	straight-line	basis	over	the	expected	useful	lives	as	the	anticipated	undiscounted	cash	flows	are	relatively	consistent over	the	expected	useful	lives	of	the	intangible	assets.

The	estimated	$600,000	of	purchase	price	allocated	to	in-process	research	and	development	projects	related	to	AEG's	Organic	Photoconductor	Coating	and Selenium	product	lines.

# R2	Technology

On	July	13,	2006,	we	completed	the	acquisition	of	R2	Technology,	Inc.	R2	Technology	located	in	Santa	Clara,	California,	develops	and	sells	computer-aided detection	technology	and	products	(CAD),	an	innovative	technology	that	assists	radiologists	in	the	early	detection	of	breast	cancer.	The	aggregate	purchase	price	for	R2 of	approximately	$220.6	million	(subject	to	adjustment)	consisted	of	4.4	million	shares	of	our	common	stock	valued	at	$205.5	million,	cash	paid	of	$6.9	million,	debt assumed	of	$5.7	million	and	approximately	$2.5	million	for	acquisition	related	fees	and	expenses.	The	results	of	operations	for	R2	have	been	included	in	our consolidated	financial	statements	from	the	date	of	acquisition	as	part	of	our	mammography	business	segment.

We	have	formulated	a	plan	to	restructure	certain	of	R2's	historical	activities.	As	of	the	acquisition	date	we	have	recorded	a	liability	of	approximately	$798,000	in accordance	with	EITF	Issue	No.	95-3,	Recognition	of	Liabilities	in	Connection	with	a	Purchase	Business	Combination,	related	to	the	termination	of	certain	employees and	a	loss	related	to	the	abandonment	of	certain	lease	space	under	this	plan.	Approximately	$46,000	related	to	these	liabilities	has	been	paid	as	of	September	30,	2006. We	believe	this	plan	will	be	finalized	within	one	year	from	the	acquisition	date	and	will	record	any	additional	liabilities	at	such	time	resulting	in	an	increase	to	goodwill. The	final	purchase	price	allocations	will	be	completed	within	one	year	of	the	acquisition	and	any	adjustments	are	not	expected	to	have	a	material	impact	on	our	financial position	or	results	of	operation.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer relationships,	trademarks	and	developed	technology	had	separately	identifiable	values.	Customer	relationships	represent	R2's	strong	active	customer	base,	dominant market	position	and	strong	partnership	with	several	large	companies.	Trademarks	represent	the	R2	product	names	that	we	intend	to	continue	to	use.	Developed technology	represents	currently	marketable	purchased	products	that	we	will	continue	to	resell	as	well	as	utilize	to	enhance	and	incorporate	into	our	existing	products.

The	estimated	$10.2	million	of	purchase	price	allocated	to	in-process	research	and	development	projects	primarily	related	to	R2's	Digital	CAD	products.	The projects	are	expected	to	add	direct	digital	algorithm

capabilities	as	well	as	a	new	platform	technology	to	analyze	images	and	breast	density	measurement.	The	project	is	approximately	20%	complete	and	we	expect	to	spend approximately	$3.1	million	over	the	next	year	to	complete.

# Suros	Surgical	Systems

On	July	27,	2006,	we	completed	the	acquisition	of	Suros	Surgical	Systems,	Inc.	Suros	Surgical,	located	in	Indianapolis,	Indiana,	develops,	manufactures	and	sells minimally	invasive	interventional	breast	biopsy	technology	and	products	for	biopsy,	tissue	removal	and	biopsy	site	marking.	The	purchase	price	for	Suros	was approximately	$240	million	paid	in	a	combination	of	cash	and	2.3	million	shares	of	our	common	stock.	The	common	stock	value	of	approximately	$106.5	million,	cash paid	of	$139	million	inclusive	of	certain	liabilities	assumed,	and	approximately	$2.6	million	for	acquisition	related	fees	and	expenses	resulted	in	an	aggregate	purchase price	of	approximately	$248	million.	The	results	of	operations	for	Suros	have	been	included	in	our	consolidated	financial	statements	from	the	date	of	acquisition	as	part of	our	mammography	business	segment.

The	acquisition	also	provides	for	a	two-year	earn	out.	The	earn-out	is	payable	in	two	annual	cash	installments	equal	to	the	incremental	revenue	growth	in	Suros' business	in	the	two	years	following	the	closing.	We	have	considered	the	provisions	of	EITF	Issue	No.	95-8,	Accounting	for	Contingent	Consideration	Paid	to	the Shareholders	of	and	Acquired	Enterprise	in	a	Purchase	Business	Combination,	and	concluded	that	this	contingent	consideration	represents	additional	purchase	price.	As a	result,	goodwill	will	be	increased	by	the	amount	of	this	additional	consideration,	if	any,	when	it	becomes	due	and	payable.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer relationships,	trademarks	and	developed	technology	had	separately	identifiable	values.	Customer	relationships	represents	Suros'	large	installed	base	that	are	expected	to purchase	disposable	products	on	a	regular	basis.	Trademarks	represent	the	Suros	product	names	that	we	intend	to	continue	to	use.	Developed	technology	represents currently	marketable	purchased	products	that	the	Company	continues	to	sell	as	well	as	utilize	to	enhance	and	incorporate	into	our	existing	products.

The	estimated	$4.9	million	of	purchase	price	allocated	to	in-process	research	and	development	projects	primarily	related	to	Suros'	disposable	products.	The projects	are	at	various	stages	of	completion	and	include	next	generation	handpiece	and	site	marker	technologies.	These	projects	are	expected	to	be	completed	over	the next	year.

We	had	existing	relationships	with	each	of	AEG,	R2	and	Suros	as	suppliers	of	inventory	items.	The	supply	agreements	were	entered	into	in	prior	years	at	arm's length	terms	and	conditions.	No	minimum	purchase	requirements	exist	and	the	pricing	was	consistent	with	other	vendor	agreements.

# RESULTS	OF	OPERATIONS

The	following	table	sets	forth,	for	the	periods	indicated,	the	percentage	of	total	revenues	represented	by	items	as	shown	in	our	consolidated	statements	of	income.

All	dollar	amounts	in	tables	are	presented	in	thousands.

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Revenues: |  |  |  |
| Product\tsales | 83.9% | 79.6% | 77.8% |
| Service\tand\tother\trevenue | 16.1 | 20.4 | 22.2 |
|  | 100.0 | 100.0 | 100.0 |
| Cost\tand\texpenses: |  |  |  |
| Cost\tof\tproduct\tsales | 40.4 | 40.5 | 41.4 |
| Cost\tof\tproduct\tsales—amortization\tof\tintangible\tassets | 1.0 | 0.3 | 0.4 |
| Cost\tof\tservice\tand\tother\trevenue | 16.8 | 20.2 | 21.2 |
| Research\tand\tdevelopment | 6.1 | 6.5 | 7.3 |
| Selling\tand\tmarketing | 12.1 | 11.9 | 13.9 |
| General\tand\tadministrative | 9.2 | 9.6 | 10.7 |
| Amortization\tof\tacquired\tintangibles | 0.4 | — | — |
| Net\tgain\ton\tsale\tof\tintellectual\tproperty | (1.1) | — | — |
| Acquired\tin-process\tresearch\tand\tdevelopment | 4.3 | — | — |
|  | 89.1 | 88.7 | 94.5 |
| Income\tfrom\toperations | 10.9 | 11.3 | 5.5 |
| Interest\tincome | 0.9 | 0.8 | 0.2 |
| Interest/other\texpense | (0.3) | (0.1) | (0.1) |
| Income\tbefore\tincome\ttaxes | 11.5 | 12.0 | 5.6 |
| Provision\tfor\tincome\ttaxes | 5.6 | 2.2 | 0.3 |
| Net\tincome | 5.9% | 9.8% | 5.3% |

# Fiscal	Year	Ended	September	30,	2006	Compared	to	Fiscal	Year	Ended	September	24,	2005

# Product	Sales.

|  |  |  | Years	Ended |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | September\t30,\t2006 | September\t30,\t2006 | September\t24,\t2005 | September\t24,\t2005 | Change | Change |
|  | Amount | %\tof\tTotal\nRevenue | Amount | %\tof\tTotal\nRevenue | Amount | % |
| Product\tSales |  |  |  |  |  |  |
| Mammography/\tBreast\tCare | $292,773 | 63% | $159,469 | 55% | $133,304 | 84% |
| Osteoporosis\tAssessment | $59,678 | 13% | $56,065 | 19% | $3,613 | 6% |
| Other | $35,661 | 8% | $13,541 | 6% | $22,120 | 163% |
|  | $388,112 | 84% | $229,075 | 80% | $159,037 | 69% |

In	fiscal	2006	our	product	sales	increased	69%	compared	to	fiscal	2005	primarily	due	to	an	increase	in	revenues	from	our	mammography	products.	Also contributing	to	the	increase	was	an	increase	in	our	other	product	sales,	primarily	attributable	to	$18.6	million	of	sales	from	AEG,	acquired	during	the	third	quarter	of fiscal	2006	and	the	initial	sales	of	a	new	line	of	third	party	extremity	MRI	systems	of	$4.8	million.	Osteoporosis	sales	also	increased,	to	a	lesser	extent,	in	fiscal	2006.

Mammography	product	sales	increased	84%	in	fiscal	2006	compared	to	fiscal	2005	primarily	due	to	a	$106.9	million	increase	in	digital	mammography	system sales,	a	$19.5	million	increase	in	Multicare	stereotactic	table	sales	and	$12.1	million	of	product	sales	from	R2	and	Suros,	entities	acquired	in	the	fourth	quarter	of	fiscal 2006.	These	increases	were	partially	offset	by	a	$4.8	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	sold	worldwide.	In	fiscal	2006,	we	sold	555	digital	mammography	systems	compared	to	239 systems	in	fiscal	2005.	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	increase	in	Multicare	stereotactic	tables	was	primarily	attributable	to	an	increase	in	the	number	of	systems	sold	worldwide	in	the current	fiscal	year	compared	to	fiscal	2005.	We	attribute	this	increase	at	least	in	part,	to	our	acquisition	of	the	Mammotest	intellectual	property	from	Fischer.	With	our sale	of	that	technology	to	Siemens	AG,	we	expect	to	face	increasing	competition	for	these	tables.	The	decrease	in	sales	of	our	analog	mammography	systems	was primarily	attributable	to	a	decrease	in	the	number	of	systems	sold	both	domestically	and	in	Europe,	partially	offset	by	an	increase	in	units	sold	in	other	international markets	combined	with	a	decrease	in	average	selling	price	in	all	markets.	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	decrease	in	fiscal	2007.

Osteoporosis	assessment	product	sales	increased	6%	in	fiscal	2006	compared	to	fiscal	2005.	This	increase	was	primarily	due	to	an	increase	in	the	number	of systems	sold	in	the	United	States	and	an	increase	in	the	number	of	our	lower-priced	Explorer	bone	densitometry	systems	sold	internationally,	that	was	offset	in	part	by	a slight	decrease	in	the	average	selling	prices.

Other	product	sales	increased	163%	in	fiscal	2006	compared	to	fiscal	2005.	This	increase	was	primarily	due	to	the	addition	of	$18.6	million	of	sales	from	AEG, acquired	during	the	third	quarter	of	fiscal	2006,	$4.8	million	of	sales	from	a	new	line	of	third	party	extremity	MRI	systems	and,	to	a	lesser	extent,	a	$731,000	increase	in our	mini	C-arm	system	sales.	Partially	offsetting	these	increases	was	a	$2.0	million	decrease	in	our	sales	of	general	radiography	systems	resulting	from	our	phase	out	of that	business.

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.	In fiscal	2005,	approximately	67%	of	product	sales	were	generated	in	the	United	States,	19%	in	Europe,	10%	in	Asia,	and	4%	in	other	international	markets.	We	believe	the shift	in	sales	dollars	to	the	United	States	market	is	primarily	due	to	an	increase	in	demand	for	our	Selenia	digital	mammography	system	as	digital	mammography	is becoming	more	widely	accepted	in	the	United	States.

#       Service	and	Other	Revenue.

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	27%	in	fiscal	2006	compared	to	fiscal	2005.	This	increase	was	primarily	due	to	increases	in	the	number	of	service contracts	sold	and	training	revenues	in	our	mammography/	breast	care	segment	and,	to	a	lesser	extent,	in	our	osteoporosis	assessment	and	other	segments.	We	believe that	these	increases	reflect	the	continued	growth	in	our	installed	base	of	products.

| Cost	of	Product	Sales. |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Years\tEnded |  |  |  |
|  | September\t30,\t2006 | September\t30,\t2006 | September\t24,\t2005 | September\t24,\t2005 | Change | Change |
|  |  | %\tof\tProduct |  | %\tof\tProduct |  |  |
|  | Amount | Sales | Amount | Sales | Amount | % |
| Cost\tof\tProduct\tSales | $186,862 | 48% | $116,478 | 51% | $70,384 | 60% |

Cost	of	product	sales	decreased	as	a	percentage	of	product	sales	to	48%	in	fiscal	2006	from	51%	in	fiscal	2005.	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,	our	full	field	digital mammography	systems.	The	Selenia	systems	have	significantly	higher	selling	prices,	more	than	offsetting	the	higher	costs	of	the	product,	when	compared	to	analog mammography.	In	addition,	the	fourth	quarter	of	fiscal	2006	includes	the	addition	of	the	recently	acquired	R2	and	Suros	product	lines	which	have	lower	costs	as	a percentage	of	sales.	Our	higher	Selenia	sales	combined	with	the	increase	in	revenues	for	the	Multicare	stereotactic	tables	also	resulted	in	an	improved	absorption	of	fixed manufacturing	costs.	Offsetting	these	improvements	was	an	increase	in	costs	as	a	percentage	of	sales	in	our	other	segment	due	to	the	combination	of	AEG photoconductor	sales,	which	earn	a	substantially	lower	margin	as	compared	to	our	core	product	lines,	and	higher	costs	associated	with	the	new	mini	C-arm	Insight product.	The	decreases	noted	above	were	offset	by	$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	acquisition.

#       Cost	of	Product	Sales—Amortization	of	intangible	assets.

Costs	of	Product	Sales—Amortization	of	intangibles	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.	The	underlying	intangible	assets	substantially	relate	to	acquired	developed technology	and	know-how.	These	intangible	assets	are	being	amortized	over	their	estimated	useful	life	of	between	8.5	and	10	years.	We	expect	amortization	expense	of $10.9	million	related	to	these	intangibles	in	fiscal	2007.

#       Cost	of	Service	and	Other	Revenue.

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	to	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	an	increase	in	customers	entering	into	service	agreements	in	connection	with	our	transition	to digital	mammography	and	direct	service	coverage.

# Operating	Expenses.

|  | September	30,	2006 |  | September	24,	2005 | September	24,	2005 | Change | Change |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Amount | %\tof\tTotal\nRevenue | Amount | %\tof\tTotal\nRevenue | Amount | % |
| Operating\tExpenses |  |  |  |  |  |  |
| Research\tand\tDevelopment | $28,294 | 7% | $18,617 | 7% | $9,677 | 52% |
| Selling\tand\tMarketing | $55,910 | 12% | $34,199 | 12% | $21,711 | 63% |
| General\tand\tAdministrative | $42,551 | 9% | $26,667 | 9% | $15,884 | 60% |
| Amortization\tof\tAcquired\tIntangibles | $1,631 | 0% | — | — | $1,631 | — |
| Net\tGain\ton\tSale\tof\tIntellectual\tProperty | ($5,093) | (1%) | — | — | ($5,093) | — |
| Acquired\tIn-Process\tResearch\tand\tDevelopment | $19,900 | 4% | — | — | $19,900 | — |
|  | $143,192 | 31% | $79,483 | 28% | $63,710 | 80% |

Research	and	Development	Expenses.	Research	and	development	expenses	increased	52%	in	fiscal	2006	compared	to	fiscal	2005.	The	increase	was	primarily	due to	compensation	and	related	expenses	which	increased	$5.3	million	including	costs	associated	with	additional	personnel	for	our	core	business	$1.7	million	from	an increase	in	personnel	as	a	result	of	the	AEG,	R2	and	Suros	acquisitions,	and	to	$519,000	of	stock	based	compensation.	Also	contributing	to	the	increase	was	an	increase in	mammography	related	expenses	of	$1.9	million	primarily	related	to	our	tomosynthesis	development	project.	We	expect	total	research	and	development	expenses	to increase	in	absolute	dollars	in	fiscal	2007	with	a	full	year	of	headcount	and	compensation	related	expenses	related	to	the	acquired	entities	as	well	as	our	continued development	of	tomosynthesis	technology	for	mammography.

Selling	and	Marketing	Expenses.	Selling	and	marketing	expenses	increased	63%	in	fiscal	2006	compared	to	fiscal	2005.	The	increase	was	primarily	due	to	an increase	of	approximately	$9.3	million	of	commissions	expense	to	our	direct	sales	force	due	to	the	increased	product	sales	in	direct	territories	and	$2.9	million	of distributor	commissions	due	to	increased	product	sales	through	these	channels.	Salaries,	benefit	and	travel	expenses	increased	approximately	$5.9	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	and	to	a	lesser	extent	$351,000,	of	stock-based compensation	under	SFAS	123	(R).	Also	contributing	to	the	increase	was	$1.0	million	of	additional	tradeshow	and	marketing	related	expenses	as	compared	to	the	prior year.	We	expect	total	sales	and	marketing	expenses	in	absolute	dollars	to	increase	in	fiscal	2007	with	a	full	year	of	compensation	and	related	expenses	for	additional personnel	related	to	the	acquired	entities	and	an	increase	in	total	product	sales.

General	and	Administrative	Expenses.	General	and	administrative	expenses	increased	60%	in	fiscal	2006	compared	to	fiscal	2005.	The	increase	was	primarily due	to	an	increase	of	$8.7	million	in	compensation	and	related	benefits	primarily	due	to	an	increase	in	personnel	including	$3.3	million	from	the	increased	headcount	as a	result	of	the	acquisitions	of	AEG,	R2	and	Suros	and	$2.6	million	of	stock-based	compensation	under	SFAS	123	(R).	Also	contributing	to	the	increase	was	$1.7	million in	legal	expenses	primarily	related	to	the	FTC	investigation	and	settlement	and	an	increase	of	$1.0	million	in	accounting	and	tax	expenses	associated	with	the	recently acquired	entities.	We	expect	total	general	and	administrative	expenses	in	absolute	dollars	to	increase	in	fiscal	2007	with	a	full	year	of	compensation	and	related	expenses for	additional	personnel	related	to	the	acquired	entities.

Amortization	of	Acquired	Intangible	Assets.	The	Company	incurred	amortization	expense	for	acquired	intangible	assets	of	$1.6	million	in	fiscal	2006	due	to	the acquisitions	of	AEG,	R2,	Suros	and	the	intangible	assets	acquired	from	Fischer	Imaging	during	fiscal	2006.	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	10	years.	We	expect amortization	expense	of	$5.5	million	related	to	these	intangibles	in	fiscal	2007.

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.

Interest	income	increased	in	fiscal	2006	compared	to	fiscal	2005	primarily	due	to	a	higher	average	investment	balance	and	an	increase	in	the	interest	rate	earned	in the	current	year	compared	to	last	year.	We	expect	interest	income	to	decrease	significantly	in	fiscal	2007	as	a	result	of	the	substantial	reduction	of	our	investment balances	in	connection	with	our	recent	acquisitions.

#       Interest	and	Other	Expense,	net

In	fiscal	2006,	these	expenses	consisted	primarily	of	the	interest	costs	on	our	unsecured	revolving	line	of	credit	entered	into	on	July	24,	2006	(and	amended	on September	25,	2006)	of	$738,000	as	well	as	interest	costs	on	notes	payable	assumed	with	the	acquisition	of	AEG	in	the	amount	of	$309,000.	In	fiscal	2005,	these expenses	were	primarily	comprised	of	the	interest	costs	on	the	Wells	Fargo	Foothill,	Inc.	note	payable	of	$376,000	partially	offset	by	foreign	currency	transaction	gains of	$221,000.	In	September	2005,	we	paid	off	the	Wells	Fargo	Foothill,	Inc.	note	payable.	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.	In	connection	with our	recent	acquisitions	we	assumed	approximately	$10.7	million	of	debt	as	a	result	of	the	AEG	acquisition	and	borrowed	$65	million,	of	which	$55	million	was outstanding	as	of	September	30,	2006,	under	our	unsecured	revolving	line	of	credit	for	the	Suros	acquisition.	As	a	result,	we	anticipate	that	our	interest	expense	will increase	in	fiscal	2007.

#       Provision	for	Income	Taxes.

We	account	for	income	taxes	under	SFAS	No.	109.	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.	Our	effective	tax	rate for	fiscal	2006	was	48.5%	of	pre-tax	earnings.	This	represents	our	normalized	rate	of	approximately	38%	increased	for	the	in-process	research	and	development	charges recorded	during	the	year	which	are	not	deductible	for	tax	purposes.	Our	effective	tax	rate	for	fiscal	2005	was	19%	of	pre-tax	earnings.	This	represented	our	normalized rate	of	approximately	38%	reduced	by	a	decrease	in	certain	valuation	allowances	and	tax	reserves.	We	anticipate	a	normalized	effective	tax	rate	of	38%	of	pre-tax earnings	in	fiscal	2007.

We	had	previously	recorded	a	valuation	allowance	to	reduce	our	deferred	tax	assets	to	the	amount	that	was	more	likely	than	not	to	be	realized.	In	fiscal	2005,	we considered	our	recent	operating	results,	future	taxable	income	and	ongoing	prudent	and	feasible	tax	planning	strategies	in	assessing	the	need	for	the	valuation	allowance. As	a	result,	we	determined	that	we	were	able	to	realize	a	portion	of	our	deferred	tax	assets	in	excess	of	the	net	recorded	amount,	and	therefore,	an	adjustment	of	$6.2 million	was	made	to	reduce	the	valuation	allowance.	The	benefit	of	the	release	in	valuation	allowance	was	realized	through	reductions	to	tax	expense	and	increases	to additional	paid	in	capital.	In	addition,	during	the	fourth	quarter	of	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 provision	for	income	taxes	in	fiscal	2005.

# Segment	Results	of	Operations

Beginning	in	fiscal	2006,	we	combined	our	previously	reported	mammography	and	digital	detector	operating	segments,	to	better	reflect	how	we	view	our operations	and	manage	our	business.	In	prior	years,	we	offered	DirectRay	digital	detectors	in	Hologic	designed,	manufactured,	installed	and	serviced	general radiography	systems	and	also	sold	panels	to	Original	Equipment	Manufacturers	(OEMs),	to	incorporate	into	their	own	equipment.	In	fiscal	2006	we	moved	away	from selling	systems	and	panels	for	general	radiography	use	and	began	to	shift	resources	to	our	core	women's	health	products	mammography	systems.	In	January	2006	we ceased	sales	of	digital	systems	for	general	radiography,	and	on	October	1,	2006	we	ceased	manufacture	of	general	radiography	panels.	As	a	result	the	primary	function	of the	digital	detector	business	is	to	support	our	mammography	product	line.	We	now	report	our	business	as	three	segments:	mammography/	breast	care,	osteoporosis assessment	and	other.	The	recently	acquired	AEG	photoconductor	business	is	included	in	our	other	business	segment.	The	recently	acquired	R2	and	Suros	operations	are included	in	mammography/breast	care.	Prior	periods	have	been	restated	to	conform	to	this	presentation.

The	accounting	policies	of	the	segments	are	the	same	as	those	described	in	the	footnotes	to	the	accompanying	consolidated	financial	statements.	We	measure segment	performance	based	on	total	revenues	and	operating	income	or	loss.	Revenues	from	product	sales	of	each	of	these	segments	are	described	in	further	detail	above. The	discussion	that	follows	is	a	summary	analysis	of	total	revenues	and	the	primary	changes	in	operating	income	or	loss	by	segment.

# Mammography/	Breast	Care.

|  | September	30,	2006 | September	30,	2006 | September	24,	2005 | September	24,	2005 | Change | Change |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | %\tof\tTotal |  | %\tof\tTotal |  |  |
|  |  | Segment |  | Segment |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Total\tRevenues | $335,795 | 100% | $189,313 | 100% | $146,482 | 77% |
| Operating\tIncome | $44,227 | 13% | $17,460 | 9% | $26,767 | 153% |

Mammography	revenues,	as	discussed	above,	increased	primarily	due	to	the	$133.3	million	increase	in	product	sales	and	an	increase	of	$13.2	million	in	service and	other	revenues	primarily	related	to	the	increased	number	of	systems	in	our	installed	base.	Operating	income	for	this	business	segment	increased	primarily	due	to	the increased	revenues.	Our	gross	margin	in	this	business	segment	increased	to	44%	in	fiscal	2006	as	compared	to	37%	in	fiscal	2005.	In	fiscal	2006	our	gross	margins improved	from	the	increase	in	product	revenues	of	our	more	profitable	Selenia	systems	versus	our	analog	mammography	systems	as	well	as	the	integration	of	higher margin	product	sales	from	the	recently	acquired	businesses	of	R2	and	Suros.	In	addition,	higher	Selenia	sales	combined	with	the	increase	in	revenues	for	Multicare stereotactic	tables	allowed	for	the	greater	absorption	of	manufacturing	costs.	This	improvement	in	the	gross	margin	was	offset	in	part	by	an	increase	in	service	related costs	related	to	an	increase	in	the	number	of	our	service	personnel	in	the	current	fiscal	year.	In	general,	we	expect	improved	gross	margins	in	fiscal	2007	from	an increase	in	product	revenues	of	our	more	profitable	Selenia	full	field	digital	mammography	systems	as	well	as	from	a	full	year	of	R2	and	Suros	product	sales.	Operating expenses	for	this	business	segment	increased	98%	in	fiscal	2006	primarily	due	to	increased	selling	expenses	which	is	primarily	due	to	the	higher	revenues	an	increase	in research	and	development,	primarily	related	to	increased	expenditures	for	our	tomosynthesis	project,	the	$19.3	million	write-off	of	acquired	in-process	research	and development	related	to	our	acquisitions,$1.6	million	of	intangible	asset	amortization	related	to	our	acquisitions,and$2.7	million	of	stock-based	compensation.	These increased	expenses	were	partially	offset	in	part	by	a	net	gain	of	$5.1	million	from	our	sale	of	Mammotest	intellectual	property	to	Siemens.

# Osteoporosis	Assessment.

|  |  |  | Years	Ended |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | September\t30,\t2006 | September\t30,\t2006 | September\t24,\t2005 |  | Change | Change |
|  |  | %\tof\tTotal | %\tof\tTotal | %\tof\tTotal |  |  |
|  |  | Segment | Segment | Segment |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Total\tRevenues | $80,162 | 100% | $74,957 | 100% | $5,205 | 7% |
| Operating\tIncome | $9,760 | 12% | $11,175 | 15% | ($1,415) | (13%) |

Osteoporosis	assessment	revenues	increased	in	fiscal	2006	compared	to	fiscal	2005	primarily	due	to	the	$3.6	million	increase	in	product	sales	discussed	above	and a	$1.6	million	increase	in	service	revenues.	The	increase	in	service	revenues	was	primarily	due	to	the	increased	number	of	systems	in	our	installed	base.	Operating income	for	osteoporosis	assessment	decreased	primarily	due	to	increased	operating	expenses	and	to	a	lesser	extent	a	decrease	in	gross	margins.	Our	gross	margin	in	this business	segment	was	43%	in	fiscal	2006	compared	to	44%	in	fiscal	2005.	The	decrease	in	osteoporosis	assessment	gross	margins	was	primarily	attributable	to	a combination	of	a	decrease	in	average	selling	prices	and	higher	service	repair	costs.	The	increase	in	operating	expenses	of	$3.2	million	was	primarily	attributable	to increased	general	and	administrative	expenses	of	$1.6	million	related	to	increased	compensation	and	legal	fees	discussed	above	as	well	as	$1.0	million	of	stock-	based compensation	under	SFAS	123	(R).

