CYTYC CORP, 424A, 1997-01-14

CYTYC CORP
424A, 1997-01-14
LABORATORY ANALYTICAL INSTRUMENTS

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<PAGE>
Filed pursuant to Rule 424(a)
Registration No. 333-19367

SUBJECT TO COMPLETION, DATED JANUARY 7, 1997

LOGO
3,000,000 SHARES

COMMON STOCK

Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 shares are
being offered for sale by Cytyc Corporation ("Cytyc" or the "Company") and
1,000,000 shares are being offered for sale by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders." On January 6,
1997, the last reported sale price for the Common Stock, as reported on the
Nasdaq National Market, was $25.75 per share. See "Price Range of Common
Stock." The Common Stock is traded on the Nasdaq National Market under the
symbol "CYTC."

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS(1)
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<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
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Total(2).................... $ $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company estimated at $500,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.

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The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about , 1997.

ROBERTSON, STEPHENS & COMPANY

MONTGOMERY SECURITIES

PIPER JAFFRAY INC.

The date of this Prospectus is , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>

[Inside Front Cover]

[Heading "ThinPrep (R) 2000 Sample Preparation System" above a box containing
photographs of the ThinPrep 2000 Processor, a PreservCyt Solution vial and
a diagram of the Company's patented filtration process. The box contains
the following text:]

The ThinPrep System has received premarket approval from the United
States Food and Drug Administration for cervical cancer screening as a
replacement for the conventional Pap smear method.

The ThinPrep System employs a fluid-based collection method in which
the patient's cervical sample is deposited into preservative solution by
the health care provider. Once in the laboratory, the patient's sample
is placed in the ThinPrep 2000 Processor, which gently agitates the
solution to separate mucus, blood and debris from the cervical cells.

The ThinPrep 2000 Processor utilizes a patented filtration process to
produce a thin, uniform layer of cells that are deposited on a glass
slide. The Company believes that the result is optimal cell preservation
and preparation consistency.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
<PAGE>

[Inside Gatefold]

[Centered over the gatefold is the following text:
"A medical professional examines cells on the microscope slide for
precancerous signs, indicated by the presence of subtle changes in cell
shape, size and structure"]

[Left side of gatefold includes photographs of the conventional Pap smear under
magnification (400x) and in a tray of slides, along with the following
text:

Pap Smear Slide

With the conventional Pap smear method, cells can be damaged by air
drying or obscured by mucus, blood and nondiagnostic debris.

A tray of conventional Pap smear slides ready for microscopic
examination by a medical professional. The conventional Pap smear method
results in significant variability from slide to slide.

[Right side of gatefold has the heading:
"ThinPrep(R) Slide" and has photographs of a ThinPrep slide under
magnification (400x) and a tray of ThinPrep slides, along with the
following text:

ThinPrep(R) Slide

The ThinPrep System preserves the cells and minimizes cell overlap, mucus,
blood and nondiagnostic debris.

A tray of ThinPrep prepared slides ready for microscopic examination by a
medical professional. Automated control of the preparation process provides
slide uniformity and standardization.
<PAGE>

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................ 4
Risk Factors........................................................... 7
Use of Proceeds........................................................ 19
Dividend Policy........................................................ 19
Price Range of Common Stock............................................ 20
Capitalization......................................................... 21
Dilution............................................................... 22
Selected Consolidated Financial Data................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 24
Business............................................................... 28
Management............................................................. 45
Certain Transactions................................................... 52
Principal and Selling Stockholders..................................... 54
Description of Capital Stock........................................... 56
Shares Eligible for Future Sale........................................ 58
Underwriting........................................................... 60
Legal Matters.......................................................... 61
Experts................................................................ 61
Additional Information................................................. 61
Index to Consolidated Financial Statements............................. F-1
</TABLE>

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Cytyc(R), the Cytyc logo, ThinPrep(R), TransCyt(R), PreservCyt(R),
EnhanCyt(R) and CytoLyt(R) are registered trademarks of the Company. All other
trademarks and registered trademarks used in this Prospectus are the property
of their respective owners.

3
<PAGE>

SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.

THE COMPANY

Cytyc Corporation designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The ThinPrep sample
preparation system ("ThinPrep System") allows for the automated preparation of
cervical cell specimens on microscope slides for use in cervical cancer
screening ("ThinPrep Pap Test"), as well as for the automated preparation of
other cell specimens on microscope slides for use in non-gynecological testing
applications. On May 20, 1996, the Company received premarket approval ("PMA")
from the United States Food and Drug Administration ("FDA") to market the
ThinPrep System for cervical cancer screening as a replacement for the
conventional Pap smear method. On November 6, 1996, the FDA cleared expanded
product labeling for the ThinPrep System to include the claim that the ThinPrep
System is significantly more effective in detecting Low Grade Squamous
Intraepithelial Lesions ("LGSIL") and more severe lesions than the conventional
Pap smear method in a variety of patient populations. The expanded labeling
also indicates that the specimen quality using the ThinPrep System is
significantly improved over that of the conventional Pap smear method. The
Company believes that the ThinPrep System improves accuracy in the detection of
cervical cancer and precancerous lesions by making the slide more
representative of the patient's clinical condition, improving preservation of
the sample, standardizing the presentation of cells on the slide, and reducing
the presence of mucus, blood and other obscuring debris. The Company intends to
commence the full-scale commercial launch of the ThinPrep System for cervical
cancer screening in the first quarter of 1997.

Cervical cancer is one of the most common cancers among women throughout the
world, with approximately 440,000 new cases reported annually. The American
Cancer Society estimates that approximately 15,800 new cases of invasive
cervical cancer and 65,000 new cases of carcinoma in situ, a precancerous
condition, were diagnosed in the United States in 1995. In the same year, an
estimated 4,800 women died of cervical cancer in the United States. The Pap
smear is currently the most widely-used test for the early detection of cancer
in the United States. In the United States, widespread and regular use of the
Pap smear as a screening test has contributed to a greater than 70% decrease in
mortality from cervical cancer in the past 45 years. In 1994, clinical
laboratories in hospitals, commercial laboratories and privately-owned
reference laboratories in the United States processed over 50 million Pap
smears. The Company believes that laboratories outside the United States
processed at least 50 million additional Pap smears in 1994.

In spite of the success of the conventional Pap smear method in reducing
deaths due to cervical cancer, the test has significant limitations, including
inadequacies in sample collection and slide preparation, slide interpretation
errors and the inability to use the specimen for additional diagnostic tests.
These limitations result in a substantial number of inaccurate test results,
including false negative diagnoses (abnormal cells present in the patient that
are missed by screening). These inaccurate test results may subject the patient
to a more expensive and invasive course of treatment and to the inconvenience
and anxiety of return office visits and repeat testing. The Company believes
these inaccurate test results ultimately lead to significant unnecessary costs
to the health care system.

In October 1995, in support of its PMA application, the Company completed a
clinical trial of 6,747 patients at six clinical sites in the United States,
including three screening centers and three hospital sites. The clinical trial
was designed to rigorously compare the effectiveness of the ThinPrep System to
the conventional Pap smear method for the detection of cancerous and
precancerous lesions of the cervix. Combining the results of all six clinical
sites, the ThinPrep method demonstrated an 18% improvement in the detection of
disease as compared to

4
<PAGE>

the conventional Pap smear. The results from the three screening centers
indicated a 65% improvement in the detection of disease, while in the three
hospital sites in which patients had historically exhibited high prevalence
rates of cervical abnormalities, the ThinPrep method demonstrated a 6%
improvement.

The Company is currently focusing on activities related to the full-scale
commercial launch of the ThinPrep System for cervical cancer screening in the
United States. The Company's strategy is to achieve market acceptance of the
ThinPrep System through the use of a direct marketing and sales organization.
This organization will focus on health care providers, third-party payors and
clinical laboratories to stimulate demand for the ThinPrep Pap Test, to
facilitate reimbursement and to demonstrate the economic and clinical benefits
of the ThinPrep System. On November 20, 1996, United HealthCare Corporation
("United HealthCare") announced that it will expand its health care coverage to
include the ThinPrep Pap Test, however, the applicable rate of reimbursement
has yet to be negotiated between United HealthCare or its various plans and the
specific clinical laboratories servicing such plans. There can be no assurance
that third-party payors will provide such coverage, that reimbursement levels
will be adequate or that health care providers or clinical laboratories will
use the ThinPrep System for cervical cancer screening in lieu of the
conventional Pap smear method. The Company has marketed the ThinPrep System for
use in non-gynecological testing applications since 1991.

The ThinPrep System, consisting of the ThinPrep 2000 Processor and related
disposable reagents, filters and other supplies, is also designed to allow for
additional diagnostic testing from a single patient sample. The ability to
perform multiple tests from a single sample would allow additional testing
without the expense, inconvenience and anxiety associated with return office
visits. For example, in collaboration with Digene Corporation ("Digene"), the
Company completed a joint clinical trial in August 1996 designed to demonstrate
that the Company's PreservCyt Solution is an effective transport medium for use
in the testing of cervical cell specimens using Digene's Hybrid Capture human
papillomavirus ("HPV") test. While the Company and Digene have submitted PMA
supplements with respect to this use, the ThinPrep System has not been approved
by the FDA for such use or any additional diagnostic testing procedures, and no
assurance can be given that any such approvals could be obtained on a timely
basis, if at all.

Cytyc's objective is to establish the ThinPrep System as the standard of care
for the collection, preservation and slide preparation of cervical cell
specimens. The key elements of this strategy are to: (i) continue to promote
the clinical and patient care benefits of the ThinPrep System; (ii) expand
marketing and sales programs to health care providers, third-party payors and
clinical laboratories; (iii) establish adequate levels of reimbursement by
third-party payors; (iv) expand and leverage the Company's worldwide installed
customer base of over 450 ThinPrep 2000 Processors and predecessor instruments;
and (v) expand the applications of the ThinPrep technology for use in
diagnostic testing.

The Company was incorporated in Delaware in 1987. The Company's offices are
located at 85 Swanson Road, Boxborough, MA 01719. The Company's telephone
number is (508) 263-8000.

RISK FACTORS

In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 7 to 17 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Dependence on
a Single Product," "Uncertainty of Market Acceptance and Additional Cost,"
"Limited Marketing and Sales Experience," "Dependence on Third-Party
Reimbursement," "Limited Number of Customers and Lengthy Sales Process,"
"Limited Operating History; Uncertainty of Profitability," "Risks Associated
With Commercialization," "Intense Competition," "Limited Manufacturing
Experience and Capacity," "History of Losses," "Potential Fluctuations in
Future Quarterly Results," "Rapid Technological Change," "Extensive Government
Regulation," "Uncertainty of Additional Applications," "Dependence on Key
Personnel," "Dependence on Patents, Copyrights, Licenses and Proprietary
Rights; Risk of Third-Party Claims of Infringement," "International Sales and
Operations Risks," "Dependence on Single Source Suppliers," "Future Capital
Needs and Uncertainty of Availability of Additional Financing," "Uncertainty of
Possible Negative Effects of Health Care Reform," "Potential Volatility of
Stock Price," "Environmental Regulation," "Anti-Takeover Considerations,"
"Shares Eligible for Future Sale," "Immediate and Substantial Dilution," "Broad
Management Discretion in Use of Proceeds" and "Lack of Dividends."

5
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company...... 2,000,000 shares
Common Stock Offered by the Selling
Stockholders............................ 1,000,000 shares
Common Stock Outstanding after the
Offering................................ 16,013,002 shares (1)
Use of Proceeds.......................... To implement full-scale marketing and
sales activities for the ThinPrep
System for cervical cancer screening
in the United States, to establish
international marketing, sales and
customer support capabilities, with
the remainder to be used for working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol............ CYTC
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 628 $ 2,589 $ 3,441 $ 2,920 $ 4,273 $ 2,751 $ 5,485
Gross profit................. (187) 509 (1,647) 695 1,860 1,249 2,383
Income (loss) from
operations.................. (4,588) (5,355) (10,379) (4,154) (6,162) (4,321) (9,569)
Net income (loss)............ $(4,338) $(5,135) $(10,271) $(4,266) $(5,915) $(4,206) $(8,060)
======= ======= ======== ======= ======= ======= =======
Net income (loss) per
share (2)................... $ (0.62) $ (0.65) $ (1.22) $ (0.48) $ (0.54) $ (0.39) $ (0.63)
======= ======= ======== ======= ======= ======= =======
Weighted average shares
outstanding (2)............. 7,038 7,849 8,409 8,954 10,868 10,868 12,737
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 43,814 $ 92,034
Total assets........................................... 52,772 100,992
Accumulated deficit.................................... (43,248) (43,248)
Total stockholders' equity............................. 50,191 98,411
</TABLE>
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(1) Excludes 204,048 shares of Common Stock issued upon the exercise of stock
options between October 1, 1996 and December 31, 1996, at a weighted-
average exercise price of $1.30 per share; 1,710,526 shares of Common Stock
issuable upon the exercise of stock options outstanding as of December 31,
1996 granted under the Company's Stock Option Plans, at a weighted-average
exercise price of $7.95 per share; and 2,000 shares of Common Stock
issuable upon the exercise of an outstanding warrant at an exercise price
of $10.00 per share. See Note 10 of Notes to Consolidated Financial
Statements.
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $25.75 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."

Except as otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.

6
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.

DEPENDENCE ON SINGLE PRODUCT

Substantially all of the Company's revenues to date have been derived from
sales of its ThinPrep 2000 Processor and predecessor instruments, and related
disposable reagents, filters and other supplies, for use in non-gynecological
testing applications. The Company expects in the future to derive
substantially all of its revenue from sales of its ThinPrep System for
cervical cancer screening. Although the Company received clearance from the
FDA to market its ThinPrep System for cervical cancer screening on May 20,
1996, to date the Company has not initiated full-scale marketing and sales
efforts for the ThinPrep System for cervical cancer screening. In addition,
the Company does not expect to establish full-scale commercial production
capability of the ThinPrep System for cervical cancer screening before the
second quarter of 1997. The Company has very limited experience in
manufacturing, marketing and selling the ThinPrep System for cervical cancer
screening. The Company's inability to successfully commercialize the ThinPrep
System for cervical cancer screening or to obtain adequate third-party
reimbursement coverage, among other factors, would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- The ThinPrep System."

UNCERTAINTY OF MARKET ACCEPTANCE AND ADDITIONAL COST

The Company's success and growth will depend on market acceptance of the
ThinPrep System for cervical cancer screening by health care providers, third-
party payors and clinical laboratories. Market acceptance will depend on the
Company's ability to demonstrate to these parties that there are limitations
in the conventional Pap smear method of sample collection and slide
preparation, and that the Company's ThinPrep System can substantially mitigate
these shortcomings without adversely affecting diagnostic accuracy. The
laboratory cost of using the ThinPrep System for cervical cancer screening is
higher than that of a conventional Pap smear. Due in part to increased
competitive pressures in the health care industry to reduce costs, the
Company's ability to gain market acceptance of the ThinPrep System for
cervical cancer screening will depend on the Company's ability to demonstrate
that the higher cost of using the ThinPrep System will be offset by a
reduction in costs often associated with conventional Pap smears, including
inaccurate diagnoses and the need for repeat Pap tests. There can be no
assurance that the Company will be able to successfully demonstrate that use
of the ThinPrep System for cervical cancer screening is cost competitive
compared to the use of the conventional Pap smear method. In addition, the
Company believes that many clinical laboratories offer Pap tests at lower
gross margins than other tests in order to receive orders for other, higher
margin, laboratory tests. As a result, clinical laboratories may be reluctant
or unwilling to accept the additional costs related to installing and
utilizing the higher-priced ThinPrep System. In addition, the Company's
clinical trials were conducted using a "broom-like" sampling device, and the
Company believes that only a small percentage of the market uses this type of
a sampling device. There can be no assurance that the "broom-like" sampling
device will be accepted by the market. Although the Company has filed a
supplement to its PMA to expand its labeling claims to include the more
commonly used endocervical brush sampling device, there can be no assurance
that such supplement will be approved by the FDA. Recently, other companies
have introduced systems for rescreening Pap smears that they claim will
substantially improve the likelihood of an accurate diagnosis. The widespread
adoption of such systems could impair the Company's ability to market the
ThinPrep System and would have a material adverse effect on the Company's

7
<PAGE>

business, financial condition and results of operations. There can be no
assurance that health care providers, third-party payors or clinical
laboratories will choose to accept the ThinPrep System as a replacement to
current laboratory Pap smear collection and slide preparation practices. Even
if the ThinPrep System were to gain market acceptance, sales of ThinPrep
System products would depend to a large extent on the availability and level
of reimbursement from third-party payors such as private insurance plans,
managed care organizations, and Medicare and Medicaid. See "Business --
Marketing and Sales" and "-- Third-Party Reimbursement."

LIMITED MARKETING AND SALES EXPERIENCE

Although the Company received clearance from the FDA to market its ThinPrep
System for cervical cancer screening on May 20, 1996, to date the Company has
not initiated full-scale marketing and sales efforts for the ThinPrep System.
In order to effectively market the ThinPrep System for cervical cancer
screening, the Company will need to substantially increase its marketing and
sales capabilities. Although the Company has recently expanded its direct
sales and field support organization in the United States and is evaluating
other marketing and sales channels, both domestic and international, including
contract sales organizations, distributors and marketing partners, no
assurance can be given that the Company's direct sales force will succeed in
promoting the ThinPrep System to health care providers, third-party payors or
clinical laboratories, or that additional marketing and sales channels will be
successfully established. In addition, due to limited market awareness of the
ThinPrep System, the Company believes that the sales effort will be a lengthy
process, requiring the Company to educate health care providers and third-
party payors regarding the clinical benefits and cost-effectiveness of the
ThinPrep System. There can be no assurance that the Company will be able to
recruit and retain skilled marketing, sales, service or support personnel or
foreign distributors, or that the Company's marketing and sales efforts will
be successful. Failure to successfully expand its marketing and sales
capabilities in the United States and establish its marketing and sales
organization internationally would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's marketing success in the United States and abroad will depend on
whether it can obtain required regulatory approvals, successfully demonstrate
the cost-effectiveness of the ThinPrep System, further develop its direct
sales capabilities and establish arrangements with contract sales
organizations, distributors and marketing partners. Failure by the Company to
successfully market its products would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Marketing and Sales."

DEPENDENCE ON THIRD-PARTY REIMBURSEMENT

Successful sales of the ThinPrep System for cervical cancer screening in the
United States and other countries will depend on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations, and Medicare and Medicaid. There is significant
uncertainty concerning third-party reimbursement for the use of any medical
device incorporating new technology. Although United HealthCare has recently
announced that it will expand its health care coverage to include the ThinPrep
Pap Test, the applicable rate of reimbursement has yet to be negotiated
between United HealthCare or its various plans and the specific clinical
laboratories servicing such plans. There can be no assurance that additional
third-party payors will provide such coverage, that reimbursement levels will
be adequate, or that health care providers or clinical laboratories will use
the ThinPrep System for cervical cancer screening in lieu of the conventional
Pap smear method. The Company believes that laboratories using the ThinPrep
System for cervical cancer screening will charge more to third-party payors
than would be charged for using a conventional Pap test. There can be no
assurance that the higher cost of using the ThinPrep System will be offset by
a reduction in costs often associated with conventional Pap smears including
inaccurate diagnoses and the need for repeat Pap tests. Reimbursement by a
third-party payor depends on a number of factors, including the level of
demand by physicians and the payor's determination that use of the ThinPrep
System represents a clinical advance compared to current technology, is safe
and effective, medically necessary, appropriate for the specific patient
populations and cost-effective. Since reimbursement approval is required from
each payor individually, seeking such approvals is a time-consuming and costly
process which requires the Company to provide scientific and clinical data to
support the use of the ThinPrep System to each payor separately. There can be
no assurance that third-party reimbursement will be available for the

8
<PAGE>

ThinPrep System or any other products that may be developed by the Company, or
that such third-party reimbursement, if obtained, will be adequate. A key
component in the reimbursement decision by most private insurers, state
Medicaid agencies, and the United States Health Care Financing Administration,
which administers Medicare, is the assignment of a Current Procedural
Terminology ("CPT") code which is used in the submission of claims to insurers
for reimbursement for medical services. CPT codes are assigned, maintained and
revised by the CPT Editorial Board administered by the American Medical
Association. Although the Company has commenced sales of the ThinPrep Pap
Test, reimbursement has only been obtained through use of a non-specific CPT
code. The Company has petitioned the CPT Editorial Board to modify an existing
code or to establish a separate code for the ThinPrep System for cervical
cancer screening. The Company believes that the CPT Editorial Board will
render a decision on the Company's petition at its regularly scheduled meeting
in the second quarter of 1997 and, if approved, such code will not be
available for use prior to 1998. Failure to secure a modification to an
existing code or secure the establishment of a separate code from the CPT
Editorial Board could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has very
limited experience in obtaining reimbursement for its products in the United
States or other countries. In addition, third-party payors are routinely
limiting reimbursement and coverage for medical devices and in many instances
are exerting significant pressure on medical suppliers to lower their prices.
Lack of or inadequate reimbursement by government and other third-party payors
for the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
outside the United States health care reimbursement systems vary from country
to country, and there can be no assurance that third-party reimbursement will
be made available at an adequate level, if at all for the ThinPrep Pap Test
under any other reimbursement system. See "Business -- Third-Party
Reimbursement."

LIMITED NUMBER OF CUSTOMERS AND LENGTHY SALES PROCESS

Due in part to a recent trend toward consolidation of clinical laboratories,
the Company expects that the number of potential domestic customers for its
products will decrease. Due to the relative size of the largest United States
laboratories, it is likely that a significant portion of ThinPrep System sales
will be concentrated among a relatively small number of large clinical
laboratories. The Company will need to foster an awareness of and acceptance
by these potential customers of the ThinPrep System for cervical cancer
screening and the benefits of this system over the conventional sample
collection and slide preparation method. Further, in order to generate demand
for the ThinPrep Pap Test among clinical laboratories, the Company will be
required to educate physicians and health care providers regarding the
clinical benefits and cost-effectiveness of the ThinPrep System as well as to
demonstrate to such parties that adequate levels of reimbursement will be
available for the ThinPrep Pap Test, a process which the Company believes will
require a lengthy sales effort. The Company's dependence on sales to large
laboratories may strengthen the purchasing leverage of these potential
customers. There can be no assurance that the Company will be successful in
selling the ThinPrep System to these large laboratories or that any such sales
will result in sufficient revenue to allow the Company to become profitable.
See "Business -- Marketing and Sales."

LIMITED OPERATING HISTORY; UNCERTAINTY OF PROFITABILITY

The Company has a limited operating history and, to date, has focused on
product development, clinical trials, obtaining regulatory approvals, the
expansion of manufacturing facilities and the establishment of marketing and
sales capabilities for its ThinPrep System for cervical cancer screening in
the United States. Substantially all of the Company's revenues to date have
been derived from sales of its ThinPrep 2000 Processor and predecessor
instruments, and related disposable reagents, filters and other supplies for
non-gynecological testing applications. Consequently, the Company has very
limited experience in marketing and selling its products for cervical cancer
screening. There can be no assurance that the Company will be able to
effectively market and sell the ThinPrep System for cervical cancer screening.
The Company's future revenues and profitability are critically dependent on
the Company's ability to successfully market and sell the ThinPrep System for
cervical cancer screening. In the past, the Company has offered discounts to
stimulate demand for the ThinPrep System and may elect to do so in the future,
which discounts could have a material adverse

9
<PAGE>

effect on the Company's business, financial condition and results of
operations. There can be no assurance that profitability will ever be
achieved. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Marketing and Sales."

RISKS ASSOCIATED WITH COMMERCIALIZATION

In connection with the full-scale commercialization of the ThinPrep System
for cervical cancer screening, the Company has significantly expanded its
facilities and intends to continue to significantly increase the number of its
marketing and sales, engineering, and financial personnel, and enhance or
replace its management information systems. Such activities are likely to
place significant strain on the Company's management, operations and systems.
Whether the Company can successfully manage the transition to a large-scale
commercial enterprise will depend, in part, upon substantial expansion of its
domestic and establishment of its international marketing and sales
distribution networks, successful expansion and maintenance of its
manufacturing capability, and strengthening of its financial and management
systems and procedures. Failure to make such a transition successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's ability to compete effectively will
depend, in part, upon its ability to revise, improve and effectively utilize
its operational, management, marketing, sales and financial systems
necessitated by changes in the Company's business. There can be no assurance
that the Company will be able to effectively manage such changes and any
failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Marketing and Sales."

INTENSE COMPETITION

The Company faces direct competition from a number of publicly-traded and
privately-held companies, including other manufacturers of thin layer slide
preparation systems. Many of the Company's existing and potential competitors
have substantially greater financial, marketing, sales, distribution and
technical resources than the Company, and more experience in research and
development, clinical trials, regulatory matters, manufacturing and marketing.
In addition, many of these companies may have established third-party
reimbursement for their products. Several established medical device
manufacturers produce thin layer slide preparation systems for use in non-
gynecological testing applications, at least one of which has achieved brand-
name recognition and significant penetration in the non-gynecological cytology
market. The Company believes that another competitor, AutoCyte, Inc., is
conducting clinical trials of a system for the production and automated
analysis of thin layer slides, a potential alternative to the conventional Pap
smear and the ThinPrep Pap Test. The development, FDA approval and commercial
marketing of such systems for cervical cancer screening could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition to direct competition, the Company faces indirect
competition primarily from two companies, Neopath, Inc. ("Neopath") and
Neuromedical Systems, Inc., both of which currently market imaging systems to
re-examine or re-screen conventional Pap smears previously diagnosed as
negative. The Company believes that these rescreening systems, as currently
sold, could not be used with the ThinPrep System and, therefore, if either of
such systems is installed at or used by hospitals or clinical laboratories,
the Company's ability to market its products to such hospitals or laboratories
could be materially adversely affected. In addition, if either company
receives FDA approval of its system as a primary screening system to replace
some or all of the manual screening of conventional Pap smears, marketing of
these systems for such purpose could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."

LIMITED MANUFACTURING EXPERIENCE AND CAPACITY

The Company has limited manufacturing experience, and there can be no
assurance that the Company will be able to recruit and retain a sufficient
number of skilled manufacturing personnel or manufacture and supply the
ThinPrep System including the related disposable reagents, filters and other
supplies in a timely manner, or at a cost or in quantities necessary to make
them commercially viable. In June 1996, the Company

10
<PAGE>

moved from a 17,500 square foot facility to a 51,000 square foot facility. The
Company believes that its existing manufacturing system is inadequate to meet
the full-scale production demands for the ThinPrep System for cervical cancer
screening. The Company is currently installing new custom-built automated
equipment for the high-volume manufacture of disposable filters for use in
connection with the ThinPrep System, which the Company expects will be fully
operational in the first half of 1997. The Company's manufacturing process is
subject to pervasive and continuing regulation by the FDA, including the FDA's
Good Manufacturing Practices ("GMP") requirements. Failure to comply with such
regulations or any failure of the custom-built equipment to perform to the
Company's specifications or expectations, or any other delay in the full
implementation of such equipment due to necessary training of the Company's
personnel or otherwise, could impair the Company's ability to establish full-
scale commercial production capability in a timely manner, if at all. If the
Company is unable to achieve commercial-scale production capability on a
timely basis, or to sustain such capability, the acceptance by the market of
the Company's ThinPrep System could be impaired and such inability would have
a material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company has limited manufacturing
experience with the ThinPrep System for cervical cancer screening and,
accordingly, there can be no assurance that the Company's ThinPrep System for
cervical cancer screening will perform adequately in the field when subjected
to use under a variety of laboratory conditions and as a result may be subject
to total or partial suspension of production, withdrawal of approval, and
recall or seizure of products in the event of product malfunction or failure.
In addition, prior to international commercialization, the Company will need
to comply with ISO 9001 standards. There can be no assurance that the Company
will be able to maintain compliance with GMP requirements or attain or
maintain ISO 9001 standards. Failure to either attain or maintain compliance
with the applicable manufacturing requirements of various regulatory agencies
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing" and "--
Government Regulation."

HISTORY OF LOSSES

The Company has incurred substantial losses since its inception and, as of
September 30, 1996, the Company had an accumulated deficit of approximately
$43.2 million. Such losses have resulted primarily from expenses associated
with obtaining FDA approval of the Company's ThinPrep System for cervical
cancer screening, engineering and development efforts related to the ThinPrep
System, expansion of the Company's manufacturing facilities, and the
establishment of a marketing and sales organization. The Company expects such
losses to continue for the foreseeable future due to expansion of its
marketing and sales activities, both domestic and international, its product
development efforts, and commencement of full-scale commercial manufacturing.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY RESULTS

The Company expects that its operating results will fluctuate significantly
from quarter to quarter in the future and will depend on a number of factors,
many of which are outside the Company's control. These factors include: the
extent to which the Company's products gain market acceptance; the rate and
size of expenditures incurred as the Company expands its domestic and
establishes its international sales and distribution networks; the timing of
any approvals of the ThinPrep System for reimbursement by third-party payors;
the timing and size of sales; the likelihood and timing of FDA approval of PMA
supplements related to the ThinPrep System; the timing and size of
expenditures incurred in the research and development of new products; and the
introduction and market acceptance of competing products or technologies. The
Company is currently installing new custom-built automated equipment for the
high-volume manufacture of disposable filters for use in connection with the
ThinPrep System, which the Company expects will be fully operational in the
first half of 1997. Any delay or difficulty in commencing full-scale
commercial production using such new equipment would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Manufacturing."

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<PAGE>

RAPID TECHNOLOGICAL CHANGE

The medical device industry is characterized by rapid product development
and technological advances. The Company's products could be rendered obsolete
or uneconomical by the introduction and market acceptance of competing
products, by technological advances of the Company's current or potential
competitors or by other approaches. The Company competes on the basis of a
number of factors in areas in which the Company currently has limited
experience, including manufacturing efficiency, marketing and sales
capabilities and customer service and support. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competition, including the development and
commercialization of new products and technology, will not have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."

EXTENSIVE GOVERNMENT REGULATION

The manufacture and sale of medical diagnostic devices intended for
commercial use are subject to extensive government regulation in the United
States and in other countries. The process of obtaining FDA and other required
regulatory approvals can be time-consuming, expensive and uncertain,
frequently requiring several years from the commencement of clinical trials to
the receipt of regulatory approval. There can be no assurance that the Company
will be able to obtain necessary regulatory approvals or clearances or comply
with regulatory requirements applicable to the ThinPrep System for cervical
cancer screening or other applications in the United States or internationally
on a timely basis, or at all. Noncompliance with applicable requirements can
result in failure of the government to grant premarket approval for devices,
withdrawal of clearances or approvals, total or partial suspension of
production, fines, injunctions, civil penalties, recall or seizure of
products, and criminal prosecution.

The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; the use of a different
facility or establishment to manufacture, process or package the device;
changes in manufacturing methods or quality control systems; changes in
performance or design specifications; and labeling changes. Any such change
will require supplemental FDA approval. The ThinPrep System for cervical
cancer screening is a Class III device that received PMA approval in May 1996
for cervical cancer screening. The Company anticipates that other applications
for the ThinPrep System will require FDA approval of a PMA supplement or a new
PMA application. There can be no assurance that such approvals will be
obtained on a timely basis, if at all.

Regulatory approvals, if granted, may include significant limitations on the
intended uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the promotion by the Company and any of its distributors of
approved medical devices for off-label uses. In addition, product approvals
may be withdrawn for failure to comply with regulatory standards or the
occurrence of unforeseen problems following initial marketing. Manufacturers
of medical devices are subject to strict federal regulations regarding
validation and the quality of manufacturing, including compliance with GMP
regulations relating to testing, control and documentation. The Company's
existing and future manufacturing facilities and manufacturing processes for
the ThinPrep System for cervical cancer screening or other applications will
be required to comply with these and all other applicable FDA regulations, and
with regulations imposed by other governments. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through periodic
inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Failure to comply with applicable
United States and international regulatory requirements can result in failure
of the relevant government agency to grant premarket approval for devices,
withdrawal of approval, total or partial suspension of production, fines,
injunctions, civil penalties, recall or seizure of products, and criminal
prosecution. Furthermore, changes in existing regulations or adoption of new
regulations or policies could prevent the Company from obtaining, or affect
the cost and timing of, future regulatory approvals or clearances.

The Company is currently installing new custom-built automated manufacturing
equipment, which incorporates new materials handling procedures that are
intended to increase production capacity. Such

12
<PAGE>

equipment is expected to be operational in the first half of 1997. The Company
believes that use of this equipment will not require a PMA supplement and,
accordingly, the Company intends to report the equipment change to the FDA in
the Company's May 1997 PMA annual report, which must report changes made
without filing a PMA supplement. There can be no assurance, however, that the
FDA will agree that the change does not require approval of a new PMA
supplement. If the FDA were to require the Company to submit a PMA supplement,
the Company could also be prohibited from distributing product manufactured
with the new equipment until after approval was obtained. In the interim, the
Company would be restricted to using its current equipment, which has more
limited production capacity. Such reduction in capacity and limitations on the
sale of product could have a material adverse effect on the Company's
business, financial condition and results of operation.

In July 1996, the Company filed a PMA supplement requesting approval of the
ThinPrep System using the endocervical brush sampling device, which is a
commonly used method of collecting samples for conventional Pap smears. The
ThinPrep System is currently approved for use only with a "broom-like"
sampling device, which was developed more recently and is not as widely used
as the brush and spatula. There can be no assurance that the FDA will approve
the PMA supplement in a timely fashion, or at all. A delay in obtaining, or
failure to obtain, such approval could have a material adverse effect on the
Company's ability to gain market acceptance.

In October 1996, the Company filed a PMA supplement requesting approval of
the use of PreservCyt Solution as an alternative transport medium for
gynecologic specimens tested with the Digene's Hybrid Capture HPV DNA test.
The approval of the PMA supplement is necessary in order for the Company to
promote the ThinPrep System as capable of conducting Digene's assay and
cervical cancer screening from a single specimen. There can be no assurance
that the FDA will agree that the clinical data from that study supports
approval of the PMA supplement, nor can there be any assurance that the FDA
will approve the PMA supplement in a timely fashion, if at all. A delay in
obtaining, or failure to obtain, such approval could have a material adverse
effect on the Company's ability to gain market acceptance based on the
ThinPrep System's capability of conducting multiple tests from a single
specimen.

The laboratories that would purchase the ThinPrep System are subject to
extensive regulation under the Clinical Laboratory Improvement Amendments of
1988 (CLIA). There can be no assurance what effect, if any, positive or
negative, future changes in CLIA requirements on laboratories might have on
sales of the ThinPrep System. If the ThinPrep System does not comply with CLIA
requirements, there would be a material adverse effect on sales of the
ThinPrep System.

The Company is seeking ISO 9001 registration, an international quality
standard, and the "CE" mark for its ThinPrep System. The CE mark is recognized
by countries that are members of the European Union and the European Free
Trade Association and, effective in 1998, will be required to be affixed to
all medical devices sold in the European Union. No assurance can be given that
the Company will obtain the CE mark for the ThinPrep System, or satisfy ISO
9001 standards, or that any product which the Company may develop or
commercialize will obtain the CE mark, or will be able to obtain any other
required regulatory clearance or approval on a timely basis, or at all. See
"Business -- Government Regulation."

UNCERTAINTY OF ADDITIONAL APPLICATIONS

The Company intends to pursue licensing and collaboration arrangements with
other companies to perform diagnostic tests developed by these companies using
the original patient sample obtained by the ThinPrep System's controlled cell
collection and transfer process. For example, in August 1996, the Company
completed a joint clinical trial with Digene designed to demonstrate that the
Company's PreservCyt Solution

13
<PAGE>

is an effective transport medium for use in the testing of cervical cell
specimens using Digene's Hybrid Capture HPV test. While the Company has filed
a PMA supplement for this application, the ThinPrep System has not been
approved by the FDA for such use or any additional diagnostic testing
procedures, and there can be no assurance that any such approvals could be
obtained on a timely basis, if at all. The Company intends to continue to
evaluate additional diagnostic applications of its ThinPrep technology in
testing for the presence of other types of cancers and sexually transmitted
diseases. The Company has not yet determined which of these applications, if
any, it will seek to develop and commercialize. In addition, any additional
applications will require submission of a PMA application or supplement prior
to the marketing of the ThinPrep System for use in such applications. There
can be no assurance that the Company will be successful in establishing
relationships with companies developing tests that can benefit from the
ThinPrep technology, or developing, receiving regulatory approvals for,
introducing and marketing new applications, or that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction or marketing of such applications. If the Company is
unable to develop new or expanded applications, or if the ThinPrep System for
such applications does not achieve market acceptance, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business -- The ThinPrep System."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on the principal members of its management
and scientific staff, the loss of whose services might impede achievement of
its research and development or strategic objectives. The Company's success
will depend on its ability to retain key employees and to attract additional
qualified employees. In addition, the Company intends to hire a significant
number of additional engineering, sales and financial personnel in 1997 and
thereafter. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain existing personnel and to
attract, assimilate or retain additional highly qualified employees in the
future. If the Company is unable to hire and retain qualified personnel in key
positions, such inability would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management -- Executive Officers, Directors and
Key Employees."

DEPENDENCE ON PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS; RISK OF
THIRD-PARTY CLAIMS OF INFRINGEMENT

The Company relies on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect its proprietary technology, rights
and know-how. The Company holds seven issued United States patents, and has
three United States patent applications pending, relating to various aspects
of its ThinPrep technology. There can be no assurance, however, that pending
patent applications will ultimately issue as patents or that the claims
allowed in any of the Company's existing or future patents will provide
competitive advantages for the Company's products or will not be successfully
challenged or circumvented by competitors. Under current law, patent
applications in the United States are maintained in secrecy until patents are
issued and patent applications in foreign countries are maintained in secrecy
for a period after filing. The right to a patent in the United States is
attributable to the first to invent, not the first to file a patent
application. The Company cannot be sure that its products or technologies do
not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from selling its products or could be required to obtain licenses
from the owners of such patents or be required to redesign its products to
avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to the Company or
that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. The Company's failure to obtain these
licenses or to redesign its products or processes would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the obligations of employees of the
Company and third parties with whom the Company has entered into
confidentiality agreements to maintain the confidentiality of trade secrets
and proprietary information will

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<PAGE>

effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets
or proprietary information will not be independently developed by the
Company's competitors. In addition, the Company is the exclusive licensee of
certain patented technology from DEKA Products Limited Partnership ("DEKA")
for use in the field of cytology related to the fluid pumping system used in
the ThinPrep System. The Company is obligated to pay royalties equal to 1% of
net sales of the ThinPrep Processor, filter cylinder disposable products which
are used with the ThinPrep System, and improvements made by the Company
relating to such items. The license provides that it may be terminated (i) by
mutual written consent of both parties or (ii) by DEKA on written notice to
the Company in the event that the license is assigned without the consent of
DEKA. Failure by the Company to maintain rights to such technology could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company also holds unregistered copyrights on
documentation and operating software developed by it for the ThinPrep System.
There can be no assurance that any copyrights owned by the Company will
provide competitive advantages for the Company's products or will not be
challenged or circumvented by its competitors. Litigation may be necessary to
defend against claims of infringement, to enforce patents and copyrights of
the Company, or to protect trade secrets and could result in substantial cost
to, and diversion of efforts by, the Company. There can be no assurance that
the Company would prevail in any such litigation. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. See "Business -- Patents,
Copyrights, Licenses and Proprietary Rights."

INTERNATIONAL SALES AND OPERATIONS RISKS

The Company plans to sell its ThinPrep System and any future products to
customers both in the United States and internationally. While the Company is
evaluating marketing and sales channels abroad, including contract sales
organizations, distributors and marketing partners, the Company currently has
very limited foreign sales channels in place at this time. There can be no
assurance that the Company will successfully develop international sales
capabilities or that, if the Company establishes such capabilities, the
Company will be successful in obtaining reimbursement or any regulatory
approvals required in foreign countries. International sales and operations
may be limited or disrupted by the imposition of government controls, export
license requirements, political instability, trade restrictions, changes in
tariffs or difficulties in staffing and managing international operations.
Foreign regulatory agencies often establish product standards different from
those in the United States and any inability to obtain foreign regulatory
approvals on a timely basis could have a material adverse effect on the
Company's international business operations. Additionally, if significant
international sales occur, the Company's business, financial condition and
results of operations could be adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates. There can be no assurance
that the Company will be able to successfully commercialize the ThinPrep
System or any future products in any foreign market. See "Business --
Marketing and Sales," "-- Third-Party Reimbursement" and "-- Government
Regulation."

DEPENDENCE ON SINGLE SOURCE SUPPLIERS

Certain key components of the Company's ThinPrep System are currently
provided to the Company by single sources. In the event that the Company is
unable to obtain sufficient quantities of such components on commercially
reasonable terms, or in a timely manner, the Company would not be able to
manufacture its products on a timely and cost-competitive basis which would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing."

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING

15
<PAGE>

internationally, the resources required to expand manufacturing capacity, and
the extent to which the ThinPrep System for cervical cancer screening
generates market acceptance and demand. The Company's capital requirements
will also depend upon the progress of the Company's research and development
programs including clinical trials, the receipt of and the time required to
obtain regulatory clearances and approvals, and the resources the Company
devotes to developing, manufacturing and marketing its products. There can be
no assurance that the Company will not require additional financing or will
not in the future seek to raise additional funds through bank facilities, debt
or equity offerings or other sources of capital. Additional funding may not be
available when needed or on terms acceptable to the Company, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTH CARE REFORM

The health care industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to control the escalation
of health care expenditures within the economy. Reforms that have been and may
be considered include controls on health care spending through limitations on
the increase in private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups and fundamental
changes to the health care delivery system. Health care reform could, for
example, result in a reduction in the recommended frequency of Pap tests or
limitations on reimbursement based on the frequency of tests, either of which
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates that Congress and
state legislatures will continue to review and assess cost containment
measures, alternative health care delivery systems and methods of payment, and
public debate of these issues will likely continue. Due to uncertainties
regarding the outcome of health care reform initiatives and their enactment
and implementation, the Company cannot predict what reforms will be proposed
or adopted or the effect such proposal or adoption may have on the Company.
There can be no assurance that future health care legislation or other changes
in the administration or interpretation of government health care or third-
party reimbursement programs will not have a material adverse effect on the
Company's business, financial condition and results of operations.

POTENTIAL VOLATILITY OF STOCK PRICE

The market price of the shares of Common Stock, like that of the common
stock of many other medical device companies, may be highly volatile. Factors
such as the results of clinical trials by the Company or its competitors,
concern as to the safety or efficacy of products of the Company or its
competitors, announcements of technological innovations or new products by the
Company or its competitors, governmental regulation, health care legislation,
developments in patent or other proprietary rights of the Company or its
competitors, fluctuations in the Company's operating results, comments made by
securities analysts and general market and economic conditions are likely to
have a significant impact on the future price of the Common Stock. In
addition, the stock market in general has experienced extreme price and volume
fluctuations which has resulted in substantial volatility of the stock price
of medical device companies that has often been unrelated to the operating
performance of these companies. These or other factors may adversely affect
the market price of the Company's Common Stock. See "Price Range of Common
Stock."

ENVIRONMENTAL REGULATION

The Company is subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic, infectious or other hazardous
substances used to manufacture the Company's products. The failure to comply
with current or future regulations could result in the imposition of
substantial fines against the Company, suspension of production, alteration of
its manufacturing processes or cessation of operations. There can be no
assurance

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<PAGE>

that the Company will not be required to incur significant costs to comply
with any such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations. Any failure by the Company to
control the use, disposal, removal or storage of, or to adequately restrict
the discharge of, or assist in the cleanup of, hazardous chemicals or
hazardous, infectious or toxic substances could subject the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities would have a material adverse
effect on the Company's business, financial condition and results of
operations.

ANTI-TAKEOVER CONSIDERATIONS

The Company's Board of Directors has the authority, without action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock and to fix
the rights and preferences of such Preferred Stock. The issuance of Preferred
Stock or of rights to purchase Preferred Stock could be used to discourage an
unsolicited acquisition proposal. In addition, the Company's Third Amended and
Restated Certificate of Incorporation provides for a staggered Board of
Directors. The Company's By-Laws specify procedures for director nominations
by stockholders and the submission of other proposals for consideration at
stockholder meetings. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer or
proxy contest involving the Company, including Section 203, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions
are met. The possible issuance of Preferred Stock, the existence of a
staggered Board of Directors, the procedures required for director nominations
and stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest, making more difficult the
acquisition of a substantial block of the Company's Common Stock or limiting
the price that investors might be willing to pay in the future for shares of
the Company's Common Stock. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Company's Common Stock after this
offering or the prospect of such sales could adversely affect the market price
of the Common Stock and the Company's ability to raise additional equity
capital. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements ("Lock-Ups") under which the
holders of 2,413,351 shares have agreed not to sell or otherwise dispose of
any of their shares for a period of 90 days after the date of this Prospectus
without the prior written consent of Robertson, Stephens & Company. In its
sole discretion and at any time without notice, Robertson, Stephens & Company
may release all or any portion of the shares subject to Lock-Ups. Of the
16,013,002 shares of Common Stock that will be outstanding after this
offering, the 3,000,000 shares sold in this offering and the 3,450,000 shares
sold in the Company's initial public offering will be freely tradeable without
restriction or further registration under the Securities Act, except shares
owned by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act ("Affiliates"), which shares may generally be sold in
compliance with the applicable provisions of Rule 144. Beginning 90 days after
the date of this Prospectus, approximately 706,348 additional shares subject
to Lock-Ups will become eligible for sale in the public market pursuant to
Rule 144. The Company has registered all the shares of Common Stock reserved
for issuance under the Company's stock option plans as of the date of this
Prospectus. As of December 31, 1996, the Company had reserved 2,520,654 shares
of Common Stock for issuance under the Company's stock option plans. In
addition, holders of approximately 4,859,912 shares of Common Stock will be
entitled to certain registration rights with respect to such shares. If such
holders, by exercising their registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have a
material adverse effect on the market price of the Company's Common Stock. In
addition, any demand of such holders to include such shares in Company-
initiated registration statements could have an adverse effect on the
Company's ability to raise needed capital. See "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Underwriting."

17
<PAGE>

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of shares of Common Stock in this offering will incur immediate
and substantial dilution in the pro forma net tangible book value per share
from the public offering price. In addition, investors purchasing shares in
this offering will incur additional dilution to the extent that stock options
and warrants (whether currently outstanding or subsequently issued or granted)
are exercised. See "Dilution."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company anticipates using approximately $25.0 million of the net
proceeds of this offering to implement full-scale marketing and sales of the
ThinPrep System for cervical cancer screening, supported by customer and
technical service representatives, in the United States, approximately $10.0
million of the net proceeds of this offering to establish international
marketing, sales and customer support capabilities, with the remainder to be
used for working capital and general corporate purposes. As a consequence, the
Company's management will have the discretion to allocate a significant
percentage of the net proceeds to uses that stockholders may not consider
desirable, and there can be no assurance that the net proceeds can or will be
invested to yield a significant return. See "Use of Proceeds."

LACK OF DIVIDENDS

The Company currently intends to retain all earnings, if any, for future
growth and, therefore, does not intend to pay cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."

18
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby will be approximately $48.2 million
($59.2 million if the Underwriters' over-allotment option is exercised in
full), based on the assumed public offering price of $25.75 per share, after
underwriting discounts and commissions and estimated offering expenses.