# Other.

|  |  |  | Years	Ended |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | September\t30,\t2006 | September\t30,\t2006 | September\t24,\t2005 | September\t24,\t2005 | Change | Change |
|  | Amount | %\tof\tTotal\nSegment\nRevenue | Amount | %\tof\tTotal\nSegment\nRevenue | Amount | % |
| Total\tRevenues | $46,723 | 100% | $23,414 | 100% | $23,309 | 100% |
| Operating\tIncome\t(Loss) | ($3,648) | (8%) | $3,996 | 17% | ($7,644) | (191%) |

Revenues	for	this	business	segment,	which	includes	the	mini	C-arm	business,	domestic	distribution	of	a	third	party	extremity	MRI	system,	the	digital	general radiography	business,	the	conventional	general	radiography	service	business	and	the	AEG	photoconductor	businesses'	increased	in	fiscal	2006	primarily	due	to	the	$22.1 million	increase	in	product	sales	discussed	above	and	a	$1.2	million	increase	in	service	and	other	revenues.	The	increase	in	product	sales	was	primarily	due	to	the incremental	revenues	as	a	result	of	the	AEG	acquisition	as	well	as	the	initial	sales	of	a	new	line	of	third	party	extremity	MRI	systems.	These	increases	were	partially offset	by	decreases	in	product	sales	related	to	digital	general	radiography	business	and	the	conventional	general	radiography	service	business,	both	of	which	are	being phased	out.	The	increase	in	service	and	other	revenues	is	due	to	incremental	revenues	as	a	result	of	the	AEG	acquisition,	increased	mini	C-arm	and	digital	general radiography	spare	parts	revenues	and	increased	service	revenues	from	our	increased	installed	base	of	extremity	MRI	systems	partially	offset	by	a	decrease	in	these revenues	in	the	conventional	general	radiography	business.	The	decrease	in	operating	income	was	primarily	due	to	an	increase	in	operating	expenses	related	to	the acquisition	of	AEG	as	well	as	purchase	accounting	related	charges	including	a	$1.6	million	increase	of	cost	of	product	sales	related	to	the	sale	of	inventory	that	had	been written	up	to	fair	value	as	of	the	date	of	acquisition	and	a	charge	for	in-process	research	and	development	of	$600,000.	Also	contributing	to	the	decrease	of	operating income	was	the	ramp-up	of	sales	and	marketing	expenses	for	a	new	line	of	third	party	extremity	MRI	systems.

# Fiscal	Year	Ended	September	24,	2005	Compared	to	Fiscal	Year	Ended	September	25,	2004

|  | September	24,	2005 | September	24,	2005 | September	25,	2004 | September	25,	2004 | Change | Change |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Amount | %\tof\tTotal\nRevenue | Amount | %\tof\tTotal\nRevenue | Amount | % |
| Product\tSales |  |  |  |  |  |  |
| Mammography/Breast\tCare | $159,469 | 55% | $105,906 | 46% | $53,563 | 48% |
| Osteoporosis\tAssessment | $56,065 | 20% | $51,376 | 23% | $4,689 | 9% |
| Other | $13,541 | 5% | $20,654 | 9% | ($7,113) | (34%) |
|  | $229,075 | 80% | $177,936 | 78% | $51,139 | 29% |

In	fiscal	2005	our	product	sales	increased	29%	compared	to	fiscal	2004	primarily	due	to	an	increase	in	revenues	from	our	mammography	products,	and	to	a	lesser extent,	an	increase	in	osteoporosis	assessment	sales.	Partially	offsetting	these	increases	was	a	decrease	in	our	other	segment	product	sales,	primarily	attributable	to	our continued	phase-out	of	our	general	radiography	systems	business.	We	have	discontinued	taking	orders	for	these	systems	but	continue	to	service	the	installed	base.

Mammography	product	sales	increased	48%	in	fiscal	2005	compared	to	fiscal	2004	primarily	due	to	a	$33.5	million	increase	in	digital	mammography	system sales,	a	$9.8	million	increase	in	Multicare	stereotactic	table	sales,	a	$6.3	million	increase	in	digital	detector	sales	and	a	$3.6	million	increase	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	sold	in	the	United States	and	by	the	inclusion	of	the	CAD	software	option	on	almost	all	of	the	units	sold	in	the	United	States	during	the	current	year	offset	in	part,	by	a	slight	decrease	in the	number	of	Selenia	systems	sold	in	Europe	and	a	slight	decrease	in	the	average	selling	price	for	Selenia	systems	in	fiscal	2005	as	compared	to	fiscal	2004.	In	fiscal 2005,	we	sold	239	digital	mammography	systems	compared	to	143	systems	in	fiscal	2004.	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	increase	in	our	digital	detector	sales	reflects	the	increase	in digital	detectors	sold	for	both	general	radiography	and	mammography.	The	increase	in	sales	of	our	analog	mammography	systems	was	primarily	attributable	to	an increase	in	the	number	of	systems	sold	internationally	and	for	our	Multicare	stereotactic	tables	was	primarily	attributable	to	an	increase	in	the	number	of	systems	sold worldwide	in	the	current	fiscal	year	compared	to	fiscal	2004.

Osteoporosis	assessment	product	sales	increased	9%	in	fiscal	2005	compared	to	fiscal	2004.	This	increase	was	primarily	due	to	an	increase	in	the	number	of systems	and	upgrades	sold	in	the	United	States	and	an	increase	in	the	number	of	our	lower-priced	Explorer	bone	densitometry	systems	sold	internationally,	that	was offset	in	part	by	a	slight	decrease	in	the	average	selling	prices.

Other	product	sales	decreased	34%	in	fiscal	2005	compared	to	fiscal	2004.	This	decrease	was	primarily	attributable	to	a	$5.9	million	decrease	in	worldwide	digital general	radiography	product	sales	and	a	$1.1	million	decrease	in	our	worldwide	mini	C-arm	product	sales.	The	decrease	in	general	radiography	product	sales	reflect	our decision	to	phase	out	our	digital	general	radiography	systems.	As	a	result	of	this	decision,	we	expect	our	product	sales	for	our	digital	general	radiography	systems	to	be negligible	going	forward.	In	the	current	fiscal	year,	sales	of	digital	general	radiography	systems	accounted	for	$2.3	million	of	other	product	revenues.	The	decrease	in sales	of	our	mini	C-arm	products	for	the	current	fiscal	year	was	primarily	due	to	a	reduction	in	the	number	of	systems	sold	in	the	United	States	and	in	Europe	as	a	result of	increased	competition	as	well	as	the	deferral	of	purchases	in	anticipation	of	our	pending	release	of	Insight,	our	new	mini	C-arm	system.

In	fiscal	2005,	approximately	67%	of	product	sales	were	generated	in	the	United	States,	19%	in	Europe,	10%	in	Asia,	and	4%	in	other	international	markets.	In fiscal	2004,	approximately	61%	of	product	sales	were	generated	in	the	United	States,	21%	in	Europe,	11%	in	Asia,	and	7%	in	other	international	markets.	We	believe	the shift	in	sales	dollars	to	the	United	States	market	is	primarily	due	to	an	increase	in	demand	for	our	Selenia	digital	mammography	system	as	digital	mammography	is becoming	more	widely	accepted	in	the	United	States.	The	decrease	in	sales	in	other	international	markets	in	fiscal	2005	was	primarily	attributable	to	the	fulfillment	of	a large	order	for	our	Selenia	digital	mammography	systems	in	Mexico	in	fiscal	2004.

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	15%	in	fiscal	2005	compared	to	fiscal	2004.	This	increase	was	primarily	due	to	increases	in	the	number	of	service contracts	sold,	training	revenues	and	spare	parts	in	our	mammography	segment	and,	to	a	lesser	extent,	in	our	osteoporosis	assessment	and	digital	detector	segments.	We believe	that	these	increases	reflect	the	continued	growth	in	our	installed	base	of	systems	and	digital	detectors.

Cost	of	product	sales	decreased	as	a	percentage	of	product	sales	to	51%	in	fiscal	2005	from	53%	in	fiscal	2004.	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,	our	full	field	digital mammography	systems,	and	the	increase	in	revenues	for	digital	detectors	resulting	in	an	improved	absorption	of	fixed	manufacturing	costs.	The	Selenia	systems	have significantly	higher	selling	prices,	more	than	offsetting	the

higher	costs	of	the	product,	when	compared	to	analog	mammography.	This	improvement	was	partially	offset	by	a	slight	reduction	in	the	average	selling	prices	for	digital mammography	systems	worldwide,	a	significant	increase	in	the	number	of	analog	mammography	systems	sold	internationally,	which	earn	a	lower	gross	margin	than digital	mammography,	and	a	shift	in	sales	to	lower	margin	bone	densitometry	systems,	sold	both	internationally	and	into	the	primary	care	market	in	the	United	States.

| Cost	of	Service	and	Other	Revenue. |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Years\tEnded |  |  |  |
|  | September\t24,\t2005 | September\t24,\t2005 | September\t25,\t2004 | September\t25,\t2004 | Change | Change |
|  |  | %\tof\tService |  | %\tof\tService |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Cost\tof\tService\tand\tOther\tRevenue | $58,181 | 99% | $48,574 | 96% | $9,607 | 20% |

Cost	of	service	and	other	revenue	increased	as	a	percentage	of	service	and	other	revenue	to	99%	in	fiscal	2005	from	96%	in	fiscal	2004.	These	costs	increased	as	a percentage	of	service	and	other	revenue	primarily	due	to	increased	warranty	costs	of	$7.7	million	in	our	mammography	businesses,	and	due	to	additional	personnel	and other	costs	to	expand	our	service	capabilities,	especially	in	the	United	States,	to	support	our	growing	installed	base	of	products.

|  |  |  | Years	Ended |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | September\t24,\t2005 | September\t24,\t2005 | September\t25,\t2004 | September\t25,\t2004 | Change | Change |
|  | Amount | %\tof\tTotal\nRevenue | Amount | %\tof\tTotal\nRevenue | Amount | % |
| Operating\tExpenses |  |  |  |  |  |  |
| Research\tand\tDevelopment | $18,617 | 6% | $16,659 | 7% | $1,958 | 12% |
| Selling\tand\tMarketing | $34,199 | 12% | $31,761 | 14% | $2,438 | 8% |
| General\tand\tAdministrative | $27,578 | 10% | $24,363 | 11% | $3,215 | 13% |
|  | $80,394 | 28% | $72,783 | 32% | $7,611 | 10% |

Research	and	Development	Expenses.	Research	and	development	expenses	increased	12%	in	fiscal	2005	compared	to	fiscal	2004.	The	increase	was	primarily	due to	an	increase	in	mammography	related	expenses	of	$1.1	million	and	in	digital	detectors	of	$776,000	primarily	related	to	our	tomosynthesis	development	project	and,	to a	lesser	extent,	an	increase	in	mini	C-arm	related	expenses	of	$825,000.	These	increases	were	primarily	due	to	increased	headcount	and	compensation	related	expenses that	were	partially	offset	by	a	decrease	in	research	and	development	spending	and	personnel	costs	of	$834,000	primarily	related	to	our	phase-out	of	the	digital	general radiography	systems	product	line.

Selling	and	Marketing	Expenses.	Selling	and	marketing	expenses	increased	8%	in	fiscal	2005	compared	to	fiscal	2004.	The	increase	was	primarily	due	to	an increase	of	approximately	$1.8	million	of	salaries,	benefits	and	travel	expenses	from	an	increase	in	our	direct	sales	force,	$1.1	million	of	increased	commissions	to	our direct	sales	force	due	to	the	increased	product	sales	in	direct	territories	and	$557,000	of	additional	freight	charges	due	to	increased	sales	to	customers	in	group	purchasing organizations.	These	increases	were	partially	offset	by	a	$921,000	decrease	of	international	distributor	commissions	primarily	related	to	the	sale	of	Selenias	in	Mexico	in fiscal	2004.	Sales	and	marketing	expenses	have	also	shifted	between	the	operating	segments	for	the	current	fiscal	year	by	increasing	in	mammography	reflecting	our increased	revenues	from	that	segment,	and	decreasing	for	each	of	our	osteoporosis	assessment,	and	other	business	segments.

General	and	Administrative	Expenses.	General	and	administrative	expenses	increased	13%	in	fiscal	2005	compared	to	fiscal	2004.	The	increase	was	primarily due	to	an	increase	of	$1.5	million	in	compensation	and

related	benefits,	an	increase	of	$1.1	million	in	legal	expenses	primarily	related	to	the	settlement	of	two	disputes	and	an	increase	of	$645,000	in	accounting	and	tax expenses	associated	with	additional	corporate	governance	required	by	the	Sarbanes-Oxley	Act	of	2002.

| expenses	associated	with	additional	corporate	governance	required	by	the	Sarbanes-Oxley	Act	of	2002. |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- |
| Interest\tIncome. |  |  |  |  |
|  |  | Years\tEnded |  |  |
|  | September\t24,\t2005 | September\t25,\t2004 | Change | Change |
|  | Amount | Amount | Amount | % |
| Interest\tIncome | $2,219 | $540 | $1,679 | 311% |

Interest	income	increased	in	fiscal	2005	compared	to	fiscal	2004	primarily	due	to	a	higher	investment	balance	and	an	increase	in	the	interest	rate	earned	in	the current	year	compared	to	last	year.

#       Interest	and	Other	Income	(Expense),	net

| current	year	compared	to	last	year. |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Interest\tand\tOther\tIncome\t(Expense),\tnet |  |  |  |  |  |  |
|  |  |  | Years\tEnded | Years\tEnded |  |  |
|  | September\t24,\t2005 | September\t24,\t2005 | September\t25,\t2004 | September\t25,\t2004 | Change | Change |
|  | Amount | Amount | Amount | Amount | Amount | % |
| Interest\tand\tOther\tIncome\t(Expense),\tnet | ($ | 155) | ($ | 199) | $44 | 22% |

In	fiscal	2005,	these	expenses	were	primarily	comprised	of	the	interest	costs	on	the	Wells	Fargo	Foothill,	Inc.	note	payable	of	$376,000	partially	offset	by	foreign currency	transaction	gains	of	$221,000.	In	fiscal	2004,	these	expenses	were	primarily	comprised	of	interest	costs	on	the	Wells	Fargo	Foothill,	Inc.	note	payable.	In September	2005,	we	paid	off	the	Wells	Fargo	Foothill,	Inc.	note	payable.	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	Euro	the	foreign	currency,	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.

We	account	for	income	taxes	under	SFAS	No.	109.	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	carryforwards	to	the	extent	they	are	realizable.	We	had	recorded	a valuation	allowance	to	reduce	our	deferred	tax	assets	to	the	amount	that	was	more	likely	than	not	to	be	realized.	In	fiscal	2005,	we	considered	our	recent	operating results,	future	taxable	income	and	ongoing	prudent	and	feasible	tax	planning	strategies	in	assessing	the	need	for	the	valuation	allowance.	As	a	result,	we	have determined	that	we	are	able	to	realize	a	portion	of	our	deferred	tax	assets	in	excess	of	the	net	recorded	amount,	and	therefore,	an	adjustment	of	$6.2	million	was	made	to reduce	the	valuation	allowance.	The	benefit	of	the	release	in	valuation	allowance	was	realized	through	reductions	to	tax	expense	and	increases	to	additional	paid	in capital	in	the	current	fiscal	year.	However,	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	addition,	during	the	fourth	quarter	of	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	provision	for	income	taxes	in	fiscal	2005.	We	provided	for	nominal	federal,	state	and	foreign	income	taxes	in fiscal	2004	and	certain	minimum	taxes	where	net-operating	losses	could	not	be	used.

Our	businesses	are	reported	as	three	segments:	mammography/breast	care;	osteoporosis	assessment;	and	other.	The	accounting	policies	of	the	segments	are	the same	as	those	described	in	the	footnotes	to	the	accompanying	consolidated	financial	statements.	We	measure	segment	performance	based	on	total	revenues	and operating	income	or	loss.	Revenues	from	product	sales	of	each	of	these	segments	are	described	in	further	detail	above.	The	discussion	that	follows	is	a	summary	analysis of	total	revenues	and	the	primary	changes	in	operating	income	or	loss	by	segment.

|  | September	24,	2005 | September	24,	2005 | September	25,	2004 | September	25,	2004 | Change | Change |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | %\tof\tTotal |  | %\tof\tTotal |  |  |
|  |  | Segment |  | Segment |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Total\tRevenues | $189,313 | 100% | $129,626 | 100% | $59,687 | 46% |
| Operating\tIncome | $17,460 | 9% | $4,759 | 4% | $12,701 | 267% |

Mammography	revenues	increased	primarily	due	to	the	$53.6	million	increase	in	product	sales	discussed	above	and	an	increase	of	$5.5	million	in	service	and other	revenues	primarily	related	to	the	increased	number	of	installed	systems	reaching	warranty	expiration.	Operating	income	for	this	business	segment	increased primarily	due	to	the	increased	revenues.	Our	gross	margin	in	this	business	segment	remained	at	37%	in	both	fiscal	2005	and	in	fiscal	2004.	In	fiscal	2005	our	gross margins	improved	from	the	increase	in	product	revenues	of	our	more	profitable	Selenia	systems	versus	our	analog	mammography	systems.	This	improvement	in	the gross	margin	was	offset	by	a	reduction	in	the	average	selling	prices	for	the	base	digital	mammography	systems	without	the	CAD	option	and	a	significant	increase	in	the sales	of	lower	end	analog	mammography	systems	sold	internationally	at	lower	margin	rates	than	in	the	United	States	and	compared	to	the	digital	mammography	product line,	and	an	increase	in	service	related	costs.	Also	offsetting	the	gross	margin	improvement	was	increased	warranty	expense	related	to	our	digital	detections.	Partially offsetting	the	gross	margin	increase	in	absolute	dollars	was	increased	operating	expenses	associated	with	growing	the	business,	including	increased	headcount	and	our tomosynthesis	technology	development	efforts.

|  |  |  | Years	Ended |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | September\t24,\t2005 | September\t24,\t2005 | September\t25,\t2004 | September\t25,\t2004 | Change | Change |
|  |  | %\tof\tTotal |  | %\tof\tTotal |  |  |
|  |  | Segment |  | Segment |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Total\tRevenues | $74,957 | 100% | $68,483 | 100% | $6,474 | 9% |
| Operating\tIncome | $11,175 | 15% | $7,500 | 11% | $3,675 | 49% |

Osteoporosis	assessment	revenues	increased	in	fiscal	2005	compared	to	fiscal	2004	primarily	due	to	the	$4.7	million	increase	in	product	sales	discussed	above	and a	$1.8	million	increase	in	service	revenues.	The	increase	in	service	revenues	was	primarily	due	to	the	increased	number	of	systems	in	our	installed	base.

Operating	income	for	osteoporosis	assessment	increased	primarily	due	to	increased	revenues	and,	to	a	much	lesser	extent,	a	reduction	in	operating	expenses.	Our	gross margin	in	this	business	segment	was	44%	in	fiscal	2005	compared	to	43%	in	fiscal	2004.	The	increase	in	osteoporosis	assessment	gross	margins	was	primarily attributable	to	the	increase	in	revenues	and	related	improved	absorption	of	manufacturing	costs.	The	reduction	in	operating	expenses	of	$337,000	was	primarily attributable	to	reduced	commissions	expense,	primarily	related	to	the	shift	to	international	sales.

|  | September	24,	2005 | September	24,	2005 | September	25,	2004 | September	25,	2004 | Change | Change |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | %\tof\tTotal |  | %\tof\tTotal |  |  |
|  |  | Segment |  | Segment |  |  |
|  | Amount | Revenue | Amount | Revenue | Amount | % |
| Total\tRevenues | $23,414 | 100% | $30,596 | 100% | ($7,182) | (23%) |
| Operating\tIncome | $3,996 | 17% | $327 | 1% | $3,669 | 1,122% |

Revenues	for	this	business	segment,	which	includes	the	mini	C-arm	business,	the	digital	general	radiography	business	and	the	conventional	general	radiography service	business,	decreased	primarily	due	to	a	$5.9	million	decrease	in	digital	general	radiography	systems	sold	worldwide,	as	a	result	of	our	phase	out	of	that	business, and	a	$1.1	million	decrease	in	product	sales	of	our	mini	C-arm	products	as	discussed	above.	The	improvements	in	operating	income	were	primarily	due	to	lower operating	expenses	as	a	result	of	our	decision	to	de-emphasize	the	digital	general	radiography	systems	business,	which	has	been	substantially	phased	out,	and	to reallocate	resources	and	costs	in	order	to	focus	on	the	more	profitable	and	faster	growing	digital	mammography	systems.

# Liquidity	and	Capital	Resources

At	September	30,	2006	we	had	approximately	$115.7	million	of	working	capital.	At	that	date	our	cash	and	cash	equivalents	totaled	$29.9	million.	Our	cash	and cash	equivalents	balance	decreased	$84.1	million	during	fiscal	2006	primarily	due	to	the	use	of	$27.6	million	in	cash	for	the	acquisition	of	the	mammography	intellectual property	of	Fischer	Imaging,	cash	for	the	acquisition	of	AEG	and	related	fees	and	expenses	of	$21.9	million	net	of	cash	acquired,	cash	for	the	acquisition	of	R2	and related	fees	and	expenses	of	$13.4	million	net	of	cash	acquired,	cash	to	acquire	Suros	and	related	fees	and	expenses	of	$136.5	million	net	of	cash	acquired	and	for	the purchase	of	property	and	equipment	of	$13	million.	These	uses	of	cash	were	partially	offset	by	cash	provided	by	financing	and	operating	activities	and	the	sale	of intellectual	property	for	$6.5	million.

Our	operating	activities	provided	us	with	$31.1	million	of	cash,	which	included	net	income	of	$27.4	million	for	fiscal	2006	increased	by	non-cash	charges	for depreciation	and	amortization	of	an	aggregate	$16.1	million,	and	the	acquired	in-process	research	and	development	charge	of	$19.9	million	related	to	the	Fischer,	AEG, R2	and	Suros	acquisitions,	which	were	partially	offset	by	the	$27.9	million	tax	benefit	related	to	the	exercise	of	non-qualified	stock	options.	Cash	used	by	operations	due to	changes	in	our	current	assets	and	liabilities	included	an	increase	in	inventory	of	$23.0	million	and	accounts	receivable	of	$9.5	million.	These	uses	of	cash	were partially	offset	by	an	increase	in	accrued	expenses	of	$14.5	million,	an	increase	in	deferred	revenue	of	$10.5	million,	and	an	increase	in	accounts	payable	of	$3.9 million.	The	increase	in	inventory	was	to	support	the	increased	sales	volume,	especially	for	digital	mammography	and	in	support	of	our	domestic	distribution	of	a	new line	of	a	third	party	extremity	MRI	system	as	well	as	an	increase	in	amounts	related	to	our	newly	acquired	businesses.	The	increase	in	accounts	receivable	was	primarily due	to	the	increased	revenues	during	fiscal	2006.	The	increase	in	deferred	revenue	was	primarily	due	to	an	increase	in	the	number	of	deferred	service	contracts	for	our core	business	as	well	as	an	increase	in	amounts	related	to	our	newly	acquired	businesses.	The	increase	in	accrued	expenses	and	accounts	payable	was	due	to	increased expenditures	to	support	our	growing	inventory	and	expenses	as	well	as	increase	in	amounts	related	to	our	newly	acquired	businesses.

In	fiscal	2006,	we	used	approximately	$206.7	million	of	cash	in	investing	activities.	This	use	of	cash	was	primarily	attributable	to	cash	used	for	business acquisitions	of	$171.8	million,	net	of	cash	acquired,	during	the	year.	To	a	lesser	extent,	$27.6	million	of	cash	was	used	to	acquire	Fischer	Imaging's	mammography intellectual	property	and	to	purchase	property	and	equipment	of	$13.0	million,	which	consisted	primarily	of	manufacturing	and	test	equipment,	computer	hardware	and demonstration	equipment.	Partially	offsetting	these	cash	uses	was	$6.5	million	related	to	our	sale	of	the	acquired	Fischer	Imaging	intellectual	property.

In	fiscal	2006,	financing	activities	provided	us	with	$90.6	million	of	cash.	These	cash	flows	included	approximately	$65.0	million	received	under	our	line	of credit	with	Bank	of	America,	the	tax	benefit	from	the	exercise	of	non	qualified	stock	options	of	$27.9	million	and	proceeds	from	the	exercise	of	stock	options	of	$10.7 million,	partially	offset	by	$10.0	million	of	repayments	under	our	bank	line	of	credit	and	$2.9	million	of	repayments	on	certain	notes	payable	assumed	with	the acquisition	of	AEG.

As	a	result	of	the	acquisition	of	AEG,	we	assumed	certain	of	AEG's	existing	debt	aggregating	$9.1	million	as	of	September	30,	2006.	The	terms	of	the	agreements have	various	maturities	ranging	from	July	1,	2007	through	March	15,	2011.	Interest	rates	are	variable	and	at	September	30,	2006	ranged	from	5.0%	to	6.5%.	In connection	with	our	acquisition	of	AEG	we	issued	a	total	of	109,720	shares	of	our	common	stock.	These	shares	are	subject	to	a	contingent	put	option	pursuant	to	which the	holders	have	the	option	to	resell	the	shares	to	us	during	a	period	of	one	year	following	the	completion	of	the	acquisition	if	the	closing	price	of	our	stock	falls	and remains	below	a	threshold	price.	The	repurchase	price	would	be	the	closing	price	of	our	common	stock	on	the	date	of	exercise.	Our	maximum	aggregate	obligation under	these	put	options	would	be	approximately	$4.1	million	if	the	put	option	were	exercised	for	all	the	shares	covered	by	those	options	and	the	closing	price	of	our shares	on	the	date	of	exercise	equaled	the	maximum	threshold	price	permitting	the	exercise	of	the	option.

On	July	13,	2006,	we	completed	the	acquisition	of	R2	Technology,	Inc.	The	purchase	price	for	the	acquisition	was	paid	exclusively	in	shares	of	our	common stock,	other	than	cash	in	lieu	of	fractional	shares.	In	connection	with	that	acquisition,	we	assumed	and	repaid	in	full	R2	debt	of	$5.7	million.

On	July	27,	2006,	we	completed	the	acquisition	of	Suros	Surgical	Systems,	Inc.	The	purchase	price	for	the	acquisition	was	paid	in	a	combination	of	paid	in	a combination	of	cash	and	in	shares	of	our	common	stock.	In	addition	a	cash	earn-out	will	be	payable	in	two	annual	installments	equal	to	the	incremental	revenue	growth in	Suros	Surgical's	business	in	the	two	years	following	the	closing.

On	September	25,	2006,	we	entered	into	an	amended	and	restated	credit	agreement	with	Bank	of	America,	N.A.,	and	the	other	lenders	party	there	to,	providing	for a	$150	million	senior	unsecured	revolving	line	of	credit.	At	our	option,	revolving	loans	outstanding	under	the	credit	agreement	will	bear	interest	at	a	rate	equal	to (a)	Eurodollar	Rate	-	the	British	Bankers	Association	London	Inter-Bank	Offered	Rate	for	dollar	deposits	(known	as	"LIBOR")	plus	the	applicable	margin	(as	defined	in the	credit	agreement,	which	margin	ranges	from	0.625%	to	1.00%	depending	on	our	consolidated	leverage	ratio)	or	(b)	Base	Rate—the	higher	of	(i)	the	Bank	of	America prime	rate	and	(ii)	the	Federal	Funds	rate	plus	0.50%	.	The	credit	agreement	includes	financial	covenants	requiring	that	we	maintain,	measured	as	of	the	end	of	each fiscal	quarter,	a	maximum	consolidated	leverage	ratio	of	2.50:1.00	and	a	minimum	consolidated	interest	coverage	ratio	of	3.00:1.00.	We	were	in	compliance	with	these covenants	as	of	September	30,	2006.	The	credit	agreement	also	contains	events	of	default	that	permit	the	acceleration	of	the	loans	and	the	termination	of	the	credit agreement,	including,	but	not	limited	to,	payment	defaults	under	the	credit	agreement	and	cross-default	under	certain	other	indebtedness,	the	breach	of	certain	covenants, the	entry	of	material	judgments,	and	the	occurrence	of	bankruptcy,	insolvency	or	change	of	control	events.	As	of	September	30,	2006,	there	was	$55	million	outstanding under	this	credit	agreement	with	a	weighted	average	interest	rate	of	6.14%.	Borrowings	under	the	credit	agreement	were	used	to	finance	a	portion	of	the	Suros	Surgical acquisition	and	for	general	corporate	purposes.	The	credit	agreement	matures	on	September	24,	2011.	As	of	September	30,	2006,	we	had	$95	million	available	for	future borrowings.	Prior	to	maturity,	we	may	reborrow	amounts	repaid	for	any	permitted	purpose.

The	lease	for	our	headquarters	and	manufacturing	facility	located	in	Bedford,	Massachusetts	and	our	Lorad	manufacturing	facility	in	Danbury,	Connecticut,	has	a term	of	20	years,	with	four	five-year	renewal	terms,	which

we	may	exercise	at	our	option.	The	basic	rent	for	the	facilities	is	$3.2	million	per	year,	which	is	subject	to	adjustment	for	increases	in	the	consumer	price	index.	The	total minimum	lease	payments	during	the	remainder	of	20-year	term	is	$50.2	million.	In	addition,	we	are	required	to	maintain	the	facilities	during	the	term	of	the	lease	and	to pay	all	taxes,	insurance,	utilities	and	other	costs	associated	with	those	facilities.	Under	the	lease,	we	make	customary	representations	and	warranties	and	agree	to	certain financial	covenants	and	indemnities.	In	the	event	we	default	on	the	lease,	the	landlord	may	terminate	the	lease,	accelerate	payments	and	collect	liquidated	damages.	We were	in	compliance	with	all	covenants	as	of	September	30,	2006.

We	maintain	an	unsecured	line	of	credit	with	a	European	bank	for	the	equivalent	of	$3.0	million,	which	bears	interest	at	the	Europe	Interbank	Offered	Rate (3.42%	at	September	30,	2006)	plus	1.5%.	The	borrowings	under	this	line	are	primarily	used	by	our	European	subsidiaries	to	settle	intercompany	sales	and	are denominated	in	the	respective	local	currencies	of	its	European	subsidiaries.	The	line	of	credit	may	be	canceled	by	the	bank	with	30	days	notice.	At	September	30,	2006, there	were	no	outstanding	borrowings	under	this	line.

The	following	table	summarizes	our	contractual	obligations	and	commitments	as	of	September	30,	2006:

|  |  | Less	than |  |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Contractual\tObligations | Total | 1\tyear | 1-3\tyears | 3-5\tyears | 5\tyears |
|  |  |  | (in\tthousands) |  |  |
| Operating\tLeases | $67,240 | $6,703 | $ 12,375 | $ 11,068 | $37,094 |
| Purchase\tObligations\t(1) | 37,552 | 17,925 | 19,627 | — | — |
| Long-Term\tDebt\tObligations | 9,084 | 2,921 | 2,068 | 4,095 | — |
| Total\tContractual\tObligations | $ 113,876 | $ 27,549 | $ 34,070 | $ 15,163 | $37,094 |

(1) Approximately	$34.2	million	of	the	purchase	obligations	relates	to	an	exclusive	distribution	and	service	agreement	in	the	United	States	under	which	we	will	sell and	service	a	line	of	extremity	MRI	systems.	Pursuant	to	the	terms	of	this	contract,	we	have	certain	minimum	inventory	purchase	obligations	for	the	initial	term	of eighteen	months.	Thereafter	the	purchase	obligations	are	subject	to	renegotiation	in	the	event	of	any	unforeseen	changes	in	the	market	dynamics.

We	also	have	outstanding	two	interest	rate	swap	contracts	that	mature	in	2010	and	24	forward	forgeign	currency	exchange	agreements	that	mature	in	less	than	a year.	Currently,	these	derivative	instruments	are	in	a	net	gain	position	which	is	of	an	immaterial	nature.

The	amounts	above	do	not	include	any	amounts	that	may	be	payable	to	AEG	and	Suros	for	earn-outs	over	the	next	two	fiscal	years.	Except	as	set	forth	above	and potential	earn-out	payments	to	for	AEG	and	Suros,	we	do	not	have	any	other	significant	capital	commitments.	We	are	working	on	several	projects,	with	an	emphasis	on digital	mammography.	In	addition,	we	expect	to	continue	to	review	and	evaluate	potential	acquisitions	of	businesses,	products	or	technologies,	and	strategic	alliances that	we	believe	will	complement	our	current	or	future	business.	Subject	to	the	risk	factors	set	forth	above	and	the	general	disclaimers	set	forth	in	our	Special	Note Regarding	Forward-Looking	Statements	at	the	outset	of	this	Report,	we	believe	that	cash	flow	from	operations	and	cash	available	from	our	bank	line	of	credit	will provide	us	with	sufficient	funds	in	order	to	fund	our	expected	operations	over	the	next	twelve	months.

The	expected	timing	of	payment	and	amounts	of	the	obligations	discussed	above	are	estimated	based	on	current	information.

# Recent	Accounting	Pronouncements

In	July	2006,	the	Financial	Account	Standards	Board	(FASB)	issued	Financial	Interpretation	No.	(FIN)	48,	Accounting	for	Uncertainty	in	Income	Taxes,	which applies	to	all	tax	positions	related	to	income	taxes	subject	to	SFAS	No.	109	(SFAS	109),	Accounting	for	Income	Taxes.	This	includes	tax	positions	considered	to	be "routine"	as	well	as	those	with	a	high	degree	of	uncertainty.	FIN	48	utilizes	a	two-step	approach	for	evaluating	tax

positions.	Recognition	(step	one)	occurs	when	an	enterprise	concludes	that	a	tax	position,	based	solely	on	its	technical	merits,	is	more-likely-than-not	to	be	sustained upon	examination.	Measurement	(step	two)	is	only	addressed	if	step	one	has	been	satisfied	(i.e.,	the	position	is	more-likely-than-not	to	be	sustained).	Under	step	two,	the tax	benefit	is	measured	as	the	largest	amount	of	benefit,	determined	on	a	cumulative	probability	basis	that	is	more-likely-than-not	to	be	realized	upon	ultimate settlement.	FIN	48's	use	of	the	term	"more-likely-than-not"	in	steps	one	and	two	is	consistent	with	how	that	term	is	used	in	SFAS	109	(i.e.,	a	likelihood	of	occurrence greater	than	50	percent).

Those	tax	positions	failing	to	qualify	for	initial	recognition	are	recognized	in	the	first	subsequent	interim	period	they	meet	the	more-likely-than-not	standard,	or are	resolved	through	negotiation	or	litigation	with	the	taxing	authority,	or	upon	expiration	of	the	statue	of	limitations.	Derecognition	of	a	tax	position	that	was	previously recognized	would	occur	when	a	company	subsequently	determines	that	a	tax	position	no	longer	meets	the	more-likely-than-not	threshold	of	being	sustained.	FIN	48 specifically	prohibits	the	use	of	a	valuation	allowance	as	a	substitute	for	derecognition	of	tax	positions.

In	addition,	FIN	48	will	require	expanded	disclosure	requirements,	which	include	a	tabular	rollforward	of	the	beginning	and	ending	aggregate	unrecognized	tax benefits	as	well	as	specific	detail	related	to	tax	uncertainties	for	which	it	is	reasonably	possible	the	amount	of	unrecognized	tax	benefit	will	significantly	increase	or decrease	within	twelve	months.	These	disclosures	are	required	at	each	annual	reporting	period	unless	a	significant	change	occurs	in	an	interim	period.

FIN	48	is	effective	for	fiscal	years	beginning	after	December	15,	2006.	We	expect	to	adopt	FIN	48	in	its	first	quarter	of	fiscal	2008,	which	begins	on September	30,	2007.	Differences	between	the	amounts	recognized	in	the	statements	of	financial	position	prior	to	the	adoption	of	FIN	48	and	the	amounts	reported	after adoption	should	be	accounted	for	as	a	cumulative-effect	adjustment	recorded	to	the	beginning	balance	of	retained	earnings.	The	cumulative	effect	adjustment	would	not apply	to	those	items	that	would	not	have	been	recognized	in	earnings,	such	as	the	effect	of	adopting	FIN	48	on	tax	positions	related	to	business	combinations.

We	are	currently	evaluating	the	impact	of	the	adoption	of	FIN	48,	but	do	not	believe	the	adoption	will	have	a	material	impact	on	our	results	of	operation	or financial	position.

In	June	2005,	the	FASB	issued	SFAS	No.	154,	Accounting	Changes	and	Error	Corrections,	which	will	require	entities	that	voluntarily	make	a	change	in accounting	principle	to	apply	that	change	retrospectively	to	prior	periods'	financial	statements,	unless	this	would	be	impracticable.	SFAS	No.	154	supersedes	APB Opinion	No.	20,	Accounting	Changes,	which	previously	required	that	most	voluntary	changes	in	accounting	principle	be	recognized	by	including	in	the	current	period's net	income	the	cumulative	effect	of	changing	to	the	new	accounting	principle.	SFAS	No.	154	also	makes	a	distinction	between	"retrospective	application"	of	an accounting	principle	and	the	"restatement"	of	financial	statements	to	reflect	the	correction	of	an	error.	Another	significant	change	in	practice	under	SFAS	No.	154	will be	that	if	an	entity	changes	its	method	of	depreciation,	amortization,	or	depletion	for	long-lived,	non-financial	assets,	the	change	must	be	accounted	for	as	a	change	in accounting	estimate.	Under	APB	No.	20,	such	a	change	would	have	been	reported	as	a	change	in	accounting	principle.	SFAS	No.	154	applies	to	accounting	changes	and error	corrections	that	are	made	in	fiscal	years	beginning	after	December	15,	2005.

On	September	15,	2006,	the	FASB	issued	SFAS	No.	157	(SFAS	157),	Fair	Value	Measurements.	SFAS	157	provides	enhanced	guidance	for	using	fair	value	to measure	assets	and	liabilities.	SFAS	157	also	responds	to	investors'	requests	for	expanded	information	about	the	extent	to	which	companies	measure	assets	and liabilities	at	fair	value,	the	information	used	to	fair	value	and	the	effect	of	fair	value	measurements	on	earnings.	SFAS	157	applies	whenever	other	standards	require	(or permit)	assets	or	liabilities	to	be	measured	at	fair	value.	SFAS	157	does	not	expand	the	use	of	fair	value	in	any	new	circumstances.	SFAS	157	is	effective	for	financial statements	issued	for	fiscal	years	beginning	after	November	15,	2007	and	interim	periods	within	those	fiscal	years.	Early	adoption	is	not	permitted.	Therefore,	we	will adopt	SFAS	157	in	fiscal	2009,	which	commences	on	September	28,	2008.	We	are	currently	evaluating	the	impact	of	the	adoption	of	SFAS	157,	but	do	not	believe	the adoption	will	have	a	material	impact	on	our	results	of	operation	or	financial	position.

On	September	29,	2006,	the	FASB	issued	SFAS	No.	158	(SFAS	158),	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	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 postretirement	plan's	overfunded	status	or	a	liability	for	a	plan's	underfunded	status,	measure	a	defined	benefit	postretirement	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	postretirement	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	postretirement	benefit	plan	accounting.	The	requirement	to	recognize	the	funded	status	of	a	defined	benefit	postretirement plan	and	the	disclosure	requirements	are	effective	for	fiscal	years	ending	after	December	31,	2006	for	public	entities,	which	would	be	our	year	ending	September	29, 2007.	The	requirement	to	measure	plan	assets	and	benefit	obligations	as	of	the	date	of	the	employer's	fiscal	year-end	statement	of	financial	position	is	effective	for	fiscal years	ended	after	December	15,	2008,	which	would	be	our	year	ending	September	27,	2009.	We	are	currently	evaluating	the	impact	of	the	adoption	of	SFAS	157,	but	do not	believe	the	adoption	will	have	a	material	impact	on	our	results	of	operation	or	financial	position.

On	September	13,	2006,	the	SEC	staff	published	SAB	No.	108	(SAB	108),	Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements in	Current	Year	Financial	Statements.	SAB	108	addresses	quantifying	the	financial	statement	effects	of	misstatements,	specifically,	how	the	effects	of	prior	year uncorrected	errors	must	be	considered	in	quantifying	misstatements	in	the	current	year	financial	statements.	SAB	108	does	not	change	the	SEC	staff's	previous	positions in	SAB	99,	Materiality,	regarding	qualitative	considerations	in	assessing	the	materiality	of	misstatements.	SAB	108	acknowledges	the	existing	diversity	in	practice	in this	area	and	discusses	techniques	commonly	used	to	accumulate	and	quantify	misstatements.	The	"rollover"	method	used	by	some	companies	and	auditors	quantifies	a misstatement	based	on	the	effects	of	correcting	the	misstatement	existing	in	the	current	period	income	statement.	The	"iron	curtain"	method	quantifies	a	misstatement based	on	the	effects	of	correcting	the	misstatement	in	the	balance	sheet	at	the	end	of	the	current	period,	regardless	of	the	misstatement's	period	of	origin.	The	SEC	staff does	not	believe	exclusive	reliance	on	one	method	biased	toward	either	the	income	statement	of	the	balance	sheet	is	appropriate.	The	staff	believes	that	registrants	and auditors	must	quantify	the	effects	on	the	current	year	financial	statements	of	correcting	all	misstatements,	including	both	carryover	and	reversing	effects	of	uncorrected prior	year	misstatements.	After	considering	all	relevant	quantitative	and	qualitative	factors,	if	either	approach	results	in	a	misstatement	that	is	material,	a	registrant's financial	statements	must	be	adjusted.	SAB	108	is	effective	for	fiscal	years	ending	after	November	15,	2006,	which	is	our	year	ending	September	29,	2007.	We	are	not aware	of	any	prior	year	uncorrected	errors	that	would	be	effected	by	this	statement.

# Item	7A. Quantitative	and	Qualitative	Disclosures	About	Market	Risk.

Financial	Instruments,	Other	Financial	Instruments,	and	Derivative	Commodity	Instruments.	SFAS	No.	107,	Disclosure	of	Fair	Value	of	Financial	Instruments, requires	disclosure	about	fair	value	of	financial	instruments.	Financial	instruments	consist	of	cash	equivalents,	short	and	long-term	investments,	accounts	receivable,	and debt	obligations.	The	fair	value	of	these	financial	instruments	approximates	their	carrying	amount.

Primary	Market	Risk	Exposures.	Our	primary	market	risk	exposures	are	in	the	areas	of	interest	rate	risk	and	foreign	currency	exchange	rate	risk.	We	incur	interest expense	on	borrowings	outstanding	under	our	credit	agreement	with	Bank	of	America	and	on	the	debt	assumed	as	a	result	of	our	acquisition	of	AEG.	At	our	option, revolving	loans	outstanding	under	the	credit	agreement	will	bear	interest	at	a	rate	equal	to	(a)	Eurodollar	Rate—the	British	Bankers	Association	London	Inter-Bank Offered	Rate	for	dollar	deposits	(known	as	"LIBOR")	plus	the	applicable	margin	(as	defined	in	the	credit	agreement,	which	margin	ranges	from	0.625%	to	1.00% depending	on	our	consolidated	leverage	ratio)	or	(b)	Base	Rate—the	higher	of	(i)	the	Bank	of	America	prime	rate	and	(ii)	the	Federal	Funds	rate	plus	0.50%.	The	terms of	the	AEG	debt	agreements	have	various	maturities	ranging	from	July	1,	2007	through	March	15,	2011.	Interest	rates	are	variable	and	at	September	30,	2006	ranged from	5%	to	6.5%.	We	may	also	incur	interest	expense	on	loans	made	under	a	European	line	of	credit	that	accrues	interest	at	the	Europe	Interbank	Offered	Rate	plus 1.50%	to	2.25%,	as	defined.	At	September	30,	2006,	there	were	no	amounts	outstanding	under	the	European	line	of	credit.

We	have	interest	rate	swap	contracts	in	place	totaling	6	million	Euros	and	$7.6	million	U.S.	dollars	where	we	pay	at	a	fixed	rate	and	receive	at	a	floating	rate. Fixed	rates	range	from	2.85%	to	3.75%	and	the	floating	rates	range	from	2.1%	to	3.41%.	Maturity	dates	coincide	with	those	of	the	outstanding	hedge	debt	agreements, thus	having	various	maturities	ranging	from	November	2007	through	December	2010.

Investments	in	both	fixed	rate	and	floating	rate	interest	earning	instruments	carry	a	degree	of	interest	rate	risk.	Fixed	rate	securities	may	have	their	fair	market value	adversely	impacted	due	to	a	rise	in	interest	rates,	while	floating	rate	securities	may	produce	less	income	than	expected	if	interest	rates	fall.	Due	in	part	to	these factors,	our	future	investment	income	may	fall	short	of	expectation	due	to	changes	in	interest	rates	or	we	may	suffer	losses	in	principal	if	forced	to	sell	securities	that experience	a	decline	in	market	value	due	to	changes	in	interest	rates.	A	hypothetical	10%	increase	or	decrease	in	interest	rates,	however,	would	not	have	a	material adverse	effect	on	our	financial	condition.	Interest	income	on	our	investment	is	recorded	as	a	component	of	Other	Income	in	our	accompanying	consolidated	financial statements.

Foreign	Currency	Exchange	Risk.	Internationally,	we	currently	operate	in	Belgium,	France,	Germany,	China	and	Canada.	Our	international	business	is	subject	to risks,	including,	but	not	limited	to:	unique	economic	conditions,	changes	in	political	climate,	differing	tax	structures,	other	regulations	and	restrictions,	and	foreign exchange	rate	volatility.	Accordingly,	our	future	results	could	be	materially	adversely	impacted	by	changes	in	these	or	other	factors.

Substantially	all	of	our	sales	outside	the	United	States	are	conducted	in	U.S.	dollar	denominated	transactions.	We	operate	international	subsidiaries	that	incur expenses	denominated	in	local	currencies.	However,	we	believe	that	these	operating	expenses	of	our	international	subsidiaries	that	are	incurred	in	local	currencies	will not	have	a	material	adverse	effect	on	our	business,	results	of	operations	or	financial	condition.	Expenses	to	service	our	contracts	are	incurred	both	by	our	international subsidiaries	in	the	local	currency	and	by	the	parent	company	in	U.S.	dollars.	As	such,	our	operating	results	and	certain	assets	and	liabilities	that	are	denominated	in	the Euro	are	affected	by	changes	in	the	relative	strength	of	the	U.S.	dollar	against	the	Euro.	Our	expenses	are	positively	affected	when	the	United	States	dollar	strengthens against	the	Euro	and	adversely	affected	when	the	United	States	dollar	weakens.	However,	based	on	the	level	of	operating	expenses,	we	believe	that	the	foreign	currency exchange	risk	is	not	significant.	During	fiscal	2006,	2005,	and	2004,	we	incurred	foreign	currency	exchange	gains	(losses)	of	$30,000,	$221,000,	and	$(192,000), respectively.

We	occasionally	use	forward	foreign	exchange	contracts	to	mitigate	our	foreign	currency	exchange	rate	exposures	related	to	our	foreign	currency	denominated assets	and	liabilities,	and	more	specifically,	to	hedge,	on	a	net	basis,	the	foreign	currency	exposure	of	a	portion	of	our	German	sales	denominated	in	the	U.S.	dollar.	The terms	of	these	forward	contracts	are	of	a	short-term	nature	(6-12	months).	At	September	30,	2006,	we	had	$8.15	million	outstanding	forward	foreign	exchange	contracts to	exchange	U.S.	dollars	for	Euros.	The	forward	foreign	exchange	contracts	have	various	maturity	dates	within	the	first	two	quarters	of	fiscal	2007	and	had	a	book	value that	approximated	fair	value.

The	market	risk	associated	with	the	forward	foreign	exchange	contracts	resulting	from	currency	exchange	rate	or	interest	rate	movements	is	expected	to	mitigate the	market	risk	of	the	underlying	assets	being	hedged.	A	hypothetical	10%	movement	in	the	foreign	currency	exchange	rate	between	U.S.	dollars	and	Euros	would	not have	a	material	adverse	effect	on	our	financial	condition.	We	do	not	use	forward	contracts	for	trading	or	speculative	purposes.

# Item	8. Financial	Statements	and	Supplementary	Data.

Our	consolidated	Financial	Statements	and	Supplementary	Data	are	listed	under	Part	IV,	Item	15,	in	this	report.

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

# None.

# Item	9A. Controls	and	Procedures.

# Evaluation	of	Disclosure	Controls	and	Procedures

We	maintain	disclosure	controls	and	procedures	that	are	designed	to	ensure	that	information	required	to	be	disclosed	in	our	Securities	Exchange	Act	reports	is recorded,	processed,	summarized	and	reported	within	the	time	periods	specified	in	the	SEC's	rules	and	forms,	and	that	such	information	is	accumulated	and communicated	to	our	management,	including	our	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate,	to	allow	timely	decisions	regarding	required disclosure.	In	designing	and	evaluating	the	disclosure	controls	and	procedures,	management	recognized	that	any	controls	and	procedures,	no	matter	how	well	designed and	operated,	can	provide	only	reasonable	assurance	of	achieving	the	desired	control	objectives,	as	ours	are	designed	to	do,	and	management	necessarily	was	required	to apply	its	judgment	in	evaluating	the	cost-benefit	relationship	of	possible	controls	and	procedures.

As	of	September	30,	2006,	we	carried	out	an	evaluation,	under	the	supervision	and	with	the	participation	of	our	management,	including	our	Chief	Executive Officer	and	Chief	Financial	Officer,	of	the	effectiveness	of	the	design	and	operation	of	our	disclosure	controls	and	procedures,	as	defined	in	Rules	13a-15(e)	and	15d- 15(e)	under	the	Securities	Exchange	Act	of	1934.	Based	upon	that	evaluation,	our	Chief	Executive	Officer	and	Chief	Financial	Officer	concluded	that	our	disclosure controls	and	procedures	are	effective	in	enabling	us	to	record,	process,	summarize	and	report	information	required	to	be	included	in	our	periodic	SEC	filings	within	the required	time	period.

# Report	of	Management	on	Internal	Control	over	Financial	Reporting

We	are	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Internal	control	over	financial	reporting	is	defined	in	Rule 13a-15(f)	and	15d-15(f)	under	the	Securities	Exchange	Act	of	1934,	as	amended,	as	a	process	designed	by,	or	under	the	supervision	of	our	principal	executive	and principal	financial	officers	and	effected	by	our	board	of	directors,	management	and	other	personnel	to	provide	reasonable	assurance	regarding	the	reliability	of	financial reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles	and	includes	those	policies	and procedures	that:

•	 pertain	to	the	maintenance	of	records	that	in	reasonable	detail	accurately	and	fairly	reflect	the	transactions	and	disposition	of	our	assets;

•	 provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted accounting	principles,	and	that	our	receipts	and	expenditures	are	being	made	only	in	accordance	with	authorization	of	our	management	and	directors;	and

•	 provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use	or	disposition	of	our	assets	that	could	have	a	material effect	on	the	financial	statements.

Our	internal	control	system	was	designed	to	provide	reasonable	assurance	to	our	management	and	board	of	directors	regarding	the	preparation	and	fair presentation	of	published	financial	statements.	Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements. Projections	of	any	evaluation	of	effectiveness	to	future	periods	are	subject	to	the	risks	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

We	have	assessed	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	September	30,	2006.	In	making	this	assessment,	we	used	the	criteria	set forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	Internal	Control-Integrated	Framework.

Our	assessment	of	and	conclusion	on	the	effectiveness	of	internal	control	over	financial	reporting	did	not	include	the	internal	controls	of	AEG	Elektrofotografie GmbH	and	subsidiaries,	R2	Technology,	Inc.,	and	Suros	Surgical	Systems,	Inc.,	businesses	we	acquired	during	the	year	ended	September	30,	2006	and	which	are 60

# included

in	our	2006	consolidated	financial	statements	and	constituted	approximately	$589,559,000	and	$479,434,000	of	total	and	net	assets,	respectively,	as	of	September	30,

Based	on	our	assessment,	we	believe	that,	as	of	September	30,	2006,	our	internal	control	over	financial	reporting	is	effective	at	a	reasonable	assurance	level	based on	these	criteria.

Ernst	&	Young,	our	independent	registered	public	accounting	firm,	has	issued	an	audit	report	on	our	assessment	of	our	internal	control	over	financial	reporting. This	report,	in	which	they	expressed	an	unqualified	opinion	is	included	below.

# Report	of	Independent	Registered	Public	Accounting	Firm

# on	Internal	Control	over	Financial	Reporting

# The	Board	of	Directors	and	Stockholders	of	Hologic,	Inc.

We	have	audited	management's	assessment,	included	in	the	accompanying	Report	of	Management	on	Internal	Control	over	Financial	Reporting,	that	Hologic, Inc.	maintained	effective	internal	control	over	financial	reporting	as	of	September	30,	2006,	based	on	criteria	established	in	Internal	Control—Integrated	Framework issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(the	COSO	criteria).	Hologic	Inc.'s	management	is	responsible	for	maintaining effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting.	Our	responsibility	is	to	express an	opinion	on	management's	assessment	and	an	opinion	on	the	effectiveness	of	the	company's	internal	control	over	financial	reporting	based	on	our	audit.

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

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

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

As	indicated	in	the	accompanying	Report	of	Management	on	Internal	Control	over	Financial	Reporting,	management's	assessment	of	and	conclusion	on	the effectiveness	of	internal	control	over	financial	reporting	did	not	include	the	internal	controls	of	AEG	Elektrofotografie	GmbH	and	subsidiaries,	R2	Technology,	Inc., and	Suros	Surgical	Systems,	Inc.,	which	were	businesses	acquired	during	the	year	ended	September	30,	2006	and

which	are	included	in	the	2006	consolidated	financial	statements	of	Hologic,	Inc.	and	constituted	approximately	$589,559,000	and	$479,434,000	of	total	and	net	assets, respectively,	as	of	September	30,	2006	and	approximately	$39,172,000	and	($19,525,000)	of	revenues	and	net	loss,	respectively,	for	the	period	for	the	date	of	acquisition through	September	30,	2006.	Our	audit	of	internal	control	over	financial	reporting	of	Hologic,	Inc.	also	did	not	include	an	evaluation	of	the	internal	control	over financial	reporting	of	AEG	Elektrofotografie	GmbH	and	subsidiaries,	R2	Technology,	Inc.,	and	Suros	Surgical	Systems,	Inc.

In	our	opinion,	management's	assessment	that	Hologic,	Inc.	maintained	effective	internal	control	over	financial	reporting	as	of	September	30,	2006,	is	fairly stated,	in	all	material	respects,	based	on	the	COSO	criteria.	Also,	in	our	opinion,	Hologic,	Inc.	maintained,	in	all	material	respects,	effective	internal	control	over financial	reporting	as	of	Hologic,	Inc.,	based	on	the	COSO	criteria.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheets	of Hologic,	Inc.	as	of	September	30,	2006	and	September	24,	2005	and	the	related	consolidated	statements	of	income,	stockholders'	equity	and	other	comprehensive income	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	September	30,	2006	of	Hologic,	Inc.	and	our	report	dated	December	11,	2006,	expressed	an unqualified	opinion	thereon.

/s/	Ernst	&	Young	LLP

# Boston,	Massachusetts

# Changes	in	Internal	Control	over	Financial	Reporting

As	a	result	of	our	recent	acquisitions	we	have	begun	to	intergrate	certain	business	processes	and	systems	of	the	acquired	entities.	Accordingly,	certain	changes have	been	made	and	will	continue	to	be	made	to	our	internal	controls	over	financial	reporting	until	such	time	as	these	integrations	are	complete.	There	have	been	no other	changes	in	our	internal	control	over	financial	reporting	that	occurred	during	the	last	fiscal	quarter	that	have	materially	affected,	or	are	reasonably	likely	to materially	affect,	our	internal	control	over	financial	reporting.