The Company anticipates using approximately $25.0 million of the net
proceeds of this offering for the full-scale marketing and sales of the
ThinPrep System for cervical cancer screening, supported by customer and
technical service representatives, in the United States, approximately $10.0
million of the net proceeds of this offering to establish international
marketing, sales and customer support capabilities, with the remainder to be
used for working capital and general corporate purposes. The Company may also
use a portion of the net proceeds for the acquisition of businesses, products
and technologies that are complementary to those of the Company, although no
such acquisitions are currently being negotiated and no portion of the net
proceeds has been allocated for any specific acquisition. The Company will
have broad discretion over a significant portion of the proceeds of the
offering. The amounts and timing of the Company's expenditures may vary
significantly depending upon numerous factors, including market acceptance of
the ThinPrep System for cervical cancer screening, the timing of the
transition to full-scale manufacturing, the timing of expenditures required
for the Company's research and development programs, the results of clinical
trials for additional applications, the timing of regulatory actions, and the
availability of adequate reimbursement by third-party payors. Pending such
uses, the Company intends to invest the net proceeds in investment-grade,
interest-bearing securities.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends since its inception.
The Company currently intends to retain its earnings for future growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Future cash dividends, if any, will be determined by the Company's
Board of Directors.

19
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CYTC." The following table sets forth, for the calendar periods
indicated since the Company's initial public offering in March 1996, the range
of high and low sales prices for the Common Stock of the Company on the Nasdaq
National Market. These prices do not include retail mark-up, mark-down or
commissions.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1996
First Quarter (from March 8, 1996)......................... $18 $15 7/8
Second Quarter............................................. 34 1/2 16
Third Quarter.............................................. 26 1/8 12
Fourth Quarter............................................. 29 3/4 11 3/4
1997
First Quarter (through January 6, 1997).................... 27 3/4 25 1/4
</TABLE>

As of January 6, 1997, there were 227 holders of record of the Company's
Common Stock. On January 6, 1997, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $25.75 per share.

20
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to reflect the sale of the 2,000,000 shares
of Common Stock offered by the Company hereby, at an assumed public offering
price of $25.75 per share and the application of the estimated net proceeds
therefrom:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000
shares authorized, no shares issued as adjusted......... $ -- $ --
Common Stock, $0.01 par value; 30,000,000
shares authorized, 13,802,932 shares issued and
outstanding;
and 15,802,932 shares issued and outstanding, as
adjusted (1)............................................ 138 158
Additional paid-in capital............................... 93,301 141,501
Accumulated deficit...................................... (43,248) (43,248)
------- --------
Total stockholders' equity............................ 50,191 98,411
------- --------
Total capitalization................................ $50,191 $98,411
======= ========
</TABLE>
- --------
(1) Excludes 204,048 shares of Common Stock issued upon the exercise of stock
options between October 1, 1996 and December 31, 1996, at a weighted-
average exercise price of $1.30 per share; 1,710,526 shares of Common
Stock issuable upon the exercise of stock options outstanding as of
December 31, 1996 granted under the Company's stock option plans, at a
weighted-average exercise price of $7.95 per share; and 2,000 shares of
Common Stock issuable upon the exercise of an outstanding warrant at an
exercise price of $10.00 per share. See Note 10 of Notes to Consolidated
Financial Statements.

21
<PAGE>

DILUTION

The net tangible book value of the Company as of September 30, 1996 was
approximately $50.1 million in the aggregate, or $3.63 per share of Common
Stock based upon 13,802,932 shares outstanding. After giving effect to the
sale by the Company of the 2,000,000 shares of Common Stock offered hereby, at
an assumed offering price of $25.75 per share and the receipt of net proceeds
therefrom (after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company), the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
approximately $98.3 million or $6.22 per share of Common Stock, based upon
15,802,932 shares outstanding. This represents an immediate increase in net
tangible book value of approximately $2.59 per share to existing stockholders
and an immediate dilution in net tangible book value of $19.53 per share to
new investors purchasing shares in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed offering price per share (1)........................... $25.75
Net tangible book value before offering (2)(3)............... $3.63
Increase attributable to new investors....................... 2.59
-----
Pro forma net tangible book value after offering (2)(3)........ 6.22
------
Dilution to new investors...................................... $19.53
======
</TABLE>

- --------
(1) Before deduction of the Underwriters' discounts and commissions and
estimated offering expenses payable by the Company.

(2) Net tangible book value per share is equal to total tangible assets of the
Company less total liabilities divided by the number of shares of Common
Stock outstanding.

(3) Based on shares outstanding as of September 30, 1996. Excludes 204,048
shares of Common Stock issued upon the exercise of stock options between
October 1, 1996 and December 31, 1996, at a weighted- average exercise
price of $1.30 per share; 1,710,526 shares of Common Stock issuable upon
the exercise of stock options outstanding as of December 31, 1996 granted
under the Company's stock option plans, at a weighted-average exercise
price of $7.95 per share; and 2,000 shares of Common Stock issuable upon
the exercise of an outstanding warrant at an exercise price of $10.00 per
share. See Note 10 of Notes to Consolidated Financial Statements.

22
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below for each of the
years ended December 31, 1993, 1994 and 1995 and at December 31, 1994 and 1995
are derived from consolidated financial statements of the Company audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere herein. The consolidated selected financial data for the years ended
December 31, 1991 and 1992 and at December 31, 1991, 1992 and 1993 are derived
from consolidated financial statements of the Company audited by Arthur
Andersen LLP which are not included in this Prospectus. The consolidated
statement of operations data for the nine months ended September 30, 1995 and
1996 and the consolidated balance sheet data as of September 30, 1996 have
been derived from unaudited financial statements which have been included
elsewhere herein. The unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial information set forth
herein. The results for interim periods are not necessarily indicative of the
results expected for the full year or for any future period. The selected
consolidated financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 628 $ 2,589 $ 3,441 $ 2,920 $ 4,273 $ 2,751 $ 5,485
Cost of sales................ 815 2,080 5,088 2,225 2,413 1,502 3,102
------- -------- -------- -------- -------- ------- -------
Gross profit................. (187) 509 (1,647) 695 1,860 1,249 2,383
------- -------- -------- -------- -------- ------- -------
Operating expenses:
Research and development... 2,681 2,914 3,058 2,175 3,908 2,774 3,343
Marketing, sales and
customer support.......... 1,041 2,049 3,417 1,418 2,582 1,804 6,374
General and administrative. 679 901 2,257 1,256 1,532 992 2,235
------- -------- -------- -------- -------- ------- -------
Total operating expenses. 4,401 5,864 8,732 4,849 8,022 5,570 11,952
------- -------- -------- -------- -------- ------- -------
Income (loss) from
operations.................. (4,588) (5,355) (10,379) (4,154) (6,162) (4,321) (9,569)
Other income (expense), net.. 250 220 108 (112) 247 115 1,509
------- -------- -------- -------- -------- ------- -------
Net income (loss)........ $(4,338) $ (5,135) $(10,271) $ (4,266) $ (5,915) $(4,206) $(8,060)
======= ======== ======== ======== ======== ======= =======
Pro forma (1):
Net income (loss) per
share .................... $ (0.62) $ (0.65) $ (1.22) $ (0.48) $ (0.54) $ (0.39) $ (0.63)
======= ======== ======== ======== ======== ======= =======
Weighted average shares
outstanding............... 7,038 7,849 8,409 8,954 10,868 10,868 12,737
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- -------- -------- -------- -------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments...... $ 1,123 $ 7,558 $ 1,662 $ 2,777 $ 7,902 $43,814
Total assets................. 2,875 10,190 3,217 3,851 11,025 52,772
Accumulated deficit.......... (9,601) (14,736) (25,007) (29,273) (35,188) (43,248)
Total stockholders' equity
(deficit)................... 2,461 9,380 (883) (2,112) 8,078 50,191
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the computation of per share data.

23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.

OVERVIEW

The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep System consists of
the ThinPrep 2000 Processor, and related disposable reagents, filters and
other supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received PMA approval from the FDA to market the ThinPrep System for cervical
cancer screening as a replacement for the conventional Pap smear method. On
November 6, 1996, the FDA cleared expanded product labeling for the ThinPrep
System to include the claim that the ThinPrep System is significantly more
effective in detecting LGSIL and more severe lesions than the conventional Pap
smear method in a variety of patient populations. The expanded labeling also
indicates that the specimen quality using the ThinPrep System is significantly
improved over that of the conventional Pap smear method. To date,
substantially all of the Company's revenues have been derived from sales of
the ThinPrep System for use in non-gynecological testing applications.

Since inception, the Company has incurred substantial losses, principally
from expenses associated with obtaining FDA approval of the Company's ThinPrep
System for cervical cancer screening, engineering and development efforts
related to the ThinPrep System, expansion of the Company's manufacturing
facilities, and the establishment of a marketing and sales organization. The
Company expects such losses to continue for the foreseeable future as it
expands its domestic and establishes its international marketing and sales
activities, continues its product development efforts, and commences full-
scale manufacturing of the ThinPrep System for cervical cancer screening. The
operating results of the Company have fluctuated significantly in the past on
an annual and a quarterly basis. The Company expects that its operating
results will fluctuate significantly from quarter to quarter in the future and
will depend on a number of factors, including the extent to which the
Company's products gain market acceptance, the rate and size of expenditures
incurred as the Company expands its domestic and establishes its international
sales and distribution networks, the timing of any approvals of the ThinPrep
System for reimbursement by third-party payors, and other factors, many of
which are outside the Company's control.

In June 1996, the Company moved from a 17,500 square foot facility to a
51,000 square foot facility. The Company believes that its existing
manufacturing system is inadequate to meet the full-scale production demands
for the ThinPrep System for cervical cancer screening. The Company is
currently installing new custom-built automated equipment for the high-volume
manufacture of disposable filters for use in connection with the ThinPrep
System. The Company expects that such new equipment will be fully operational
in the first half of 1997.

The Company believes that in the United States, the current rate of
reimbursement to laboratories from managed care organizations and other third-
party payors to screen conventional Pap smears ranges from $6.00 to $36.00 per
test, with $17.00 as the most common rate of reimbursement.

The Company has established a list price for the ThinPrep Pap Test,
including related disposable reagents, filters and supplies of $9.75 per test.
The Company believes that the $9.75 cost per ThinPrep Pap Test, plus a
laboratory mark-up, will be billed to third-party payors and result in a
higher cost than the current charge for conventional Pap tests. The list price
for the ThinPrep 2000 Processor is $39,000 per processor. In the past, the
Company has offered discounts to stimulate demand for the ThinPrep System and
may elect to do so in the future, which discounts could have a material
adverse effect on the Company's business, financial condition and results of
operations.

24
<PAGE>

The Company believes that its expanded FDA labeling supported by clinical
trial results may assist in the establishment of increased reimbursement for
the ThinPrep Pap Test. Although United HealthCare has recently announced that
it will expand its health care coverage to include the ThinPrep Pap Test, the
applicable rate of reimbursement has yet to be negotiated between United
HealthCare or its various plans and the specific clinical laboratories
servicing such plans. There can be no assurance that additional third-party
payors will provide such coverage, that reimbursement levels will be adequate,
or that health care providers or clinical laboratories will use the ThinPrep
System for cervical cancer screening in lieu of the conventional Pap smear
method.

The Company will continue to increase the amount of expenditures for
marketing, sales and customer support activities, principally in support of
the full-scale commercial launch of the ThinPrep System for cervical cancer
screening, which is expected to commence in early 1997. There can be no
assurance, however, that such investments will result in increased net sales
or that the Company's direct sales force will succeed in promoting the
ThinPrep System to health care providers, third-party payors or clinical
laboratories, or that additional marketing and sales channels will be
successfully established. The Company will continue to increase its
expenditures for research and development to fund development of follow-on
products and additional applications of the ThinPrep technology. The Company
will also continue to increase the amount of expenditures for administrative
activities, principally for the employment of additional administrative
personnel, increases in professional fees and the incremental costs associated
with being a publicly-held company.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1996 and September 30, 1995

Net sales increased to $5.5 million for the nine months ended September 30,
1996 from $2.8 million in the same period of 1995, an increase of 99.4%. This
increase in sales was primarily due to an increase in the number of ThinPrep
Processors sold, additional sales of related disposable reagents, filters and
other supplies for non-gynecological testing and sales of the Company's
ThinPrep Pap Test. The increase in net sales for the nine months ended
September 30, 1996 was also attributable to an initial shipment of ThinPrep
2000 Processors and ThinPrep Pap Test supplies of approximately $700,000 to
the Company's distributor in Australia. There can be no assurance that net
sales to Australia will continue or increase in future quarters. Gross profit
increased to $2.4 million for the nine months ended September 30, 1996 from
$1.2 million in the same period of 1995, an increase of 90.8%, and the gross
margin decreased to 43.4% for the nine months ended September 30, 1996 from
45.4% in the same period of 1995. Management attributes the decrease in gross
margin for the nine months ended September 30, 1996 to the lower unit margin
for unit sales to existing customers participating in the Company's trade-up
program by upgrading to the ThinPrep 2000 Processor and the expenses incurred
in moving the Company's operations to Boxborough, Massachusetts during the
quarter ended June 30, 1996.

Total operating expenses increased to $12.0 million for the nine months
ended September 30, 1996 from $5.6 million in the same period of 1995, an
increase of 114.6%. Research and development costs increased to $3.3 million
in 1996 from $2.8 million in 1995, an increase of 20.5%, as a result of the
employment of additional research and development personnel and engineering
consulting expenses related to the development of the ThinPrep 3000 Processor.
Marketing, sales and customer support increased to $6.4 million for the nine
months ended September 30, 1996 from $1.8 million in the same period of 1995,
an increase of 253.3%. The increase in marketing, sales and customer support
costs reflects the employment of additional sales and customer support
personnel, increased commissions, increased customer training requirements and
additional marketing consulting costs related to the anticipated full-scale
commercial launch of the ThinPrep System. Administrative costs increased to
$2.2 million for the nine months ended September 30, 1996 from $992,000 for
the nine months ended September 30, 1995, an increase of 125.3% due to the
employment of additional administrative personnel, increased business
insurance costs and expenses associated with being a publicly-held company.
Net interest income increased to $1.5 million for the nine months ended
September 30, 1996 from $129,000 for the nine months ended September 30, 1995,
due to the investment of funds from the Company's initial public offering.

25
<PAGE>

Years Ended December 31, 1995 and December 31, 1994

Net sales increased to $4.3 million in 1995 from $2.9 million in 1994, an
increase of 46.3%. This increase in sales was primarily due to an increase in
the number of ThinPrep Processors sold for non-gynecological applications, the
introduction of the ThinPrep 2000 Processor, which is marketed at a higher
gross margin, and, to a lesser extent, additional sales of related disposable
reagents, filters and other supplies. Gross profit increased to $1.9 million
in 1995 from $695,000 in 1994, an increase of 167.6%, and gross margin
increased to 43.5% in 1995 from 23.8% in 1994. Management attributes the
improvement in gross margin in 1995 to the introduction of the ThinPrep 2000
Processor and to improvements in manufacturing efficiency based on increased
volume.

Total operating expenses increased to $8.0 million in 1995 from $4.8 million
in 1994, an increase of 65.4%. Research and development costs increased to
$3.9 million in 1995 from $2.2 million in 1994, an increase of 79.7%, as a
result of increased clinical trial expenses and the employment of additional
research and development personnel. Sales, marketing and customer support
costs increased to $2.6 million in 1995 from $1.4 million in 1994, an increase
of 82.1%, as a result of hiring additional sales personnel, increased
commissions and additional consulting costs. Administrative costs increased to
$1.5 million in 1995 from $1.3 million in 1994, an increase of 22.0%, due to
the hiring of a consultant and additional administrative personnel.

Years Ended December 31, 1994 and December 31, 1993

Net sales decreased to $2.9 million in 1994 from $3.4 million in 1993, a
decrease of 15.1%. This decrease resulted from a reduction in the number of
ThinPrep Processors sold, partially offset by an increase in the amount of
sales of related disposable reagents, filters and other supplies. The
reduction in ThinPrep Processor sales in 1994 resulted from the Company's
decision to reduce sales and marketing efforts in 1994, including a reduction
in the number of sales personnel due to an effort to conserve cash. Gross
profit improved to $695,000 in 1994 from a negative gross profit of $1.6
million in 1993 and gross margin increased to 23.8% in 1994 from a negative
gross margin of 47.9% in 1993. Management attributes the improvement in gross
margin in 1994 to improvements in manufacturing efficiency.

Total operating expenses decreased to $4.8 million in 1994 from $8.7 million
in 1993, a decrease of 44.5%. Research and development costs decreased to $2.2
million in 1994 from $3.1 million in 1993, a decrease of 28.9%, as a result of
reductions in the number of research personnel, related research supplies and
the amount of consulting services. Sales, marketing and customer support costs
decreased to $1.4 million in 1994 from $3.4 million in 1993, a decrease of
58.5%, as a result of reductions in the number of sales and marketing
personnel, the amount of travel and supplies, and commissions expense as a
result of a reduction in the number of ThinPrep Processors sold in 1994.
Administrative costs decreased to $1.3 million in 1994 from $2.3 million in
1993, a decrease of 44.4%, as a result of reductions in the number of
administrative personnel and the amounts expended for travel, supplies and
consulting services.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $43.2 million as of September
30, 1996. The Company has funded its operations primarily through the private
placement of equity securities of $43.3 million in net proceeds and
approximately $50.0 million in net proceeds from its initial public offering
in 1996. As of September 30, 1996, the Company had cash, cash equivalents and
short-term investments of $43.8 million. Cash used in the Company's operations
was $5.6, $4.6 and $7.0 million for the years ended December 31, 1993, 1994
and 1995, respectively. The increase in cash used in operations in 1995 was
due to increased levels of research and development, clinical trial, marketing
and administrative expenditures. The Company used $9.7 million of cash during
the nine months ended September 30, 1996 for operating activities, primarily
for the expansion of its marketing, sales and customer support organizations.

26
<PAGE>

The Company's capital expenditures for the years ended December 31, 1993,
1994, 1995 and the nine months ended September 30, 1996 were $188,000,
$286,000, $663,000 and $3.8 million, respectively. The increase in capital
expenditures in the nine months ended September 30, 1996 was due primarily to
the Company's expenditures for new custom-built manufacturing equipment and
leasehold improvements for its new facility. Additionally, as of September 30,
1996, the Company had additional purchase commitments for manufacturing
equipment of approximately $780,000 and for leasehold improvements of
approximately $94,000.

The Company is the exclusive licensee of certain patented technology used in
the ThinPrep System. In consideration for this license, the Company has agreed
to pay a royalty equal to 1% of net sales of the ThinPrep Processor, filter
cylinder disposable products which are used with the ThinPrep System, and
improvements made by the Company relating to such items. There are no minimum
royalty payments in connection with this license.

Accounts receivable increased approximately $778,000 to approximately $2.1
million during the nine months ended September 30, 1996, due to increased
sales volume. Inventories increased approximately $440,000 to $1.2 million for
the nine months ended September 30, 1996, due primarily to the Company's
inventory build up of ThinPrep 2000 Processors and related disposable
reagents, filters and other supplies in anticipation of the Company's move to
its new facility in June 1996 and installation of new custom-built
manufacturing equipment. Stockholders' equity increased approximately $42.1
million for the nine months ended September 30, 1996, primarily due to the
sale of 3,450,000 shares of Common Stock in the Company's initial public
offering, partially offset by a net loss of $8.1 million for the nine months
ended September 30, 1996.

The Company believes that the anticipated net proceeds from this offering
together with interest thereon and the Company's existing capital resources
will be sufficient to fund its operations through at least 1998. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including the resources required to further develop its marketing,
and sales capabilities domestically and internationally, the resources
required to expand manufacturing capacity, and the extent to which the
ThinPrep System for cervical cancer screening generates market acceptance and
demand. The Company's capital requirements will also depend upon the progress
of the Company's research and development programs including clinical trials,
the receipt of and the time required to obtain regulatory clearances and
approvals, and the resources the Company devotes to developing, manufacturing
and marketing its products. There can be no assurance that the Company will
not require additional financing or will not in the future seek to raise
additional funds through bank facilities, debt or equity offerings or other
sources of capital. Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations.

27
<PAGE>

BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

THE COMPANY

Cytyc Corporation designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The Company's ThinPrep
System allows for the automated preparation of cervical cell specimens on
microscope slides for use in cervical cancer screening, as well as for the
automated preparation of other cell specimens on microscope slides for use in
non-gynecological testing applications. On May 20, 1996, the Company received
PMA approval from the FDA to market the ThinPrep System for cervical cancer
screening as a replacement for the conventional Pap smear method. On November
6, 1996, the FDA cleared expanded product labeling for the ThinPrep System to
include the claim that the ThinPrep System is significantly more effective in
detecting LGSIL and more severe lesions than the conventional Pap smear method
in a variety of patient populations. The expanded labeling also indicates that
the specimen quality using the ThinPrep System is significantly improved over
that of the conventional Pap smear method. The Company believes that the
ThinPrep System improves accuracy in the detection of cervical cancer and
precancerous lesions by making the slide more representative of the patient's
clinical condition, improving preservation of the sample, standardizing the
presentation of cells on the slide, and reducing the presence of mucus, blood
and other obscuring debris. The Company intends to commence the full-scale
commercial launch of the ThinPrep System for cervical cancer screening in the
first quarter of 1997.

CERVICAL CANCER

Cervical cancer is one of the most common cancers among women throughout the
world, with approximately 440,000 new cases reported annually. The American
Cancer Society estimates that approximately 15,800 new cases of invasive
cervical cancer and 65,000 new cases of carcinoma in situ, a precancerous
condition, were diagnosed in the United States in 1995. In the same year, an
estimated 4,800 women died of cervical cancer in the United States. Cervical
cancer is preceded by curable precancerous lesions that progress without
symptoms over a period of years until they become invasive, penetrating the
cervical epithelium (cellular covering) and entering the bloodstream or lymph
system. In order to detect these precancerous lesions, gynecologists in the
United States typically recommend annual screening examinations. If detected
in the precancerous stage, virtually all cervical cancer cases are
preventable. The treatment of cervical cancer after it reaches the invasive
stage may require surgery, including a hysterectomy, and chemotherapy or
radiation treatment, which are difficult, expensive and may not be successful.

The factors associated with the development of cervical cancer are believed
to include early sexual activity, multiple sexual partners, cigarette smoking
and immunosuppression. In addition, a number of recent studies have concluded
that cervical cancer is strongly correlated to the presence of certain types
of HPV. According to these studies, HPV DNA is present in most cases of
precancerous lesions and in more than 90% of cases of intraepithelial and
invasive cancer. Cervical lesions that are HPV-negative or lacking certain
types of HPV are less likely to progress to cervical cancer.

THE PAP SMEAR

The Market for Pap Smears

Cervical cancer screening has been conducted since the late 1940s using the
Pap smear, a test developed by Dr. George Papanicolaou. In the United States,
widespread and regular use of the Pap smear as a screening test has
contributed to a greater than 70% decrease in mortality from cervical cancer
in the past 45 years. The Pap smear is currently the most widely-used
screening test for the early detection of cancer in the United States. In
1994, clinical laboratories in hospitals, commercial laboratories and
privately-owned reference laboratories in the United States processed over 50
million Pap smears. The Company believes that laboratories outside of the
United States processed at least 50 million additional Pap smears in 1994.

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<PAGE>

The Pap Smear Process

The Pap smear process involves the science of cytology, which is the
microscopic interpretation of precancerous, malignant and other changes in
cells. The conventional Pap smear process begins with the collection of a
cervical specimen during a gynecological examination. To obtain a cervical
cell sample, a sampling device, such as a brush, spatula or a "broom-like"
device, is used to scrape cells from the surface of the cervix. The sample is
then manually smeared onto a clean microscope slide by the physician who must
then spray the slide within a few seconds with a fixative agent to prevent
damage to the cell specimen from air drying. The slide is then submitted to a
clinical laboratory for manual microscopic examination.

At the laboratory, a cytotechnologist, a medical professional with special
training in the examination and interpretation of human cells, conducts a
microscopic review of a prepared slide to determine the adequacy of the sample
and the presence of abnormal cells. In determining slide adequacy,
cytotechnologists classify each slide in one of three categories: (i)
satisfactory for evaluation, (ii) satisfactory but limited by ("SBLB") certain
characteristics, or (iii) unsatisfactory for evaluation. The percentage of
unsatisfactory and SBLB slides varies widely from laboratory to laboratory. In
a 1991 study of 600 laboratories, it was reported that up to 20% of slides
were classified as unsatisfactory and up to 40% were classified as SBLB.
Frequent reasons for unsatisfactory or SBLB classifications include excess
blood or mucus that impairs viewing or too few cells per slide.