# Item	9B. Other	Information.

# PART	III

# Item	10. Directors	and	Executive	Officers	of	the	Registrant.

Pursuant	to	Section	406	of	the	Sarbanes-Oxley	Act	of	2002,	we	have	adopted	a	Code	of	Ethics	for	Senior	Financial	Officers	that	applies	to	our	principal	executive officer	and	principal	financial	officer,	principal	accounting	officer	and	controller,	and	other	persons	performing	similar	functions.	Our	Code	of	Ethics	for	Senior Financial	Officers	is	publicly	available	on	our	website	at	www.hologic.com.	We	intend	to	satisfy	the	disclosure	requirement	under	Item	5.05	of	Current	Report	on	Form 8-K	regarding	an	amendment	to,	or	waiver	from,	a	provision	of	this	code	by	posting	such	information	on	our	website,	at	the	address	specified	above.

The	additional	information	required	by	this	item	is	incorporated	by	reference	to	our	Definitive	Proxy	Statement	for	our	annual	meeting	of	stockholders	to	be	filed with	the	Securities	and	Exchange	Commission	within	120	days	after	the	close	of	our	fiscal	year.

# Item	11. Executive	Compensation.

The	information	required	by	this	item	is	incorporated	by	reference	to	our	Definitive	Proxy	Statement	for	our	annual	meeting	of	stockholders	to	be	filed	with	the Securities	and	Exchange	Commission	within	120	days	after	the	close	of	our	fiscal	year.

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters.

We	maintain	a	number	of	equity	compensation	plans	for	employees,	officers,	directors	and	others	whose	efforts	contribute	to	our	success.	The	table	below	sets forth	certain	information	as	of	the	end	of	our	fiscal	year	ended	September	30,	2006	regarding	the	shares	of	our	common	stock	available	for	grant	or	granted	under	stock option	plans	and	equity	incentives	that	(i)	were	approved	by	our	stockholders,	and	(ii)	were	not	approved	by	our	stockholders.	The	number	of	securities	and	the	exercise price	of	the	outstanding	securities	have	been	adjusted	to	reflect	our	two-for-one	stock	split	effected	on	November	30,	2005.

# Equity	Compensation	Plan	Information

| Plan	Category | Number	Of<br>Securities	To	Be<br>Issued	Upon<br>Exercise	Of<br>Outstanding<br>Options,	Warrants<br>And	Rights<br>(a) | Weighted-Average<br>Exercise	Price	Of<br>Outstanding	Options,<br>Warrants	And	Rights<br>(b) | Number	Of	Securities<br>Remaining	Available	For<br>Future	Issuance	Under<br>Equity	Compensation<br>Plans	(excluding<br>securities	reflected	in<br>column	(a))<br>(c) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders | 3,650,734 | $16.85 | 32,014 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\tholders\t(1) | 567,331 | $6.94 | 0 |
| Total | 4,218,065 | $15.52 | 32,014 |

(1) Includes	the	following	plans:	1997	Employee	Equity	Incentive	Plan	and	2000	Acquisition	Equity	Incentive	Plan.	A	description	of	each	of	these	plans	is	as follows:

1997	Employee	Equity	Incentive	Plan.	The	purposes	of	the	1997	Employee	Equity	Incentive	Plan	(the	"1997	Plan"),	adopted	by	the	Board	of	Directors	in	May 1997,	are	to	attract	and	retain	key	employees,	consultants	and	advisors,	to	provide	an	incentive	for	them	to	assist	us	in	achieving	long-range	performance	goals,	and	to enable	such	person	to	participate	in	our	long-term	growth.	In	general,	under	the	1997	Plan,	all	employees,

consultants,	and	advisors	who	are	not	executive	officers	or	directors	are	eligible	to	participate	in	the	1997	Plan.	The	1997	Plan	is	administered	by	a	committee	consisting of	at	least	three	members	of	the	Board	appointed	by	the	Board	of	Directors.	Participants	in	the	1997	Plan	are	eligible	to	receive	non-qualified	stock	options,	stock appreciation	rights,	restricted	stock	and	performance	shares.	A	total	of	2,200,000	shares	of	our	common	stock	were	reserved	for	issuance	under	the	1997	Plan.	Of	the shares	reserved	for	issuance	under	the	1997	Plan,	options	to	purchase	502,784	shares	have	been	granted	and	are	outstanding.	In	September	2005,	our	Board	of	Directors determined	that	no	further	awards	would	be	made	under	this	plan	and	cancelled	all	remaining	166,084	shares,	available	for	issuance	under	the	1997	Plan	that	are	not subject	to	outstanding	stock	option	awards.

2000	Acquisition	Incentive	Plan.	The	purpose	of	the	2000	Acquisition	Equity	Incentive	Plan	(the	"2000	Plan"),	adopted	by	the	Board	of	Directors	in	April	2001, is	to	attract	and	retain	(a)	employees,	consultants	and	advisors,	of	newly	acquired	businesses	who	have	been	or	are	being	hired	as	employees,	consultants	or	advisors	of our	company	or	any	of	our	consolidated	subsidiaries,	and	(b)	employees,	consultants	and	advisors,	of	our	company	who	have	or	are	anticipated	to	provide	significant assistance	in	connection	with	the	acquisition	of	a	newly	acquired	business	or	its	integration	with	our	company,	and	to	provide	such	persons	an	incentive	for	them	to achieve	long-range	performance	goals,	and	to	enable	them	to	participate	in	our	long-term	growth.	In	general,	under	the	2000	Plan,	only	employees,	consultants	and advisors	who	are	not	officers	or	directors	of	our	company	are	eligible	to	participate	in	the	2000	Plan.	The	2000	Plan	is	administered	by	the	Board	or,	at	its	option,	a committee	consisting	of	at	least	three	members	of	the	Board	appointed	by	the	Board	of	Directors.	Participants	in	the	2000	Plan	are	eligible	to	receive	non-qualified	stock options,	stock	appreciation	rights,	restricted	stock	and	performance	shares.	A	total	of	1,600,000	shares	of	our	common	stock	were	reserved	for	issuance	under	the	2000 Plan.	Of	the	shares	reserved	for	issuance	under	the	2000	Plan,	options	to	purchase	360,820	shares	have	been	granted	and	are	outstanding.	In	September	2005,	the	Board of	Directors	determined	that	no	further	awards	would	be	made	under	this	plan	and	cancelled	all	remaining	417,704	shares,	available	for	issuance	under	the	2000	Plan that	are	not	subject	to	outstanding	stock	option	awards.

# Item	13. Certain	Relationships	and	Related	Transactions.

# Item	14. Principal	Accountant	Fees	and	Services.

# PART	IV

# Item	15. Exhibits,	Financial	Statement	Schedules.

(a)	The	following	documents	are	filed	as	part	of	this	report:

(1)	Financial	Statements

Report	of	Independent	Registered	Public	Accounting	Firm	on	Consolidated	Financial	Statements

Consolidated	Balance	Sheets	as	of	September	30,	2006	and	September	24,	2005

Consolidated	Statements	of	Income	for	the	years	ended	September	30,	2006,	September	24,	2005	and	September	25,	2004

Consolidated	Statements	of	Stockholders'	Equity	and	comprehensive	income	for	the	years	ended	September	30,	2006,	September	24,	2005	and September	25,	2004

Consolidated	Statements	of	Cash	Flows	for	the	years	ended	September	30,	2006,	September	24,	2005	and	September	25,	2004

Notes	to	Consolidated	Financial	Statements

# (2)	Financial	Statement	Schedules

All	schedules	have	been	omitted	because	they	are	not	required	or	because	the	required	information	is	given	in	the	Consolidated	Financial	Statements or	Notes	thereto.

# (b)	Listing	of	Exhibits

* Management	compensation	plan	or	arrangement

** Portions	of	this	Agreement	identified	by	***	have	been	omitted	pursuant	to	a	request	for	confidential	treatment	and	have	been	filed	separately	with	the Commission	on	December	6,	2005,	pursuant	to	Rule	24b-2	of	the	Securities	Exchange	Act	of	1934,	as	amended.

A We	previously	filed	this	exhibit	on	January	24,	1990	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Registration	Statement	on	Form	S-1	(Registration No.	33-33128),	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

B We	previously	filed	this	exhibit	on	January	31,	1990	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Registration	Statement	on	Form	8-A,	and	the previously	filed	exhibit	is	incorporated	herein	by	reference.

C We	previously	filed	this	exhibit	on	May	14,	1996,	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Quarterly	Report	on	Form	10-Q	(SEC	File	No.	000- 18281)	for	the	quarter	ended	March	30,	1996,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

D We	previously	filed	this	exhibit	on	August	20,	1997	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Registration	Statement	on	Form	S-8	(SEC	File No.	333-34003),	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

E Trex	Medical	Corporation	previously	filed	this	exhibit	with	the	referenced	exhibit	number	as	an	Exhibit	to	its	Registration	Statement	on	Form	S-1	(Reg.	No.	333- 2926),	and	the	previously	filed	exhibit	is	incorporated	by	reference.

F We	previously	filed	this	exhibit	on	December	22,	2000	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Annual	Report	on	Form	10-K	(SEC	File	No.	000- 18281)	for	the	fiscal	year	ended	September	30,	2000,	and	the	previously	filed	exhibit	is	incorporated	by	reference.

G We	previously	filed	this	exhibit	on	December	12,	2001	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Annual	Report	on	Form	10-K	(SEC	File	No.	000- 18281)	for	the	fiscal	year	ended	September	29,	2001,	and	the	previously	filed	exhibit	is	incorporated	by	reference.

H We	previously	filed	this	exhibit	on	September	17,	2002	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000- 18281),	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

I We	previously	filed	this	exhibit	on	December	24,	2002	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Annual	Report	on	Form	10-K	(SEC	File	No.	000- 18281)	for	the	fiscal	year	ended	September	28,	2002,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

J We	previously	filed	this	exhibit	on	May	11,	2004	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Quarterly	Report	on	Form	10-Q	(SEC	File	No.	000- 18281)	for	the	quarter	ended	March	27,	2004,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

K We	previously	filed	this	exhibit	on	September	23,	2004	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000- 18281)	dated	as	of	September	23,	2004,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

L We	previously	filed	this	exhibit	on	February	3,	2005	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Quarterly	Report	on	Form	10-Q	(SEC	File	No.	000- 18281)	for	the	quarter	ended	December	25,	2004,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

M We	previously	filed	this	exhibit	on	June	23,	2005	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000-18281) dated	as	of	June	22,	2005,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

N We	previously	filed	this	exhibit	on	May	4,	2006	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Quarterly	Report	on	Form	10-Q	(SEC	File	No.	000- 18281)	for	the	fiscal	quarter	ended	March	25,	2006,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

O We	previously	filed	this	exhibit	on	December	6,	2005	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Annual	Report	on	Form	10-K	(SEC	File	No.	000- 18281)	for	the	fiscal	year	ended	September	24,	2005,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

P We	previously	filed	this	exhibit	on	November	2,	2006	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000- 18281)	dated	as	of	November	2,	2006,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

Q We	previously	filed	this	exhibit	on	September	28,	2006	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000- 18281)	dated	as	of	September	28,	2006,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

R We	previously	filed	this	exhibit	on	July	27,	2006	with	the	referenced	exhibit	number	as	an	exhibit	to	our	Current	Report	on	Form	8-K	(SEC	File	No.	000-18281) dated	as	of	July	27,	2006,	and	the	previously	filed	exhibit	is	incorporated	herein	by	reference.

# SIGNATURES

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

# JOHN	W.	CUMMING

# Chairman	of	the	Board

and	Chief	Executive	Officer

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

# Audited	Consolidated	Financial	Statements

# Contents

# on	Consolidated	Financial	Statements

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Hologic,	Inc.	and	subsidiaries	as	of	September	30,	2006	and	September	24,	2005,	and	the related	consolidated	statements	of	income,	stockholders'	equity	and	other	comprehensive	income,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended September	30,	2006.	These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial statements	based	on	our	audits.

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

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Hologic,	Inc.	and subsidiaries	at	September	30,	2006	and	September	24,	2005,	and	the	consolidated	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period ended	September	30,	2006,	in	conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	effectiveness	of	Hologic,	Inc.'s internal	control	over	financial	reporting	as	of	September	30,	2006,	based	on	criteria	established	in	Internal	Control-Integrated	Framework	issued	by	the	Committee	of Sponsoring	Organizations	of	the	Treadway	Commission	and	our	report	dated	December	11,	2006	expressed	an	unqualified	opinion	on	both	management's	assessment	of and	the	effective	operation	of	internal	control	over	financial	reporting.

# Consolidated	Balance	Sheets

# (In	thousands,	except	per	share	data)

|  | September	30,<br>2006 | September	24,<br>2005 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $29,923 | $113,994 |
| Accounts\treceivable,\tless\treserves\tof\t$3,712\tand\t$2,592\trespectively | 108,566 | 57,742 |
| Inventories | 93,477 | 44,520 |
| Deferred\tincome\ttax\tasset | 50,944 | 6,023 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 7,112 | 6,096 |
| Total\tcurrent\tassets | 290,022 | 228,375 |
| Property\tand\tequipment,\tat\tcost: |  |  |
| Land | 2,695 | 1,500 |
| Buildings\tand\timprovements | 25,699 | 14,336 |
| Equipment\tand\tsoftware | 65,113 | 43,282 |
| Furniture\tand\tfixtures | 5,120 | 3,805 |
| Leasehold\timprovements | 4,535 | 2,788 |
|  | 103,162 | 65,711 |
| Less—accumulated\tdepreciation\tand\tamortization | 41,439 | 32,382 |
|  | 61,723 | 33,329 |
| Other\tassets: |  |  |
| Intangible\tassets,\tnet\tof\taccumulated\tamortization\tof\t$9,241\tand\t$6,954,\trespectively | 47,381 | 646 |
| Developed\ttechnology\tand\tknow-how,\tnet\tof\taccumulated\tamortization\tof\t$8,946\tand\t$4,592,\trespectively | 110,780 | 4,516 |
| Goodwill | 341,994 | 6,285 |
| Other,\tnet | 4,305 | 6,688 |
| Total\tassets | $856,205 | $279,839 |
| Liabilities |  |  |
| Current\tliabilities: |  |  |
| Line\tof\tcredit | $55,000 | $— |
| Current\tportion\tof\tnotes\tpayable | 2,921 | — |
| Accounts\tpayable | 26,443 | 14,163 |
| Accrued\texpenses\t(Note\t15) | 59,012 | 25,237 |
| Deferred\trevenue | 30,903 | 16,360 |
| Total\tcurrent\tliabilities | 174,279 | 55,760 |
| Note\tpayable,\tnet\tof\tcurrent\tportion | 6,163 | — |
| Deferred\tincome\ttax\tliabilities | 60,858 | 1,471 |
| Deferred\trevenue | 6,630 | 4,774 |
| Other\tlong\tterm\tliabilities. | 2,525 | — |
| Commitments\tand\tcontingencies\t(Note\t13) |  |  |
| Stockholders'\tequity |  |  |
| Preferred\tstock,\t$0.01\tpar\tvalue–1,623\tshares\tauthorized;\t0\tshares\tissued | — | — |
|  | 526 | 443 |
| Capital\tin\texcess\tof\tpar\tvalue | 532,255 | 172,642 |
| Retained\tearnings | 73,875 | 46,452 |
| Accumulated\tother\tcomprehensive\tloss | (442) | (1,239) |
| Treasury\tstock,\tat\tcost—90\tshares | (464) | (464) |
| Total\tstockholders'\tequity | 605,750 | 217,834 |
| Total\tliabilities\tand\tstockholders'\tequity | $856,205 | $279,839 |

See	accompanying	notes.

# Consolidated	Statements	of	Income

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Revenues: |  |  |  |
| Product\tsales | $388,111 | $229,075 | $177,936 |
| Service\tand\tother\trevenue | 74,569 | 58,609 | 50,769 |
|  | 462,680 | 287,684 | 228,705 |
| Costs\tand\texpenses\t(1): |  |  |  |
| Cost\tof\tproduct\tsales | 186,862 | 116,478 | 94,762 |
| Cost\tof\tproduct\tsales—amortization\tof\tintangible\tassets | 4,784 | 911 | 911 |
| Cost\tof\tservice\tand\tother\trevenue | 77,502 | 58,181 | 48,574 |
| Research\tand\tdevelopment | 28,294 | 18,617 | 16,659 |
| Selling\tand\tmarketing | 55,910 | 34,199 | 31,761 |
| General\tand\tadministrative | 42,551 | 26,667 | 23,452 |
| Amortization\tof\tacquired\tintangible\tassets | 1,631 | — | — |
| Net\tgain\ton\tsale\tof\tintellectual\tproperty | (5,093) | — | — |
| Acquired\tin-process\tresearch\tand\tdevelopment | 19,900 | — | — |
|  | 412,341 | 255,053 | 216,119 |
| Income\tfrom\toperations | 50,339 | 32,631 | 12,586 |
| Interest\tincome | 4,082 | 2,219 | 540 |
| Interest\tand\tother\texpense,\tnet | (1,198) | (155) | (199) |
| Income\tbefore\tincome\ttaxes | 53,223 | 34,695 | 12,927 |
| Provision\tfor\tincome\ttaxes | 25,800 | 6,439 | 763 |
| Net\tincome | $27,423 | $28,256 | $12,164 |
| Basic\tnet\tincome\tper\tcommon\tand\tcommon\tequivalent\tshare: | $0.59 | $0.66 | $0.30 |
| Diluted\tnet\tincome\tper\tcommon\tand\tcommon\tequivalent\tshare: | $0.56 | $0.63 | $0.29 |
| Weighted\taverage\tnumber\tof\tcommon\tshares\toutstanding:\nBasic | 46,512 | 42,824 | 40,516 |
| Diluted | 48,620 | 45,126 | 42,593 |
| (1)\tStock-based\tCompensation\tincluded\tin\tCosts\tand\tExpenses: |  |  |  |
| Cost\tof\trevenues | $481 | $— | $— |
| Research\tand\tdevelopment | 519 | — | — |
| Selling\tand\tmarketing | 351 | — | — |
| General\tand\tadministrative | 2,600 | — | — |

# Consolidated	Statements	of	Stockholders'	Equity	and	Comprehensive	Income

|  | Common	Stock | Common	Stock |  |  | Treasury	Stock | Treasury	Stock | Accumulated |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Capital\tin |  |  |  | Other | Total |  |
|  | Number\tof | $0.01 | Excess\tof | Retained | Number\tof |  | Comprehensive | Stockholders' | Comprehensive |
|  | Shares | Par\tValue | Par\tValue | Earnings | Shares | Amount | Loss | Equity | Income |
| Balance\tat\tSeptember\t27,\t2003 | 39,932 | $400 | $144,255 | $6,032 | 90 | (464) | (1,296) | 148,927 |  |
| Exercise\tof\tstock\toptions | 1,175 | 12 | 4,578 | — | — | — | — | 4,590 | — |
| Issuance\tof\tcommon\tstock\tunder\temployee |  |  |  |  |  |  |  |  |  |
| stock\tpurchase\tplan | 64 | — | 413 | — | — | — | — | 413 | — |
| Net\tincome | — | — | — | \t 12,164 | — | — | — | 12,164 | $12,164 |
| Translation\tadjustments | — | — | — | — | — | — | 181 | 181 | 181 |
| Comprehensive\tincome |  |  |  |  |  |  |  |  | $12,345 |
| Balance\tat\tSeptember\t25,\t2004 | 41,171 | 412 | \t 149,246 | \t 18,196 | 90 | (464) | (1,115) | 166,275 |  |
| Exercise\tof\tstock\toptions | 3,077 | 31 | 15,324 | — | — | — | — | 15,355 | — |
| Issuance\tif\tcommon\tstock\tunder\temployer\tstock |  |  |  |  |  |  |  |  |  |
| purchase\tplan | 47 | — | 511 | — | — | — | — | 511 | — |
| Tax\tbenefit\trelated\tto\texercise\tof\tstock\toptions | — | — | 7,561 | — | — | — | — | 7,561 | — |
| Net\tincome | — | — | — | \t 28,256 | — | — | — | 28,256 | $28,256 |
| Translation\tadjustments | — | — | — | — | — | — | (124) | (124) | (124) |
| Comprehensive\tincome |  |  |  |  |  |  |  |  | $28,132 |
| Balance\tat\tSeptember\t24,\t2005 | 44,295 | 443 | \t 172,642 | \t 46,452 | 90 | (464) | (1,239) | 217,834 |  |
| Issuance\tof\tcommon\tshares\trelated\tto |  |  |  |  |  |  |  |  |  |
| acquisitions | 6,924 | 69 | \t 317,206 | — | — | — | — | 317,275 | — |
| Exercise\tof\tstock\toptions | 1,426 | 14 | 10,548 | — | — | — | — | 10,562 | — |
| Stock\tbased\tcompensation\texpense | — | — | 3,951 | — | — | — | — | 3,951 | — |
| Tax\tbenefit\trelated\tto\texercise\tof\tstock\toptions | — | — | 27,908 | — | — | — | — | 27,908 | — |
| Net\tincome | — | — | — | \t 27,423 | — | — | — | 27,423 | $27,423 |
| Translation\tadjustments | — | — | — | — | — | — | 797 | 797 | 797 |
| Comprehensive\tincome |  |  |  |  |  |  |  |  | $28,220 |
| Balance\tat\tSeptember\t30,\t2006 | 52,645 | $526 | $532,255 | $73,875 | 90 | $(464) | $(442) | $605,750 |  |

# Consolidated	Statements	of	Cash	Flows

# (In	thousands)

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tincome | $27,423 | $28,256 | $12,164 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation | 9,492 | 6,421 | 5,712 |
| Amortization | 6,641 | 1,153 | 1,877 |
| Impairment\tcharge\ton\tsale\tof\tintellectual\tproperty | 1,407 | — | — |
| Non-cash\tinterest\texpense | (899) | 133 | 123 |
| Tax\tbenefit\trelated\tto\texercise\tof\tnon\tqualified\tstock\toptions | (27,908) | 7,561 | — |
| Charge\tfor\tin-process\tresearch\tand\tdevelopment | 19,900 | — | — |
| Stock-based\tcompensation\texpense | 3,951 | — | — |
| Deferred\tincome\ttaxes | (5,797) | (135) | (2,436) |
| Loss\ton\tdisposal\tof\tproperty\tand\tequipment | 420 | 805 | 744 |
| Changes\tin\tassets\tand\tliabilities,\tnet\tof\tacquisitions: |  |  |  |
| Accounts\treceivable | (9,545) | (9,310) | (4,435) |
| Inventories | (23,023) | (4,381) | 3,428 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 92 | (3,059) | 444 |
| Accounts\tpayable | 3,940 | 3,623 | (452) |
| Accrued\texpenses | 14,500 | 5,972 | 5,935 |
| Deferred\trevenue | 10,530 | 8,139 | 3,522 |
| Net\tcash\tprovided\tby\toperating\tactivities | 31,124 | 45,178 | 26,626 |
| Investing\tactivities |  |  |  |
| Business\tacquisitions,\tnet\tof\tcash\tacquired | (171,828) | — | — |
| Net\tcash\tpaid\tfor\tacquisition\tof\tintangible\tassets | (27,594) |  |  |
| Proceeds\tfrom\tsale\tof\tintellectual\tproperty | 6,500 | — | — |
| Net\tcash\tpaid\tfor\tacquisition\tof\tdistributor | — | — | (341) |
| Deferred\tacquisition\tcosts | — | (5,428) | — |
| Purchase\tof\tproperty\tand\tequipment | (12,989) | (7,699) | (7,187) |
| (Increase)\tdecrease\tin\tother\tassets | (765) | (1,172) | 163 |
| Net\tcash\tused\tin\tinvesting\tactivities | (206,676) | (14,299) | (7,365) |
| Financing\tactivities |  |  |  |
| Proceeds\tunder\tcredit\tfacility | 65,000 | — | — |
| Repayments\tunder\tcredit\tfacility | (10,000) | — | — |
| Repayments\tof\tnotes\tpayable | (2,948) | (947) | (1,083) |
| Tax\tbenefit\trelated\tto\texercise\tof\tnon\tqualified\tstock\toptions | 27,908 |  |  |
| Net\tproceeds\tfrom\tsale\tof\tcommon\tstock\tpursuant\tto\tstock\tplans | 10,639 | 15,868 | 5,003 |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 90,599 | 14,921 | 3,920 |
| Effect\tof\texchange\trate\tchanges\ton\tcash\tand\tcash\tequivalents | 882 | (141) | (23) |
| Net\t(decrease)\tincrease\tin\tcash\tand\tcash\tequivalents | (84,071) | 45,659 | 23,158 |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tyear | 113,994 | 68,335 | 45,177 |
| Cash\tand\tcash\tequivalents,\tend\tof\tyear | $29,923 | $113,994 | $68,335 |
| Supplemental\tDisclosure\tof\tCash\tFlow\tInformation: |  |  |  |
| Cash\tpaid\tduring\tthe\tperiod\tfor\tincome\ttaxes | $1,817 | $1,118 | $448 |
| Cash\tpaid\tduring\tthe\tperiod\tfor\tinterest | $1,077 | $185 | $91 |
| Supplemental\tDisclosure\tof\tNon-Cash\tInvesting\tActivities: |  |  |  |
| Exchange\tof\tnote\treceivable\tfor\tintangible\tassets | $5,428 | $— | $— |
| Business\tAcquisition,\tNet\tof\tCash\tAcquired: |  |  |  |
| Fair\tvalue\tof\ttangible\tassets\tacquired | $152,077 | — | — |
| Liabilities\tassumed | (135,623) | — | — |
| Fair\tvalue\tof\tstock\tissued |  |  |  |
|  | (317,275) | — | — |
| Cost\tin\texcess\tof\tfair\tvalue\tof\tassets\t(Goodwill) | 335,709 | — | — |
| Fair\tvalue\tof\tacquired\tidentifiable\tintangible\tassets | 132,100 | — | — |
| In\tprocess\tresearch\tand\tdevelopment | 15,700 | — | — |
|  | 182,688 | — | — |
| Less\tcash\tacquired | 10,860 | — | — |
| Net\tcash\tpaid\tfor\tacquisition | $171,828 | $— | $— |

# 1. Operations

Hologic,	Inc.	(the	Company	or	Hologic)	develops,	manufactures	and	distributes	diagnostic	and	medical	imaging	systems	primarily	serving	the	healthcare	needs	of women.	The	Company's	core	women's	healthcare	business	units	are	focused	on	mammography	and	osteoporosis	assessment	and	breast	biopsy.

# 2. Summary	of	Significant	Accounting	Policies

The	accompanying	consolidated	financial	statements	reflect	the	application	of	certain	accounting	policies	as	described	in	this	note	and	elsewhere	in	the accompanying	consolidated	financial	statements.

The	Company	believes	that	a	significant	accounting	policy	is	one	that	is	both	important	to	the	portrayal	of	the	Company's	financial	condition	and	results	and requires	management's	most	difficult,	subjective	or	complex	judgments,	often	as	the	result	of	the	need	to	make	estimates	about	the	effect	of	matters	that	are	inherently uncertain.

# Principles	of	Consolidation

The	principles	of	Financial	Accounting	Standards	Board	(FASB)	Interpretation	(FIN)	No.	46,	Consolidation	of	Variable	Interest	Entities	and	Accounting Research	Bulletin	No.	51,	Consolidation	of	Financial	Statements	are	considered	when	determining	whether	an	entity	is	subject	to	consolidation.	The	consolidated financial	statements	include	the	accounts	of	the	Company	and	its	wholly	owned	subsidiaries.	In	addition,	the	consolidated	financial	statements	include	the	accounts	of its	majority-owned	(85.6%)	subsidiary,	AEG	Photoconductor	(Shanghai)	Co.	Ltd.	(APS),	which	was	acquired	as	part	of	the	acquisition	of	AEG	Elektrofotografie	GmbH (AEG)	in	fiscal	2006	(Note	3).	The	value	of	the	minority	interest	is	approximately	$756	as	of	September	30,	2006	and	is	recorded	as	component	of	other	long-term liabilities	in	the	accompanying	consolidated	balance	sheet.	This	amount	includes	approximately	$50	of	the	minority	interest	in	income	during	the	period	from	the	date	of acquisition	through	September	30,	2006,	recorded	as	a	component	of	other	income	(expense),	net	in	the	accompanying	consolidated	statement	of	income.	All	significant intercompany	transactions	and	balances	have	been	eliminated	in	consolidation.

# Reclassifications

Deferred	revenue	totaling	$4,800	previously	recorded	within	current	liabilities	on	the	Company's	September	24,	2005	consolidated	balance	sheet	have	been reclassified	to	long	term	to	conform	with	the	current	period	presentation.	Amortization	expense	for	acquired	developed	technology	and	know	how	previously	recorded within	general	and	administrative	expense	totaling	$911	for	both	fiscal	2005	and	fiscal	2004	with	in	the	consolidated	statement	of	income	has	been	reclassified	to	cost	of product	sales—amortization	of	intangible	assets	to	conform	with	the	current	period	presentation.

On	November	8,	2006,	the	Company	issued	a	press	release	containing	its	financial	results	as	of	and	for	the	three	and	twelve	months	ended	September	30,	2006 including	a	consolidated	balance	sheet.	Subsequent	to	that	date,	the	Company	has	made	certain	reclassification	entries	to	the	deferred	income	tax	and	notes	payable balances	included	in	the	previously	disclosed	consolidated	balance	sheet.	Accordingly,	certain	income	tax	and	notes	payable	amounts	previously	disclosed	in	the	balance sheet	included	with	the	November	8,	2006	press	release	differ	from	such	account	balances	in	the	accompanying	consolidated	balance	sheet.

# Fiscal	Year

# Notes	to	Consolidated	Financial	Statements	(continued)

# Stock	Split

On	November	30,	2005,	the	Company	effected	a	two-for-one	stock	split	in	the	form	of	a	stock	dividend.	The	stock	split	has	been	retroactively	reflected	in	the accompanying	consolidated	financial	statements	and	notes	for	all	periods	presented.

# Management's	Estimates	and	Uncertainties

The	preparation	of	financial	statements	in	conformity	with	U.S	generally	accepted	accounting	principles	requires	management	to	make	significant	estimates	and assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial	statements	and	the reported	amounts	of	revenues	and	expenses	during	the	reporting	periods.

Significant	estimates	relied	upon	in	preparing	these	consolidated	financial	statements	include	revenue	recognition	for	multiple-element	arrangements,	allowances for	doubtful	accounts,	reserves	for	excess	and	obsolete	inventories,	expected	future	cash	flows	used	to	evaluate	the	recoverability	of	long-lived	assets,	estimated	fair values	of	long-lived	assets	used	to	record	impairment	charges	related	to	intangible	assets	and	goodwill,	amortization	periods,	certain	accrued	expenses,	restructuring	and other	related	charges,	stock-based	compensation,	pension	liabilities,	contingent	liabilities,	and	recoverability	of	the	Company's	net	deferred	tax	assets	and	related valuation	allowance.

Although	the	Company	regularly	assesses	these	estimates,	actual	results	could	differ	materially	from	these	estimates.	Changes	in	estimates	are	recorded	in	the period	in	which	they	become	known.	The	Company	bases	its	estimates	on	historical	experience	and	various	other	assumptions	that	it	believes	to	be	reasonable	under	the circumstances.	Actual	results	may	differ	from	management's	estimates	if	past	experience	or	other	assumptions	do	not	turn	out	to	be	substantially	accurate.

The	Company	is	subject	to	a	number	of	risks	similar	to	those	of	other	companies	of	similar	size	in	its	industry,	including,	early	stage	of	development	of	direct-to- digital	products,	rapid	technological	changes,	competition,	limited	number	of	suppliers,	customer	concentration,	integration	of	acquisitions,	government	regulations, management	of	international	activities,	protection	of	proprietary	rights,	patent	litigation	and	dependence	on	key	individuals.

# Cash	Equivalents

The	Company	considers	its	highly	liquid	investments	with	original	maturities	of	three	months	or	less	at	the	time	of	acquisition	to	be	cash	equivalents.	At September	30,	2006	and	September	24,	2005	the	Company's	cash	equivalents	consisted	of	money	market	accounts.

# Concentrations	of	Credit	Risk

Financial	instruments	that	subject	the	Company	to	credit	risk	primarily	consist	of	cash	and	cash	equivalents,	cost-method	investments,	derivative	financial instrument	contracts	and	trade	accounts	receivable.	The	Company	invests	its	cash	and	cash	equivalents	with	financial	institutions	with	highly	rated	credit	and	monitors the	amount	of	credit	exposure	to	any	one	financial	institution.	The	Company's	credit	risk	is	managed	by	investing	its	cash	in	high-quality	money	market	instruments. The	Company	transacts	derivative	financial	instrument	contracts	with	major	financial	institutions	and	monitors	outstanding	positions	to	limit	its	credit	exposure.	The Company's	customers	are	principally	located	in	the	United	States,	Europe	and	Asia.	The	Company	performs	ongoing	credit

evaluations	of	the	financial	condition	of	its	customers	and	generally	does	not	require	collateral.	Although,	the	Company	is	directly	affected	by	the	overall	financial condition	of	the	healthcare	industry,	management	does	not	believe	significant	credit	risk	exists	as	of	September	30,	2006.	The	Company	generally	has	not	experienced any	material	losses	related	to	receivables	from	individual	customers	or	groups	of	customers	in	the	x-ray	and	medical	device	industry.	The	Company	maintains	an allowance	for	doubtful	accounts	based	on	accounts	past	due	according	to	contractual	terms	and	historical	collection	experience.	Actual	losses	when	incurred	are	charged to	the	allowance.	The	Company's	losses	related	to	collection	of	trade	receivables	have	consistently	been	within	management's	expectations.	Due	to	these	factors,	no additional	credit	risk	beyond	amounts	provided	for	collection	losses,	which	the	Company	reevaluates	on	a	monthly	basis	based	on	specific	review	of	receivable	agings and	the	period	that	any	receivables	are	beyond	the	standard	payment	terms,	is	believed	by	management	to	be	probable	in	the	Company's	accounts	receivable.

There	were	no	customers	with	balances	greater	than	10%	of	accounts	receivable	as	of	September	30,	2006	and	September	24,	2005,	nor	customers	that represented	greater	than	10%	of	product	revenues	for	fiscal	2006,	2005	and	2004.

# Disclosure	of	Fair	Value	of	Financial	Instruments

The	Company's	financial	instruments	mainly	consist	of	cash	and	cash	equivalents,	accounts	receivable,	cost-method	investments,	derivative	financial	instrument contracts,	line	of	credit,	and	notes	payable.	The	carrying	amounts	of	the	Company's	cash	equivalents,	and	accounts	receivable	approximate	fair	value	due	to	the	short- term	nature	of	these	instruments.	The	Company's	$150	million	line	of	credit	with	Bank	of	America	has	a	variable	interest	rate	and,	therefore,	fluctuates	based	on	market conditions.	The	company	also	acquired	several	notes	payable	in	connection	with	the	AEG	acquisition.	These	notes	payable	are	denominated	in	either	the	Euro	or	US dollar	and	have	variable	rates	of	interest.	As	of	September	30,	2006	the	fair	value	of	the	line	of	credit	and	outstanding	notes	payable	approximates	the	carrying	amount based	on	comparable	market	terms	and	conditions.

Additionally,	in	connection	with	the	acquisition	of	AEG,	the	Company	acquired	certain	forward	foreign	contracts	and	certain	interest	rate	swap	contracts	in	place related	to	debt	assumed	in	connection	with	the	acquisition	(See	Note	6	for	further	discussion	)

# Inventories

Inventories	are	stated	at	the	lower	of	cost	(first-in,	first-out)	or	market	and	consist	of	the	following:

| September	30,<br>2006 | September	24,<br>2005 |
| :--- | :--- |
| $58,226 | $34,714 |
| 35,251 | 9,806 |
| $93,477 | $44,520 |

Work-in-process	and	finished	goods	inventories	consist	of	materials,	labor	and	manufacturing	overhead.	Provisions	for	excess	or	obsolete	inventory	are	primarily based	on	management's	estimates	of	forecasted	net	sales	and	service	usage	levels.	A	significant	change	in	the	timing	or	level	of	demand	for	the	Company's	products	as compared	to	forecasted	amounts	may	result	in	recording	additional	provisions	for	excess	or	expired	inventory	in	the	future.	The	Company	records	provisions	for	excess or	obsolete	inventory	as	cost	of	product	sales.

# Concentration	of	Suppliers

The	Company	purchases	certain	components	of	the	Company's	products	from	a	small	number	of	suppliers.	A	change	in	or	loss	of	these	suppliers	could	cause	a delay	in	filling	customer	orders	and	a	possible	loss	of	sales,	which	would	adversely	affect	results	of	operations;	however,	management	believes	that	suitable	replacement suppliers	could	be	obtained	in	such	an	event.

# Property	and	Equipment

The	Company	provides	for	depreciation	and	amortization	by	charges	to	operations,	using	the	straight-line	method,	which	allocate	the	cost	of	property	and equipment	over	the	following	estimated	useful	lives:

# Repair	and	maintenance	costs	are	expensed	as	incurred.

The	Company	applies	the	provisions	of	American	Institute	of	Certified	Public	Accountants	(AICPA)	Statement	of	Position	(SOP)	98-1,	Software	Developed	or Obtained	for	Internal	Use.	SOP	98-1	requires	computer	software	costs	associated	with	internal	use	software	to	be	expensed	as	incurred	until	certain	capitalization criteria	are	met.	SOP	98-1	also	defines	which	types	of	costs	should	be	capitalized	and	which	should	be	expensed.	The	Company	capitalized	$664,	$453	and	$140	during fiscal	2006,	2005	and	2004,	respectively,	related	to	a	company	wide	Enterprise	Resource	Planning	(ERP)	systems	implementation	project,	as	well	as,	upgrades	and enhancements	that	added	significant	functionality	to	the	system	and	has	included	these	amounts	in	equipment	and	software	in	the	accompanying	consolidated	balance sheets.

The	Company	amortizes	such	costs	when	the	ERP	system	and	new	functionality	become	operational.	The	initial	system	costs	are	being	amortized	over	an estimated	useful	life	of	ten	years	and	new	functionality	is	amortized	over	the	remaining	useful	life	of	the	related	system.

# Valuation	of	Business	Combinations	and	Acquisition	of	Intangible	Assets

The	Company	records	intangible	assets	acquired	in	recent	business	combinations	and	acquisitions	of	intangible	assets	under	the	purchase	method	of	accounting. The	Company	accounts	for	acquisitions	completed	before	July	1,	2001	in	accordance	with	Accounting	Principles	Board	(APB)	Opinion	No.	16,	Business	Combinations and	accounts	for	acquisitions	completed	after	June	30,	2001	in	accordance	with	FASB	Statement	No.	141,	Business	Combinations.	Amounts	paid	for	each	acquisition	are allocated	to	the	assets	acquired	and	liabilities	assumed	based	on	their	fair	values	at	the	dates	of	acquisition.	The	Company	then	allocates	the	purchase	price	in	excess	of net	tangible	assets	acquired	to	identifiable	intangible	assets,	including	purchased	research	and	development	based	on	detailed	valuations	that	use	information	and assumptions	provided	by	management.	The	Company	allocates	any	excess	purchase	price	over	the	fair	value	of	the	net	tangible	and	intangible	assets	acquired	to goodwill.

The	valuation	of	purchased	research	and	development	represents	the	estimated	fair	value	at	the	dates	of	acquisition	related	to	in-process	projects.	The	Company's 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.	The	Company	expenses	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,	the	Company	may	not	realize	the	financial	benefits	expected	for	these	projects,	or	for	the	acquisitions	as	a	whole.

The	Company	uses	the	income	approach	to	determine	the	fair	values	of	its	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.	The Company	bases	its	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,	the	Company	considers,	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.	The	Company	bases	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	the Company	acquired	in	connection	with	its	2006	acquisitions,	it	used	risk-adjusted	discount	rates	ranging	from	14	%	to	35%	to	discount	its	projected	cash	flows.	The Company	believes	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.

The	Company	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	trademarks.	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.	Trademarks	represent acquired	product	names	that	the	Company	intends	to	continue	to	utilize.

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.	The	Company	records	intangible	assets	at	historical	cost.	The	Company	amortizes	its	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.	The	Company	reviews	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,	the	Company	will	write-down	the	carrying	value	of	the	intangible	asset	to	its	fair	value	in	the	period	identified.	The	Company generally	calculates	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,	the	Company	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	in	July	2006,	the	Company	recorded	an impairment	charge	of	approximately	$1,400	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	in	the	accompanying	consolidated	statement	of	income	and	is classified	as	part	of	the	mammography	segment.

Consistent	with	prior	years,	the	Company	conducted	its	annual	impairment	test	of	goodwill	during	the	second	quarter	of	fiscal	2006.	The	Company	considered	a number	of	factors,	including	a	valuation	to	conduct	this	test.	The	valuation	is	based	upon	expected	future	discounted	operating	cash	flows	of	the	mammography reporting	unit	as	well	as	analysis	of	recent	sales	or	offerings	of	similar	companies.	The	timing	and	size	of	impairment	charges	involve	the	application	of	management's judgment	and	could	significantly	affect	the	Company's	operating	results.	The	Company	determined	that	all	of	the	criteria	under	SFAS	No.	142	to	carry-forward	the	prior year	determination	of	reporting	unit	fair	value	were	met	and,	based	on	the	applicable	valuation	determined	that	no	impairment	exists.

Goodwill	by	reporting	segment	consists	of	the	following:

| Reporting	Segment | Balance	as	of<br>September	30,	2006 | Balance	as	of<br>September	24,	2005 |
| :--- | :--- | :--- |
| Mammography | $335,021 | $6,285 |
| Other | 6,973 | — |
|  | $341,994 | $6,285 |

The	increase	in	goodwill	is	attributable	to	the	acquisitions	of	AEG,	R2	and	Suros	during	fiscal	2006	(See	Note	3	for	further	discussion).	There	was	no	change	to goodwill	amounts	outstanding	prior	to	fiscal	2006.

Intangible	assets	consist	of	the	following:

|  |  | Average | Gross |  | Gross |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Estimated | Carrying | Accumulated | Carrying | Accumulated |
| Reporting\tSegment | Description | Useful\tLife | Value | Amortization | Value | Amortization |
| Osteoporosis\tAssessment | Patents | 12.9\tyears | $4,952 | 4,650 | $4,952 | $4,516 |
| Mammography | Developed\tTechnology | 9.3\tyears | 117,826 | 8,853 | 9,108 | 4,592 |
|  | Customer\tRelationship | 8.5\tyears | 37,793 | 1,437 | — | — |
|  | Trade\tName | 8.5\tyears | 9,100 | 134 | — | — |
|  | Order\tbacklog | 6\tmonths | 800 | 430 | — | — |
|  | Patents | 5.7\tyears | 777 | 531 | 648 | 438 |
| Other | Patents | 4\tyears | 2,000 | 2,000 | 2,000 | 2,000 |
|  | Developed\tTechnology | 8.5\tyears | 1,900 | 93 | — | — |
|  | Customer\tRelationship | 8.5\tyears | 800 | 40 | — | — |
|  | Trade\tName | 8.5\tyears | 400 | 20 | — | — |

Amortization	expense	related	to	developed	technology	and	order	backlog	is	classified	as	a	component	of	cost	of	product	sales—amortization	of	intangible	assets in	the	accompanying	consolidated	statement	of	income.	Amortization	expense	related	to	customer	relationship	and	trade	name	is	classified	as	a	component	of amortization	of	other	acquired	intangible	assets	in	the	accompanying	consolidated	statement	of	income.

The	estimated	remaining	amortization	expense	for	each	of	the	five	succeeding	fiscal	years:

| Fiscal	2007 | $16,377 |
| :--- | :--- |
| Fiscal\t2008 | 20,637 |
| Fiscal\t2009 | 21,316 |
| Fiscal\t2010 | 21,731 |
| Fiscal\t2011 | 19,518 |

# Long-Lived	Assets

The	Company	accounts	for	long-lived	assets	in	accordance	with	the	provisions	of	Statement	of	Financial	Accounting	Standards	(SFAS)	No.	144,	Accounting	for the	Impairment	or	Disposal	of	Long	Lived	Assets.	This	statement	requires	that	long-lived	assets	and	certain	identifiable	intangible	assets	be	reviewed	for	impairment whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	of	an	asset	may	not	be	recoverable.	During	this	review,	the	Company	re-evaluates	the significant	assumptions	used	in	determining	the	original	cost	and	estimated	lives	of	long-lived	assets.	Although	the	assumptions	may	vary	from	asset	to	asset,	they generally	include	operating	results,	changes	in	the	use	of	the	asset,	cash	flows	and	other	indicators	of	value.	Management	then	determines	whether	the	remaining	useful life	continues	to	be	appropriate	or	whether	there	has	been	an	impairment	of	long-lived	assets	based	primarily	upon	whether	expected	future	undiscounted	cash	flows	are sufficient	to	support	the	assets'	recovery.	If	impairment	exists,	the	Company	would	adjust	the	carrying	value	of	the	asset	to	fair	value,	generally	determined	by	a discounted	cash	flow	analysis.	To	date,	the	Company	has	not	identified	any	impairments	requiring	adjustment.

# Other	Assets

Included	in	other	assets	in	the	accompanying	balance	sheet	as	of	September	30,	2006	are	deferred	financing	costs	of	approximately	$900	related	to	direct	third party	costs	incurred	in	the	Company's	closing	of	the	credit	facility	with	Bank	of	America	on	July	24,	2006	and	as	amended	on	September	25,	2006	(see	Note	5).	The Company	is	amortizing	these	amounts	to	interest	expense	over	a	five-year	period,	which	approximates	the	level	yield	method.	Other	assets	also	include	certain	other minority	cost-method	equity	investments	in	non-publicly	traded	securities.	These	investments	are	generally	carried	at	cost	as	the	Company	owns	less	than	20%	of	the voting	equity	and	does	not	have	the	ability	to	exercise	significant	influence	over	these	companies.	The	Company	regularly	evaluates	the	carrying	value	of	its investments.	When	the	carrying	value	of	an	investment	exceeds	the	fair	value	and	the	decline	in	the	fair	value	is	deemed	to	be	other-than-temporary,	the	Company	writes down	the	value	of	the	investment	to	its	fair	value.	During	2006,	2005	and	2004,	none	of	the	investments	held	were	deemed	to	be	in	a	other-than-temporary	loss.	The carrying	value	of	these	investments	was	approximately	$1,530	and	$132	as	of	September	30,	2006	and	September	29,	2005,	respectively.

# Research	and	Software	Development	Costs

Costs	incurred	in	the	research	and	development	of	the	Company's	products	are	expensed	as	incurred.	The	Company	accounts	for	the	development	costs	of software	embedded	in	the	Company's	products	in	accordance	with	SFAS	No.	86,	Accounting	for	the	Costs	of	Computer	Software	to	be	Sold,	Leased	or	Otherwise Marketed.	Costs	incurred	in	the	research,	design	and	development	of	software	embedded	in	products	to	be	sold	to	customers	are	charged	to	expense	until	technological feasibility	of	the	ultimate	product	to	be	sold	is	established.	Software	development	costs	incurred	after	the	establishment	of	technological	feasibility	and	until	the	product is	available	for	general	release	are	capitalized,	provided	recoverability	is	reasonably	assured.	Software	development	costs	eligible	for	capitalization	have	not	been significant	to	date.

# Foreign	Currency	Translation

The	financial	statements	of	the	Company's	foreign	subsidiary	are	translated	in	accordance	with	SFAS	No.	52,	Foreign	Currency	Translation.	The	reporting currency	for	the	Company	is	the	U.S.	dollar	(dollar).	The	functional	currency	of	the	Company's	subsidiaries	in	Belgium	and	Germany	is	the	Euro	and	China	is	the Renminbi.	Accordingly,	the	assets	and	liabilities	of	the	Company's	subsidiaries	are	translated	into	U.S.	dollars	using	the	exchange	rate	in	effect	at	each	balance	sheet date.

Revenue	and	expense	accounts	generally	are	translated	using	an	average	rate	of	exchange	during	the	period.	Foreign	currency	translation	adjustments	are accumulated	as	a	component	of	other	comprehensive	loss	as	a	separate	component	of	stockholders'	equity.	Gains	and	losses	arising	from	transactions	denominated	in foreign	currencies	are	included	in	interest	and	other	expense	on	the	consolidated	statements	of	income	and	to	date	have	not	been	material.

# Comprehensive	Income

SFAS	No.	130,	Reporting	Comprehensive	Income,	requires	disclosure	of	all	components	of	comprehensive	income	on	an	annual	and	interim	basis. Comprehensive	income	is	defined	as	the	change	in	equity	of	a	business	enterprise	during	a	period	from	transactions,	other	events	and	circumstances	from	nonowner sources.	Comprehensive	income	is	disclosed	in	the	accompanying	consolidated	statements	of	stockholders'	equity.	Foreign	currency	translation	adjustments	are	the	only items	of	other	comprehensive	income.

The	Company	recognizes	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	and	collection	of	the	resulting	receivable	is	probable.	Generally,	the	Company's	product	arrangements	are	multiple- element	arrangements,	including	services,	such	as	installation	and	training	and	multiple	products.	In	accordance	with	Emerging	Issues	Task	Force	(EITF)	Issue	No.	00- 21,	Accounting	for	Revenue	Arrangements	with	Multiple	Deliverables,	based	on	the	terms	and	conditions	of	the	product	arrangements,	the	Company	believes	that	these services	and	undelivered	products	can	be	accounted	for	separately	from	the	delivered	product	element	as	the	Company's	delivered	product	has	value	to	its	customers	on a	stand-alone	basis	and	the	Company	has	objective	and	reliable	evidence	of	the	fair	value	of	such	services	and	undelivered	products	based	on	the	consistency	of	prices charged	when	these	elements	are	sold	separately.	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	undelivered	elements	of	service	to	be	performed	and	products	to	be	delivered	are	all	probable,	perfunctory	in	nature	and	under	the Company's	control.	The	residual	revenue	under	the	product	arrangement	is	recognized	as	product	revenue	upon	shipment.	There	is	no	customer	right	of	return	in	the Company's	sales	agreements.

The	Company	recognizes	product	revenue	upon	the	completion	of	installation	for	shipments	that	require	more	than	perfunctory	obligations	at	the	time	of shipment,	specifically	for	certain	of	its	digital	imaging	systems.	A	provision	is	made	at	that	time	for	estimated	warranty	costs	to	be	incurred.

Although	the	Company's	products	contain	operating	and	application	software,	the	Company	has	determined	that	for	all	of	its	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 Software.

The	Company	has	determined	that	the	provisions	of	SOP	97-2	apply	to	revenue	transactions	for	those	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.	The	Company's	determination	of	fair	value	of	the	undelivered	elements	in	the	multi-element	arrangements	is	based	on	vendor-specific objective	evidence	(VSOE).	The	Company	limits	its	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	R2	product	sales upon	completion	of	installation	at	which	time	the	only	remaining	undelivered	element	is	Post	Contract	Support	(PCS).

For	multi-element	arrangements	where	VSOE	of	fair	value	for	Post	Contract	Support	(PCS)	has	not	been	established,	the	Company	would	recognize	revenue	for the	entire	arrangement	ratably	over	the	contractual	term	of	PCS.	For	multi-element	arrangements	where	VSOE	of	fair	value	of	PCS	has	been	established,	the	Company recognizes	revenue	using	the	residual	method	at	the	time	all	other	revenue	recognition	criteria	have	been	met.	Amounts	attributable	to	PCS	are	recorded	as	deferred revenue	and	recognized	ratably	over	the	contractual	term	of	PCS.

In	accordance	with	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	records	reimbursable	out-of-pocket	expenses	in	both	maintenance	and	services revenues	and	as	a	direct	cost	of	maintenance	and	services	in	accordance	with	EIFT	Issue	No.	01-14,	Income	Statement	Characterization	of	Reimbursements	Received	for Out-of-Pocket	Expenses	Incurred	(EITF	01-14).	For	the	fiscal	2006,	2005	and	2004,	shipping	and	handling	and	reimbursable	out-of-pocket	expense	were	not	material

# Cost	of	Service	and	Other	Revenues

Cost	of	service	and	other	revenues	primarily	represents	payroll	and	related	costs	associated	with	the	Company's	professional	services'	employees,	consultants, infrastructure	costs	and	overhead	allocations,	including	depreciation	and	rent.

At	September	30,	2006,	the	Company	has	several	stock-based	employee	compensation	plans,	which	are	more	fully	described	in	Note	9.	During	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	Option	No.	25,	(Option	25),	Accounting	for	Stock	Issued	to	Employees,	and	amends	SFAS	No.	95,	Statement	of	Cash Flows.	Generally,	the	approach	on	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,	the	Company	adopted	SFAS	123(R)	at	the	beginning	of	fiscal	2006 utilizing	the	"modified	prospective"	method.	A	"modified	prospective"	method	is	one	in	which	compensation	cost	is	recognized	beginning	with	the	adoption	date (a)	based	on	the	requirements	of	SFAS	123(R)	for	all	share-based	payments	granted	after	the	adoption	date	and	(b)	based

on	the	requirements	of	SFAS	123	for	all	awards	granted	to	employees	prior	to	the	adoption	date	of	SFAS	123(R)	that	remain	unvested	on	the	effective	date.	As	a	result, the	Company	is	recognizing	compensation	for	the	fair	value	of	the	unvested	portion	of	options	grants	issued	prior	to	the	adoption	of	SFAS	123(R),	whose	fair	value	was calculated	utilizing	a	Black-Scholes	Option	Pricing	Model.	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	the	Company's	historical	policy	under SFAS	123.	As	a	result	the	Company	has	applied	an	estimated	forfeiture	rate	of	between	9.4%	and	10.6%	in	fiscal	2006	in	determining	the	expense	recorded	in	the Company's	consolidated	statement	of	income.

Compensation	expense	related	to	employee	stock	options	reduced	both	basic	and	diluted	earning	per	share	by	$0.04	for	fiscal	2006.	These	results	reflect	stock compensation	expense	of	$3,560	and	related	tax	benefit	of	$1,727	for	fiscal	2006.	No	stock-based	compensation	expense	was	capitalized	as	part	of	inventory	during	the year	ended	September	30,	2006.	In	accordance	with	the	modified-prospective	transition	method	of	SFAS	123(R),	results	for	prior	periods	have	not	been	restated.	As	of September	30,	2006,	there	was	$14,900	of	unrecognized	compensation	expense	related	to	non-vested	market-based	share	awards	that	is	expected	to	be	recognized	over	a weighted	average	grant	period	of	3.38	years.

The	Company	has	also	recorded	$391	of	stock	based	compensation	expense	in	fiscal	2006	for	the	fair	value	of	restricted	stock	units	(See	Note	11	for	further discussion).	The	restricted	stock	units	have	a	weighted	average	grant	date	fair	value	of	$46.38	and	none	were	vested	as	of	September	30,	2006.

As	permitted	by	Statement	No.	123,	for	periods	prior	to	the	beginning	of	fiscal	2006,	the	Company	accounted	for	share-based	payments	to	employees	using Opinion	No.	25's	intrinsic	value	method	and,	as	such,	generally	recognized	no	compensation	cost	for	the	granting	of	employee	stock	options.	The	following	table illustrates	the	effect	on	net	income	and	net	income	per	share	if	the	fair	value	based	method	had	been	applied	to	the	prior	periods:

|  | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- |
| Net\tincome\tas\treported | $28,256 | $12,164 |
| Less:\tTotal\tstock-based\temployee\tcompensation\texpense\tdetermined\tunder\tfair-value-based\tmethod\tfor\tall\tawards,\tnet\tof |  |  |
| related\ttax\teffects | (9,614) | (3,563) |
| Pro\tforma\tnet\tincome | $18,642 | $8,601 |
| Diluted\tnet\tincome\tper\tshare,\tas\treported | $0.63 | $0.29 |
| Pro\tforma\tdiluted\tnet\tincome\tper\tshare | $0.41 | $0.20 |
| Weighted-average\tremaining\tcontractual\tlife\tof\toptions\toutstanding | 6.56\tyears | 6.70\tyears |

Effective	with	the	adoption	of	SFAS	123	(R)	,	the	Company	has	elected	to	use	a	bi-nomial	lattice	model	to	determine	the	weighted	average	fair	value	of	options, rather	than	the	Black-Scholes	model.	The	Company	considered	a	number	of	factors	to	determine	the	fair	value	of	options	including	the	advice	of	an	outside	valuation advisor	and	the	advisor's	model.