After determining the adequacy of the slide, the cytotechnologist manually
screens each Pap smear slide with a microscope to differentiate diseased or
abnormal cells from healthy cells based on size, shape and structural details
of the cells and nuclei. Typically, each Pap smear slide is then classified in
accordance with The Bethesda System for Reporting Cervical/Vaginal Cytologic
Diagnoses ("Bethesda System") into one of the following categories: (i)
Negative; (ii) Atypical Squamous Cells of Undetermined Significance/Atypical
Glandular Cells of Undetermined Significance ("ASCUS/AGUS"); (iii) LGSIL; (iv)
High Grade Squamous Intraepithelial Lesion ("HGSIL"); and (v) Carcinoma. Any
slide classified as other than negative is considered abnormal and may be
precancerous or cancerous. All abnormal slides are referred to a senior
cytotechnologist and pathologist for further review and final diagnosis.

Notwithstanding the classifications imposed by the Bethesda System, the
subjective nature of the classification of Pap smear specimens results in
diagnoses that vary widely among cytotechnologists, pathologists and
laboratories. In 1988, to address accuracy and quality control concerns,
Congress adopted the Clinical Laboratory Improvement Amendments of 1988
("CLIA"). CLIA requires cytology laboratories to perform proficiency testing
and quality control by testing cytotechnologists in order to assure a minimum
level of competence and expertise. In addition, the CLIA regulations currently
limit the number of slides screened per day by a cytotechnologist to 100.
Certain states have also adopted regulations further limiting the number of
slides which can be manually examined per day by a cytotechnologist. As a
further quality control measure, the CLIA regulations require that
laboratories manually rescreen at least 10% of the slides that are initially
classified as negative.

Other methods of rescreening are currently available, including computer
imaging technologies that select certain negative slides or portions of
negative slides for reexamination by the cytotechnologist. These computer
imaging technologies are intended to provide an additional quality control
measure to help identify false negative diagnoses.

Follow-Up Treatment of Abnormal Pap Smears

Women with abnormal Pap smears may have to return to their physician's
office for a repeat Pap smear or to undergo costly colposcopy and biopsy
procedures. A colposcopy involves the physician using a device to visually
examine the surface of the cervix, and if necessary, performing a biopsy.
Treatment of early-stage noninvasive cervical cancer may be accomplished by
procedures to remove the abnormal cells. Once the cancer reaches the invasive
stage, the patient's chances for recovery are diminished and more radical
treatment is typically required, such as a hysterectomy and chemotherapy or
radiation therapy. These procedures may expose the patient to risk and cost
and result in significant physical and psychological stress.

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<PAGE>

PROBLEMS WITH THE CONVENTIONAL PAP SMEAR

In spite of the success of the Pap smear in reducing deaths due to cervical
cancer, the test has significant limitations, including inadequacies in sample
collection and slide preparation, slide interpretation errors and the
inability to use the specimen for additional diagnostic tests. These
limitations result in a substantial number of inaccurate test results,
including false negative diagnoses.

False Negative Diagnoses

The limitations of the conventional Pap smear method in sample collection,
slide preparation and interpretation result in a substantial number of
inaccurate test results in the form of false negative diagnoses. A false
negative diagnosis may allow the disease to progress to a later-stage of
development before being detected, thereby requiring a more expensive and
invasive course of treatment and diminishing the likelihood of successful
treatment. Reports of the false negative rate of the Pap test vary widely,
between 5% and 55%. Studies suggest that approximately 50% of false negative
diagnoses are attributable to inadequacies in sample collection and slide
preparation and approximately 50% are attributable to slide interpretation
errors.

Inadequacies in Sample Collection and Slide Preparation

There are a variety of difficulties with current methods of cell collection,
cell transfer and slide preparation. These difficulties include cell loss,
improper fixation of the cells (typically, from air drying), thick and uneven
smearing of cells on the slide, and excess blood, mucus and other obscuring
debris on the slide. A study published in the American Journal of Clinical
Pathology in February 1994 reported that as much as 80% of the sample taken
from a patient using the conventional Pap smear method is not transferred to
the microscope slide and remains on the discarded collection device. This
discarded portion of the sample may contain the abnormal cells necessary for
an accurate diagnosis. In addition to the problem of cell transfer, the
conventional Pap smear method produces inconsistent and non-uniform slides
with extreme variability in quality, making examination difficult. The Company
believes that these limitations are responsible for a large percentage of
slides being classified as SBLB. These slides are more difficult to interpret
and increase the uncertainty of an accurate diagnosis. Consequently, patients
are often subjected to the inconvenience and expense of return office visits
for repeat testing and to the anxiety resulting from the inconclusive nature
of the initial test. The Company believes that these repeat visits and
examinations also result in significant costs to the health care system.

Slide Interpretation Errors

The process of screening and interpreting a manually prepared Pap smear is
complex and tedious. This process requires constant vigilance, as
approximately 90% to 95% of all Pap smear diagnoses in the United States are
negative. In addition, the process is prone to error as a result of the
complexity of properly evaluating and categorizing subtle and minute changes
in cellular or nuclear detail. The screening process requires intense visual
review through a microscope of a large volume of slides, each of which
typically contains 50,000 to 300,000 cervical cells. The small percentage of
Pap smears that contain any abnormality may, in turn, contain only a small
number of abnormal cells among the vast number of normal cells.
Cytotechnologists generally review each slide for approximately five to 10
minutes and may review up to 100 slides per day. All of these factors
contribute to the incidence of false negative diagnoses.

Lack of Additional Testing Capability

The conventional Pap smear method does not permit additional or adjunct
testing from the original patient sample. The ability to produce multiple
slides from a single sample could be used by clinical laboratories for follow-
up testing, quality control or proficiency testing. Further, the conventional
Pap smear method requires the patient to be called back to the physician's
office to provide a second sample if additional testing, such as HPV testing,
is desired. Recent studies correlating the presence of certain types of HPV to
a higher risk of cervical cancer have suggested HPV testing as a follow-up
procedure for women with a Pap

30
<PAGE>

smear classification of ASCUS/AGUS or LGSIL. These studies propose follow-up
HPV testing as an alternative to more expensive and extensive follow-up
procedures, since as many as 80% of these patients will not progress to high
grade lesions or cancer. The National Cancer Institute ("NCI") and the Kaiser
Foundation Research Institute are separately conducting clinical studies in
the United States, using the ThinPrep method of patient sample collection and
a Hybrid Capture HPV test developed by Digene, to demonstrate that
supplementing cervical cancer screening with HPV testing is a cost-effective
method for providing prognostic information for diagnoses that initially show
minor abnormalities. The NCI estimates that expenditures associated with
additional testing and care of patients with a Pap smear classification of
ASCUS/AGUS or LGSIL costs the United States health care system $3.6 billion
annually.

THE THINPREP SYSTEM

Cytyc developed the ThinPrep System to address the limitations of the
conventional Pap smear method. The ThinPrep System, which was cleared for
marketing as a replacement for the conventional Pap smear method for cervical
cancer screening by the FDA on May 20, 1996, consists of the ThinPrep 2000
Processor and related disposable reagents, filters and other supplies. The
ThinPrep System is designed to reduce the incidence of false negative
diagnoses, improve slide quality, reduce inconclusive SBLBs and enable a
single sample to be used for additional diagnostic testing. On November 6,
1996, the FDA cleared expanded product labeling for the ThinPrep System to
include the claim that the ThinPrep System is significantly more effective in
detecting LGSIL and more severe lesions than the conventional Pap smear method
in a variety of patient populations. This expanded labeling also indicates
that the specimen quality using the ThinPrep System is significantly improved
over that of the conventional Pap smear method.

The ThinPrep process begins with the patient's cervical sample being taken
by the physician using a cervical sampling device which, rather than being
smeared on a microscope slide, is rinsed in a vial filled with the Company's
proprietary PreservCyt Solution. This enables virtually all of the patient's
cell sample to be preserved before the cells can be damaged by air drying. The
ThinPrep specimen vial is then labeled and sent to a laboratory equipped with
a ThinPrep 2000 Processor for slide preparation and screening.

At the laboratory, the ThinPrep specimen vial is inserted into a ThinPrep
2000 Processor, a proprietary sample preparation device which automates the
process of preparing cervical specimens. Once the vial is inserted into the
ThinPrep 2000 Processor, a gentle dispersion step breaks up blood, mucus, non-
diagnostic debris and large sheets of cells and homogenizes the cell
population. The cells are then automatically collected on the Company's
proprietary TransCyt Filter, which incorporates an eight micron membrane
specifically designed to collect abnormal and cancerous cells. The ThinPrep
2000 Processor constantly monitors the rate of flow through the TransCyt
Filter during the collection process in order to prevent the cellular
presentation from being too scant or too dense. A thin layer of cells is then
transferred to a glass slide in a 20 mm-diameter circle and the slide is
automatically deposited into a preservative solution. The ThinPrep 2000
Processor allows for the processing of approximately 20 to 25 patient samples
per hour.

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<PAGE>

THE THINPREP SAMPLE PREPARATION PROCESS

[Three diagrams depicting the ThinPrep Sample Preparation Process. The text
below accompanies each of the three diagrams:]

(1) Dispersion (2) Cell (3) Cell
Collection Transfer
A gentle vacuum After the cells
The TransCyt is created are collected on
Filter rotates within the the membrane,
within the TransCyt Filter, the TransCyt
sample vial, which collects Filter is
creating cells on the inverted and
currents in the exterior surface gently pressed
fluid that are of the membrane. against the
strong enough to Cell collection ThinPrep
separate debris is controlled by Microscope
and disperse the ThinPrep Slide. Natural
mucus, but 2000 Processor's attraction and
gentle enough to software that slight positive
have no adverse monitors the air pressure
effect on cell rate of flow cause the cells
appearance. through the to adhere to the
TransCyt Filter. ThinPrep
Microscope Slide
resulting in an
even
distribution of
cells in a
defined circular
area.

The Company's proprietary reagents and supplies include PreservCyt Solution
to collect and transport cervical samples to the laboratory for optimal cell
preservation and TransCyt Filters to collect cells and remove non-diagnostic
debris and mucus. The Company also sells ThinPrep Microscope Slides, high-
quality microscope slides manufactured to the Company's specifications, which
improve cell adhesion to the slide.

Additional ThinPrep System Applications

The Company believes that the ThinPrep System's controlled cell collection
and transfer process will permit multiple tests to be conducted from a single
sample without requiring the expense, inconvenience and anxiety associated with
return office visits. For example, in collaboration with Digene, the Company
completed a joint clinical trial in August 1996 designed to demonstrate that
the Company's PreservCyt Solution is an effective transport medium for use in
the testing of cervical cell specimens using Digene's Hybrid Capture HPV test.
Digene's Hybrid Capture assay is the only test cleared in the United States by
the FDA for the follow-up testing of equivocal cervical cell specimens. On
October 4, 1996, the Company submitted a PMA supplement to demonstrate that the
Company's PreservCyt Solution is an effective transport medium for Digene's
Hybrid Capture HPV test.

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BENEFITS OF THE THINPREP SYSTEM

On November 6, 1996, the FDA cleared expanded product labeling for the
ThinPrep System to include the claim that the ThinPrep System is significantly
more effective in detecting LGSIL and more severe lesions than the
conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear
method. The Company believes that the benefits of the ThinPrep System include
the following:

Improved Accuracy

The Company believes that the ThinPrep System improves accuracy in the
detection of cervical cancer and precancerous lesions by making the slide more
representative of the patient's clinical condition, improving preservation of
the sample, standardizing the presentation of cells on the slide, and reducing
the presence of mucus, blood and other obscuring debris. With the ThinPrep
System, a thin, evenly dispersed 20 mm-diameter layer of cells is
automatically deposited onto a microscope slide from the cells collected on
the filter, which maximizes slide to slide uniformity and clarity. This
increased clarity reduces the number of slides classified as SBLB, thereby
resulting in a more definitive diagnosis and decreasing the need for calling
the patient back for repeat testing.

Standardization and Simplification of Sample Preparation Process

The ThinPrep System standardizes and simplifies the sample preparation
process. Rather than manually smearing the sample on a microscope slide and
being required to immediately spray the slide with a fixative agent, the
physician rinses the collection device into a vial of PreservCyt Solution.
This simplified cell collection technique maximizes preservation of cell
structure, minimizes cell damage due to air drying and eliminates problems
associated with inconsistent smearing of cells on slides. Using the ThinPrep
collection process, virtually all of the cell sample is deposited in the
PreservCyt Solution for sample processing. In contrast, as much as 80% of the
sample taken from the patient using the conventional Pap smear method is not
transferred to the microscope slide but remains on the discarded sample
device.

Multiple Tests from Single Sample

The conventional Pap smear only provides a single slide for interpretation.
A patient's sample collected in the Company's PreservCyt Solution vial could
be used for additional diagnostic testing, including HPV, chlamydia and other
sexually transmitted diseases. The ability to permit multiple tests to be
conducted from a single sample would allow additional testing without
requiring the expense, inconvenience and anxiety associated with return office
visits. This feature may also provide for laboratory implementation of quality
control and proficiency of testing methods. FDA approval of new PMA
applications or PMA supplements will be required before the Company may sell
or promote the ThinPrep System for additional diagnostic tests. See "--
Government Regulation."

Improved Productivity

The Company believes that the clear presentation of cells on slides prepared
with the ThinPrep System allows for more efficient screening by reducing
cytotechnologist fatigue and the amount of time required to examine each
slide. A reduction in screening time allows laboratory personnel to devote
more time to quality control, examination of additional samples or other
activities.

CLINICAL TRIAL RESULTS

In October 1995, the Company completed the clinical trial used to support
its PMA application, which was a blinded study performed at six clinical sites
in the United States, including three screening centers and three hospital
sites. This clinical trial was managed by an independent contract research
organization which monitored the clinical sites, compiled the data and
performed statistical analysis. The study was designed to rigorously compare
the effectiveness of the ThinPrep System to the conventional Pap smear method
for the detection of precancerous lesions of the cervix. Specimen adequacy was
also compared.

33
<PAGE>

The clinical trial protocol was designed as a split sample, matched pair
study, from which a conventional Pap smear was prepared first and the
remainder of the sample was rinsed into a vial of PreservCyt Solution. A
ThinPrep slide was then prepared from the vial. ThinPrep and conventional Pap
smear slides were processed independently. Different cytotechnologists
performed the initial screening of the ThinPrep and conventional slides.
Special reporting forms containing patient history as well as a checklist of
all possible categories of the Bethesda System were used to record the results
of the initial screening. An independent pathologist reviewed all discrepant,
borderline, positive and a random 5% of negative slides in a blinded fashion
to provide a further objective review of the results.

A total of 6,747 patients at six clinical sites in the United States,
including three hospital sites and three screening sites, were included in the
primary data analysis of the clinical trial. Combining the results of all six
sites, the ThinPrep System demonstrated a statistically significant 18%
improvement in the detection of disease (LGSIL or higher classification) as
compared to the conventional Pap smear. The results from the three screening
centers indicated a 65% improvement in the detection of disease, while in the
three hospital sites in which patients had historically exhibited high
prevalence rates of cervical abnormalities, the ThinPrep method demonstrated a
6% improvement. Based on the clinical trial results, the FDA cleared expanded
product labeling for the ThinPrep System to include that the ThinPrep System
is significantly more effective in detecting LGSIL and more severe lesions
than the conventional Pap smear method in a variety of patient populations.

The Company believes that the difference in the results of the screening
centers and the hospital sites was due to the characteristics of the patient
populations of the two groups. The screening centers serve a patient
population of primarily low to moderate risk patients. The three hospital
sites serve high risk, primarily inner city populations where the rates of
gynecological infection were as high as 49%. The Company believes that this
factor reduced the ability to discriminate between the performance of the
ThinPrep System and the conventional Pap smear method. Market data indicate
that approximately 97% of all samples taken for cervical cancer screening in
the United States are obtained from patients seen in clinics and physicians'
offices for routine examinations. Patients seen in hospital outpatient
departments or emergency rooms represent only approximately 3% of the total
Pap smears taken annually. The Company therefore believes that the screening
centers used in the clinical trial are more representative of the cervical
samples taken in routine examinations in the United States.

Slides from each patient were also evaluated for specimen adequacy.
Combining the results of all six sites, the ThinPrep System reduced the SBLB
classification rate of specimen adequacy by 29%, a statistically significant
reduction. The Company believes, based on data submitted with its PMA
application, that the ThinPrep System may reduce SBLB classifications by as
much as 50% if the immersion of the sampling device in the PreservCyt Solution
occurs directly after the sample is taken rather than after the preparation of
a conventional Pap smear slide. The direct immersion procedure reflects the
intended use of the ThinPrep System in clinical practice. Based on the
clinical trial results, the FDA cleared expanded product labeling for the
ThinPrep System to include that the specimen quality using the ThinPrep System
is significantly improved over that of the conventional Pap smear method.

NON-GYNECOLOGICAL CYTOLOGY

In May 1991, the Company began commercial shipments of the ThinPrep
Processor to cytology laboratories in the United States for use in non-
gynecological testing applications. There are currently over 450 ThinPrep 2000
Processors and predecessor instruments installed in clinical laboratories and
hospitals worldwide. Non-gynecological specimens include sputum; voided and
catheterized urine; body fluids such as peritoneal fluid, ascites fluid, or
cerebrospinal fluid; brushing of respiratory or gastrointestinal tracts; and
fine needle aspiration specimens obtained from a variety of sources such as
the breast, thyroid, lung or liver. These samples are evaluated in patients in
whom malignancy is strongly suspected or as follow-up information in patients
previously diagnosed and treated for cancer.

34
<PAGE>

BUSINESS STRATEGY

Market to Health Care Providers, Third-Party Payors and Clinical
Laboratories. The Company's strategy is to achieve market acceptance of the
ThinPrep System for cervical cancer screening through the use of a direct
marketing and sales organization to promote the clinical and patient care
benefits of the ThinPrep System. This organization will focus on health care
providers, third-party payors and clinical laboratories to stimulate demand
for the ThinPrep Pap Test, to facilitate reimbursement and to demonstrate the
economic and clinical benefits of the ThinPrep System. As of December 31,
1996, the Company had 46 marketing, sales and customer support professionals,
and intends to substantially increase such number in the forseeable future. In
addition, the Company intends to expand educational and promotional activities
in major metropolitan areas in the United States.

Establish Reimbursement by Third-Party Payors. The Company plans to assist
clinical laboratories in obtaining reimbursement for the ThinPrep System for
cervical cancer screening from a broad range of third-party payors, including
managed care organizations, private insurers, and Medicare and Medicaid. The
Company believes that its clinical trial results and expanded product labeling
may assist in obtaining reimbursement for the ThinPrep Pap Test. While the
Company's customers are currently seeking reimbursement under a non-specific
CPT code, the Company is petitioning to modify an existing CPT code or to
establish a separate CPT code for third-party reimbursement for cervical
cancer screening tests using the ThinPrep System.

Expand and Leverage Installed Customer Base. The Company will seek to expand
and leverage its installed customer base of over 350 ThinPrep 2000 Processors
and 100 predecessor instruments so that existing customers will have the
capability to perform cervical cancer screening. Broadening its installed base
of systems will also expand the Company's opportunity to market and sell its
related disposable reagents, filters and other supplies.

Expand Applications of ThinPrep Technology. The Company believes that the
collection and preservation methods used in the ThinPrep System may be suited
for other types of diagnostic testing, including testing for HPV, chlamydia
and other sexually transmitted diseases. The Company intends to pursue
licensing and collaboration arrangements with other companies to perform
diagnostic tests developed by these companies using the original patient
sample obtained by the ThinPrep System's cell collection and transfer process.
For example, in collaboration with Digene, the Company completed a joint
clinical trial in August 1996 designed to demonstrate that the Company's
PreservCyt Solution is an effective transport medium for use in the testing of
cervical cell specimens using Digene's Hybrid Capture HPV test. On October 4,
1996, the Company submitted a PMA supplement to cover this additional
application of the ThinPrep technology. In addition, the Company believes that
the ability to make multiple slides from a single sample will allow the
Company to pursue quality control and proficiency testing applications of its
ThinPrep technology.

MARKETING AND SALES

The Company's marketing and sales strategy is to achieve broad market
acceptance of the ThinPrep System for cervical cancer screening. A critical
element of this strategy is to utilize the results of the Company's 1995
clinical trial and expanded FDA labeling to demonstrate the safety and
efficacy of the ThinPrep System to health care providers, third-party payors
and clinical laboratories. The Company believes that coordination of the
activity of these three market segments is necessary to achieve the desired
level of market penetration of the ThinPrep System. To accomplish this, the
Company is expanding its direct sales organization in the United States
supported by customer and technical service representatives.

35
<PAGE>

Health Care Providers. The Company is expanding its direct marketing and
sales organization to promote the benefits of the ThinPrep System to health
care providers, primarily obstetricians and gynecologists, who perform a high
volume of Pap smear tests in targeted markets in the United States. This
direct sales activity will be supported by focused medical education events,
medical advertising and other promotional activities.

Third-Party Payors. The Company will employ a direct marketing and sales
organization to promote the clinical and economic benefits of the ThinPrep
System to medical and financial decision makers at national managed care
organizations, major private insurers and regional and local third-party
payors. The Company's marketing efforts will also include advertising and
promotional programs that specifically focus on the clinical and economic
benefits of the ThinPrep System.

Clinical Laboratories. The Company will continue to market directly to
clinical laboratories through its direct sales organization, as well as to
conduct promotional activities and provide customer support and service
programs. The Company also employs cytotechnologists who will conduct all
initial customer training and applications support. The Company's direct
marketing and sales organization will focus on the economic benefits of the
ThinPrep System for clinical laboratories.

As of December 31, 1996, the Company employed 46 persons in sales, marketing
and customer support. The Company is also evaluating the use of other
marketing and sales channels, both domestic and international, including
contract sales organizations, distributors and marketing partners. Due to
limited market awareness of the ThinPrep System, the Company believes that the
sales effort will involve a lengthy process, requiring the Company to educate
health care providers and third-party payors regarding the clinical benefits
and cost-effectiveness of the ThinPrep System. The Company's success and
growth will depend on market acceptance of the ThinPrep System among health
care providers, third-party payors and clinical laboratories.

The Company will continue to sell the ThinPrep 2000 Processor to customers
and charge separately for related disposable reagents, filters and supplies.
The Company has established domestic list prices for the ThinPrep 2000
Processor of $39,000 per processor and for the ThinPrep Pap Test, including
related disposable reagents, filters and supplies, of $9.75 per test. In the
past, the Company has offered discounts to stimulate demand for the ThinPrep
System and may elect to do so in the future, which discounts could have a
material adverse effect on the Company's business, financial condition and
results of operations.

In order to effectively market the ThinPrep System for cervical cancer
screening, the Company will need to substantially increase its marketing and
sales capabilities. No assurance can be given that the Company's direct sales
force will succeed in promoting the ThinPrep System to health care providers,
third-party payors or clinical laboratories, or that additional marketing and
sales channels will be successfully established. While the Company is
currently evaluating marketing and sales channels abroad, including contract
sales organizations, distributors and marketing partners, the Company has
established very limited foreign sales channels. There can be no assurance
that the Company will be able to recruit and retain skilled marketing, sales,
service or support personnel or foreign distributors, or that the Company's
marketing and sales efforts will be successful. Failure to successfully expand
its marketing and sales capabilities in the United States or establish its
international marketing and sales organization internationally would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's marketing success in the United States
and abroad will depend on whether it can obtain required regulatory approvals,
successfully demonstrate the cost-effectiveness of the ThinPrep System,
further develop its direct sales capability and establish arrangements with
contract sales organizations, distributors and marketing partners. Failure by
the Company to successfully market its products would have a material adverse
effect on the Company's business, financial condition and results of
operations.