The	Company	had	used	the	Black-Scholes	option	pricing	model	to	determine	the	weighted	average	fair	value	of	options	prior	to	adopting	SFAS	123	(R).	The weighted	average	fair	value	of	options	granted	during	the	fiscal	year	end	2006,	under	the	binomial	valuation	method,	were	$19.54.	The	weighted	average	fair	value	of options	granted	during	the	years	ended	2005	and	2004,	under	the	Black-Scholes	valuation	method,	were	$7.14

and	$4.46,	respectively.	The	fair	value	of	options	at	the	date	of	grant	and	the	weighted-average	assumptions	utilized	to	determine	such	values	are	indicated	in	the following	table:

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Risk-free\tinterest\trates | 4.6% | 3.7% | 2.9% |
| Expected\tdividend\tyield | — | — | — |
| Expected\tlife\t(in\tyears) | 4.7 | 4.5 | 4.0 |
| Expected\tvolatility | 55.0% | 61.0% | 70.0% |

The	assumptions	used	to	calculate	the	pro	forma	disclosure	for	shares	purchased	under	the	Employee	Stock	Purchase	Plan	for	the	fiscal	years	2005	and	2004	are	as

follows:

|  | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- |
| Risk-free\tinterest\trates | 2.3% | 2.8% |
| Expected\tdividend\tyield | — | — |
| Expected\tlife\t(in\tyears) | 0.5 | 0.5 |
| Expected\tvolatility | 39.7% | 61.4% |

The	Employee	Stock	Purchase	Plan	was	terminated	in	fiscal	2005.

# Net	Income	Per	Share

Basic	and	diluted	net	income	per	share	is	presented	in	conformity	with	SFAS	No.	128,	Earnings	per	Share.	Basic	net	income	per	share	is	computed	by	dividing net	income	by	the	weighted-average	number	of	common	shares	outstanding	during	the	period.	Dilutive	net	income	per	share	in	2006,	2005	and	2004	includes	the	effects of	all	dilutive,	potentially	issuable.	common	shares	using	the	treasury	stock	method.

Basic	and	diluted	weighted	average	common	shares	for	fiscal	years	2006,	2005,	and	2004	are	as	follows:

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Basic\tweighted-average\tcommon\tshares\toutstanding | 46,512 | 42,824 | 40,516 |
| Weighted-average\tcommon\tequivalent\tshares | 2,108 | 2,302 | 2,077 |
| Diluted\tweighted-average\tcommon\tshares\toutstanding | 48,620 | 45,126 | 42,593 |

Dilutive	weighted-average	shares	outstanding	do	not	include	285,	133	and	1,335	common-equivalent	shares	for	fiscal	years	2006,	2005	and	2004,	respectively,	as their	effect	would	have	been	antidilutive.	Dilutive	weighted-average	shares	outstanding	also	excludes	51	unvested	shares	for	fiscal	2006,	as	their	effect	would	have	been anti-diluting.

# Product	Warranties

The	Company	typically	offers	a	one-year	warranty	for	all	of	its	products.	The	Company	provides	for	the	estimated	cost	of	product	warranties	at	the	time	product revenue	is	recognized.	Factors	that	affect	the	Company's

warranty	reserves	include	the	number	of	units	sold,	historical	and	anticipated	rates	of	warranty	repairs	and	the	cost	per	repair.	The	Company	periodically	assesses	the adequacy	of	the	warranty	reserve	and	adjusts	the	amount	as	necessary.

Product	warranty	activity	for	the	years	ended	September	30,	2006	and	September	24,	2005	is	as	follows:

|  | Balance	at<br>Beginning	of<br>Period | Charged	to<br>Costs	and<br>Expenses | Acquired<br>Reserves | Write-<br>Offs/<br>Payments | Balance	at	End<br>of	Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Period\tend: |  |  |  |  |  |
| September\t30,\t2006 | $6,674 | $6,020 | $941 | $(4,648) | $8,987 |
| September\t24,\t2005 | $4,528 | $8,549 | $— | $(6,403) | $6,674 |

# Restructuring	Accrual

# Workforce	reduction

As	of	the	dates	of	acquisition	of	AEG	Elektrofotografie	GmbH	and	R2	Technology,	Inc.	(R2)	(see	Note	3),	management	of	the	Company	began	assessing	and formulating	a	plan	to	involuntarily	terminate	certain	employees	of	the	acquired	companies.	In	the	fourth	quarter	of	fiscal	2006,	the	Company	finalized	and	approved	a headcount	reduction	plan	under	which	the	Company	terminated	53	manufacturing	and	administrative	personnel	and	21	manufacturing	and	administrative	personnel	of the	acquired	AEG	Elektrofotografie	subsidiaries	in	Germany	and	United	States,	respectively.	In	the	fourth	quarter	of	fiscal	2006,	the	Company	also	finalized	and approved	a	headcount	reduction	plan	under	which	the	Company	terminated	58	personnel	of	R2	across	all	functional	areas	of	the	acquired	entity.	The	reduction	plans resulted	in	a	liability	for	costs	associated	with	an	employee	severance	arrangement	of	approximately	$2,584	in	accordance	with	EITF	Issue	No.	95-3,	Recognition	of Liabilities	in	Connection	with	a	Purchase	Business	Combination.	The	cost	was	included	in	the	respective	purchase	price	allocations.	The	Company	has	made	payments totaling	$1,048	through	September	30,	2006	and	anticipates	all	remaining	amounts	to	be	paid	in	fiscal	2007.

# Lease	charges

In	conjunction	with	the	acquisition	of	R2	(see	Note	3),	the	Company	recorded	a	liability	for	lease	abandonment	costs	of	$312	related	to	lease	payments	on	leased facilities	in	Santa	Clara,	California.	The	costs	were	included	in	the	respective	purchase	price	allocations	in	accordance	with	EITF	Issue	No.	95-3.	The	Company	has made	no	payments	related	to	this	liability	as	of	September	30,	2006	but	anticipates	paying	the	full	amount	in	fiscal	2007.

# Advertising	Costs

Advertising	costs	are	charged	to	operations	as	incurred.	The	Company	does	not	have	any	direct-response	advertising.	Advertising	costs,	which	include	trade shows	and	conventions,	were	approximately	$5,003,	$4,000	and	$4,479	for	fiscal	2006,	2005	and	2004,	respectively,	and	were	included	in	selling	and	marketing	expense in	the	Consolidated	Statements	of	Income.

# Recently	Issued	Accounting	Pronouncements

In	July	2006,	the	Financial	Account	Standards	Board	(FASB)	issued	Financial	Interpretation	No.	(FIN)	48,	Accounting	for	Uncertainty	in	Income	Taxes,	which applies	to	all	tax	positions	related	to	income	taxes	subject	to

SFAS	No.	109	(SFAS	109),	Accounting	for	Income	Taxes.	This	includes	tax	positions	considered	to	be	"routine"	as	well	as	those	with	a	high	degree	of	uncertainty.	FIN 48	utilizes	a	two-step	approach	for	evaluating	tax	positions.	Recognition	(step	one)	occurs	when	an	enterprise	concludes	that	a	tax	position,	based	solely	on	its	technical merits,	is	more-likely-than-not	to	be	sustained	upon	examination.	Measurement	(step	two)	is	only	addressed	if	step	one	has	been	satisfied	(i.e.,	the	position	is	more- likely-than-not	to	be	sustained).	Under	step	two,	the	tax	benefit	is	measured	as	the	largest	amount	of	benefit,	determined	on	a	cumulative	probability	basis	that	is	more- likely-than-not	to	be	realized	upon	ultimate	settlement.	FIN	48's	use	of	the	term	"more-likely-than-not"	in	steps	one	and	two	is	consistent	with	how	that	term	is	used	in SFAS	109	(i.e.,	a	likelihood	of	occurrence	greater	than	50	percent).

FIN	48	is	effective	for	fiscal	years	beginning	after	December	15,	2006.	The	Company	expects	to	adopt	FIN	48	in	its	first	quarter	of	fiscal	2008,	which	begins	on September	30,	2007.	Differences	between	the	amounts	recognized	in	the	statements	of	financial	position	prior	to	the	adoption	of	FIN	48	and	the	amounts	reported	after adoption	should	be	accounted	for	as	a	cumulative-effect	adjustment	recorded	to	the	beginning	balance	of	retained	earnings.	The	cumulative	effect	adjustment	would	not apply	to	those	items	that	would	not	have	been	recognized	in	earnings,	such	as	the	effect	of	adopting	FIN	48	on	tax	positions	related	to	business	combinations.

The	Company	is	currently	evaluating	the	impact	of	the	adoption	of	FIN	48,	but	does	not	believe	the	adoption	will	have	a	material	impact	on	its	results	of operation	or	financial	position.

On	September	15,	2006,	the	FASB	issued	SFAS	No.	157	(SFAS	157),	Fair	Value	Measurements,	SFAS	157	provides	enhanced	guidance	for	using	fair	value	to measure	assets	and	liabilities.	SFAS	157	also	responds	to	investors'	requests	for	expanded	information	about	the	extent	to	which	companies	measure	assets	and liabilities

at	fair	value,	the	information	used	to	fair	value	and	the	effect	of	fair	value	measurements	on	earnings.	SFAS	157	applies	whenever	other	standards	require	(or	permit) assets	or	liabilities	to	be	measured	at	fair	value.	SFAS	157	does	not	expand	the	use	of	fair	value	in	any	new	circumstances.	SFAS	157	is	effective	for	financial statements	issued	for	fiscal	years	beginning	after	November	15,	2007	and	interim	periods	within	those	fiscal	years.	Early	adoption	is	not	permitted.	Therefore,	the Company	will	adopt	SFAS	157	in	fiscal	2009,	which	commences	on	September	28,	2008.	The	Company	is	currently	evaluating	the	impact	of	the	adoption	of	SFAS	157, but	does	not	believe	the	adoption	will	have	a	material	impact	on	its	results	of	operation	or	financial	position.

On	September	29,	2006,	the	FASB	issued	SFAS	No.	158	(SFAS	158),	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	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 postretirement	plan's	overfunded	status	or	a	liability	for	a	plan's	underfunded	status,	measure	a	defined	benefit	postretirement	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	postretirement	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	postretirement	benefit	plan	accounting.	The	requirement	to	recognize	the	funded	status	of	a	defined	benefit	postretirement plan	and	the	disclosure	requirements	are	effective	for	fiscal	years	ending	after	December	31,	2006	for	public	entities,	which	would	be	the	year	ending	September	29, 2007	for	the	Company.	The	requirement	to	measure	plan	assets	and	benefit	obligations	as	of	the	date	of	the	employer's	fiscal	year-end	statement	of	financial	position	is effective	for	fiscal	years	ended	after	December	15,	2008,	which	would	be	the	year	ending	September	27,	2009	for	the	Company.	The	Company	is	currently	evaluating the	impact	of	the	adoption	of	SFAS	157,	but	does	not	believe	the	adoption	will	have	a	material	impact	on	its	results	of	operation	or	financial	position.

On	September	13,	2006,	the	SEC	staff	published	SAB	No.	108	(SAB	108),	Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements in	Current	Year	Financial	Statements.	SAB	108	addresses	quantifying	the	financial	statement	effects	of	misstatements,	specifically,	how	the	effects	of	prior	year uncorrected	errors	must	be	considered	in	quantifying	misstatements	in	the	current	year	financial	statements.	SAB	108	does	not	change	the	SEC	staff's	previous	positions in	SAB	99,	Materiality,	regarding	qualitative	considerations	in	assessing	the	materiality	of	misstatements.	SAB	108	acknowledges	the	existing	diversity	in	practice	in this	area	and	discusses	techniques	commonly	used	to	accumulate	and	quantify	misstatements.	The	"rollover"	method	used	by	some	companies	and	auditors	quantifies	a misstatement	based	on	the	effects	of	correcting	the	misstatement	existing	in	the	current	period	income	statement.	The	"iron	curtain"	method	quantifies	a	misstatement based	on	the	effects	of	correcting	the	misstatement	in	the	balance	sheet	at	the	end	of	the	current	period,	regardless	of	the	misstatement's	period	of	origin.	The	SEC	staff does	not	believe	exclusive	reliance	on	one	method	biased	toward	either	the	income	statement	of	the	balance	sheet	is	appropriate.	The	staff	believes	that	registrants	and auditors	must	quantify	the	effects	on	the	current	year	financial	statements	of	correcting	all	misstatements,	including	both	carryover	and	reversing	effects	of	uncorrected prior	year	misstatements.	After	considering	all	relevant	quantitative	and	qualitative	factors,	if	either	approach	results	in	a	misstatement	that	is	material,	a	registrant's financial	statements	must	be	adjusted.	SAB	108	is	effective	for	fiscal	years	ending	after	November	15,	2006,	which	is	the	year	ending	September	29,	2007	for	the Company.	The	Company	is	not	aware	of	any	prior	year	uncorrected	errors	that	would	be	effected	by	this	statement.

# 3. Business	Combinations

On	May	2,	2006,	the	Company	acquired	100%	of	the	outstanding	voting	stock	of	AEG	Elektrofotografie	GmbH	and	its	group	of	related	companies	(AEG).	The results	of	operations	for	AEG	have	been	included	in	the

Company's	consolidated	financial	statements	from	the	date	of	acquisition	as	part	of	its	other	business	segment.	The	Company	has	concluded	that	the	acquisition	of	AEG does	not	represent	a	material	business	combination	and	therefore	no	pro	forma	financial	information	has	been	provided	herein.

AEG	specializes	in	the	manufacture	of	photoconductor	materials	for	use	in	a	variety	of	electro	photographic	applications	including	for	the	coating	of	the Company's	digital	detectors.	The	acquisition	of	AEG	allows	the	Company	to	have	control	over	a	critical	step	in	its	detector	manufacturing	process	–	to	efficiently manage	its	supply	chain	and	improve	manufacturing	margins.	The	combination	of	the	companies	should	also	facilitate	further	manufacturing	efficiencies	and	accelerate research	and	development	of	new	detector	products.	AEG	was	a	privately	held	group	of	companies	headquartered	in	Warstein,	Germany,	with	manufacturing	operations in	Germany,	China	and	the	United	States.

The	aggregate	purchase	price	for	AEG	was	approximately	$31,300	(subject	to	adjustment)	consisting	of	EUR	$24,100	in	cash	and	110	shares	of	Hologic	Common Stock	valued	at	$5,300,	and	approximately	$1,900	for	acquisition	related	fees	and	expenses.	The	Company	determined	the	fair	value	of	the	shares	issued	in	connection with	the	acquisition	in	accordance	with	EITF	Issue	No.	99-12,	Determination	of	the	Measurement	Date	for	the	Market	Price	of	Acquirer	Securities	Issued	in	a	Purchase Business	Combination.	These	110	shares	are	subject	to	contingent	put	options	pursuant	to	which	the	holders	have	the	option	to	resell	the	shares	to	the	Company	during	a period	of	one	year	following	the	completion	of	the	acquisition	if	the	closing	price	of	the	Company's	stock	falls	and	remains	below	a	threshold	price.	The	repurchase price	would	be	the	closing	price	of	the	Company's	common	stock	on	the	date	of	exercise.	The	Company's	maximum	aggregate	obligation	under	these	put	options	would be	approximately	$4,100	if	the	put	option	were	exercised	for	all	the	shares	covered	by	those	options	and	the	closing	price	of	our	common	stock	on	the	date	of	exercise equaled	the	maximum	threshold	price	permitting	the	exercise	of	the	option.	No	shares	were	subject	to	the	put	option	as	of	September	30,	2006	as	the	Company's	stock price	was	in	excess	of	the	minimum	value.

The	acquisition	also	provides	for	a	one-year	earn	out	of	EUR	1,700	(approximately	$2,000	USD)	which	will	be	payable	in	cash	if	AEG	calendar	year	2006 earnings,	as	defined,	exceeds	a	pre-determined	amount.	The	Company	has	considered	the	provision	of	EITF	Issue	No.	95-8,	Accounting	for	Contingent	Consideration Paid	to	the	Shareholders	of	and	Acquired	Enterprise	in	a	Purchase	Business	Combination,	and	concluded	that	this	contingent	consideration	represents	additional purchase	price.	As	a	result,	goodwill	will	be	increased	by	the	amount	of	the	additional	consideration,	if	any,	when	it	becomes	due	and	payable.	The	components	and allocation	of	the	purchase	price,	consists	of	the	following	approximate	amounts:

The	purchase	price	allocation	above	has	been	revised	from	that	included	in	the	Company's	Form	10-Q	for	the	period	ended	June	24,	2006,	to	decrease	the	net tangible	asset	acquired	and	increased	the	deferred	income	tax	liability	with	a	corresponding	increase	to	goodwill	for	both.	The	decrease	to	the	net	tangible	assets primarily

relates	to	an	increase	in	the	Company's	liability	for	restructuring	in	accordance	with	EITF	95-3,	Recognition	of	Liabilities	in	connection	with	a	Purchase	Business Combination.	The	increase	in	deferred	tax	liabilities	is	a	result	of	the	Company's	finalization	of	tax	attributes	acquired.

The	Company	has	begun	to	implement	a	plan	to	restructure	certain	of	AEG's	historical	activities.	The	Company	recorded	a	liability	of	approximately	$2,100	in accordance	with	EITF	Issue	No.	95-3,	Recognition	of	Liabilities	in	Connection	with	a	Purchase	Business	Combination,	related	to	the	termination	of	certain	employees under	this	plan	and	approximately	$1,000	has	been	paid	as	of	September	30,	2006.	The	Company	believes	this	plan	will	be	finalized	within	one	year	from	the acquisition	date	and	will	record	any	additional	liabilities	at	such	time	resulting	in	an	increase	to	goodwill.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer lists,	trademarks	and	developed	technology	had	separately	identifiable	values.	The	fair	value	of	these	intangible	assets	was	determined	through	the	application	of	the income	approach.	Customer	lists	represent	customer	relationships	as	AEG	has	a	high	dependency	on	a	small	number	of	large	accounts.	AEG	markets	its	products through	distributors	as	well	as	directly	to	its	own	customers.	Trademarks	represent	the	AEG	product	names	that	the	Company	intends	to	continue	to	use.	Developed technology	represents	currently	marketable	purchased	products	that	the	Company	continues	to	resell	as	well	as	utilize	to	enhance	and	incorporate	into	the	Company's existing	products.	The	intangible	assets	are	expected	to	be	amortized	on	a	straight-line	basis	over	the	expected	useful	lives	as	the	anticipated	undiscounted	cash	flows	are relatively	consistent	over	the	expected	useful	lives	of	the	intangible	assets.

The	estimated	$600	of	purchase	price	allocated	to	in-process	research	and	development	projects	related	to	AEG's	Organic	Photoconductor	Coating	and	Selenium product	lines.

The	deferred	income	tax	liability	relates	to	the	tax	effect	of	acquired	identifiable	intangible	assets,	and	fair	value	adjustments	to	acquired	inventory,	land,	building and	related	improvements	as	such	amounts	are	not	deductible	for	tax	purposes.

The	Company	had	an	existing	relationship	with	AEG	as	a	supplier	of	inventory	items.	The	supply	agreement	was	entered	into	in	prior	years	at	arm's	length	terms and	conditions.	No	minimum	purchase	requirements	exist	and	the	pricing	was	consistent	with	other	vendor	agreements.	Additionally,	the	Company	had	previously advanced	AEG	$1,000	of	which	$700	remained	outstanding	as	of	the	date	of	acquisition.

# Acquisition	of	R2	Technology,	Inc.

On	July	13,	2006,	the	Company	completed	the	acquisition	of	R2	Technology,	Inc.,	pursuant	to	an	Agreement	and	Plan	of	Merger	dated	April	24,	2006.	The	results of	operations	for	R2	have	been	included	in	the	Company's	consolidated	financial	statements	from	the	date	of	acquisition	as	part	of	its	Mammography	business	segment. R2	Technology,	located	in	Santa	Clara,	California,	develops	and	sells	computer-aided	detection	technology	and	products	(CAD),	an	innovative	technology	that	assists radiologists	in	the	early	detection	of	breast	cancer.

The	aggregate	purchase	price	for	R2	of	approximately	$220,600	(subject	to	adjustment)	consisting	of	approximately	4,400	shares	of	Hologic	Common	Stock valued	at	$205,500,	cash	paid	of	$6,900,	debt	assumed	of	$5,700	and	approximately	$2,500	for	acquisition	related	fees	and	expenses.	The	Company	determined	the	fair value	of	the	shares	issued	in	connection	with	the	acquisition	in	accordance	with	EITF	Issue	No.	99-12,

Determination	of	the	Measurement	Date	for	the	Market	Price	of	Acquirer	Securities	Issued	in	a	Purchase	Business	Combination.	The	components	and	allocation	of	the purchase	price,	consists	of	the	following	approximate	amounts:

| Net	tangible	assets	acquired	as	of	July	13,	2006 | $800 |
| :--- | :--- |
| In-process\tresearch\tand\tdevelopment | 10,200 |
| Developed\ttechnology\tand\tknow\thow | 39,500 |
| Customer\trelationship | 15,700 |
| Trade\tname | 3,300 |
| Order\tBacklog | 800 |
| Deferred\tincome\ttaxes | 4,400 |
| Goodwill | 145,900 |
| Estimated\tPurchase\tPrice | $220,600 |

The	Company	has	begun	to	assess	and	formulate	a	plan	to	restructure	certain	of	R2's	historical	activities.	As	of	the	acquisition	date	the	Company	recorded	a liability	of	approximately	$798	in	accordance	with	EITF	Issue	No.	95-3,	Recognition	of	Liabilities	in	Connection	with	a	Purchase	Business	Combination,	related	to	the termination	of	certain	employees	and	loss	related	to	the	abandonment	of	certain	lease	space	under	this	plan	of	which	approximately	$46	has	been	paid	as	of September	30,	2006.	The	Company	believes	this	plan	will	be	finalized	within	one	year	from	the	acquisition	date	and	will	record	any	additional	liabilities	at	such	time resulting	in	an	increase	to	goodwill.	The	final	purchase	price	allocations	will	be	completed	within	one	year	of	the	acquisition	and	any	adjustments	are	not	expected	to have	a	material	impact	on	the	Company's	financial	position	or	results	of	operation.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer relationships,	trademarks	and	developed	technology	had	separately	identifiable	values.	Customer	relationships	represent	R2's	strong	active	customer	base,	dominant market	position	and	strong	partnership	with	several	large	companies.	Trademarks	represent	the	R2	product	names	that	the	Company	intends	to	continue	to	use. Developed	technology	represents	currently	marketable	purchased	products	that	the	Company	continues	to	resell	as	well	as	utilize	to	enhance	and	incorporate	into	the Company's	existing	products.

The	estimated	$10,200	of	purchase	price	allocated	to	in-process	research	and	development	projects	primarily	related	to	R2s	Digital	CAD	products.	The	projects are	expected	to	add	direct	digital	algorithm	capabilities	as	well	as	a	new	platform	technology	to	analyze	images	and	breast	density	measurement.	The	project	is approximately	20%	complete	and	the	Company	expects	to	spend	approximately	$3,100	over	the	year	to	complete.

The	deferred	income	tax	asset	relates	to	the	tax	effect	of	acquired	net	operating	loss	carry	forwards	that	the	Company	believes	are	realizable	partially	offset	by acquired	identifiable	intangible	assets,	and	fair	value	adjustments	to	acquired	inventory	as	such	amounts	are	not	deductible	for	tax	purposes.

# Acquisition	of	Suros	Surgical	Systems,	Inc.

On	July	27,	2006,	the	Company	completed	the	acquisition	of	Suros	Surgical	Systems,	Inc.,	pursuant	to	an	Agreement	and	Plan	of	Merger	dated	April	17,	2006. The	results	of	operations	for	Suros	have	been	included	in	the	Company's	consolidated	financial	statements	from	the	date	of	acquisition	as	part	of	its	Mammography business	segment.	Suros	Surgical,	located	in	Indianapolis,	Indiana,	develops,	manufactures	and	sells	minimally	invasive	interventional	breast	biopsy	technology	and products	for	biopsy,	tissue	removal	and	biopsy	site	marking.

The	aggregate	purchase	price	for	Suros	of	approximately	$248,000	(subject	to	adjustment)	consisted	of	2,300	shares	of	Hologic	Common	Stock	valued	at $106,500,	cash	paid	of	$139,000,	and	approximately	$2,600	for	acquisition	related	fees	and	expenses.	The	Company	determined	the	fair	value	of	the	shares	issued	in connection	with	the	acquisition	in	accordance	with	EITF	Issue	No.	99-12,	Determination	of	the	Measurement	Date	for	the	Market	Price	of	Acquirer	Securities	Issued	in a	Purchase	Business	Combination.	The	components	and	allocation	of	the	purchase	price,	consists	of	the	following	approximate	amounts:

The	acquisition	also	provides	for	a	two-year	earn	out.	The	earn-out	will	be	payable	in	two	annual	cash	installments	equal	to	the	incremental	revenue	growth	in Suros'	business	in	the	two	years	following	the	closing.	The	Company	has	considered	the	provision	of	EITF	Issue	No.	95-8,	Accounting	for	Contingent	Consideration Paid	to	the	Shareholders	of	and	Acquired	Enterprise	in	a	Purchase	Business	Combination,	and	concluded	that	this	contingent	consideration	represents	additional purchase	price.	As	a	result,	goodwill	will	be	increased	by	the	amount	of	the	additional	consideration,	if	any,	when	it	becomes	due	and	payable.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	were	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	only	customer lists,	trademarks	and	developed	technology	had	separately	identifiable	values.	Customer	relationships	represents	Suros	large	installed	base	that	are	expected	to	purchase disposable	products	on	a	regular	basis.	Trademarks	represent	the	Suros	product	names	that	the	Company	intends	to	continue	to	use.	Developed	technology	represents currently	marketable	purchased	products	that	the	Company	continues	to	resell	as	well	as	utilize	to	enhance	and	incorporate	into	the	Company's	existing	products.

The	estimated	$4,900	of	purchase	price	allocated	to	in-process	research	and	development	projects	primarily	related	to	Suros'	Disposable	products.	The	projects are	of	various	stages	of	completion	and	include	next	generation	handpiece	and	site	marker	technologies.	The	Company	expects	that	these	projects	will	be	completed during	fiscal	2007.

The	deferred	income	tax	liability	relates	to	the	tax	effect	of	acquired	identifiable	intangible	assets,	and	fair	value	adjustments	to	acquired	inventory	as	such amounts	are	not	deductible	for	tax	purposes,	partially	offset	by	acquired	net	operating	loss	carry	forwards	that	the	Company	believes	are	realizable.

For	all	of	the	acquisitions	discussed	above,	goodwill	represents	the	excess	of	the	purchase	price	over	the	net	identifiable	tangible	and	intangible	assets	acquired. The	Company	determined	that	the	acquisition	of	each	AEG,	R2	and	Suros	resulted	in	the	recognition	of	goodwill	primarily	because	of	synergies	unique	to	the	Company and	the	strength	of	its	acquired	workforce.

# Supplemental	Pro-forma	Information

The	following	unaudited	pro	forma	information	presents	the	consolidated	results	of	operations	of	the	Company,	R2	and	Suros	as	if	the	acquisitions	had	occurred at	the	beginning	of	each	of	fiscal	2006	and	2005,

with	pro	forma	adjustments	to	give	effect	to	amortization	of	intangible	assets,	an	increase	in	interest	expense	on	acquisition	financing	and	certain	other	adjustments together	with	related	tax	effects:

The	$15,100	charge	for	purchased	research	and	development	that	was	a	direct	result	of	the	transaction	is	excluded	from	the	unaudited	pro	forma	information above.	The	unaudited	pro	forma	results	are	not	necessarily	indicative	of	the	results	that	the	Company	would	have	attained	had	the	acquisitions	of	both	R2	and	Suros occurred	at	the	beginning	of	the	periods	presented.

# 4. Acquisition	of	Intangible	Assets

On	September	29,	2005,	pursuant	to	an	Asset	Purchase	Agreement	between	the	Company	and	Fischer	Imaging	Corporation	(Fischer)	(the	Purchase	Agreement), dated	June	22,	2005,	the	Company	acquired	the	intellectual	property	and	customer	lists	relating	to	Fischer's	mammography	business	and	products	for	$26,900	in	cash and	cancellation	of	the	principal	and	interest	outstanding	under	a	$5,000	secured	loan	previously	provided	by	Hologic	to	Fischer.

The	aggregate	purchase	price	for	the	Fischer	intellectual	property	and	customer	lists	was	approximately	$33,000,	which	includes	approximately	$1,000	related	to direct	acquisition	costs.	In	accordance	with	Emerging	Issues	Task	Force	Issue	No.	98-3,	Determining	Whether	a	Non-monetary	Transaction	Involved	Receipt	of Productive	Assets	or	of	a	Business,	the	Company	determined	the	acquisition	does	not	qualify	as	an	acquisition	of	a	business	and	in	accordance	with	SFAS	No.	141	and SFAS	No.	142,	the	purchase	price	has	been	allocated	to	the	acquired	assets	of	Fischer	based	on	their	fair	value.

As	part	of	the	purchase	price	allocation,	all	intangible	assets	that	are	a	part	of	the	acquisition	were	identified	and	valued.	It	was	determined	that	technology	assets and	customer	lists	had	separately	identifiable	values.	As	a	result	of	this	identification	and	valuation	process,	the	Company	allocated	approximately	$4,200	of	the purchase	price	to	in-process	research	and	development	projects	related	to	Fischer's	digital	mammography	product.	This	allocation	represented	the	estimated	fair	value assuming	these	projects	were	completed	based	on	risk-adjusted	cash	flows	related	to	the	incomplete	research	and	development	projects.	At	the	date	of	acquisition,	the development	of	these	projects	had	not	yet	reached	technological	feasibility,	and	the	research	and	development	in	progress	had	no	alternative	future	use.	The	Company does	not	intend	to	complete	these	projects.	Accordingly,	these	costs	were	expensed	as	of	the	acquisition	date.

In	addition,	the	Company	allocated	approximately	$23,200	and	$5,600	to	developed	technology	and	customer	lists,	respectively	through	the	application	of	the income	approach	to	determine	the	fair	value	of	the	acquired	assets.	Developed	technology	represents	patented	and	unpatented	technology	and	know-how	related	to	the Fischer	digital	mammography	and	breast	biopsy	systems.	Developed	technology	is	expected	to	be	amortized	over	a	period	of	12.5	years.	Customer	lists	represent established	relationships	with	customers,	which	provides	a	ready	channel	for	the	sale	of	additional	products	and	services.	Customer	lists	are	expected	to	be	amortized over	a	period	of	8.5	years.

The	aggregate	purchase	price	of	approximately	$33,000	including	acquisition	costs	was	allocated	as	follows:

The	Company	considered	whether	any	contingencies	were	acquired,	as	the	price	paid	was	more	than	the	fair	market	value	of	the	intangible	assets	and	determined none	were	acquired.

As	a	result	of	an	FTC	inquiry	the	Company	sold	all	of	the	intellectual	property	acquired	from	Fischer	relating	to	the	Mammotest	system,	in	the	fourth	quarter	of fiscal	2006	for	$6,500,	subject	to	the	Company's	retention	of	a	royalty-free,	non-exclusive,	perpetual,	irrevocable,	worldwide	right	and	license	to	use	that	intellectual property.	In	connection	with	this	sale	the	Company	recorded	an	impairment	charge	of	approximately	$1,400	and	a	resulting	net	gain	of	approximately	$5,100	from	the proceeds	on	the	sale.

# 5. Credit	Facilities

# Credit	Agreement

On	September	25,	2006,	the	Company	entered	into	an	amended	and	restated	$150,000	unsecured	line	of	credit	agreement	(Credit	Agreement)	with	Bank	of America,	N.A.	and	the	other	lenders	party	thereto	(BOA).	At	the	Company's	option,	committed	loans	(as	defined	in	the	Credit	Agreement)	outstanding	under	the	Credit Agreement	will	bear	interest	at	a	rate	equal	to	(a)	Eurodollar	Rate—the	British	Bankers	Association	London	Inter-Bank	offered	Rate	for	dollar	deposits	("LIBOR")	plus the	applicable	margin	(as	defined	in	the	Credit	Agreement,	which	margins	ranges	from	0.625%	to	1.00%	depending	on	the	Company's	consolidated	leverage	ratio)	or (b)	Base	Rate—the	higher	of	the	(i)	the	Bank	of	America	prime	rate	and	(ii)	the	Federal	Funds	rate	plus	0.50%	(the	"Base	Rate").	The	Credit	Agreement	includes financial	covenants	requiring	the	Company	to	maintain,	measured	as	of	the	end	of	each	fiscal	quarter,	a	maximum	consolidated	leverage	ratio	of	2.50:1.00	and	a minimum	consolidated	interest	coverage	ratio	of	3.00:1.00.	The	Credit	Agreement	also	contains	events	of	default	that	permit	the	acceleration	of	the	loans	and	the termination	of	the	Credit	Agreement,	including,	but	not	limited	to,	payment	default	under	the	Credit	Agreement	and	cross-default	under	certain	other	indebtedness,	the breach	of	certain	covenants,	the	entry	of	material	judgments,	and	the	occurrence	of	bankruptcy,	insolvency	of	change	of	control	events.	Certain	of	these	clauses	have been	determined	to	represent	subjective	acceleration	clauses.	There	is	no	requirement	to	maintain	a	lock-box	arrangement	with	the	BOA.	There	was	approximately $55,000	outstanding	under	this	agreement	as	of	September	30,	2006	with	a	weighted	average	interest	rate	of	6.14%.	Unused	borrowing	availability	under	the	credit agreement	is	subject	to	a	fee	ranging	from	0.12%	to	0.20%,	as	defined.	Interest	expense	incurred	under	this	line	of	credit	totaled	$738	in	fiscal	2006.	The	Company	was in	compliance	with	its	financial	covenants	as	of	September	30,	2006	and	did	not	consider	any	of	the	subjective	acceleration	clause	to	be	probable	of	occurring. Borrowings	under	the	Credit	Agreement	are	scheduled	to	mature	on	September	24,	2011.	As	of	September	30,	2006,	the	Company	had	$95,000	available	for	future borrowings	under	the	Credit	Agreement.

# European	Line	of	Credit

The	Company	maintains	an	unsecured	line	of	credit	with	a	bank	for	the	equivalent	of	$3,000,	which	bears	interest	at	the	Europe	Interbank	Offered	Rate	(3.42%	at September	30,	2006)	plus	1.50%.	There	were	no	amounts

outstanding	during	2006	and	2005.	The	borrowings	under	this	line	are	primarily	used	by	the	Company's	European	subsidiaries	to	settle	intercompany	sales	and	are denominated	in	the	respective	local	currencies	of	its	European	subsidiaries.	The	line	of	credit	may	be	canceled	by	the	bank	with	30	days'	notice.	There	were	no borrowings	outstanding	under	the	line	of	credit	during	2006,	2005,	or	2004.	No	interest	expense	was	incurred	for	fiscal	2006,	2005	and	2004	on	this	line	of	credit.

In	connection	with	the	acquisition	of	AEG,	the	Company	assumed	certain	of	AEG's	existing	debt	aggregating	$9,084	as	of	September	30,	2006.	The	terms	of	the agreements	have	various	maturities	ranging	from	July	1,	2007	through	March	15,	2011.	Outstanding	borrowings	have	a	weighted	average	interest	rate	of	5.82%.	Interest expense	incurred	under	these	debt	agreements	totaled	$309	in	fiscal	2006.

Future	debt	principal	payments	under	these	debt	arrangements	are	approximately	as	follows:

# Foothill	Note

On	September	21,	2001,	the	Company	signed	a	Loan	and	Security	Agreement	with	Wells	Fargo	Foothill,	Inc.,	as	amended	(the	Foothill	Agreement).	The	Foothill Agreement	provided	for	a	term	loan	in	the	amount	of	$2,360,	payable	monthly	in	equal	installments	over	five	years.	The	term	loan	accrued	interest	daily	at	an	annual rate	equal	to	the	prime	rate	plus	1.00%	and	was	repaid	in	full	on	September	21,	2005.

# 6. Derivative	Financial	Instruments	and	Hedging	Agreements

# Interest	rate	swaps

In	connection	with	the	debt	assumed	from	the	AEG	acquisition	(see	Notes	3	and	5),	the	Company	has	in	place,	interest	rate	swap	contracts	with	a	total	notional value	of	6,000	euros	(approximately	$7,600	U.S.	dollars	at	September	30,	2006).	These	interest	rate	swaps	are	used	to	convert	the	floating	interest-rate	component	of certain	debt	obligations	to	fixed	rates.	Maturity	dates	coincide	with	those	of	the	outstanding	hedged	debt	agreements	of	July	2010	and	December	2010.	These agreements	do	not	qualify	for	hedge	accounting	under	Statements	of	Financial	Accounting	Standards	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging Activities	("SFAS	133")	and	thus	are	marked	to	market	each	reporting	period	with	the	change	in	fair	value	recorded	to	other	income	(expense),	net	in	the	accompanying consolidated	statements	of	income.	The	fair	value	of	the	interest	rate	swaps	was	$33	as	of	September	30,	2006.

Investments	in	both	fixed	rate	and	floating	rate	interest	earning	instruments	carry	a	degree	of	interest	rate	risk.	Fixed	rate	securities	may	have	their	fair	market value	adversely	impacted	due	to	a	rise	in	interest	rates,	while	floating	rate	securities	may	produce	less	income	than	expected	if	interest	rates	fall.	Due	in	part	to	these factors,	the	Company's	future	investment	income	may	fall	short	of	expectations	due	to	changes	in	interest	rates

or	the	Company	may	suffer	losses	in	principal	if	forced	to	sell	securities	that	experience	a	decline	in	market	value	due	to	changes	in	interest	rates.	A	hypothetical	10% increase	or	decrease	in	interest	rates,	however,	would	not	have	a	material	adverse	effect	on	the	Company's	financial	condition.

# Forward	Contracts

Also	in	connection	with	the	AEG	acquisition,	the	Company	assumed	certain	foreign	currency	forward	contracts	to	hedge,	on	a	net	basis,	the	foreign	currency fluctuations	associated	with	a	portion	of	the	AEG's	assets	and	liabilities	that	are	denominated	in	the	US	dollar,	including	inter-company	accounts.	Inter-company transactions	are	denominated	in	the	functional	currency	of	our	foreign	subsidiary	in	order	to	centralize	foreign	exchange	risk	in	the	parent	company	in	the	United	States. Increases	or	decreases	in	our	foreign	currency	exposures	are	partially	offset	by	gains	and	losses	on	the	forward	contracts,	so	as	to	mitigate	foreign	currency	transaction gains	and	losses.	The	terms	of	these	forward	contracts	are	of	a	short-term	nature	(6	to	12	months).	The	Company	does	not	use	forward	contracts	for	trading	or speculative	purposes.	The	forward	contracts	are	not	designated	as	cash	flow	or	fair	value	hedges	under	SFAS	No.	133	and	do	not	represent	effective	hedges.	All outstanding	forward	contracts	are	marked	to	market	at	the	end	of	the	period	and	recorded	on	the	balance	sheet	at	fair	value	in	other	current	assets	and	other	current liabilities.	The	changes	in	fair	value	from	these	contracts	and	from	the	underlying	hedged	exposures	are	generally	offsetting	and	are	recorded	in	other	income,	net	in	the accompanying	Consolidated	Statements	of	Income.

The	change	in	fair	value	of	these	outstanding	contracts	through	September	30,	2006	resulted	in	recognition	of	an	unrealized	gain	of	$263,	and	is	included	in	other income	in	the	accompanying	statement	of	income.

At	September	30,	2006,	the	Company	had	24	outstanding	forward	exchange	contracts	to	exchange	an	aggregate	$8,150	US	dollars	for	Euros.	The	forward	foreign exchange	contracts	mature	during	the	first	two	quarters	of	fiscal	2007	and	had	a	book	value	that	approximated	fair	value.

# 7. Pension	and	Other	Employee	Benefits

In	conjunction	with	the	May	2,	2006	acquisition	of	AEG,	the	Company	assumed	a	certain	defined	benefit	pension	plans	covering	the	employees	of	the	AEG German	subsidiary	(Pension	Benefits).	The	Company	is	required	to	account	for	these	Pension	Benefits	in	accordance	with	SFAS	No.	87,	Employers'	Accounting	for Pensions	(SFAS	87),	which	requires	that	amounts	recognized	in	the	financial	statements	be	determined	on	an	actuarial	basis.

Under	German	law,	there	are	no	rules	governing	investment	or	statutory	supervision	of	the	pension	plan.	As	such,	there	is	no	minimum	funding	requirement imposed	on	employers.	Benefits	are	safeguarded	by	the	Pension	Guaranty	Fund;	a	form	of	compulsory	reinsurance	that	guarantees	an	employee	will	receive	vested pension	benefits	in	the	event	of	insolvency.

The	tables	below	provide	a	reconciliation	of	benefit	obligations,	plan	assets,	funded	status,	and	related	actuarial	assumptions	of	the	Company's	German	Pension Benefits.

| Change	in	Benefit	Obligation<br>(In	thousands) | Pension	Benefits<br>September	30,<br>2006 |
| :--- | :--- |
| Benefit\tobligation\tat\tacquisition\tdate\t(May\t2,\t2006) | $8,635 |
| Service\tcost | 1 |
| Interest\tcost | 141 |
| Plan\tparticipants'\tcontributions | — |
| Amendments | — |
| Actuarial\tloss\t(gain) | (677) |
| Divestitures | — |
| Foreign\texchange | — |
| Benefits\tpaid | (95) |
| Benefit\tobligation\tat\tend\tof\tyear | $8,005 |

| Funded	Status—unrecognized	components<br>(In	thousands) | Pension	Benefits<br>September	30,<br>2006 |
| :--- | :--- |
| Funded\tstatus | $(8,006) |
| Unrecognized\tactuarial\tgain | (677) |
| Unrecognized\ttransition\tobligation | — |
| Unrecognized\tprior\tservice\tcost | — |
| Prepaid\t(accrued)\tbenefit\tcost | $(8,683) |

The	table	above	reconciles	the	benefit	obligation	and	the	fair	value	of	plan	assets	to	the	amounts	recorded	on	the	Company's	balance	sheet	due	to	certain	items that	are	amortized	over	future	periods	rather	than	recognized	in	the	current	period.

| Funded	Status—amounts	recognized	on	the	Balance	Sheet<br>(In	thousands) | Pension	Benefits<br>September	30,<br>2006 |
| :--- | :--- |
| Prepaid\tbenefit\tcost | $— |
| Accrued\tbenefit\tliability | (8,683) |
| Intangible\tasset | — |
| Accumulated\tother\tcomprehensive\tincome | — |
| Prepaid\t(accrued)\tbenefit\tcost | $(8,683) |

| Discount	rate | 4.5% |
| :--- | :--- |
| Rate\tof\tcompensation\tincrease | 0% |

The	tables	below	outline	the	components	of	net	periodic	benefit	cost	and	related	actuarial	assumptions	of	the	Company's	German	Pension	Benefits	plan.

The	projected	benefit	obligationfor	the	German	Pension	Benefits	plans	with	projected	benefit	obligations	in	excess	of	plan	assets	was	$8,000	September	30,	2006 and	the	accumulated	benefit	obligation	for	the	German	Pension	Benefits	plans	was	$8,700	at	September	30,	2006.

There	also	exists	the	obligation	to	pay	long-term	service	awards	benefits.	The	projected	benefit	obligation	for	long-term	service	awards	was	$489	at September	30,	2006.

The	table	below	reflects	the	total	Pension	Benefits	expected	to	be	paid	from	the	plans.

|  | Pension	Benefits |
| :--- | :--- |
| 2007 | $255 |
| 2008 | 295 |
| 2009 | 304 |
| 2010 | 310 |
| 2011 | 327 |
| 2012-2016 | 1,934 |

The	Company	also	maintains	additional	contractual	pension	benefits	for	its	top	German	executive	officers	in	the	form	of	a	defined	contribution	plan. Contributions	in	fiscal	2006	were	$83.

The	Company	accounts	for	income	taxes	using	the	liability	method	as	required	by	SFAS	No.	109,	"Accounting	for	Income	Taxes."	Under	this	method,	deferred income	taxes	are	recognized	for	the	future	tax	consequences	of	differences	between	the	tax	and	financial	accounting	of	assets	and	liabilities	at	the	end	of	each	reporting period.	Deferred	income	taxes	are	based	on	enacted	tax	laws	and	statutory	tax	rates	applicable	to	the	periods	in	which	the	differences	are	expected	to	affect	taxable income.	A	valuation	allowance	is	established	when	necessary	to	reduce	deferred	tax	assets	to	the	amounts	expected	to	be	realized.

The	provision	(benefit)	for	income	taxes	in	the	accompanying	consolidated	statements	of	income	consists	of	the	following:

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Federal: |  |  |  |
| Current | $26,164 | $5,153 | $250 |
| Deferred | (3,540) | 18 | — |
|  | 22,624 | 5,171 | 250 |
| State: |  |  |  |
| Current | 4,240 | 987 | 175 |
| Deferred | (630) | (153) | — |
|  | 3,610 | 834 | 175 |
| Foreign: |  |  |  |
| Current | 196 | 434 | 338 |
| Deferred | (630) | — | — |
|  | (434) | 434 | 338 |
|  | $25,800 | $6,439 | $763 |

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

|  |  | Years	ended |  |
| :--- | :--- | :--- | :--- |
|  | September\t30, | September\t24, | September\t25, |
|  | 2006 | 2005 | 2004 |
| Income\ttax\tprovision\tat\tfederal\tstatutory\trate | 35% | 35% | 35.0% |
| Increase\t(decrease)\tin\ttax\tresulting\tfrom: |  |  |  |
| Change\tin\tvaluation\tallowance | 1.3 | (17.9) | (26.3) |
| Release\tof\ttax\treserves | — | (2.2) | — |
| State\ttax\tprovision,\tnet\tof\tfederal |  |  |  |
| benefit | 4.0 | 3.1 | 0.9 |
| Tax\tCredits | (0.2) | (0.1) | (3.9) |
| In\tprocess\tresearch\tand\tdevelopment | 10.3 | — | — |
| Permanent\tdifferences | (1.7) | 0.5 | 1.4 |
| Other | (0.2) | 0.2 | (1.2) |
|  | 48.5% | 18.6% | 5.9% |

The	components	of	domestic	and	foreign	income	before	the	provision	for	income	taxes	are	as	follows:

|  |  | Years	ended |  |
| :--- | :--- | :--- | :--- |
|  | September\t30,\n2006 | September\t24,\n2005 | September\t25,\n2004 |
| Domestic | $54,542 | $33,662 | $11,489 |
| Foreign | (1,319) | 1,033 | 1,438 |
|  | $53,223 | $34,695 | $12,927 |

The	components	of	the	net	deferred	tax	asset	recognized	in	the	accompanying	Consolidated	Balance	Sheets	are	as	follows:

|  | September	30,<br>2006 | September	30,<br>2006 | September	24,<br>2005 |
| :--- | :--- | :--- | :--- |
| Deferred\ttax\tassets |  |  |  |
| Net\toperating\tloss\tcarryforwards | $53,447 | $53,447 | $17,380 |
| Nondeductible\taccruals |  | 1,858 | 1,580 |
| Nondeductible\treserves |  | 6,070 | 4,065 |
| Other\ttemporary\tdifferences |  | 3,074 | 1,044 |
| Research\tcredit |  | 3,503 | 908 |
|  | $67,952 | $67,952 | $24,977 |
| Deferred\tTax\tLiabilities\nDepreciation\tand\tamortization |  | (67,560) | (8,553) |
|  | $392 | $392 | $16,424 |
| Valuation\tallowance |  | (10,486) | (11,872) |
|  | ($ | 10,094) | $4,552 |

The	Company	generated	significant	tax	loss	carryforwards	during	fiscal	2001	and	2000,	which	may	be	carried	forward	for	17	and	16	years,	respectively.	Under SFAS	No.	109,	the	Company	can	only	recognize	a	deferred	tax	asset	for	future	benefit	of	its	tax	loss	carryforward	to	the	extent	that	it	is	"more	likely	than	not"	that	these assets	will	be	realized.	The	Company	has	a	valuation	allowance	against	a	portion	of	its	remaining	potential	deferred	tax	assets.	The	valuation	allowance	primarily	relates to	federal	and	state	operating	net	losses	acquired	from	Suros	and	R2,	for	which	realization	is	uncertain.

In	determining	the	realizability	of	these	assets,	the	Company	considers	numerous	factors,	including	historical	profitability,	estimated	future	taxable	income	and the	industry	in	which	it	operates.	The	Company	believes	that	its	net	deferred	tax	asset	as	of	September	30,	2006	is	more	likely	than	not	realizable.	In	fiscal	2006	the Company	released	valuation	allowance	on	net	operating	losses	generated	by	excess	stock	deductions	expected	to	be	utilized	on	the	fiscal	2006	US	tax	return.	The approximately	$10,624	of	tax	benefit	associated	with	these	net	operating	losses	was	recorded	as	an	increase	to	additional	paid	in	capital.	Additionally,	the	Company recorded	an	increase	of	approximately	$8,200	to	its	valuation	allowance	against	certain	federal	and	state	net	operating	losses	acquired	in	the	Suros	and	R2	acquisitions. This	increase	in	NOL	was	accounted	for	in	the	business	combination.	The	remaining	change	in	valuation	allowance	is	attributable	to	the	increase	in	valuation	allowance on	certain	state	tax	assets	generated	in	2006.	The	Company	believes	it	is	more	likely	than	not	that	these	state	tax	assets	will	not	be	realized.

In	addition	to	the	$10,624	discussed	above,	the	Company	also	recorded	a	$17,284	increase	to	additional	paid	in	capital	related	to	the	excess	tax	benefit	of	stock options	exercised	in	the	current	year.	The	total	increase	to	additional	paid	in	capital,	recorded	in	2006,	related	to	the	excess	tax	benefit	of	stock	options	is	$27,908.

The	following	table	summarizes	the	expiration	periods	of	the	net	operating	loss	and	credit	carryforwards:

|  | 2010-2015 | 2016-2020 | 2021-2025 | Total |
| :--- | :--- | :--- | :--- | :--- |
| Net\toperating\tloss | $7,283 | $ 55,665 | $ 71,248 | $134,196 |
| R&amp;D\tcredit | $647 | $1,295 | $1,560 | $3,502 |

|  |  |  |  | Year	of	Expiration |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2009 | 2010 | 2011 | No\texpiration | ITC\tTotal | Total\tCredits |
| MA\tITC\tcredit | $51 | $61 | $33 | $183 | $328 | $3,830 |

Hologic	had	previously	recorded	reserves	for	taxes	that	may	become	payable	as	a	result	of	federal	and	state	audits.	The	Company	establishes	reserves	based	on management's	assessment	of	exposure	associated	with	permanent	tax	differences	and	tax	credits.	The	tax	reserves	are	analyzed	periodically	and	adjustments	are	made,	as events	occur	to	warrant	adjustment	to	the	reserve.	During	the	fourth	quarter	of	fiscal	2005,	the	Company	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,	the	Company	released	$750	of	tax	reserves	related to	these	returns.

The	American	Jobs	Creation	Act	of	2004	(the	"Act")	introduced	a	special	one-time	dividend	received	deduction	on	the	repatriation	of	certain	foreign	earnings	to	a U.S.	taxpayer	(repatriation	provision),	provided	certain	criteria	are	met.	The	President	signed	the	Act	into	law	on	October	22,	2004.	Even	in	light	of	the	Act,	the Company	did	not	provide	for	U.S.	income	taxes	on	earnings	of	the	Company's	subsidiaries	outside	of	the	U.S.	The	Company's	current	intention	is	to	reinvest	the	total amount	of	the	Company's	approximately	$1,100	of	unremitted	earnings	permanently	or	repatriate	the	earnings	only	when	tax-effective	to	do	so.	It	is	not	practical	to estimate	the	amount	of	additional	taxes	that	might	be	payable	upon	repatriation	of	foreign	earnings.

# 9. Common	Stock

# Stock	Option	Plans

The	Company's	1994	Stock	Option	Plan	(the	1994	Plan)	and	the	1995	Stock	Option	Plan	(the	1995	Plan),	both	of	which	were	originally	adopted	by	Fluoroscan and	assumed	by	the	Company	upon	its	combination	with	Fluoroscan,	are	administered	by	the	Board	of	Directors.	As	of	September	30,	2006,	the	Company	had	no	shares available	for	future	grant	under	this	plan.

In	June	1995,	the	Board	of	Directors	adopted	the	1995	Combination	Stock	Option	Plan	(the	1995	Combination	Plan),	pursuant	to	which	the	Company	is authorized	to	issue	2,200	options	to	purchase	shares	of	common	stock.	Under	the	terms	of	the	1995	Combination	Plan,	the	Company	may	grant	employees	either incentive	stock	options	or	nonqualified	stock	options	to	purchase	shares	of	the	Company's	common	stock	at	a	price	not	less	than	the	fair	market	value	at	the	date	of grant.	In	addition,	the	Company	may	grant	nonqualified	options	to	other	participants,	such	as	consultants	and	advisors.	As	of	September	30,	2006,	the	Company	had	no shares	available	for	future	grant	under	this	plan.

The	Company's	1990	Nonemployee	Director	Stock	Option	Plan	(the	Directors'	Plan)	allowed	for	eligible	directors	to	receive	options	to	purchase	20	shares	of common	stock	upon	election	as	a	director.	The	options	vest	ratably	over	a	five-year	period.	In	addition,	eligible	directors	were	entitled	to	annual	option	grants	to	purchase 16	shares	of	common	stock,	which	vest	after	six	months.	Option	grants	under	the	Directors'	Plan	were	made	at	not	less	than	fair	market	value	on	the	date	of	grant.	As	of September	30,	2006,	the	Company	had	no	shares	available	for	future	grant	under	this	plan.

In	May	1997,	the	Board	of	Directors	adopted	the	1997	Employee	Equity	Incentive	Plan	(the	1997	Plan),	pursuant	to	which	the	Company	is	authorized	to	issue 2,200	shares	of	common	stock.	Under	the	terms	of	the	1997	Plan,	the	Company	may	grant	employees,	consultants	and	advisors	who	are	not	executive	officers	or directors	of	the	Company	either	nonqualified	stock	options,	stock	appreciation	rights,	performance	shares,

restricted	stock,	or	stock	units.	In	September	2005,	the	Board	of	Directors	determined	that	no	further	awards	would	be	made	under	this	plan.	As	a	result,	the	Board	of Directors	amended	this	plan	to	eliminate	all	remaining	shares	of	common	stock	available	for	issuance	under	the	plan	that	are	not	subject	to	outstanding	stock	option awards.

In	March	1999,	the	Board	of	Directors	adopted	the	1999	Equity	Incentive	Plan	(the	1999	Plan),	pursuant	to	which	the	Company	is	authorized	to	issue	600	shares, plus	an	annual	increase,	as	defined,	on	the	first	day	of	each	fiscal	year	following	the	adoption	of	the	1999	Plan.	Effective	September	28,	2004	and	September	25,	2005, the	Board	of	Directors	increased	the	number	of	shares	available	by	1,000	shares	each	year	bringing	the	total	shares	available	for	issuance	from	4,660	to	6,660.	Under	the terms	of	the	1999	Plan,	the	Company	may	grant	employees	either	incentive	stock	options	or	nonqualified	stock	options.	In	addition,	the	Company	may	grant	non- employee	director's	nonqualified	stock	options.	The	exercise	price	of	the	options	granted	under	this	plan	may	not	be	less	than	the	fair	market	value	of	the	Company's stock	on	the	date	on	which	the	option	was	granted.	As	of	September	30,	2006,	the	Company	had	32	shares	available	for	future	grant	under	this	plan.	On	October	30,	2006 the	Board	of	Directors	increased	the	number	of	shares	available	by	1,000	bringing	the	total	shares	available	for	issuance	to	7,660.