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<PAGE>

RESEARCH AND DEVELOPMENT

The Company's research and development strategy is to continue to develop
innovative medical diagnostic applications of the ThinPrep technology and to
continue to enhance the ThinPrep System. The Company has established a program
to further enhance and automate the ThinPrep Processor. The Company's next
generation model, the ThinPrep 3000 Processor, is being designed to provide
batch processing and walk-away capability by increasing capacity to 80 sample
vials and more fully-automating the slide preparation process. There can be no
assurance that the ThinPrep 3000 will be successfully developed, receive
necessary regulatory approvals, or be successfully commercialized.

The Company is also evaluating additional diagnostic applications of its
ThinPrep technology in testing for the presence of other types of cancers and
sexually transmitted diseases. The Company has not yet determined which of
these applications, if any, it will seek to develop and commercialize. There
can be no assurance that the Company will be successful in developing or
marketing additional applications. Furthermore, any additional applications
will require submission of a PMA application or PMA supplement prior to the
marketing of such applications. There can be no assurance that the FDA would
approve such submissions on a timely basis, if at all. See "-- Government
Regulation."

In addition, the Company is evaluating the use of certain automated
rescreening methods in conjunction with the ThinPrep System. Such systems use
imaging technology to identify slides as more likely to contain cellular
abnormalities. On November 8, 1996, the Company and Neopath announced the
completion of a joint study of the feasibility of screening cervical specimens
using the ThinPrep System in conjunction with Neopath's AutoPap QC. Additional
development work would be required prior to application to the FDA for the use
of such systems in combination. There can be no assurance that either company
will conduct further development work with respect to this study or that the
Company will be able to integrate successfully the ThinPrep technology with
any automated rescreening technology.

As of December 31, 1996, the Company had 30 employees engaged in research
and development. The Company's expenditures for research and development
(which includes clinical trials, regulatory affairs and engineering) were
approximately $3.1 million, $2.2 million, $3.9 million and $3.3 million, for
the years ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1996, respectively.

THIRD-PARTY REIMBURSEMENT

The Company intends to focus on obtaining coverage and reimbursement from
major national and regional managed care organizations and insurance carriers
throughout the United States. Most of the third-party payor organizations
independently evaluate new diagnostic procedures by reviewing the published
literature and the Medicare coverage and reimbursement policy on the specific
diagnostic procedure. To assist the third-party payors in their respective
evaluations of the ThinPrep System, the Company provides scientific and
clinical data to support its claims of the safety and efficacy of the ThinPrep
System. The Company believes that the ThinPrep System will allow for earlier
detection of LGSIL and more severe lesions and result in less aggressive and
costly treatment procedures. In addition, the Company expects that the
ThinPrep System will significantly improve specimen adequacy, thereby reducing
repeat office visits and test procedures and thus overall management costs.
The Company will focus on earlier disease detection and cost savings benefits
in establishing reimbursement for the ThinPrep method for cervical cancer
screening.

In the United States, the current rate of reimbursement to laboratories from
managed care organizations and other third-party payors to screen conventional
Pap smears ranges from $6.00 to $36.00 per test, with $17.00 as the most
common rate of reimbursement. The Company has established a list price for the
ThinPrep Pap test, including related disposable reagents, filters and supplies
of $9.75 per test. The Company believes that the $9.75 cost per ThinPrep Pap
Test, plus a laboratory mark-up, will be billed to third-party payors and
result in a higher cost than the current charge for conventional Pap tests.

Successful sales of the ThinPrep System for cervical cancer screening in the
United States and other countries will depend on the availability of
reimbursement from third-party payors such as private insurance

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<PAGE>

HealthCare announced that it will expand its health care coverage to include
the ThinPrep Pap Test, however, the applicable rate of reimbursement has yet
to be negotiated between United HealthCare or its various plans and the
specific clinical laboratories servicing such plans. There can be no assurance
that additional third-party payors will provide such coverage, that
reimbursement levels will be adequate or that health care providers or
clinical laboratories will use the ThinPrep System for cervical cancer
screening in lieu of the conventional Pap smear method. There is significant
uncertainty concerning third-party reimbursement for the use of any medical
device incorporating new technology. Reimbursement by a third-party payor
depends on a number of factors, including the level of demand by health care
providers and the payor's determination that the use of the ThinPrep System
represents a clinical advance compared to current technology and is safe and
effective, medically necessary, appropriate for specific patient populations
and cost-effective. Since reimbursement approval is required from each payor
individually, seeking such approvals is a time-consuming and costly process
which requires the Company to provide scientific and clinical data to support
the use of the ThinPrep System to each payor separately. There can be no
assurance that third-party reimbursement will be available for the ThinPrep
System or any other products that may be developed by the Company, or that
such third-party reimbursement, if obtained, will be adequate.

A key component in the reimbursement decision by most private insurers and
the United States Health Care Financing Administration, which administers
Medicare, is the assignment of a CPT code which is used in the submission of
claims to insurers for reimbursement for medical services. CPT codes are
assigned, maintained and revised by the CPT Editorial Board administered by
the American Medical Association. Although the Company has commenced sales of
the ThinPrep Pap Test, to date reimbursement has only been obtained through
the use of a non-specific CPT code. The Company has petitioned the CPT
Editorial Board to modify an existing CPT code or to establish a separate CPT
code for the ThinPrep System for cervical cancer screening. The Company
believes that the CPT Editorial Board will render a decision on the Company's
petition at its regularly scheduled meeting to address such matters in the
second quarter of 1997, and which if approved, such code will not be available
for use prior to 1998. Failure to secure a modification to an existing code or
to establish a separate code from the CPT Editorial Board could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices
and in many instances are exerting significant pressure on medical suppliers
to lower their prices. Lack of or inadequate reimbursement by government and
other third-party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, outside of the United States health care reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available at an adequate level, if at
all, for the ThinPrep System under any other reimbursement system.

MANUFACTURING

The Company manufactures its ThinPrep 2000 Processors and filters and
purchases related disposable reagents and supplies from third parties. In June
1996, the Company moved from a 17,500 square foot facility to a 51,000 square
foot facility. The Company believes that its existing manufacturing system is
inadequate to meet the full-scale production demands for the ThinPrep System
for cervical cancer screening. The Company is currently installing new custom-
built automated equipment for the high-volume manufacture of disposable
filters for use in connection with the ThinPrep System, which the Company
expects will be fully operational in the first half of 1997.

38
<PAGE>

comply with such regulations would materially impair the Company's ability to
achieve or maintain commercial-scale production. Further, any failure of the
custom-built equipment to perform to the Company's specifications or
expectations, or any other delay in the full implementation of such equipment
due to necessary training of the Company's personnel or otherwise, could
further impair the Company's ability to establish full-scale production
capability in a timely manner, or at all. If the Company is unable to achieve
full-scale production capability on a timely basis, or to sustain such
capability, the acceptance by the market of the Company's ThinPrep System
could be impaired and such inability would have a material adverse effect on
the Company's business, financial condition and results of operations.
Further, the Company has limited manufacturing experience with the ThinPrep
System and, accordingly, there can be no assurance that the Company's ThinPrep
System for cervical cancer screening will perform adequately in the field when
subjected to use under a variety of conditions. As a result, the Company may
be subject to total or partial suspension of production, withdrawal of
approval, and recall or seizure or products in the event of product
malfunction or failure.

The Company is seeking ISO 9001 registration, an international quality
standard, and is seeking the "CE" mark for its ThinPrep System. The CE mark is
recognized by countries that are members of the European Union and the
European Free Trade Association and, effective in 1998, will be required to be
affixed to all medical devices sold in the European Union. There can be no
assurance that the Company will be able to attain or maintain compliance with
GMP requirements, obtain the CE mark for the ThinPrep System, or satisfy ISO
9001 standards. Failure to either attain or maintain compliance with the
applicable manufacturing requirements of various regulatory agencies would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Certain key components of the Company's ThinPrep System are currently
provided to the Company by single sources. In the event that the Company is
unable to obtain sufficient quantities of such components on commercially
reasonable terms, or in a timely manner, the Company would not be able to
manufacture its products on a timely and cost-competitive basis, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

GOVERNMENT REGULATION

The manufacture and sale of medical diagnostic devices intended for
commercial use are subject to extensive governmental regulation in the United
States and in other countries. The Company's existing products, including the
ThinPrep System, are regulated in the United States as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and generally
require premarket clearance or premarket approval prior to commercial
distribution. In addition, certain material changes or modifications to
medical devices also are subject to the FDA review and clearance or approval.
Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture,
safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices in the United States. Noncompliance with
applicable requirements can result in failure of the government to grant
premarket approval for devices, withdrawal of clearances or approvals, total
or partial suspension of production, fines, injunctions, civil penalties,
recall or seizure of products, and criminal prosecution.

Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject
to general controls (e.g., labeling, premarket notification and adherence to
GMPs). Class II devices are subject to general controls and to special
controls (e.g., performance standards, postmarket surveillance, patient
registries and other FDA guidelines). Generally, Class III devices are those
which must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have not been found substantially equivalent to legally
marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and II devices.
A PMA application must be filed if the proposed device is not substantially
equivalent to a legally marketed
predicate device or if it is a Class III preamendment device for which the FDA
has called for such applications.

39
<PAGE>

If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or
distributor of the device) is required to file an investigational new device
("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of
animal and laboratory testing. If the IDE application is approved by the FDA
and one or more appropriate institutional review boards ("IRBs"), clinical
trials may begin at a specified number of investigational sites with a
specific number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient or is an exempt diagnostic device, a
sponsor may begin the clinical trial after obtaining approval for the study
from one or more appropriate IRBs, but FDA approval is not required. Sponsors
of clinical trials are permitted to sell devices distributed in the course of
the study provided compensation does not exceed recovery of the cost of
manufacture, research, development and handling.

Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) premarket notification or approval of a PMA application. If a medical
device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device,
or to a preamendment Class III device for which the FDA has not called for PMA
applications, the manufacturer or distributor may seek clearance from the FDA
to market the device by filing a 510(k) premarket notification. The 510(k)
notification may need to be supported by appropriate clinical data.

Following submission of a 510(k) premarket notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order is issued by the FDA. No law or regulation specifies the time limit by
which the FDA must respond to a 510(k) premarket notification. An FDA order
may declare that the device is substantially equivalent to another legally
marketed device and allow the proposed device to be marketed in the United
States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination of substantial equivalence. Such determinations
or requests for additional information could prevent or delay market
introduction of the product that is the subject of the 510(k) premarket
notification.

In 1990, the FDA determined that the ThinPrep System when used for non-
gynecological applications is a Class I device, but the FDA exempted it from
the 510(k) requirement that ordinarily applies to a Class I device. The
ThinPrep System for non-gynecological applications remains subject to other
general controls, including GMP requirements, which include elaborate testing,
control, documentation and other quality assurance procedures. The FDA has
recently finalized changes to the GMP regulations, including design control
and service record requirements, that likely will increase the cost of
compliance. The Company does not at present have any other Class I or II
devices.

If a manufacturer or distributor of a proposed device cannot establish that
the device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek marketing approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device.

Upon receipt of the PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA so determines, the FDA will "accept the PMA for filing." An
FDA review of a PMA application for medical devices typically takes from six
months to three years from the date the PMA application is filed, but may take
significantly longer. The review time is often significantly extended by
requests from the FDA for more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, including clinicians, may be convened to review and evaluate the
application and provide recommendations to the FDA

40
<PAGE>

as to whether the device should be approved. In addition, the FDA will inspect
the applicant's manufacturing facility to ensure compliance with GMP
requirements prior to approval of a PMA application. The FDA also may conduct
bioresearch monitoring inspections of the clinical trial sites and the PMA
applicant to ensure data integrity, and that the studies were conducted in
compliance with the applicable FDA regulations.

The PMA process can be expensive, lengthy and uncertain. There can be no
assurance that the Company will be able to obtain necessary regulatory
approvals for any proposed future products. The loss of previously received
approvals, or failure to comply with existing or future regulatory
requirements, would have a material adverse effect on the Company's business,
financial condition and results of operations.

The ThinPrep System for cervical cancer screening is a Class III device that
received PMA approval in May 1996. The Company anticipates that other
applications for the ThinPrep System will require FDA approval of a PMA
supplement or a new PMA application. There can be no assurance that such
approvals will be obtained on a timely basis, or at all.

The ThinPrep System is, and any other products manufactured or distributed
by the Company pursuant to an approved PMA application and supplements will be
subject to pervasive and continuing regulation by the FDA, including record-
keeping requirements, reporting of adverse experience with the use of the
device, postmarket surveillance, postmarket registry and other actions as
deemed necessary by the FDA. Product labeling and promotional activities are
also subject to scrutiny by the FDA and, in certain instances, by the Federal
Trade Commission. Products may only be promoted by the Company and any of its
distributors for their approved indications. No assurance can be given that
modifications to the labeling which may be required by the FDA in the future
will not adversely affect the Company's ability to market or sell the ThinPrep
Processor.

The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.

Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may differ. No assurance
can be given that such foreign regulatory approvals will be granted on a
timely basis, or at all. Exports of products subject to the 510(k)
notification requirements, but not yet cleared to market, are permitted
without FDA export approval provided certain requirements are met. Unapproved
products subject to the PMA requirements must receive prior FDA export
approval unless they are approved for use by any member country of the
European Union and certain other countries, including Australia, Canada,
Israel, Japan, New Zealand, Switzerland and South Africa, in which case they
can be exported to any country without prior FDA approval. There can be no
assurance that the Company will meet the FDA's export requirements or receive
FDA export approval when such approval is necessary, or that countries to
which the devices are to be exported will approve the devices for import.
Failure of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

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<PAGE>

The Company is currently installing new custom-built automated manufacturing
equipment, which incorporates new materials handling procedures that are
intended to increase production capacity. Such equipment is expected to be
operational in the first half of 1997. The Company believes that use of this
equipment will not require a PMA supplement and, accordingly, intends to
report the change to the FDA in the Company's May 1997 PMA annual report,
which must report changes made without filing a PMA supplement. There can be
no assurance, however, that the FDA will agree that the change does not
require approval of a new PMA supplement. If the FDA were to require the
Company to submit a PMA supplement, the Company could also be prohibited from
distributing product manufactured with the new equipment until after approval
was obtained. In the interim, the Company would be restricted to using its
current equipment, which has more limited production capacity. Such reduction
in capacity and limitations on the sale of product could have a material
adverse effect on the Company's business, financial condition and results of
operation.

In September 1996, the Company submitted a PMA supplement requesting the
FDA's approval of certain manufacturing process and material changes (and
other related changes to the device, including a software modification). There
can be no assurance that the FDA will approve the PMA Supplement on a timely
basis, if at all.

PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS

42
<PAGE>

future pursuant to pending patent applications or that its products do not
infringe any patents or proprietary rights of third parties. In the event that
any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling its products or could
be required to obtain licenses from the owners of such patents or be required
to redesign its products to avoid infringement. There can be no assurance that
such licenses would be available or, if available, would be on terms
acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. The
Company's failure to obtain these licenses or to redesign its products would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the obligations of
employees of the Company and third parties with whom the Company has entered
into confidentiality agreements to maintain the confidentiality of such trade
secrets and proprietary information will effectively prevent disclosure of the
Company's confidential information or provide meaningful protection for the
Company's confidential information if there is unauthorized use or disclosure,
or that the Company's trade secrets or proprietary information will not be
independently developed by the Company's competitors. In addition, the Company
is the exclusive licensee of certain patented technology from DEKA for use in
the field of cytology related to the fluid pumping system used in the ThinPrep
System. The Company is obligated to pay royalties equal to 1% of net sales of
the ThinPrep Processor, filter cylinder disposable products which are used in
the ThinPrep System, and improvements made by the Company relating to such
items. The license provides that it may be terminated (i) by mutual written
consent of both parties or (ii) by DEKA on written notice to the Company in
the event that the license is assigned without the consent of DEKA. Failure by
the Company to maintain rights to such technology could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company also holds unregistered rights to copyrights on
documentation and operating software developed by it for the ThinPrep System.
There can be no assurance that any copyrights owned by the Company will
provide competitive advantages for the Company's products or will not be
challenged or circumvented by its competitors. Litigation may be necessary to
defend against claims of infringement, to enforce patents and copyrights of
the Company, or to protect trade secrets and could result in substantial cost
to, and diversion of effort by, the Company. There can be no assurance that
the Company would prevail in any such litigation. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.

COMPETITION

The Company faces direct competition from a number of publicly-traded and
privately-held companies, including other manufacturers of thin layer slide
preparation systems. Many of the Company's existing and potential competitors
have substantially greater financial, marketing, sales, distribution and
technical resources than the Company, and more experience in research and
development, clinical trials, regulatory matters, manufacturing and marketing.
In addition, many of these companies may have established third-party
reimbursement for their products. Several established medical device
manufacturers produce thin layer slide preparation systems for use in non-
gynecological testing applications, at least one of which has achieved brand-
name recognition and significant penetration in the non-gynecological cytology
market. The Company believes that another competitor, AutoCyte, Inc., is
conducting clinical trials of a system for the production and automated
analysis of thin-layer slides, a potential alternative to the conventional Pap
smear and the ThinPrep Pap Test. The development, FDA approval and commercial
marketing of such systems for cervical cancer screening could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition to direct competition, the Company faces indirect
competition primarily from two companies, Neopath and Neuromedical Systems,
Inc., both of which currently market imaging systems to reexamine or rescreen
conventional Pap smears previously diagnosed as negative. The Company believes
that these rescreening systems, as currently sold, could not be used with the
ThinPrep System, and, therefore, if either of such systems is installed at or
used by hospitals and reference laboratories, the Company's ability to market
its products to such hospitals and laboratories could be materially adversely
affected. In addition, if either company receives FDA approval of its system
as a primary screening system to replace some or all of the manual screening
of conventional Pap smears, marketing of these systems for such purpose could
have a

43
<PAGE>

material adverse effect on the Company's business, financial condition and
results of operations. The medical device industry is characterized by rapid
product development and technological advances. The Company's products could
be rendered obsolete or uneconomical by the introduction and market acceptance
of competing products, by technological advances of the Company's current or
potential competitors or by other approaches. The Company competes on the
basis of a number of factors, including manufacturing efficiency, marketing
and sales capabilities and customer service and support, areas in which the
Company currently has limited experience. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competition, including the development and
commercialization of new products and technology, will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

PRODUCT LIABILITY

Commercial use of any Company products may expose the Company to product
liability claims. The Company currently has limited product liability
insurance. The medical device industry has experienced increasing difficulty
in obtaining and maintaining reasonable product liability coverage, and
substantial increases in insurance premium costs in many cases have rendered
coverage economically impractical. There can be no assurance that the
Company's existing product liability insurance will be adequate or that
additional product liability insurance will be available to the Company when
needed at a reasonable cost or that any product liability claim would not have
a material adverse effect on the Company's business, financial condition and
results of operations.

EMPLOYEES

As of December 31, 1996, the Company employed 124 persons, including 30
persons in manufacturing, field service and quality assurance, 30 persons in
research and development, 46 persons in sales, marketing and customer support
and 18 persons in administrative capacities. The Company is not subject to any
collective bargaining agreements, has never experienced a work stoppage and
considers its relations with its employees to be good.

FACILITIES

The Company's executive offices and manufacturing operations are located in
Boxborough, Massachusetts in a leased facility consisting of approximately
51,000 square feet. The lease of this facility has a term of seven years, with
an option to extend the term for an additional five years. The Company
believes this facility will satisfy its principal facilities requirements for
the foreseeable future.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect
upon the Company's business, financial condition and results of operations.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patrick J. Sullivan............. 44 President, Chief Executive Officer and
Director
Joseph W. Kelly................. 52 Vice President, Chief Financial Officer,
Treasurer and Secretary
Daniel J. Levangie.............. 46 Vice President of Sales
Ted S. Geiselman................ 40 Vice President of Engineering and
Operations
Michael F. Adams................ 40 Vice President of Regulatory Affairs
David J. Zahniser, Ph.D. ....... 44 Vice President of Scientific Affairs
Victoria S. Robinson............ 39 Vice President of Service Operations
Robert J. Silverman............. 37 Vice President of Marketing
James Linder, M.D............... 41 Medical Director
Frederick R. Blume (1).......... 54 Director
Guy de Chazal (2)............... 49 Director
Janet G. Effland (1)............ 48 Director
Franklin J. Iris (2)............ 66 Director
Edwin M. Kania, Jr.............. 39 Director
C. William McDaniel (2)......... 56 Director
Monroe Trout, M.D. (1).......... 65 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

Patrick J. Sullivan has served as President and Chief Executive Officer and
as a director of the Company since March 1994. From January 1991 to March
1994, Mr. Sullivan served as Vice President of Sales and Marketing and
subsequently as Senior Vice President. Prior to joining the Company, Mr.
Sullivan was employed in several marketing positions for five years by Abbott
Laboratories, a diversified health care company. Prior to that, Mr. Sullivan
was a consultant with McKinsey and Company, an international management
consulting firm. Mr. Sullivan is a graduate of the United States Naval Academy
and received an M.B.A. from Harvard University.

Joseph W. Kelly joined the Company in November 1995 as Vice President, Chief
Financial Officer, Treasurer and Secretary. From 1984 through March 1995, Mr.
Kelly held a variety of positions including Chairman, Chief Executive Officer
and Chief Financial Officer of Crop Genetics International, a publicly held
biotechnology company. From 1966 to 1983, Mr. Kelly held various positions,
including Partner, with Deloitte Haskins & Sells (now Deloitte & Touche), an
international consulting and accounting firm. Mr. Kelly is a Certified Public
Accountant and received his B.B.A. from Niagara University.

Daniel J. Levangie joined the Company in June 1992 as Director of Sales,
North America. In March 1994, Mr. Levangie was promoted to Vice President of
Sales and Marketing. From March 1994 to October 1996, Mr. Levangie served as
Vice President of Sales and Marketing and since October 1996, has served as
Vice President of Sales. Prior to joining the Company, Mr. Levangie held a
variety of sales and marketing positions with Abbott Laboratories, a
diversified health care company, from 1975 through 1992. Mr. Levangie received
a B.S. degree in Pharmacy from the College of Pharmacy & Allied Health
Sciences of Northeastern University.

Ted S. Geiselman joined the Company in October 1993 as Vice President of
Engineering. In April 1994, Mr. Geiselman assumed responsibility for
manufacturing operations. Prior to joining the Company, Mr. Geiselman was the
Director of Instrument Systems/Technology Management at Baxter Diagnostics, a
medical diagnostic company, from March 1991 through October 1993. Mr.
Geiselman received a B.S. in Mechanical Engineering from Pennsylvania State
University.

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<PAGE>

Michael F. Adams joined the Company as Vice President of Regulatory Affairs
in November 1994. Prior to joining the Company, Mr. Adams held a variety of
positions for the USCI Division of C.R. Bard, a medical device manufacturer,
from February 1991 through November 1994, most recently as Vice President,
Regulatory Affairs-Interventional Cardiology. From 1986 to 1991, Mr. Adams was
the Manager, Regulatory Affairs and Quality Assurance for the Sterimatics
Division of Millipore Corporation, a biotechnology company. Mr. Adams is a
Certified Regulatory Affairs Professional and holds a B.S. degree in Applied
Chemistry from the University of Massachusetts-Lowell.

David J. Zahniser, Ph.D., joined the Company in February 1989 as Scientific
Director. In April 1993 he was promoted to Vice President of Scientific
Affairs. Prior to joining the Company, Dr. Zahniser was Associate Director of
the Image Analysis Laboratory at Tufts University Medical Center, from 1980
through 1989. Dr. Zahniser's research centered around the management and
development of biomedical image analysis techniques. Dr. Zahniser has
published over 50 articles covering cytology preparation and image analysis.
Dr. Zahniser received a Ph.D. in Biophysics at the University of Nijmegan in
the Netherlands. His thesis topic was "The Development of a Fully Automatic
System for the Prescreening of Cervical Smears: BioPEPR." This work involved
both improved preparation technology and computer imaging. Dr. Zahniser
received a B.S. and an M.S. in Physics from the Massachusetts Institute of
Technology.

Victoria S. Robinson joined the Company in May 1996 as Vice President of
Service Operations. Prior to joining the Company, Ms. Robinson served as Vice
President of Business Development for Occupational Health and Rehabilitation
Inc., a health care company from September 1994 to May 1996. Prior to that,
she served as Director of Marketing and Operations of Cytyc from June 1991 to
March 1994. Ms. Robinson received a B.S. from University of Texas and an
M.B.A. from Harvard University.

Robert J. Silverman joined the Company in October 1996 as Vice President of
Marketing. Prior to joining the Company, Mr. Silverman served as Vice
President of Marketing for Pasteur-Marieux-Connaught, Inc., a pharmaceutical
company, from August 1994 until September 1996. From May 1988 to July 1994, he
held a variety of positions for the Pharmaceutical Products Division of Abbott
Laboratories, most recently as Director, New Product Development. Mr.
Silverman has also been a consultant with Bain and Company, Inc., and a sales
representative for the Upjohn Company. Mr. Silverman is a graduate of the
University of Michigan College of Pharmacy, and he received an M.B.A from
Northwestern University.

James Linder, M.D., joined the Company as Medical Director in March 1996 and
has served as a consultant to the Company from December 1995 to the present.
Since 1995, Dr. Linder has served as Associate Dean at the University of
Nebraska College of Medicine. From 1990 to 1995, Dr. Linder was a Professor
and Vice-Chair of the Department of Pathology at the University of Nebraska
and from 1983 to 1992, he served as the University's Director of
Cytopathology. He has published over 100 scientific articles and is the author
of two textbooks. He serves on the editorial boards of seven scientific
journals and is a member of the Board of Directors of the American Society of
Clinical Pathologists. Dr. Linder received his M.D. from the University of
Nebraska Medical Center and completed his post-degree training in Pathology at
Duke University Medical Center and the University of Nebraska Medical Center.

Frederick R. Blume became a director of the Company in 1989. Since 1985, Mr.
Blume has been a General Partner of Capital Health Management and Capital
Health Venture Partners, venture capital firms which manage American
Healthcare Fund and American Healthcare Fund II, L.P., respectively. Prior to
founding Capital Health Venture Partners, Mr. Blume served as a Managing
Director of PaineWebber Incorporated and as a Vice President of Kidder,
Peabody & Co., Incorporated. He is also a part-time member of the faculty of
the Carroll School of Management of Boston College and serves as a director of
US Servis, Inc., a health provider management service company, and Washington
National Corporation, an insurance company.

46
<PAGE>

Guy de Chazal became a director of the Company in 1995. Mr. de Chazal is a
Managing Director of Morgan Stanley & Co., Incorporated ("Morgan Stanley"), a
director and President of Morgan Stanley Venture Capital II, Inc., which is
the managing general partner of Morgan Stanley Venture Partners II, L.P., the
general partner of Morgan Stanley Venture Investors, L.P., Morgan Stanley
Venture Capital Fund II, L.P. and Morgan Stanley Venture Capital Fund II,
C.V., and is a general partner of Morgan Stanley Venture Partners II, L.P. He
joined Morgan Stanley, an investment banking firm, in 1986. Prior to joining
Morgan Stanley, Mr. de Chazal was a Vice President of Citicorp Venture Capital
from 1981 through 1985. From 1976 to 1981, he was a consultant with McKinsey &
Co. He is also a director of The Dodge Group, Inc., Milestone Healthcare,
Inc., PageMart Inc., PageMart Wireless, Inc., SPSS Inc. and Transcare Corp.

Janet G. Effland became a director of the Company in 1995. Since 1988, Ms.
Effland has served as a Vice President of Patricof & Co. Ventures, Inc., a
venture capital firm. Prior to joining Patricof & Co. Ventures, Inc., Ms.
Effland was the Managing Director of a portfolio of United States investments
for CIN Investment Company. While with CIN Investment Company, she was
President and Chief Executive Officer of a portfolio company which provides
software for inventory control and warehouse management. Ms. Effland is a
member of the Boards of Directors of Urologix, Inc. and several privately-held
companies.

Franklin J. Iris became a director of the Company in 1989. Since 1986, Mr.
Iris has served as the President of Iris and Associates, a firm providing
investment consulting services for venture capital and emerging growth
companies in the medical industry. He serves on the board of a number of
privately-held health care companies and institutions and also on the board of
a publicly-held company, Photon Technology International, Inc. Mr. Iris was
formerly a senior executive at Becton Dickinson and Company where, at various
times, he served as Group President, President of the Clay Adams Division and
Corporate Controller.

Edwin M. Kania, Jr. became a director of the Company in 1989. Since 1985,
Mr. Kania has been a Special Limited Partner of Morgan, Holland Partners,
L.P., which is the General Partner of Morgan, Holland Fund, L.P., a venture
capital fund. Mr. Kania also serves as a General Partner of Morgan, Holland
Fund II, L.P., a venture fund organized in 1988, and as Managing General
Partner of One Liberty Fund III, L.P., a venture fund organized in 1995. Mr.
Kania is a director of Anesta Corp., a pharmaceutical company, and PerSeptive
Biosystems, Inc., a supplier to the pharmaceutical and biotechnology
industries.

C. William McDaniel became a director of the Company in April 1987 and has
served as a consultant to the Company since April 1995. Mr. McDaniel served as
a consultant to and a director of CP Ventures, Inc., a venture capital firm,
from April 1995 to April 1996 and June 1996, respectively. From 1987 to March
1995, Mr. McDaniel was the President and a director of CP Ventures, Inc. He is
a director of Natural MicroSystems Corp., a corporation with core enabling
technology products for the call processing and mixed media market.

Monroe E. Trout, M.D., became a director of the Company in 1993. Following
his retirement from Amercian Healthcare Systems ("AmHS"), a major national
purchasing consortium of hospitals with over 1,100 members, in January 1995,
Dr. Trout was named Chairman Emeritus of AmHS. Prior to his retirement, from
1986 to January 1995, Dr. Trout held various positions with AmHS, including
Chairman, Chief Executive Officer and President. Prior to his leadership at
AmHS, Dr. Trout was a senior officer and a member of the Board of Directors of
Sterling Drug. Dr. Trout serves as a director of a number of privately-held
companies, as well as Baxter International, Inc. and The West Company,
Incorporated.

The Company's directors whose terms expire are elected by the stockholders
each year at the annual meeting of stockholders and until their successors are
duly elected and qualified, or their earlier resignation or removal. Under the
Company's Third Amended and Restated Certificate of Incorporation, the Board
of Directors of the Company is classified into three classes. See "Description
of Capital Stock -- Anti-Takeover Measures."

Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive
officers or directors of the Company.

47
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

In June 1995, the Board of Directors established a Compensation Committee
and, in September 1995, the Board of Directors established an Audit Committee.
The Compensation Committee makes recommendations concerning the salaries and
incentive compensation of employees of and consultants to the Company, and
oversees and administers the 1988 Stock Plan, the 1989 Stock Plan, the 1995
Stock Plan, the 1995 Non-Employee Director Stock Option Plan (the "1995
Director Option Plan") and the 1995 Employee Stock Purchase Plan (the "1995
Purchase Plan"). The Audit Committee is responsible for reviewing the results
and scope of audits and other services provided by the Company's independent
auditors, as well as providing recommendations to the Board of Directors with
respect to regulatory matters.

DIRECTOR COMPENSATION

Non-employee directors receive a fee of $1,000 for each meeting of the
Board, $500 for each committee meeting that they attend in person and are
reimbursed for their reasonable out-of-pocket expenses incurred in attending
such meetings. No director who is an employee of the Company will receive
separate compensation for services rendered as a director. Non-employee
directors are also eligible for participation in the Company's 1995 Director
Option Plan. See "Management -- Stock Plans" and "Certain Transactions --
Director Options" for information relating to grants of options to directors.

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers whose annual
salary and bonus for the year ended December 31, 1996 exceeded $100,000
(collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION (1) SALARY BONUS OPTIONS
------------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Patrick J. Sullivan........................ $ 157,500 $80,000 40,000
Joseph W. Kelly............................ 140,000 50,000 30,000
Daniel J. Levangie......................... 137,900 40,000 30,000
Ted S. Geiselman........................... 127,500 50,000 30,000
Michael F. Adams........................... 113,750 30,000 60,000
</TABLE>
- --------
(1) See "Management -- Executive Officers, Directors and Key Employees" for
the title of the principal position held by each Named Executive Officer.

48
<PAGE>

The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1996 by the Company to
the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED IN 1996 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Patrick J. Sullivan..... 40,000 7.46% $27.00 12/31/06 $679,206 $1,721,242
Joseph W. Kelly......... 30,000 5.59 27.00 12/31/06 509,405 1,290,931
Daniel J. Levangie...... 30,000 5.59 27.00 12/31/06 509,405 1,290,931
Ted S. Geiselman........ 30,000 5.59 27.00 12/31/06 509,405 1,290,931
Michael F. Adams........ 60,000 11.19 20.67 9/11/06 779,955 1,976,559
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast
future appreciation of the Company's stock price. The potential realizable
value computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock. This table
does not take into account any appreciation in the price of the Common
Stock to date.

YEAR-END OPTION TABLE

The following table sets forth certain information regarding the stock
options held at December 31, 1996 by each of the Named Executive Officers.

AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick J. Sullivan...... 0 372,820 0 $8,290,227
Joseph W. Kelly.......... 0 186,000 0 3,607,500
Daniel J. Levangie....... 7,547 147,545 $185,451 2,918,823
Ted S. Geiselman......... 0 122,328 0 2,295,647
Michael F. Adams......... 0 72,000 0 597,200
</TABLE>
- --------
(1) Amounts calculated by subtracting the exercise price of the options from
the market value of the underlying Common Stock using the average of the
closing bid and ask price on the Nasdaq National Market of $25.625 per
share of Common Stock on December 31, 1996.

All of the stock options set forth in the table above become fully vested
and immediately exercisable upon a consolidation, merger or sale of
substantially all of the assets of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to June 1995, the Company had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by the Company's Board of Directors. The Company's
Compensation Committee consists of Ms. Effland, Mr. Blume, and Dr. Trout. Mr.
Blume is a General Partner of Capital Health Management and Capital Health
Venture Partners, which manage American Healthcare Fund and American
Healthcare Fund II, L.P., principal stockholders of the Company, respectively.
Ms. Effland is a Vice President of Patricof & Co. Ventures, Inc., a firm
affiliated with certain principal stockholders of the Company.

49
<PAGE>

STOCK PLANS

1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted
by the Board on December 13, 1995 and approved by the Company's stockholders
in December 1995. The 1995 Plan provides for the issuance of Common Stock
pursuant to the grant to employees of "incentive stock options" within the
meaning of the Internal Revenue Code of 1986, as amended, and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock in the Company to employees, consultants, directors and
officers of the Company. The aggregate number of shares of Common Stock which
may be issued pursuant to the 1995 Plan is 1,000,000 plus, effective as of the
first trading day of each calendar year beginning in 1997, the excess, if any,
of (i) the number of shares equal to five percent of the total number of
shares of Common Stock issued and outstanding as of the close of business on
December 31 of the preceding year or then reserved for issuance upon the
exercise or conversion of outstanding options, warrants or convertible
securities, over (ii) the number of shares then remaining reserved and
available for grant under the 1995 Plan, subject to certain adjustments,
provided, however, that in no event shall more than 2,000,000 shares of Common
Stock be issued pursuant to incentive stock options under the 1995 Plan.

The 1995 Plan is administered by the Compensation Committee of the Board of
Directors, which currently consists of three outside directors. Subject to the
provisions of the 1995 Plan, the Compensation Committee has the authority to
select the optionees and determine the terms of the options granted,
including: (i) the number of shares subject to each option, (ii) when the
option becomes exercisable, (iii) the exercise price of the option (which in
the case of an incentive stock option cannot be less than the market price of
the Common Stock as of the date of grant), (iv) the duration of the option and
(v) the time, manner and form of payment upon exercise of an option. An option
is not transferable by the optionholder except by will or by the laws of
descent and distribution. Generally, no incentive stock option may be
exercised more than three months following termination of employment. However,
in the event that termination is due to death or disability, the option is
exercisable for a maximum of 180 days after such termination. As of December
31, 1996, 470,850 options are outstanding under the 1995 Plan.

1995 Employee Stock Purchase Plan. The 1995 Purchase Plan was adopted by the
Board of Directors on December 13, 1995 and approved by the Company's
stockholders in December 1995. The 1995 Purchase Plan provides for the
issuance of a maximum of 140,000 shares of Common Stock pursuant to the
exercise of nontransferable options granted to participating employees.

The 1995 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company, except employees who own
five percent or more of the Company's stock, whose customary employment is 20
hours or more per week and who were employed by the Company as of December 31,
1995 or who have completed at least 90 days of employment are eligible to
participate in the 1995 Purchase Plan. Employees who own five percent or more
of the Company's Common Stock and directors who are not employees of the
Company may not participate in the 1995 Purchase Plan. To participate in the
1995 Purchase Plan, an employee must authorize the Company to deduct an amount
(not less than one percent nor more than ten percent of a participant's total
cash compensation) from his or her pay during six-month periods commencing on
January 1 and July 1 of each year (each a "Plan Period"), but in no case shall
an employee be entitled to purchase more than 300 shares in any Plan Period.
The exercise price for the option for each Plan Period is 85% of the lesser of
the average market price of the Common Stock on the first or last business day
of the Plan Period. If an employee is not a participant on the last day of the
Plan Period, such employee is not entitled to shares pursuant to the 1995
Purchase Plan, and the amount of his or her accumulated payroll deductions
will be refunded. An employee's rights under the 1995 Purchase Plan terminate
upon his or her voluntary withdrawal from the plan at any time or upon
termination of employment. As of December 31, 1996, rights to purchase 6,022
shares of Common Stock have been granted under the 1995 Purchase Plan.

1995 Non-Employee Director Stock Option Plan. The 1995 Director Option Plan
was adopted by the Board of Directors on December 13, 1995 and approved by the
Company's stockholders in December 1995.

50
<PAGE>

The 1995 Director Option Plan, administered by the Compensation Committee of
the Board of Directors, provides for the grant of options to purchase a
maximum of 250,000 shares of Common Stock of the Company to non-employee
directors of the Company.

Under the 1995 Director Option Plan, each director who is not an employee or
officer of the Company who serves on the Board on January 1, 1996 or is first
elected to the Board on or after January 1, 1996, receives an automatic one
time initial grant of an option vesting over three years to purchase 15,000
shares of Common Stock ("Initial Grant"); and each director who is not an
employee or officer of the Company and who has only expired options
outstanding on January 1 receives an automatic grant of an option vesting over
three years to purchase an additional 15,000 shares of Common Stock on January
1 ("Recurring Grant"). All options granted under the 1995 Director Option Plan
have an exercise price equal to the fair market value of the Common Stock on
the date of grant and become exercisable in twelve equal installments of 1,250
shares of Common Stock on the last day of each calendar quarter, provided that
the director has continuously served as a member of the Board through such
date. Options may not be assigned or transferred except by will or by the laws
of descent and distribution and are exercisable to the extent vested only
while the optionee is serving as a director of the Company or within 90 days
after the optionee ceases to serve as a director of the Company (except that
if a director dies or becomes disabled while he or she is serving as a
director of the Company, the option automatically becomes fully vested and is
exercisable until the scheduled expiration date of the option). In January
1996, the Company granted options to purchase an aggregate of 105,000 shares
of Common Stock to seven non-employee directors under the 1995 Director Option
Plan at an exercise price of $16.00 per share. Other than as described above,
no options have been granted to date under the 1995 Director Option Plan.

1989 Stock Plan. The Company's 1989 Stock Plan was approved by the Company's
Board of Directors on July 6, 1989 and by its stockholders on July 6, 1989.
The purpose of the 1989 Stock Plan is to provide incentives to employees,
officers, directors, and consultants of the Company by providing them with
opportunities to purchase stock in the Company pursuant to incentive and non-
qualified stock options granted thereunder. The 1989 Stock Plan is
administered by the Compensation Committee of the Board of Directors, and
provides for the accelerated vesting of options if the Company is to be
consolidated with or acquired by another entity in a merger or sale of all or
substantially all of the Company's assets. As of December 31, 1996, 1,134,676
options were outstanding under the 1989 Stock Plan. The Board of Directors
voted that no further options be granted under the 1989 Stock Plan after the
closing of the Company's initial public offering.

1988 Stock Plan. The Company's 1988 Stock Plan was approved by the Company's
Board of Directors on August 8, 1988 and by its stockholders on August 8,
1988. On July 6, 1989, the Board terminated granting further options under the
1988 Stock Plan. There are no options outstanding under the 1988 Stock Plan.
The authorized shares thereunder were aggregated with the authorized shares
under the 1989 Stock Plan, and both plans are administered by the Compensation
Committee of the Board of Directors.

51
<PAGE>

CERTAIN TRANSACTIONS

CONSULTING AGREEMENT

The Company entered into a two year management consulting agreement with C.
William McDaniel, a director of the Company, commencing March 1, 1995. Under
the consulting agreement, Mr. McDaniel has agreed to perform consulting and
advisory services as reasonably requested from time to time by the Board of
Directors. To date, Mr. McDaniel has provided consulting and advisory services
relating to a wide range of issues, including financing, regulatory and
strategic issues. Under the terms of the agreement, Mr. McDaniel receives cash
compensation of $8,333.33 per month, and has been granted non-qualified stock
options to purchase up to 37,500 shares of the Company's Common Stock at the
price of $0.625 per share under the Company's 1989 Stock Plan. The options
vest at a rate of 4,687.50 shares per calendar quarter. See "Principal and
Selling Stockholders."

SERIES A1 AND C1 FINANCINGS

On May 19, 1994, certain of the holders of the then existing Series A
Preferred Stock ("Series A Stock"), the Series B Preferred Stock ("Series B
Stock"), the Series C Preferred Stock ("Series C Stock") and the Series D
Preferred Stock ("Series D Stock") (collectively, the "Noteholders") acquired
an aggregate of $2,999,474 in original principal amount of the Company's 8%
Secured Promissory Notes (the "Notes") and certain Series A1 Preferred Stock
Purchase Warrants (the "Warrants") pursuant to a Securities Purchase Agreement
between the Company and the Noteholders. The Notes provided that the principal
amount thereof would automatically convert into shares of any equity security
issued in a subsequent equity financing of not less than $2,000,000. Pursuant
to the terms of the Warrants, all of the Warrants were exercised on
October 14, 1994 for an aggregate of 2,399,573 shares of Series A1 Convertible
Preferred Stock ("Series A1 Stock"). The exercise price of the Warrants was
$1.25 per share, resulting in aggregate proceeds to the Company of
approximately $3,000,000.

On June 13 and 21, 1995 the Company sold an aggregate of 3,809,383 shares of
Series C1 Convertible Preferred Stock ("Series C1 Stock") at $4.20 per share,
pursuant to the Series C1 Senior Convertible Preferred Stock Purchase
Agreement dated as of June 13, 1995 (the "Series C1 Financing"), of which
714,145 shares were issued as a result of the automatic conversion of the
Notes. At the time of the Series C1 Financing, the Noteholders waived the
right to receive any interest accrued on the Notes. Upon completion of the
Series C1 Financing, all of the outstanding shares of Series A Stock, Series B
Stock, Series C Stock and Series D Stock automatically converted into
3,569,370 shares of Series B1 Convertible Preferred Stock ("Series B1 Stock").

Pursuant to the Series C1 Financing, the Company granted certain demand,
"piggy-back" and S-3 registration rights to certain stockholders. See "--
Registration Rights." Pursuant to the Series C1 Financing, the Company also
entered into Indemnification Agreements with certain executive officers and
each of the directors (and related stockholders) under which the Company
agreed to indemnify each indemnitee to the fullest extent permitted by law.

Upon the closing of the Company's initial public offering, all of the
outstanding shares of Convertible Preferred Stock converted on a 1-for-1 basis
into shares of Common Stock. The following summarizes the number of shares of
Common Stock issued upon conversion of the Convertible Preferred Stock held by
the stockholders owning greater than five percent of the outstanding shares of
stock and the directors affiliated with them: (i) American Healthcare Fund
("American Healthcare") and American Healthcare Fund II, L.P. ("American
Healthcare II," and collectively with American Healthcare, the "American
Healthcare Funds"): 213,876 shares of Series A1 Stock, 313,873 shares of
Series B1 Stock and 63,653 shares of Series C1 Stock held by American
Healthcare, and 100,608 shares of Series A1 Stock, 135,907 shares of Series B1
Stock and 83,514 shares of Series C1 Stock held by American Healthcare II;
(ii) CP Ventures, Inc. holds 44,446 shares of Common Stock, 218,236 shares of
Series A1 Stock, 300,272 shares of Series B1 Stock, and 125,666 shares of
Series C1 Stock; (iii) Fostin Capital Associates ("Fostin") and APA/Fostin
Pennsylvania Venture Capital Funds ("APA/Fostin," and collectively with
Fostin, the "Fostin Funds"): 52,000 shares of Series A1 Stock, 173,165 shares
of Series B1 Stock and 7,142 shares of Series C1 Stock held by Fostin, and
240,000 shares of

52
<PAGE>

Series A1 Stock, 288,645 shares of Series B1 Stock and 132,353 shares of
Series C1 Stock held by APA/Fostin; (iv) Morgan, Holland Fund, L.P. holds
44,446 shares of Common Stock, 218,236 shares of Series A1 Stock, 320,272
shares of Series B1 Stock and 125,666 shares of Series C1 Stock; (v) Morgan
Stanley Venture Investors, L.P. ("MSVI"), Morgan Stanley Venture Capital Fund
II, C.V. ("MSVC II, C.V.") and Morgan Stanley Venture Capital Fund II, L.P.
("MSVC II, L.P.," and collectively with MSVI and MSVC II, C.V., the "Morgan
Stanley Funds"): 163,837 shares of Series C1 Stock held by MSVI, 157,273
shares of Series C1 Stock held by MSVC II, C.V. and 631,271 shares of Series
C1 Stock held by MSVC II, L.P.; (vi) Norwest Growth Fund, Inc. ("Norwest") and
Northwest Venture Partners ("Northwest," and collectively with Norwest, the
"Norwest Funds"): 135,634 shares of Series A1 Stock, 121,122 shares of Series
B1 Stock and 100,935 shares of Series C1 Stock held by Norwest, and 135,634
shares of Series A1 Stock, 121,122 shares of Series B1 Stock and 100,935
Shares of Series C1 Stock held by Northwest; and (vii) APA Excelsior IV, L.P.
("Excelsior IV"), APA Excelsior IV/Offshore, L.P. ("Excelsior IV/Offshore")
and APA/Fostin (collectively with Excelsior IV and Excelsior IV/Offshore, the
"Patricof Managed Funds"): 1,011,905 shares of Series C1 Stock held by
Excelsior IV, 178,571 shares of Series C1 Stock held by Excelsior IV/Offshore
and 240,000 shares of Series A1 Stock, 288,645 shares of Series B1 Stock and
132,353 shares of Series C1 Stock held by APA/Fostin. Frederick R. Blume, a
director of the Company, is a General Partner of Capital Health Management,
the General Partner of American Healthcare and is a General Partner of Capital
Health Venture Partners, the General Partner of American Healthcare II. C.
William McDaniel, a director of the Company, was a consultant to and director
of CP Ventures, Inc. from April 1995 to April 1996 and June 1996,
respectively. Janet G. Effland is a Vice President of Patricof & Co. Ventures,
Inc., the Investment Manager of Excelsior IV, Excelsior IV/Offshore and
APA/Fostin. Ms. Effland is also a Limited Partner of APA/Excelsior IV
Partners, L.P., a General Partner of Excelsior IV and Excelsior IV/Offshore
and is a General Partner of APA Pennsylvania Partners, a General Partner of
APA/Fostin. Edwin M. Kania, Jr., is a Special Limited Partner of Morgan,
Holland Partners, L.P. which is the General Partner of Morgan, Holland Fund,
L.P. Guy de Chazal, a director of the Company, is a director of Morgan Stanley
and is a director and President of Morgan Stanley Venture Capital II, Inc., a
General Partner of Morgan Stanley Venture Partners II, L.P., the Managing
General Partner of Morgan Stanley Funds.