In	April	2001,	the	Board	of	Directors	adopted	the	2000	Acquisition	Equity	Incentive	Plan	(the	2000	Plan),	pursuant	to	which	the	Company	was	authorized	to	issue 2,000	shares	of	common	stock.	On	December	17,	2003,	the	Board	of	Directors	approved	a	decrease	of	400	shares	of	common	stock	available	under	the	2000	Plan reducing	the	authorized	amount	to	1,600	shares.	Under	the	terms	of	the	2000	Plan,	the	Company	may	grant	employees,	consultants	and	advisors	of	newly	acquired businesses	either	nonqualified	stock	options,	stock	appreciation	rights,	performance	shares	or	restricted	stock.	In	September	2005,	the	Board	of	Directors	determined that	no	further	awards	would	be	made	under	this	plan.	As	a	result,	the	Board	of	Directors	amended	this	plan	to	eliminate	all	remaining	shares	of	common	stock	available for	issuance	under	the	plan	that	are	not	subject	to	outstanding	stock	option	awards.

Certain	option	and	share	awards	provide	for	accelerated	vesting	if	there	is	a	change	in	control	(as	defined	in	the	Plan).

The	following	table	summarizes	all	stock	award	activity	under	all	of	the	plans	for	the	three	years	in	the	period	ended	September	30,	2006:

|  |  |  | Weighted- | Aggregate |
| :--- | :--- | :--- | :--- | :--- |
|  | Number\nof\tShares | Per\tShare\nExercise\tPrice | Average\nExercise\tPrice | Intrinsic\nValue |
| Outstanding\tat\tSeptember\t27,\t2003 | 6,456 | $\t0.91\t–\t22.13 | $4.43 |  |
| Granted | 1,987 | 6.57\t–\t11.50 | 8.20 |  |
| Terminated | (416) | 0.97\t–\t15.49 | 5.98 |  |
| Exercised | (1,176) | 0.91\t–\t7.94 | 3.91 | $6,455 |
| Outstanding\tat\tSeptember\t25,\t2004 | 6,851 | 1.59\t–\t22.13 | 5.52 |  |
| Granted | 1,060 | 9.02\t–\t26.44 | 13.47 |  |
| Terminated | (129) | 2.06\t–\t18.34 | 8.37 |  |
| Exercised | (3,077) | 1.59\t–\t15.29 | 4.99 | $38,925 |
| Outstanding\tat\tSeptember\t24,\t2005 | 4,705 | 1.97\t–\t26.44 | 7.58 |  |
| Granted | 1,006 | 26.38\t–\t55.27 | 41.03 |  |
| Terminated | (66) | 2.50\t–\t53.67 | 14.06 |  |
| Exercised | (1,426) | 1.97\t–\t27.73 | 7.41 | $50,713 |
| Outstanding\tat\tSeptember\t30,\t2006 | 4,219 | $1.97\t–\t55.27 | $15.12 | $120,030 |
| Exercisable\tat\tSeptember\t30,\t2006 | 2,443 | $1.97\t–\t37.92 | $7.57 | $87,836 |
| Exercisable\tat\tSeptember\t24,\t2005 | 3,069 | $1.97\t–\t$26.44 | $7.42 |  |
| Exercisable\tat\tSeptember\t25,\t2004 | 3,729 | $1.59\t–\t$22.13 | $4.52 |  |
| Vested\tand\texpected\tto\tvest\tat\tSeptember\t30,\t2006\t(1) | 3,894 |  |  |  |
| Available\tfor\tGrant\tat\tSeptember\t30,\t2006 | 32 |  |  |  |

(1) This	represents	the	number	of	vested	stock	options	as	of	September	30,	2006	based	on	the	unvested	outstanding	options	at	September	30,	2006	adjusted	for estimated	forfeitures.

The	table	below	provides	the	range	of	exercise	prices	for	options	outstanding	and	options	exercisable	at	September	30,	2006	however,	the	table	excludes restricted	stock	units	issued	in	fiscal	2006	for	54	shares	of	common	stock	with	a	weighted	average	exercise	price	of	$46.38:

| Options	Outstanding | Options	Outstanding | Options	Outstanding | Options	Outstanding | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
| \t\t\t\t\t\t\t\tRange\tof\n\t\t\t\tExercise\tPrice | Options\nOutstanding | Weighted-Average\nRemaining\nContractual\tLife\n(Years) | Weighted-Average\nExercise\tPrice | Options\nExercisable | Weighted-Average\nExercise\tPrice |
| $\t\t1.97–$\t\t2.89 | 210 | 4.44 | $2.59 | 210 | $2.59 |
| $\t\t2.94–$\t\t3.84 | 155 | 5.06 | 3.55 | 111 | 3.44 |
| $\t\t3.88–$\t\t5.75 | 868 | 5.62 | 4.90 | 848 | 4.90 |
| $\t\t5.76–$\t\t7.13 | 930 | 7.00 | 7.04 | 392 | 7.01 |
| $\t\t7.15–$10.18 | 790 | 4.24 | 9.71 | 728 | 9.72 |
| $10.42–$13.31 | 47 | 8.10 | 12.42 | 12 | 12.36 |
| $13.60–$18.48 | 99 | 8.41 | 17.30 | 20 | 14.41 |
| $18.56–$27.73 | 337 | 9.01 | 25.69 | 102 | 23.79 |
| $28.15–$41.57 | 138 | 9.30 | 36.04 | 20 | 35.87 |
| $42.12–$55.27 | 591 | 9.65 | 46.47 | 0 | 0 |
| $\t\t1.96–$55.27 | 4,165 | 6.65 | $15.12 | 2,443 | $7.57 |

The	Company	granted	65	fully	vested	options	in	the	fourth	quarter	of	fiscal	2005	to	employees	with	an	exercise	price	equal	to	fair	market	value	on	the	date	of grant	and	expiring	10	years	from	the	date	of	grant.	Of	the	$9,614	pro	forma	expense	in	fiscal	2005,	$1,270	relates	to	these	options.	In	accordance	with	newly	issued SFAS	No.	123	(R),	had	the	Company	granted	these	options	with	longer	time-based	vesting,	the	Company	would	have	incurred	significant	stock-based	payment expenses	in	future	years	upon	adoption	of	SFAS	123R.

A	summary	of	the	status	of	the	Company's	Restricted	Stock	Units	and	the	Company's	only	non-vested	shares,	as	of	September	30,	2006,	and	changes	during	the year	ended	September	30,	2006,	is	presented	below:

| Non-vested	Shares | Number	of<br>Shares | Date	Fair<br>Value |
| :--- | :--- | :--- |
| Non-vested\tat\tSeptember\t25,\t2005 | — | $— |
| Granted. | 54 | 46.38 |
| Vested | — | — |
| Forfeited | — | — |
| Non-vested\tat\tSeptember\t30,\t2006 | 54 | $46.38 |

As	of	September	30,	2006,	there	was	$	2,344	of	total	unrecognized	compensation	cost	related	to	non-vested	share-based	compensation	arrangements	granted under	the	Plan.	That	cost	is	expected	to	be	recognized	over	a	weighted-average	period	of	2.5	years.

As	of	September	30,	2006,	the	Company	had	$24,100	of	excess	tax	benefits	available	for	potential	deferred	tax	write-offs	related	to	option	accounting.

# Employee	Stock	Purchase	Plan

The	Company	had	an	Employee	Stock	Purchase	Plan	(the	ESP	Plan)	in	compliance	with	Section	423	of	the	Internal	Revenue	Code.	Employees	who	have completed	three	consecutive	months,	or	two	years,	whether	or	not

consecutive,	of	employment	with	the	Company	or	any	of	its	participating	subsidiaries	are	eligible	to	participate	in	the	ESP	Plan.	The	ESP	Plan	allowed	participants	to purchase	common	stock	of	the	Company	at	85%	of	the	fair	market	value,	as	defined.	During	the	fiscal	years	ended	September	24,	2005	and	September	25,	2004	the Company	issued	47	and	64	shares,	respectively,	under	the	ESP	Plan.	On	February	28,	2005,	the	Board	of	Directors	approved	to	discontinue	the	ESP	Plan	effective	on July	1,	2005.

# Rights	Agreement

On	September	17,	2002,	the	Board	of	Directors	adopted	a	new	shareholder	rights	plan	(the	2002	Rights	Plan)	to	replace	the	December	1992	Plan	when	it	expired on	December	31,	2002.	In	addition	to	certain	other	modifications,	the	2002	Rights	Plan	uses	preferred	stock	purchase	rights	rather	than	common	stock	purchase	rights. To	affect	the	2002	Rights	Plan,	the	Board	of	Directors	declared	a	dividend	distribution	of	one	right	for	each	share	of	the	Company's	common	stock	outstanding	as	of	the close	of	business	on	December	31,	2002.	Each	right	entitles	the	registered	holder	to	purchase	one-half	of	one	one-thousandth	of	a	share	of	the	Company's	Series	A Junior	Participating	Preferred	Stock	(after	taking	into	account	the	two-for-one	stock	split	effected	on	November	30,	2005)	at	a	purchase	price	of	$30.00.	The	rights	will be	exercisable	if	a	person	or	group	acquires	beneficial	ownership	of	15%	or	more	of	the	Company's	common	stock	or	announces	a	tender	or	exchange	offer	for	15%	or more	of	the	Company's	common	stock.	At	such	time,	each	holder	of	a	right	(other	than	the	15%	holder)	will	thereafter	have	a	right	to	purchase,	upon	payment	of	the purchase	price	of	the	right,	that	number	of	shares	of	the	Company's	common	stock,	which	have	a	market	value	of	twice	the	purchase	price	of	the	right.	The	2002	Rights Plan	is	designed	to	deter	coercive	or	unfair	takeover	tactics	and	to	ensure	that	all	of	the	Company's	shareholders	receive	fair	and	equal	treatment	in	the	event	of	an unsolicited	attempt	to	acquire	the	Company.

The	Company	has	a	qualified	profit	sharing	plan	covering	substantially	all	of	its	employees.	Contributions	to	the	plan	are	at	the	discretion	of	the	Company's Board	of	Directors.	The	Company	has	recorded	approximately	$1,200,	$977	and	$692	as	a	provision	for	the	profit	sharing	contribution	for	fiscal	2006,	2005	and	2004, respectively.

# 11. Supplemental	Executive	Retirement	Plan

Effective	March	15,	2006,	the	Company	adopted	a	Supplemental	Executive	Retirement	Plan	(the	"SERP"),	to	provide	non-qualified	retirement	benefits	to	a	select group	of	senior	management	and	highly	compensated	employees	of	the	Company.	The	SERP	is	a	deferred	compensation	plan	for	a	select	group	of	highly-compensated employees	of	the	Company,	including	the	executive	officers.	Eligible	employees	are	entitled	to	elect	to	contribute	up	to	75%	of	their	annual	base	salary	and	100%	of their	annual	bonus	to	the	SERP.	In	addition,	the	Company	has	the	discretion	to	make	annual	discretionary	contributions	on	behalf	of	participants	in	the	SERP.	Each Company	contribution	is	subject	to	a	three	year	vesting	schedule,	such	that	each	contribution	is	1/3rd	vested	each	year	and	is	fully	vested	3	years	after	the	contribution	is made.	The	Company	contributions	become	fully	vested	upon	death	or	disability	of	the	participant	or	a	change	in	control	of	the	Company.	Voluntary	contributions	made by	the	participant	are	100%	vested.	As	of	September	30,	2006	the	Company	has	not	made	any	contributions	to	the	SERP.

# 12. Related	Party	Transactions

In	fiscal	2000	and	2001,	the	Company	loaned	an	officer	an	aggregate	of	$500,	to	be	repaid	quarterly	through	April	2006.	In	the	event	of	a	change	in	control,	as defined,	the	amounts	outstanding	would	be	forgiven.	The	note	was	unsecured	and	beared	interest	at	7%	per	annum.

In	December	2002,	the	Compensation	Committee	of	the	Board	of	Directors	approved	a	special	bonus	program	to	provide	the	officer	with	the	funds	necessary	to pay	the	quarterly	installments	due	under	the	loan	discussed	above.	Under	the	special	bonus	program,	for	so	long	as	the	officer	remained	an	officer	of	the	Company	and there	are	amounts	remaining	to	be	repaid	under	the	loan,	the	Company	paid	the	officer	a	special	quarterly	bonus	equal	to	the	amount	due	under	the	loan,	including interest	due,	plus	an	additional	payment	equal	to	the	taxes	due	as	a	result	of	the	special	bonus	and	such	additional	payment,	such	that	the	net-after-tax	special	quarterly bonus	received	by	the	officer	equaled	the	principal	and	interest	then	due	under	the	loan.	During	the	years	ended	September	30,	2006	and	September	24,	2005	the Company	recognized	$75	and	$313,	respectively,	in	bonus	expense	in	connection	with	this	program.	As	of	January	1,	2006,	the	full	amount	of	the	loan	had	been	repaid, and	no	further	amounts	will	be	paid	to	the	officer	under	this	program.

In	May	2006,	the	Company	entered	into	retention	and	severance	agreements	with	certain	executives	that	provide	for	retention	payments	in	cash	totaling	$3,000	if these	executives	remain	employed	with	the	Company	through	December	31,	2008	("Retention	Date").	The	Company	has	determined	that	it	is	probable	that	these amounts	will	be	paid	and	therefore,	is	accruing	these	amounts	ratably	through	the	Retention	Date.	In	addition,	in	connection	with	the	retention	and	severance	agreement, these	executives	were	awarded	54	restricted	stock	units	with	an	aggregate	value	of	$2,500.	These	restricted	stock	units	cliff	vest	on	the	Retention	Date.	These	shares	are excluded	from	the	computation	of	basic	earnings	per	share	until	the	shares	vest	because	the	employee	is	not	entitled	to	the	reward	of	stock	ownership.	The	Company	is recording	the	$2,500	of	stock	based	compensation,	over	the	vesting	period	of	the	restricted	stock.	As	a	result,	the	Company	recorded	stock	based	compensation	expense of	$391	during	the	year	ended	September	30,	2006.	The	retention	and	severance	agreement	also	provide	these	executives	with	certain	cash	payment	and	continuation	of benefits,	as	defined,	in	the	event	of	termination	without	cause.

In	May	2006,	the	Company	also	entered	into	severance	agreements	with	certain	other	key	officers	that	provide	for	certain	cash	payments	and	continuation	of benefits,	as	defined,	in	the	event	of	termination	without	cause.

# 13. Commitments	and	Contingencies

# Operating	Leases

The	Company	conducts	its	operations	in	leased	facilities	under	operating	lease	agreements	that	expire	through	fiscal	2022.	The	Company	leases	certain	equipment under	operating	lease	agreements	that	expire	through	fiscal	2015.	As	a	result	of	the	acquisitions	of	AEG,	R2	and	Suros,	the	Company	assumed	the	obligation	under	their existing	facility	leases	as	well	as	for	certain	equipment	lease	agreements.

Substantially	all	of	the	Company's	lease	agreements	require	the	Company	to	maintain	the	facilities	during	the	term	of	the	lease	and	to	pay	all	taxes,	insurance, utilities	and	other	costs	associated	with	those	facilities.	In	connection	with	the	Company's	lease	term	for	its	headquarters	and	manufacturing	facility	facility	in	Danbury, Connecticut.	The	Company	makes	customary	representations	and	warranties	and	agrees	to	certain	financial	covenants	and	indemnities.	In	the	event	the	Company defaults	on	the	lease,	the	landlord	may	terminate	the	lease,	accelerate	payments	and	collect	liquidated	damages.	As	of	the	end	of	fiscal	2006,	the	Company	was	not	in default	of	any	covenants	contained	in	the	lease.

Future	minimum	lease	payments	under	all	of	the	Company's	operating	leases	are	approximately	as	follows:

| Fiscal	Years	Ending | Amount |
| :--- | :--- |
| September\t29,\t2007 | $6,855 |
| September\t27,\t2008 | 6,419 |
| September\t26,\t2009 | 6,032 |
| September\t25,\t2010 | 5,670 |
| September\t24,\t2011 | 5,398 |
| Thereafter | \t 37,095 |
| Total\t(not\treduced\tby\tminimum\tsublease\trentals\tof\t$\t250) | $67,469 |

The	Company	subleases	a	portion	of	its	Bedford	facility	and	has	received	rental	income	of	$290,	$298	and	$277	for	fiscal	years	2006,	2005	and	2004, respectively,	which	has	been	recorded	as	an	offset	to	rent	expense	in	the	accompanying	Statements	of	Income.	Rental	expense,	net	of	sublease	income,	was approximately	$5,785,	$4,739,	and	$4,660	for	fiscal	2006,	2005	and	2004,	respectively.

The	Company	subleases	a	portion	of	its	Newark,	DE	facility	and	received	rental	income	of	$1,600,	$1,700	and	$1,800	for	fiscal	2006,	2005	and	2004, respectively,	which	has	been	recorded	as	an	offset	to	rent	expense	in	the	accompanying	Statements	of	Income.	The	future	minimum	annual	rental	income	payments under	these	sublease	agreements	are	approximately	as	follows:

| Fiscal	Years	Ending | Amount |
| :--- | :--- |
| September\t29,\t2007 | $1,545 |
| September\t27,\t2008 | 1,531 |
| September\t26,\t2009 | 1,531 |
| September\t25,\t2010 | 1,531 |
| September\t24,\t2011 | 1,531 |
| Thereafter | 5,488 |
| Total | $13,157 |

The	majority	of	this	subrental	income	is	from	one	tenant	and	per	the	terms	of	this	subrental	agreement,	this	income	is	being	accounted	for	on	a	straight-line	basis.

# Purchase	Obligations

In	September	2005,	the	Company	entered	into	an	exclusive	distribution	and	service	agreement	in	the	United	States	under	which	the	Company	will	sell	and	service a	line	of	extremity	MRI	systems.	Per	the	terms	of	this	contract,	the	Company	has	certain	minimum	purchase	obligations	through	December	31,	2008	as	follows:

| Fiscal	Years	Ending | Amount |
| :--- | :--- |
| September\t29,\t2007 | $15,220 |
| September\t27,\t2008 | \t 15,100 |
| September\t26,\t2009 | 3,902 |
| Total | $34,222 |

These	minimum	purchase	obligations	represent	the	minimum	obligations	of	the	Company	for	the	initial	term	of	the	agreement	and	are	subject	to	renegotiation after	the	first	eighteen-	month	period	in	the	event	of	unforeseen	changes	in	the	market	dynamics.	The	Company	also	has	certain	other	minimum	purchase	obligations totaling	$3,330	as	of	September	30,	2006	which	are	payable	through	fiscal	2008.

The	Company	also	has	outstanding	two	interest	rate	swap	contracts	that	mature	in	2010	and	24	foreign	currency	exchange	agreements	that	mature	in	less	than	a year.	Currently,	these	derivative	instruments	are	in	a	net	gain	position	which	is	of	an	immaterial	nature.

# Workforce	subject	to	collective	Bargaining	Agreements

Approximately	200	of	AEG's	German	employees	are	represented	by	a	Works	Council	and	are	subject	to	collective	bargaining	agreements.	None	of	the Company's	other	employees	are	subject	to	a	collective	bargaining	agreement.

# 14. Business	Segments	and	Geographic	Information

The	Company	reports	segment	information	in	accordance	with	SFAS	No.	131,	Disclosures	about	Segments	of	an	Enterprise	and	Related	Information.	Operating segments	are	identified	as	components	of	an	enterprise	about	which	separate,	discrete	financial	information	is	available	for	evaluation	by	the	chief	operating	decision maker,	or	decision-making	group,	in	making	decisions	how	to	allocate	resources	and	assess	performance.	The	Company's	chief	decision-maker,	as	defined	under	SFAS No.	131,	is	the	chief	operating	officer.	Beginning	in	fiscal	2006,	the	Company	combined	its	previously	reported	mammography	and	digital	detector	operating	segments, to	better	reflect	how	the	Company	views	its	operations	and	manages	its	business.	In	fiscal	2006,	the	primary	function	of	the	digital	detector	business	is	to	support	the Company's	mammography	product	line.	The	Company	now	reports	its	business	as	three	principal	operating	segments:	mammography/breast	care	products,	osteoporosis assessment	products,	and	other	products.

Identifiable	assets	for	the	three	principal	operating	segments	consist	of	inventories,	intangible	assets,	and	property	and	equipment.	The	Company	has	presented	all other	assets	as	corporate	assets.	Inter-segment	sales	and	transfers	are	not	significant.

The	accounting	policies	of	the	segments	are	the	same	as	those	described	in	the	summary	of	significant	accounting	policies.	The	Company	evaluates	performance based	on	revenues	and	operating	income.	Segment	information	for	fiscal	years	2006,	2005	and	2004	is	as	follows:

Export	sales	from	the	United	States	to	unaffiliated	customers,	primarily	in	Europe,	Asia	and	Latin	America	during	fiscal	2006,	2005	and	2004	totaled approximately	$109,749,	$76,126	and	$68,651,	respectively.

Transfers	between	the	Company	and	its	European	subsidiaries	generally	are	recorded	at	amounts	similar	to	the	prices	paid	by	unaffiliated	foreign	dealers.	All intercompany	profit	is	eliminated	in	consolidation.

Export	product	sales	as	a	percentage	of	total	product	sales	are	as	follows:

|  | September	30,<br>2006 | September	24,<br>2005 | September	25,<br>2004 |
| :--- | :--- | :--- | :--- |
| Europe | 17% | 19% | 21% |
| Asia | 7 | 10 | 11 |
| All\tothers | 4 | 4 | 7 |
|  | 28% | 33% | 39% |

# 15. Accrued	Expenses

Accrued	expenses	consist	of	the	following:

|  | September	30,<br>2006 | September	24,<br>2005 |
| :--- | :--- | :--- |
| Accrued\tcompensation\tand\temployee\tbenefits | $26,239 | $10,143 |
| Accrued\tcommissions | 9,373 | 3,569 |
| Accrued\tincome\ttaxes | 3,445 | 447 |
| Accrued\twarranty | 8,820 | 6,674 |
| Other\taccrued\texpenses | 11,135 | 4,404 |
|  | $59,012 | $25,237 |

# 16. Litigation	and	Other	Matters

In	March	2005,	the	Company	was	served	with	a	Complaint	filed	on	November	12,	2004	by	Oleg	Sokolov	with	the	United	States	District	Court	for	the	District	of Connecticut	alleging	that	the	Company's	HTC™	grid	infringes	U.S.	Patent	Number	5,970,118.	The	plaintiff	is	seeking	to	preliminarily	and	permanently	enjoin	the Company	from	infringing	the	patent,	as	well	as	damages	resulting	from	the	alleged	infringement,	treble	damages	and	reasonable	attorney	fees,	and	such	other	and further	relief	as	may	be	available.	On	April	25,	2005,	the	Company	filed	an	Answer	and	Counterclaims	in	response	to	the	Complaint	in	which	the	Company	denied	the plaintiff's	allegations	and,	among	other	things,	sought	declaratory	relief	with	respect	to	the	patent	claims	and	damages,	as	well	as	other	relief.	On	October	28,	1998,	the plaintiff	had	previously	sued	Lorad,	asserting,	among	other	things,	that	Lorad	had	misappropriated	the	plaintiff's	trade	secrets	relating	to	the	HTC	Grid.	This	previous case	was	dismissed	on	August	28,	2000.	The	dismissal	was	affirmed	by	the	Appellate	Court	of	the	State	of	Connecticut,	and	the	United	States	Supreme	Court	refused	to grant	Certiorari.	The	Company	does	not	believe	that	it	infringes	any	valid	or	enforceable	patents	of	the	plaintiff	and	intends	to	vigorously	defend	its	interests.	As	such, no	amounts	have	been	accrued	related	to	this	matter	as	of	September	30,	2006.

The	Company	became	subject	of	a	non-public	FTC	investigation	to	determine	whether	the	Company's	recent	acquisition	of	certain	mammography	intellectual property	assets	owned	by	Fischer	Imaging	Corporation	may	be	anticompetitive	and	in	violation	of	Section	7	of	the	Clayton	Act	or	Section	5	of	the	Federal	Trade Commission	Act.	On	July	7,	2006,	the	FTC	issued	a	complaint	relating	to	this	investigation	and,	on	the	same	day,	the	Company	entered	into	a	consent	agreement	with the	FTC	to	resolve	this	dispute.

As	part	of	the	consent	agreement,	the	Company	agreed	to	sell,	subject	to	FTC	approval,	all	of	the	intellectual	property	relating	to	Fischer's	Mammotest	prone table	breast	biopsy	system	to	Siemens	AG	for	a	cash	payment	of	$6.5	million.	The	Company	retained	a	royalty-free,	non-exclusive,	perpetual,	irrevocable,	worldwide right	and	license	to	use	the	intellectual	property	relating	to	the	Mammotest	system.	The	consent	agreement	received	final	approval	from	the	FTC	on	August	9,	2006.

In	the	ordinary	course	of	business,	the	Company	is	party	to	various	types	of	litigation.	The	Company	believes	it	has	meritorious	defenses	to	all	claims,	and,	in	its opinion,	all	litigation	currently	pending	or	threatened	will	not	reasonably	be	likely	to	have	a	material	effect	on	the	Company's	financial	condition	or	results	of operations.

# 17. Quarterly	Statement	of	Income	Information	(Unaudited)

The	following	table	presents	a	summary	of	quarterly	results	of	operations	for	2006	and	2005:

|  | First<br>Quarter | Second<br>Quarter | Third<br>Quarter | Fourth<br>Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Total\trevenue | $87,956 | $100,985 | $119,685 | $154,055 |
| Gross\tprofit | 36,290 | 42,429 | 49,660 | 65,153 |
| Net\tincome\t(loss) | 5,716 | 11,164 | 12,017 | (1,473) |
| Diluted\tnet\tincome\t(loss)\tper\tcommon\tand\tcommon\tequivalent\tshare | $0.12 | $0.24 | $0.25 | $(0.03) |

|  | First<br>Quarter | Second<br>Quarter | Third<br>Quarter | Fourth<br>Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Total\trevenue | $66,176 | $69,237 | $74,053 | $78,217(1) |
| Gross\tprofit | \t 24,208 | \t 26,773 | \t 30,090 | \t 31,953 |
| Net\tincome | 4,574 | 6,048 | 8,158 | 9,476 |
| Diluted\tnet\tincome\tper\tcommon\tand\tcommon\tequivalent\tshare | $0.11 | $0.13 | $0.18 | $0.20 |

(1) The	sum	of	the	quarterly	total	revenue	does	not	agree	with	the	Consolidated	Statements	of	Income	due	to	rounding.

As	discussed	in	Note	2	the	Company's	financial	statements	are	prepared	on	a	fiscal	year	basis	ending	on	the	last	Saturday	in	September.	Each	of	the	quarters presented	above	represents	a	thirteen-week	period	ending	on	the	last	Saturday	of	December,	March,	June	and	September,	except	for	the	fourth	quarter	of	fiscal	2006 which	was	a	fourteen—week	period.

# 18. Valuation	and	Qualifying	Accounts

| 18.<br>Valuation	and	Qualifying	Accounts | Balance	at<br>Beginning<br>of	Period | Acquired<br>Reserve | Charged	to<br>Costs	and<br>Expenses | Write-<br>offs/<br>Payments | Balance	at<br>End	of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Accounts\tReceivable\tReserves\t(1) |  |  |  |  |  |
| Period\tEnded: |  |  |  |  |  |
| September\t30,\t2006 | $2,592 | $852 | $320 | ($52) | $3,712 |
| September\t24,\t2005 | 2,757 | — | — | (165) | 2,592 |
| September\t25,\t2004 | 3,477 | — | (175) | (545) | 2,757 |
| Accrued\tAcquisition\tReserve |  |  |  |  |  |
| Period\tEnded: |  |  |  |  |  |
| September\t30,\t2006 | $— | $— | $— | $— | $— |
| September\t24,\t2005 | — | — | — | — | — |
| September\t25,\t2004 | 907 | — | — | (907) | — |
| Restructuring\tAccrual |  |  |  |  |  |
| Period\tEnded: |  |  |  |  |  |
| September\t30,\t2006 | $— | $2896 | — | ($1,048) | $1,848 |
| September\t24,\t2005 | — | — | — | — | — |
| September\t25,\t2004 | 29 | — | — | (29) | — |


what percentage of the estimated purchase price is goodwill?