DIRECTOR OPTIONS

In January 1996, the Company granted options to purchase an aggregate of
105,000 shares of Common Stock to seven non-employee directors under the 1995
Director Option Plan at an exercise price of $16.00 per share. Each of Messrs.
Blume, de Chazal, Iris, Kania, McDaniel, Dr. Trout and Ms. Effland received
options to purchase up to 15,000 shares of Common Stock, vesting over a period
of three years. On March 1, 1996, the Company granted options to purchase an
aggregate of 14,000 shares of Common Stock to seven non-employee directors
under the 1989 Plan at an exercise price of $15.00 per share. Such options are
exercisable in full as of the date of grant.

REGISTRATION RIGHTS

After the offering, the holders of 4,859,912 shares of Common Stock (the
"Holders") will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of the agreement
between the Company and the Holders, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other stockholders of the Company, the Holders are entitled to
notice of such registration and are entitled to include their shares of Common
Stock in such registration. The Holders may also require the Company on two
separate occasions to file a registration statement under the Securities Act
at the Company's expense with respect to their shares of Common Stock, and the
Company is required to use its reasonable efforts to effect such registration.
Further, at any time after the Company becomes eligible to file a registration
statement on Form S-3, the Holders may require the Company to file
registration statements under the Securities Act on Form S-3 at the Company's
expense with respect to their shares of Common Stock. These rights are subject
to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration.

53
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1996 and as
adjusted to reflect the sale of the Common Stock offered hereby (i) by each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director and Named Executive
Officer of the Company, (iii) by all directors and executive officers of the
Company as a group and (iv) each Selling Stockholder. The information as to
each person has been furnished by such person and, unless otherwise indicated
in the footnotes to this table, the Company believes that all persons listed
below have sole voting and investment power with respect to their shares of
Common Stock, except to the extent authority is shared by spouses under
applicable law.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
--------------------------
SHARES SHARES TO BE
BENEFICIALLY SOLD IN THIS PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING OFFERING
---------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Patricof Managed
Funds (2)............... 1,651,474 552,376 11.79% 6.87%
445 Park Avenue
New York, NY 10022
Morgan Stanley Funds (3). 952,381 217,326 6.80% 4.59%
1221 Avenue of the
Americas, 33rd Floor
New York, N.Y. 10021
American Healthcare
Funds (4)............... 711,431 129,742 5.08% 3.63%
2084 So. Milwaukee
Street
Denver, CO 80210
Norwest Funds (5)........ 181,870 84,387 1.30% *
40 William Street, Suite
305
Wellesley, MA 02181
Morgan, Holland Fund,
L.P. ................... 53,572 15,383 * *
c/o OneLiberty Ventures
One Liberty Square, 2nd
Floor
Boston, MA 02109
Acadia Trust, N.A. and
Frederick E. Shaw, Jr.,
as Trustees (6)............ 11,694 786 * *

511 Congress Street
Portland, ME 04104
Patrick J. Sullivan (7).. 160,852 0 1.15% *
Daniel J. Levangie (8)... 13,987 0 * *
Ted S. Geiselman (9)..... 46,341 0 * *
Michael F. Adams (10).... 0 0 * *
David J. Zahniser,
Ph.D. (11).............. 24,513 0 * *
James Linder, M.D.(12)... 33,625 0 * *
Frederick R. Blume (13).. 731,736 129,742 5.22% 3.76%
Guy de Chazal (14)....... 7,000 0 * *
Janet G. Effland (15).... 1,658,474 552,376 11.83% 6.91%
Franklin J. Iris (16).... 24,519 0 * *
Edwin M. Kania, Jr. (17). 68,381 15,383 * *
C. William McDaniel (18). 35,691 0 * *
Monroe Trout, M.D. (19).. 31,576 0 * *
Joseph W. Kelly (20)..... 11,250 0 * *
Victoria S.
Robinson (21)........... 0 0 * *
Robert J. Silverman (22). 0 0 * *
All executive officers
and directors as a group
(16 persons)............ 2,847,945 697,501 20.32% 13.43%
</TABLE>

54
<PAGE>

- --------
* Represents beneficial ownership of less than one percent of the
outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable, or become exercisable within
60 days following December 31, 1996 are deemed outstanding. However, such
shares are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(2) Consists of 1,011,905 shares held by Excelsior IV, 178,571 shares held by
Excelsior IV/Offshore and 460,998 shares held by APA/Fostin.
(3) Consists of 163,837 shares held by MSVI, 157,273 shares held by MSVC II,
C.V. and 631,271 shares held by MSVC II, L.P.
(4) Consists of 491,402 shares held by American Healthcare and 220,029 shares
held by American Healthcare II.
(5) Consists of 90,935 shares held by Norwest and 90,935 shares held by
Northwest.
(6) Consists of 3,898 shares held by Abigail R. Shaw Trust, 3,898 shares held
by Benjamin J. Shaw Trust and 3,898 shares held by Eliza E. Shaw Trust.
(7) Includes 5,666 shares issuable pursuant to presently exercisable stock
options. Excludes 367,153 shares issuable pursuant to stock options that
are not presently exercisable.
(8) Includes 8,797 shares issuable pursuant to presently exercisable stock
options. Excludes 146,295 shares issuable pursuant to stock options that
are not presently exercisable.
(9) Includes 1,250 shares issuable pursuant to presently exercisable stock
options. Excludes 121,078 shares issuable pursuant to stock options that
are not presently exercisable.
(10) Excludes 72,000 shares issuable pursuant to stock options that are not
presently exercisable.
(11) Includes 208 shares issuable pursuant to presently exercisable stock
options. Excludes 54,027 shares issuable pursuant to stock options that
are not presently exercisable. Also includes an aggregate 2,000 shares
held by Mr. Zahniser's two minor children.
(12) Includes 30,625 shares issuable pursuant to presently exercisable stock
options. Excludes 74,375 shares issuable pursuant to stock options that
are not presently exercisable.
(13) Consists of 711,431 shares held by American Healthcare Funds and 7,911
shares held by Capital Health Management over which Mr. Blume may be
deemed to share voting and investment power. Mr. Blume disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. Also includes 7,000 shares issuable pursuant to
presently exercisable non-qualified stock options. Excludes 10,000 shares
issuable pursuant to stock options that are not presently exercisable.
(14) Mr. de Chazal is a director and President of Morgan Stanley Venture
Capital II, Inc., the managing general partner of Morgan Stanley Venture
Partners II, L.P. which is the general partner of Morgan Stanley Funds,
and he is also a general partner of Morgan Stanley Venture Partners II,
L.P. and thus he may be deemed to have beneficial ownership of all the
shares owned by Morgan Stanley Funds. Mr. de Chazal disclaims beneficial
ownership of such shares except to the extent of his pecuniary interests
therein. Consists of 7,000 shares issuable pursuant to presently
exercisable non-qualified stock options. Excludes 10,000 shares issuable
pursuant to stock options that are not presently exercisable.
(15) Consists of 1,651,474 shares held by Excelsior IV, Excelsior IV/Offshore
and APA/Fostin, over which Ms. Effland may be deemed to share voting and
investment power. Ms. Effland disclaims beneficial ownership of such
shares except to the extent of her pecuniary interest therein. Also
includes 7,000 shares issuable pursuant to presently exercisable non-
qualified stock options.
(16) Includes 21,334 shares issuable pursuant to presently exercisable stock
options. Excludes 15,666 shares issuable pursuant to stock options that
are not presently exercisable.
(17) Consists of 53,572 shares held by Morgan, Holland Fund, L.P. over which
Mr. Kania may be deemed to share voting and investment power. Mr. Kania
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interests therein. Also includes 7,000 shares issuable pursuant
to presently exercisable non-qualified stock options. Excludes 10,000
shares issuable pursuant to stock options that are not presently
exercisable.
(18) Includes 14,500 shares issuable pursuant to presently exercisable stock
options. Excludes 10,000 shares issuable pursuant to stock options not
presently exercisable.
(19) Consists of 20,242 shares held by the Trout Family Trust. Includes 11,334
shares issuable pursuant to presently exercisable stock options. Excludes
15,666 shares issuable pursuant to stock options that are not presently
exercisable.
(20) Includes 1,250 shares issuable pusuant to presently exercisable stock
options. Excludes 184,750 shares issuable pursuant to stock options that
are not presently exercisable.
(21) Excludes 80,000 shares issuable pursuant to stock options that are not
presently exercisable.
(22) Excludes 100,000 shares issuable pursuant to stock options that are not
presently exercisable.

55
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $0.01 par value per share, and 5,000,000 shares of Preferred
Stock, $0.01 par value per share.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Third Restated
Certificate of Incorporation (the "Certificate") which is included as an
exhibit to the Registration Statement, and by the provisions of applicable
law.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
Upon the liquidation, dissolution or winding up of the Company, holders of
Common Stock share ratably in the assets of the Company available for
distribution to its stockholders, subject to the preferential rights of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. All shares of Common Stock
outstanding upon the effective date of this Prospectus, and the shares offered
hereby will, upon issuance and sale, be fully paid and nonassessable.

PREFERRED STOCK

The Company's Board of Directors has the authority to issue 5,000,000 shares
of Preferred Stock in one or more series and to fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting
or conversion rights that could adversely affect the voting power of the
holders of Common Stock, and the issuance of Preferred Stock could be used,
under certain circumstances, to render more difficult or discourage a hostile
takeover of the Company. The Company has no present plans to issue any shares
of Preferred Stock.

STOCK PURCHASE WARRANT

On June 22, 1994, the Company issued a Stock Purchase Warrant to purchase
shares of the Company's Common Stock to AmHS Purchasing Partners, L.P. The
exercise price per share is the fair market value of a share of the Company's
Common Stock on January 1, 1995, the date on which the shares vest. The Stock
Purchase Warrant is exercisable for 2,000 shares of Common Stock at an
exercise price of $10.00 per share. The warrant expires on January 1, 2005.

ANTI-TAKEOVER MEASURES

In addition to the directors' ability to issue shares of Preferred Stock in
one or more series, the Certificate and Bylaws of the Company contain several
other provisions that are commonly considered to have an anti-takeover effect.
The Company's Certificate includes a provision classifying the Board of
Directors into three classes with staggered three-year terms, a provision
prohibiting stockholder action by written consent except as otherwise provided
by law and provisions requiring 75% stockholder approval for the removal of
any or all of the directors without cause and 66- 2/3% stockholder approval
for certain other actions taken with respect to the Certificate. Under the
Company's Certificate and Bylaws, the directors may enlarge the size of the
Board and fill any vacancies on the Board. The Company's Bylaws provide that
nominations for directors may not be

56
<PAGE>

made by stockholders at any annual or special meeting unless the stockholder
intending to make a nomination notifies the Company of its intention a
specified period in advance and furnishes certain information. The Company's
Bylaws also provide that special meetings of the Company's stockholders may be
called only by the President or the directors and require advance notice of
business to be brought by a stockholder before the annual meeting.

In February 1988, a law regulating corporate takeovers (the "Anti-Takeover
Law") took effect in Delaware. In certain circumstances, the Anti-Takeover Law
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock) for three
years following the date on which such stockholder became an "interested
stockholder" subject to certain exceptions, unless the transaction is approved
by the board of directors and the holders of at least 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). The statutory ban does not apply if, upon
consummation of the transaction in which any person becomes an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain employee stock plans). A Delaware
corporation may "opt out" of the Anti-Takeover Law with an express provision
either in its original certificate of incorporation or in its certificate of
incorporation or by-laws resulting from a stockholders' amendment approved by
at least a majority of the outstanding voting shares. The Company is a
Delaware corporation that is subject to the Anti-Takeover Law and has not
"opted out" of its provisions.

The foregoing provisions of Delaware law and the Company's Certificate and
Bylaws could have the effect of discouraging others from attempting hostile
takeovers of the Company and, as a consequence, they may also inhibit
temporary fluctuations in the market price of the Common Stock that might
result from actual or rumored hostile takeover attempts. Such provisions may
also have the effect of preventing changes in the management of the Company.
It is possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston EquiServe
Limited Partnership.

57
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 16,013,002 shares of
Common Stock outstanding (based upon shares of Common Stock outstanding as of
December 31, 1996 and assuming no exercise of outstanding options or
warrants). Of these shares, the 3,000,000 shares sold in this offering and the
3,450,000 shares sold in the Company's initial public offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by "affiliates" of the Company, as that term
is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below. Of the remaining 9,563,002 shares of Common Stock 5,308,629
shares of Common Stock (the "Restricted Shares") held by existing stockholders
upon completion of this offering will be "restricted" securities within the
meaning of Rule 144 and may not be sold except in compliance with the
registration requirements of the Securities Act or an applicable exemption
under the Securities Act, including an exemption pursuant to Rule 144. No
predictions can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect the prevailing market
price.

SALES OF RESTRICTED SHARES

As of the date of this Prospectus, approximately 2,177,987 shares are
eligible for sale in the public market pursuant to Rule 144 or Rule 701 under
the Securities Act. Beginning 90 days after the date of this Prospectus,
approximately 706,348 additional shares subject to lock-up agreements between
the Underwriters and certain stockholders, including officers and directors,
will become eligible for sale in the public market pursuant to Rule 144. In
addition, 2,182,219 shares will become eligible for sale at various times
following such 90 day period in the public market pursuant to Rule 144. In
addition, certain existing holders of an aggregate of 4,859,912 shares of
Common Stock have the right to require registration of their shares under
certain circumstances. However, stockholders holding an aggregate of 2,413,351
shares of Common Stock have entered into lock-up agreements with respect to
all shares owned by them and not sold in this offering, which provide that
they will not sell or otherwise dispose of any shares of Common Stock (except
for shares sold in this offering) without the prior written consent of
Robertson, Stephens & Company LLC for a period of 90 days from the date of
this Prospectus. Robertson, Stephens & Company LLC may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. See "Certain Transactions -- Registration
Rights".

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) including an Affiliate, who has beneficially
owned shares for at least two years (including the holding period of certain
prior owners), will be entitled to sell in "brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the
Company becomes subject to the reporting requirements of Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (approximately 160,130 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks immediately preceding such sale, subject,
generally, to the filing of a Form 144 with respect to such sales and certain
other limitations and restrictions. In addition, a person (or person whose
shares are aggregated), who is not deemed to have been an Affiliate at any
time during the 90 days immediately preceding the sale and who has
beneficially owned the shares proposed to be sold for at least three years, is
entitled to sell such shares under Rule 144(k) without regard to the
limitations described above. Further, Rule 144A under the Securities Act as
currently in effect permits the immediate sale of restricted shares to certain
qualified institutional buyers without regard to the volume restrictions
described above.

The Company has filed a Registration Statement on Form S-8 to register
shares of Common Stock which have been reserved for issuance pursuant to
grants of options to purchase Common Stock under the Company's stock plans.
Shares issued on exercise of options after the effective date of the Form S-8
are

58
<PAGE>

eligible for sale by non-affiliates in the public market without limitation
and by affiliates subject to the provisions of Rule 144, except for the
holding period limitation of Rule 144. As of December 31, 1996 options to
purchase 1,710,526 shares of Common Stock were outstanding, of which
approximately 135,638 options were exercisable.

LOCK-UP AGREEMENTS

Certain securityholders and all executive officers and directors of the
Company, who in the aggregate hold 2,413,351 shares of Common Stock and
options to purchase 1,379,476 shares of Common Stock, have agreed, pursuant to
the Lock-Up Agreements, that they will not, without the prior written consent
of Robertson, Stephens & Company LLC, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for
a period of 90 days from the date of this Prospectus.

59
<PAGE>

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Montgomery Securities and Piper Jaffray
Inc. (the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and
pay for all such shares if any are purchased:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Robertson, Stephens & Company LLC .................................
Montgomery Securities..............................................
Piper Jaffray Inc. ................................................

---------
Total............................................................ 3,000,000
=========
</TABLE>

The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession of
not more than $ per share, of which $ per share may be reallowed to other
dealers. After the public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company
and the Selling Stockholders as set forth on the cover page of this
Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
and the Selling Stockholders will receive for the 3,000,000 shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the 3,000,000 shares to be offered hereby.
If purchased, such additional shares will be sold by the Underwriters on the
same terms as those on which the 3,000,000 shares are being sold. The Company
will be obligated, pursuant to the option, to sell shares to the Underwriters
to the extent the option is exercised. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liability
arising from breaches of representations and warranties contained in the
Underwriting Agreement.

The holders of approximately 2,413,351 shares of Common Stock have agreed
with the Representatives that, until 90 days from the date of this Prospectus,
subject to certain limited exceptions, they will not, directly or indirectly,
sell, offer, contract to sell, pledge, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable for, or any rights to purchase or acquire, shares of
Common Stock, owned directly by such holders or with respect to which they
have the power of disposition, without the prior written consent of Robertson,
Stephens & Company LLC. Approximately 894,168 of such shares will be eligible
for immediate public sale following expiration of the lock-up period pursuant
to Rule 144. In addition, the Company has agreed that, until 90 days from the
date of this Prospectus, the Company will not, without the prior written
consent of Robertson, Stephens & Company LLC, subject to certain limited
exceptions, sell or otherwise dispose of, any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the Company's sale of shares in this offering, the issuance of
Common Stock upon the exercise of the outstanding Warrant or options, or the

60
<PAGE>

Company's grant of options and issuance of stock under existing employee stock
option or stock purchase plans. See "Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.

In connection with the offering, certain Underwriters and members of the
selling group, if any, may engage in passive market making transactions in the
Common Stock on Nasdaq in accordance with Rule 10b-6A under the Exchange Act.
Passive market making consists of, among other things, displaying bids limited
by the bid prices of independent market makers and purchases limited by such
prices and effected in response to order flow. Net purchases by a passive
market maker on each day are limited to a specified percentage of the passive
market maker's average daily trading volume in the Common Stock during a
specified prior period and all possible market activity must be discontinued
when such limit is reached. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail
and, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. As of the date of this Prospectus, certain attorneys of Testa,
Hurwitz & Thibeault, LLP, own an aggregate of 2,220 shares of the Company's
Common Stock. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York,
New York.

EXPERTS

The consolidated financial statements and five-year selected consolidated
financial data included in this Prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon authority of said firm as experts in
accounting and auditing in giving said reports.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission
pursuant to the information requirements of the Exchange Act may be inspected
and copies at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York,
New York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, or may be obtained from the Commission's Internet
site on the world wide web at http://www.sec.gov. Copies of such materials
also may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common
Stock of the Company is quoted for trading on the Nasdaq National Market, and
the Registration Statement, reports and other information concerning the
Company may be inspected at the offices of the Nasdaq Stock Market located at
1735 K. Street, N.W., Washington, D.C. 20006-1500.

The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby.

61
<PAGE>

As permitted by the rules and regulations of the Commission, the prospectus
omits certain information, exhibits, schedules and undertakings set forth in
the Registration Statement. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement including exhibits, schedules and reports filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement referred to
herein set forth the material terms of such contract or other document but are
not necessarily complete, and in each instance reference is made to the copy
of such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission in Washington, D.C.
and copies of all or any part of which may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048, or may be obtained through the Commission's Internet site on the
world wide web at http://www.sec.gov. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.

62
<PAGE>

CYTYC CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September
30, 1996 (Unaudited)..................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 and for the Nine Months Ended September 30, 1995 and
1996 (Unaudited)......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1993, 1994 and 1995 and for the Nine Months Ended Sep-
tember 30, 1996 (Unaudited).............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and for the Nine Months Ended September 30, 1995 and
1996 (Unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Cytyc Corporation:

We have audited the accompanying consolidated balance sheets of Cytyc
Corporation (a Delaware corporation) and subsidiary as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cytyc
Corporation and subsidiary as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.

We have also audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets as of December 31, 1991, 1992 and
1993 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the two years ended December 31, 1992,
(none of which are presented herein) and have expressed an unqualified opinion
on those financial statements. In our opinion, the information set forth in
the selected consolidated financial data for each of the five years in the
period ended December 31, 1995, appearing in this prospectus, is fairly
stated, in all material respects, in relation to the financial statements from
which it has been derived.

Arthur Andersen LLP

Boston, Massachusetts
January 15, 1996

F-2
<PAGE>

CYTYC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995 SEPTEMBER 30,1996
-------- -------- -----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 2,777 $ 5,665 $ 29,645
Short-term investments ................. -- 2,237 14,169
Accounts receivable, net (Note 3)....... 453 1,323 2,101
Inventories (Note 4).................... 63 753 1,193
Prepaid expenses and other current
assets................................. 26 48 444
-------- -------- --------
Total current assets................... 3,319 10,026 47,552
Property and equipment, net (Note 5)..... 468 940 4,425
Other assets............................. 64 59 795
-------- -------- --------
Total assets........................... $ 3,851 $ 11,025 $ 52,772
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................ $ 585 $ 1,254 $ 334
Accrued expenses (Note 6)............... 2,212 1,417 1,841
Deferred revenue........................ 167 276 406
Notes payable to stockholders (Note 7).. 2,999 -- --
-------- -------- --------
Total current liabilities.............. 5,963 2,947 2,581
-------- -------- --------
Commitments and contingencies (Note 12)
Stockholders' equity (deficit) (Note 9):
Preferred Stock, $0.01 par value --
Authorized -- 5,000,000 shares
Issued and outstanding -- none......... -- -- --
Convertible Preferred Stock, $0.01 par
value --
Authorized, issued in series and
outstanding -- 16,252,316 shares in
1994, 9,778,326 shares in 1995 and no
shares at September 30, 1996 (at
December 31, 1995 entitled to $35,533
preference in liquidation )........... 163 98 --
Common Stock, $0.01 par value--
Authorized -- 30,000,000 shares
Issued and outstanding -- 307,106
shares in 1994, 308,506 shares in 1995
and 13,802,932 shares at September 30,
1996................................... 3 3 138
Additional paid-in capital.............. 26,995 43,165 93,301
Accumulated deficit..................... (29,273) (35,188) (43,248)
-------- -------- --------
Total stockholders' equity (deficit)... (2,112) 8,078 50,191
-------- -------- --------
Total liabilities and stockholders'
equity (deficit)...................... $ 3,851 $ 11,025 $ 52,772
======== ======== ========
</TABLE>

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

F-3
<PAGE>

CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1993 1994 1995 1995 1996
-------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales...................... $ 3,441 $ 2,920 $ 4,273 $ 2,751 $ 5,485
Cost of sales.................. 5,088 2,225 2,413 1,502 3,102
-------- ------- ------- -------- --------
Gross profit................. (1,647) 695 1,860 1,249 2,383
-------- ------- ------- -------- --------
Operating expenses:
Research and development...... 3,058 2,175 3,908 2,774 3,343
Marketing, sales and customer
support...................... 3,417 1,418 2,582 1,804 6,374
General and administrative.... 2,257 1,256 1,532 992 2,235
-------- ------- ------- -------- --------
Total operating expenses..... 8,732 4,849 8,022 5,570 11,952
-------- ------- ------- -------- --------
Income (loss) from operations.. (10,379) (4,154) (6,162) (4,321) (9,569)
Other income (expense):
Interest income............... 131 43 371 238 1,523
Interest expense.............. -- (153) (109) (109) --
Other......................... (23) (2) (15) (14) (14)
-------- ------- ------- -------- --------
Total other income (expense). 108 (112) 247 115 1,509
-------- ------- ------- -------- --------
Net income (loss).............. $(10,271) $(4,266) $(5,915) $ (4,206) $ (8,060)
======== ======= ======= ======== ========
Pro forma:
Net income (loss) per share... $ (1.22) $ (0.48) $ (0.54) $ (0.39) $ (0.63)
======== ======= ======= ======== ========
Shares used in computing net
income (loss) per share...... 8,409 8,954 10,868 10,868 12,737
</TABLE>

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

F-4
<PAGE>

CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, except share data)

<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
---------------- ------------------
ADDITIONAL 7.25% NOTE TOTAL
NUMBER PAR NUMBER PAR PAID- ACCUMULATED RECEIVABLE STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE IN CAPITAL DEFICIT FOR STOCK ISSUED EQUITY (DEFICIT)
---------- ----- ----------- ----- ---------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 240,266 $ 2 13,852,743 $ 139 $ 23,985 $(14,736) $ (10) $ 9,380
Exercise of stock
options................ 14,940 -- -- -- 8 -- -- 8
Net income (loss)....... -- -- -- -- -- (10,271) -- (10,271)
---------- ---- ----------- ----- -------- -------- ----- -------
Balance, December 31,
1993................... 255,206 2 13,852,743 139 23,993 (25,007) (10) (883)
Sale of Series A1
Convertible Preferred
Stock.................. -- -- 2,399,573 24 2,975 -- -- 2,999
Exercise of stock
options................ 51,900 1 -- -- 27 -- -- 28
Forgiveness of note
receivable............. -- -- -- -- -- -- 10 10
Net income (loss)....... -- -- -- -- -- (4,266) -- (4,266)
---------- ---- ----------- ----- -------- -------- ----- -------
Balance, December 31,
1994................... 307,106 3 16,252,316 163 26,995 (29,273) -- (2,112)
Sale of Series C1
Convertible Preferred
Stock, net of issuance
costs of $157.......... -- -- 3,095,238 31 12,812 -- -- 12,843
Conversion of notes,
including accrued
interest of $262, into
Series C1 Convertible
Preferred Stock........ -- -- 714,145 7 3,254 -- -- 3,261
Conversion of four prior
series of convertible
preferred stock into
Series B1 Convertible
Preferred Stock........ -- -- (10,283,373) (103) 103 -- -- --
Exercise of stock
options................ 1,400 -- -- -- 1 -- -- 1
Net income (loss)....... -- -- -- -- -- (5,915) -- (5,915)
---------- ---- ----------- ----- -------- -------- ----- -------
Balance, December 31,
1995................... 308,506 3 9,778,326 98 43,165 (35,188) -- 8,078
Conversion of
convertible preferred
stock into Common Stock
(unaudited)............ 9,778,326 98 (9,778,326) (98) -- -- -- --
Sale of 3,450,000 shares
of Common Stock in
Initial Public
Offering, net of
issuance costs of
$1,350,000 (unaudited). 3,450,000 34 -- -- 49,952 -- -- 49,986
Exercise of stock
options (unaudited).... 266,100 3 -- -- 184 -- -- 187
Net income (loss)
(unaudited)............ -- -- -- -- -- (8,060) -- (8,060)
---------- ---- ----------- ----- -------- -------- ----- -------
Balance, September 30,
1996 (unaudited)....... 13,802,932 $138 -- $ -- $ 93,301 $(43,248) $ -- $50,191
========== ==== =========== ===== ======== ======== ===== =======
</TABLE>

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

F-5
<PAGE>

CYTYC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
-------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss)...... $(10,271) $(4,266) $(5,915) $(4,206) $(8,060)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities --
Depreciation and
amortization......... 679 173 238 157 338
Forgiveness of note
receivable........... -- 10 -- -- --
Forgiveness of accrued
interest............. -- -- 109 -- --
Changes in assets and
liabilities --
Accounts receivable.. 353 284 (870) (392) (778)
Inventories.......... 308 303 (690) (581) (440)
Prepaid expenses and
other current
assets.............. 13 (2) (22) (39) (396)
Accounts payable..... 405 (39) 669 182 (920)
Accrued expenses..... 2,787 (1,113) (642) (164) 424
Deferred revenue..... 98 16 109 95 130
-------- ------- ------- ------- -------
Net cash used in
operating
activities......... (5,628) (4,634) (7,014) (4,948) (9,702)
-------- ------- ------- ------- -------
Cash flows from
investing activities:
Decrease (increase) in
other assets.......... (88) 9 (42) (28) (736)
Purchases of property
and equipment......... (188) (286) (663) (118) (3,822)
Purchases of short-term
investments........... -- -- (2,237) -- (20,097)
Proceeds from sale and
maturity of short term
investments........... -- -- -- -- 8,165
-------- ------- ------- ------- -------
Net cash used in
investing
activities......... (276) (277) (2,942) (146) (16,490)
-------- ------- ------- ------- -------
Cash flows from
financing activities:
Proceeds from notes
payable to
stockholders.......... -- 2,999 -- -- --
Proceeds from exercise
of stock options...... 8 28 1 -- 186
Proceeds from sale of
stock................. -- 2,999 12,843 12,915 49,986
-------- ------- ------- ------- -------
Net cash provided by
financing
activities......... 8 6,026 12,844 12,915 50,172
-------- ------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ (5,896) 1,115 2,888 7,821 23,980
Cash and cash
equivalents, beginning
of period.............. 7,558 1,662 2,777 2,777 5,665
-------- ------- ------- ------- -------
Cash and cash
equivalents, end of
period................. $ 1,662 $ 2,777 $ 5,665 $10,598 $29,645
======== ======= ======= ======= =======
Supplemental disclosure
of noncash operating
and financing
activities:
Conversion of notes
payable, including
accrued interest, into
Series C1 Convertible
Preferred Stock....... $ -- $ -- $ 3,261 $ -- $ --
======== ======= ======= ======= =======
</TABLE>

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

F-6
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(1) THE COMPANY

Cytyc Corporation (the Company) designs, develops, manufactures and markets
sample preparation systems for medical diagnostic applications. The Company's
principal product, the ThinPrep System, is an automated system for the
preparation of non-gynecological samples and cervical specimens on microscope
slides.

In 1991, the Company commenced commercial sales of ThinPrep Processors,
reagents, filters and related supplies for non- gynecological diagnostic
applications to clinical laboratories and hospitals. On May 20, 1996, the
Company received clearance from the FDA to market the ThinPrep System for
cervical cancer screening.

Revenues from sales of products have not generated sufficient cash to
support the Company's operations. Since inception, the Company has incurred
substantial losses, principally from expenses associated with obtaining FDA
approval of the ThinPrep System, engineering and development efforts related
to the ThinPrep System and the establishment of a sales and administrative
organization. The Company has funded its operations primarily through the
private placement of equity securities which resulted in $43.3 million of net
proceeds and the public sale of its Common Stock which resulted in $50.0
million of net proceeds. The Company continues to be subject to certain risks
common to medical device companies in similar stages of development including
the uncertainty of availability of additional financing, dependence on a
single product, extensive government regulation, uncertainty of market
acceptance, limited manufacturing, marketing and sales experience and
uncertainty of future profitability.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(a) Principles of Consolidation

The accompanying consolidated financial statements for 1993 and 1994 include
the accounts of the Company and its wholly owned subsidiary, Cytyc SARL (a
French corporation). All material intercompany transactions and balances have
been eliminated in consolidation. Cytyc SARL ceased operations and was
formally dissolved in 1994.

(b) Revenue Recognition

The Company recognizes product revenue upon shipment, when customer
acceptance is assured and collection of the resulting receivable is probable.

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

F-7
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(d) Short-term Investments

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The adoption of SFAS No. 115 had no material
impact on the Company's financial position.

Short-term investments consist of U.S. Government securities and commercial
paper with original maturities between three and twelve months. The Company
classifies these short-term investments as held-to-maturity, and accordingly,
they are carried at amortized cost, which approximates market.

(e) Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations
of credit risk are principally cash, cash equivalents, short-term investments
and accounts receivable. The Company places its investments in highly rated
institutions. Concentration of credit risk with respect to accounts receivable
is limited to certain customers to whom the Company makes substantial sales.
To reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited. The Company maintains an allowance for potential
credit losses but historically has not experienced any significant credit
losses related to an individual customer or groups of customers in any
particular industry or geographic area.

(f) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.

(g) Depreciation and Amortization

The Company provides for depreciation and amortization by charges to
operations, on a straight-line basis, in amounts estimated to allocate the
cost of the assets over their estimated useful lives as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Production equipment......................................... 3-7 Years
Research equipment........................................... 5-7 Years
Furniture and fixtures....................................... 5-7 Years
Computer equipment........................................... 3-5 Years
Leasehold improvements....................................... Life of lease
</TABLE>

(h) Other Assets

Other assets consist of long term lease receivables from the sale of
ThinPrep Processors, long term deposits and the cost of obtaining patents.
Patent costs are amortized over their estimated useful lives on a straight-
line basis.

(i) Research and Development Costs

The Company charges research and development costs to operations as
incurred.

(j) Foreign Currency Translation

Cytyc SARL's assets and liabilities were translated at the exchange rate in
effect at the balance sheet date. Revenue and expense accounts were translated
using a weighted average of exchange rates in effect during the year. Foreign
currency translation gains or losses in 1993 and 1994 were not significant and
were charged to operations.

F-8
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(k) Computation of Pro Forma Net Income (Loss) per Share

Pro forma net income (loss) per share for the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1995 and 1996 was
computed based on the weighted average number of common shares outstanding and
gives effect to the following adjustments. Common equivalent shares are not
included in the per share calculations, as the effect of their inclusion would
be antidilutive, except that, in accordance with Securities and Exchange
Commission requirements, stock options granted and Common Stock equivalents,
consisting of Series C1 Convertible Preferred Stock, issued during the twelve-
month period prior to the filing of the initial public offering of Common
Stock described in Note (11) have been included in the calculation as if they
were outstanding for all periods presented using the treasury-stock method and
the public offering price. Also, all outstanding shares of Series A1
Convertible Preferred Stock are assumed to have been converted to Common Stock
at the time of issuance, and all outstanding shares of Series B1 Convertible
Preferred Stock are assumed to have been converted to Common Stock at the time
of issuance of each of the four prior series of convertible preferred stock,
which automatically converted into Series B1 Convertible Preferred Stock in
1995. Historical net loss per share has not been presented as such information
is not considered to be relevant or meaningful.

(l) Unaudited Interim Consolidated Financial Statements

The consolidated financial statements and interim information as of and for
the nine months ended September 30, 1995 and 1996, have been derived from the
Company's accounting records and have been prepared by the Company pursuant to
the Rules and Regulations of the Securities and Exchange Commission for
financial statements of interim periods. The information furnished reflects
all adjustments which, in the opinion of management, are necessary for a fair
presentation of results for interim periods. Such adjustments consisted only
of normal recurring items. The results for the interim periods are not
necessarily indicative of the results expected for the full year or for any
future period.

(m) Postretirement Benefits

The Company has no obligations for postretirement benefits.

(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-----------------
1993 1994 1995 1996
---- ----- ---- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period................... $ 60 $ 929 $158 $148
Amounts charged to expense..................... 878 -- 50 --
Amounts written off............................ (9) (552) (60) (28)
Amounts reclassified to other accounts......... -- (219) -- --
---- ----- ---- ----
Balance, end of period......................... $929 $ 158 $148 $120
==== ===== ==== ====
</TABLE>

F-9
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(4) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------
1994 1995 1996
------ ------ ------------
(in thousands)
<S> <C> <C> <C>
Raw material and work-
in-process............. $ 6 $ 494 $ 591
Finished goods.......... 57 259 602
------ ------ ------
$ 63 $ 753 $1,193
====== ====== ======

(5) PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and consists of the following:

<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------
1994 1995 1996
------ ------ -------------
(in thousands)
<S> <C> <C> <C>
Production equipment.... $ 301 $ 325 $ 450
Research equipment...... 519 591 668
Furniture, fixtures and
computer equipment..... 369 569 1,116
Deposits on equipment... 28 377 1,831
Leasehold improvements.. 76 94 1,536
------ ------ ------
1,293 1,956 5,601
Less accumulated depre-
ciation and amortiza-
tion................... 825 1,016 1,176
------ ------ ------
$ 468 $ 940 $4,425
====== ====== ======
</TABLE>

(6) ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------
1994 1995 1996
------ ------ -------------
(in thousands)
<S> <C> <C> <C>
Accrued warranty costs............................ $ 251 $ 251 $ 251
Accrued product upgrade costs..................... 1,320 648 402
Accrued compensation.............................. 169 204 405
Accrued taxes..................................... 157 147 161
Accrued consulting fees........................... -- -- 205
Other accruals.................................... 315 167 417
------ ------ ------
$2,212 $1,417 $1,841
====== ====== ======
</TABLE>

(7) NOTES PAYABLE TO STOCKHOLDERS

During 1994, certain holders of convertible preferred stock acquired an
aggregate of $2,999,000 of the Company's 8% Promissory Notes. In connection
with the sale of Series C1 Convertible Preferred Stock, the principal amount
of these notes was converted into 714,145 shares of Series C1 Convertible
Preferred Stock. In addition, the noteholders agreed to forgive approximately
$262,000 of accrued interest on these notes. This forgiveness of interest has
been reflected as a contribution to additional paid-in capital.

F-10
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(8) INCOME TAXES

The Company records a deferred tax asset or liability based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates assumed to be in effect when
these differences reverse.

As of December 31, 1995, the Company has available net operating loss
carryforwards of approximately $27,861,000 and research and development credit
carryforwards of approximately $813,000 to reduce future federal and state
income taxes, if any. These carryforwards expire at various dates from 2002 to
2110 and are subject to review and possible adjustment by the Internal Revenue
Service.

The Internal Revenue Code contains provisions that may limit the amount of
net operating loss and credit carryforwards that the Company may utilize in
any one year in the event of certain cumulative changes in ownership over a
three-year period. In the event the Company has had a change of ownership, as
defined, utilization of the carryforwards may be restricted.

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards........................ $ 8,424 $ 11,144
Research and development credit carryforwards........... 748 813
Capitalized research and development expenses........... 2,179 2,068
Nondeductible accruals.................................. 746 539
Other temporary differences............................. 169 114
-------- --------
Deferred tax asset...................................... $ 12,266 $ 14,678
Valuation allowance..................................... (12,266) (14,678)
-------- --------
Net deferred tax asset.................................. $ -- $ --
======== ========
</TABLE>

Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this
amount.

(9) STOCKHOLDERS' EQUITY

(a) Common Stock Reserved

As of September 30, 1996, the Company has reserved 2,730,724 shares of
Common Stock for issuance, as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Exercise of stock options................................. 2,588,724
Exercise of warrant....................................... 2,000
Employee stock purchase plan.............................. 140,000
---------
2,730,724
=========
</TABLE>
(b) Preferred Stock

In December 1995, the Board of Directors and stockholders authorized
5,000,000 shares of $.01 par value Preferred Stock, effective upon the closing
of the initial public offering of the Company's Common Stock described in Note
(11). The Board of Directors has the authority to issue such shares in one or

F-11
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

more series and to fix the relative rights and preferences without further
vote or action by the stockholders. The Board has no present plans to issue
any shares of Preferred Stock.

Convertible Preferred Stock consists of the following:

<TABLE>
<CAPTION>
LIQUIDATION PAR VALUE
PREFERENCE AT ---------------------
DECEMBER 31, 1995 1994 1995
------------------ ---------- ---------
(in thousands,
except share and per share data)
<S> <C> <C> <C>
Series A1, $0.01 par value --
Authorized, issued and
outstanding -- 2,399,573 shares in
1994 and 1995....................... $ 3,135 $ 24 $24
Series B1, $0.01 par value --
Authorized, issued and
outstanding -- 3,569,370 shares in
1995................................ 15,672 -- 36
Series C1, $0.01 par value --
Authorized, issued and
outstanding -- 3,809,383 shares in
1995................................ 16,726 -- 38
Four prior series, $0.01 par value --

Authorized, issued and
outstanding -- 13,852,743 shares in
1994................................ -- 139 --
------------- ---------- ---------
$ 35,533 $ 163 $98
============= ========== =========
</TABLE>

In connection with the sale of Series C1 Convertible Preferred Stock in
1995, 13,852,743 shares of Convertible Preferred Stock issued in four prior
series automatically converted into 3,569,370 shares of Series B1 Convertible
Preferred Stock.

The Convertible Preferred Stock has the following rights and preferences.

(i) Conversion

Each share of Series A1, B1 and C1 Convertible Preferred Stock is
convertible, at the option of the holder, into one share of Common Stock,
adjusted for certain dilutive events, as defined. In addition, upon the
closing of the Company's initial public offering described in Note (11), all
outstanding shares of Convertible Preferred Stock converted into 9,778,326
shares of Common Stock.

(ii) Voting

Convertible preferred stockholders are entitled to vote on an as-converted
basis with Common Stockholders as one class.

(iii) Dividends

The Series A1, B1 and C1 Convertible Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, annual dividends at a
rate of $0.10, $0.34 and $0.34, respectively. Dividends are cumulative, must
be paid before any dividends on Common Stock and accrue for liquidation
purposes whether or not earned or declared by the Board of Directors.

To date, the Board of Directors has not declared any dividends, and as such,
the Company has not accrued any dividends. Had all dividends been declared as
of December 31, 1995, $135,000, $681,000 and $727,000 would have been accrued
for Series A1, B1 and C1, respectively. These amounts are included in the
liquidation preference amounts in the above table.

F-12
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(iv) Liquidation

In the event of a liquidation, dissolution or winding up of the Company, as
defined, the Convertible Preferred Stockholders have a preference over common
stockholders. The Series C1 Convertible Preferred Stockholders are entitled to
receive, in priority over the Series A1 and B1 Convertible Preferred
Stockholders, an amount equal to $4.20 per share plus any accrued but unpaid
dividends. The Series A1 Convertible Preferred Stockholders are entitled to
receive, in priority over the Series B1 Convertible Preferred Stockholders, an
amount equal to $1.25 per share plus any accrued but unpaid dividends. The
Series B1 Convertible Preferred Stockholders are entitled to receive an amount
equal to $4.20 per share plus any accrued but unpaid dividends.

(10) STOCK OPTION PLANS AND WARRANT

(a) 1989 Stock Option Plan

Under the 1989 Stock Option Plan, the Board of Directors may grant options
to purchase up to an aggregate of 1,900,000 shares of Common Stock. The
Company may grant incentive stock options to eligible employees and directors.
The exercise price of each incentive stock option may not be less than 100% of
the fair market value of Common Stock at the date of grant. Nonqualified stock
options may be granted to any employee, officer, director or consultant of the
Company. The exercise price of each nonqualified stock option is determined by
the Board of Directors. To date, all stock options have been granted with
exercise prices equal to the fair market value of the Company's Common Stock
at the time of grant. All stock options issued under this Plan become
exercisable over periods ranging from 2 to 5 years and expire within 10 years
from the date of grant.

The 1989 Stock Option Plan also allows the Company to grant awards of Common
Stock to directors, officers, employees and consultants of the Company. No
such awards had been granted as of December 31, 1995. Upon the closing of the
initial public offering of the Company's Common Stock described in Note (11),
no further grants may be issued under the 1989 Plan.

(b) 1995 Director Option Plan

During 1995, the Board of Directors and stockholders approved the 1995 Non-
Employee Director Stock Option Plan pursuant to which options to purchase up
to 250,000 shares of Common Stock were authorized for future issuance. In
January 1996, the Company granted options to purchase 105,000 shares of Common
Stock to seven directors under this Plan at an exercise price equal to $16.00
per share.

During 1995, the Board of Directors and stockholders approved, effective
upon the closing of the initial public offering of the Company's Common Stock
described in Note (11), the 1995 Stock Option Plan. The aggregate number of
shares of Common Stock that may be issued pursuant to this Plan is 1,000,000
plus, effective as of January 1, 1997 and each year thereafter, the excess, if
any, of (i) five percent of the total number of shares of Common Stock issued
and outstanding as of December 31 of the preceding year or then reserved for
issuance upon the exercise or conversion of outstanding options, warrants or
convertible securities, over (ii) the number of shares then remaining reserved
and available for grant under the 1995 Plan, subject to certain adjustments,
provided, however, that in no event shall more than 2,000,000 shares of Common
Stock be issued pursuant to incentive stock options under the 1995 Plan.

At September 30, 1996, the Company had 838,650 options available for future
grants under the 1995 Stock Option Plan and the 1995 Director Option Plan.

F-13
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

The following schedule summarizes the activity under the Company's stock
option plans for the three years ended December 31, 1995 and for the three
months ended September 30, 1996:

<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE
--------- ----------------
<S> <C> <C>
Outstanding, December 31, 1992. 234,847 $0.50 -- $ 0.85
Granted.................. 226,400 0.85 -- 1.25
Exercised................ (14,940) 0.50 -- 0.85
Canceled................. (23,060) 0.50 -- 0.85
--------- ----------------
Outstanding, December 31,
1993...................... 423,247 0.50 -- 1.25
Granted.................. 628,000 0.625 -- 1.25
Exercised................ (51,900) 0.50 -- 0.85
Canceled................. (278,900) 0.50 -- 1.25
--------- ----------------
Outstanding, December 31,
1994...................... 720,447 0.50 -- 1.25
Granted.................. 876,877 0.625 -- 10.00
Exercised................ (1,400) 0.50 -- 1.25
Canceled................. (22,800) 0.50 -- 1.25
--------- ----------------
Outstanding, December 31,
1995...................... 1,573,124 0.50 -- 10.00
Granted.................. 476,900 10.00 -- 33.50
Exercised................ (266,100) 0.50 -- 2.50
Canceled................. (33,850) 0.63 -- 32.00
--------- ----------------
Outstanding, September 30,
1996...................... 1,750,074 $0.50 -- $33.50
--------- ----------------
Exercisable................ 237,354 $0.50 -- $16.00
========= ================
</TABLE>

(d) 1995 Employee Stock Purchase Plan

(e) Warrant

In June 1994, the Company issued to a stockholder a warrant to purchase
shares of Common Stock at an exercise price equal to the fair market value of
Common Stock at the time of vesting but not less than $5.00 per share. The
warrant expires ten years from the date of issuance. Vesting of the warrant
was contingent upon achievement of certain performance objectives in
connection with a purchasing agreement between the Company and the
stockholder, which was cancelled July 22, 1996. At September 30, 1996, such
warrant was exercisable to purchase 2,000 shares of Common Stock at an
exercise price of $10.00 per share.

(11) INITIAL PUBLIC OFFERING

On March 8, 1996 the Company sold through an underwritten initial public
offering, 3,000,000 shares of its Common Stock at $16.00 per share. Upon the
closing of the Company's initial public offering, all outstanding shares of
the Convertible Preferred Stock were converted into 9,778,326 shares of Common
Stock. On April 4, 1996, the Underwriters of the Company's initial public
offering exercised their over-allotment option in full to purchase an
additional 450,000 shares of the Company's Common Stock at $16 per share.

(12) COMMITMENTS AND CONTINGENCIES

The Company rents a manufacturing and administrative facility under an
operating lease expiring in April 2003.

F-14
<PAGE>

CYTYC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

At September 30, 1996, future minimum annual lease payments under this lease
is as follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(in thousands)
<S> <C>
1996.................................... $ 139
1997.................................... 572
1998.................................... 572
1999.................................... 580
2000.................................... 585
Thereafter.............................. 1,336
-------
$ 3,784
=======
</TABLE>

Rent expense under operating leases totaled approximately $183,000,
$266,000, $270,000 and $420,000 in 1993, 1994, 1995 and the nine months ended
September 30, 1996, respectively.

At September 30, 1996, the Company has commitments for the purchase of
capital equipment costing approximately $780,000.

In addition, the Company is the exclusive licensee of certain patented
technology used in the ThinPrep System. In consideration for this license, the
Company has agreed to pay a royalty equal to 1% of net sales of the ThinPrep
Processor, filter cylinder disposable products which are used with the
ThinPrep System, and improvements made by the Company relating to such items.
There are no minimum royalty payments in connection with this license.

(13) EMPLOYEE BENEFIT PLAN

The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The Plan allows for employees to defer a portion of
their salary up to the maximum allowed under IRS rules. While the Company has
the discretion to make contributions to this Plan, no such contributions have
been made to date.

F-15
<PAGE>

THINPREP 2000
SAMPLE PREPARATION SYSTEM

[PICTURES OF THE THINPREP 2000 PROCESSOR, A TRAY OF TRANS CYT /(R)/ FILTERS, AND
THINPREP DISPOSABLE REAGENTS, FILTERS AND SUPPLIES APPEARS HERE]

In addition to the ThinPrep 2000 Processor,
the ThinPrep System includes related
disposable reagents, filters
and other supplies.

<PAGE>

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