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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the transition period from ______to ______

Commission file number 0-28194

DIGENE CORPORATION

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

     Based upon the last sale price of the registrant’s Common Stock on September 9, 2002, the aggregate market value of the 13,393,719 outstanding shares of voting stock held by non-affiliates of the registrant was $114,516,298.

     As of September 9, 2002, 18,115,585 shares of the registrant’s Common Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated by reference in this Report on Form 10-K:

     1)      The registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be filed not later than 120 days after the close of the fiscal year (incorporated into Part III).

Table of Contents

PART I

ITEM 1.      BUSINESS

Overview

     We develop, manufacture and market our proprietary gene-based testing systems for the screening, monitoring and diagnosis of human diseases. Our primary focus is in women’s cancers and infectious diseases. We have applied our proprietary Hybrid Capture® technology to develop a successful diagnostic test for human papillomavirus, or HPV, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. We have created and are continuing to expand the worldwide market for human papillomavirus testing.

     Our goal is to become a global leader in gene-based testing systems for women’s cancers and infectious diseases. Our strategy is to leverage our position as a pioneer in the human papillomavirus testing market and our Hybrid Capture technology to develop additional tests for the early detection of diseases. In addition to our HPV Test, our product portfolio includes gene-based tests for the detection of chlamydia, gonorrhea, hepatitis B virus, or HBV, and cytomegalovirus, or CMV. We have established relationships with clinical laboratories, physicians and other healthcare professionals, developed primarily through our HPV Test marketing efforts, which will help us to sell these products. We expect to continue to utilize these relationships to market additional diagnostic products in development.

Recent Developments

     On February 19, 2002, we entered into a merger agreement with Cytyc Corporation and Cruiser, Inc., a wholly-owned subsidiary of Cytyc, which provided for, among other things, the commencement by Cytyc of a stock and cash tender offer for all of the outstanding shares of our common stock for $4.00 in cash plus 1.1969 shares of Cytyc common stock for each of our shares, and, following consummation of the tender offer, the merger of Cruiser, Inc. with and into us. On June 30, 2002, we delivered to Cytyc formal notice of our termination of the merger agreement. Under the merger agreement, such termination was effective immediately.

     We terminated the merger agreement after the U.S. Federal Trade Commission, or FTC, informed us and Cytyc that if the parties sought to close the transactions contemplated by the merger agreement, the FTC would seek an injunction to block the closing. The FTC’s decision to enjoin the transaction was based on two identified concerns. First, the FTC believed that companies currently selling liquid-based Pap testing products, Cytyc and Tripath Imaging, as well as any future entrants in the market, needed to have viable commercial access to our HPV Test in order to compete effectively in the market for primary cervical cancer screening tests, and the FTC believed the proposed merger transaction would put Cytyc in a position to eliminate Tripath and others by limiting access to Digene’s HPV Test. Second, the FTC believed that, in the near future, Digene’s HPV Test could compete directly with Cytyc’s liquid-based Pap test as a primary screen for cervical cancer and the proposed acquisition would eliminate such future competition.

     Under the terms of the merger agreement, we had the right to terminate the merger agreement because the tender offer had not been consummated by June 28, 2002. Following

such termination, we intend to continue to focus our efforts on our goal to become a global leader in gene-based testing systems for women’s cancers and infectious diseases.

Diagnostic Testing

     Diagnostic tests are used to inform physicians of the presence of a disease and provide critical information necessary for treatment. Diseases today are primarily classified based on physiological symptoms and indirect measurements that are obtained using conventional diagnostic methods and often bear little relationship to the underlying mechanism or cause of the disease.

     In many cases, conventional diagnostic tests also lack the sensitivity and specificity to provide definitive diagnoses during the early stages of disease. Sensitivity is typically the measure of a test’s ability to accurately detect the presence of disease. A false negative test result occurs when a patient who has disease is given a negative or normal diagnosis. Specificity is typically the measure of a test’s ability to accurately identify the target to be measured. A false positive test result occurs when a patient who does not have disease is given a positive or abnormal diagnosis. We believe sensitivity and specificity can be greatly enhanced by using gene-based information.

     We expect gene-based diagnostic tests will create a fundamental shift in both the practice of medicine and the economics of the diagnostics industry. Gene-based diagnostic tests will create an increased emphasis on preventative molecular medicine. Physicians will be able to use these tests for the early detection of disease and to treat patients on a personalized basis, allowing them to select the most effective therapy with the fewest negative side effects. Furthermore, companies that develop gene-based diagnostic tests may obtain intellectual property protection and, therefore, may generate higher margins.

     An Example: Gene-Based Testing in Cervical Cancer. Cervical cancer is the second most common cancer among women worldwide, with approximately 440,000 new cases reported annually. The treatment of cervical cancer after it reaches the advanced stage may require chemotherapy, radiation treatment or surgery, including hysterectomy. If detected in the precancerous stage, a vast majority of cases of cervical cancer are preventable. The United States has a relatively low incidence of cervical cancer due to widespread use of cervical cancer screening and significant expenditures on screening infrastructure, which include sophisticated laboratory facilities, highly trained cytotechnologists and extensive regulatory oversight. Nonetheless, approximately 5,000 women in the United States die annually of this preventable disease. Outside the United States, limited resources and underdeveloped or non-standardized testing infrastructure often lead to underdiagnosis of cervical disease, resulting in a significantly higher incidence of cervical cancer.

     Pap smears have been the principal means of cervical cancer screening since the 1940s. Approximately 50 million Pap smears are performed annually in the United States, and we believe that 60 to 100 million are performed annually in the rest of the world. Follow-up testing and treatment is based on the classification of the Pap smear result. An equivocal, or ASC-US (Atypical Squamous Cells of Undetermined Significance), classification is given to Pap smear results that cannot be definitively classified as either normal or abnormal. This classification

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occurs in approximately 5% to 7% of all cases. Women with normal Pap smears do not undergo follow-up treatment beyond routine Pap smear testing. In general, women with abnormal Pap smears undergo a colposcopic examination (visual examination of the cervix with the aid of a colposcope). Most of these women also undergo biopsy at the time of colposcopy, and many go on to have any suspected lesions ablated (physically removed with a scalpel or cauterizing instrument). In practice, women with equivocal Pap smears undergo multiple, repeat Pap smears and many undergo colposcopy and biopsy, even though more than 75% of these women do not have cervical disease.

     In August 1999, the Journal of Pathology reported that human papillomavirus, a sexually transmitted virus, is the primary cause of cervical cancer and that 99.7% of cervical cancers contain cancer-causing human papillomavirus. Persistent infection with cancer-causing human papillomavirus types is a necessary precursor to virtually all cervical cancer. A test positive for human papillomavirus is more meaningful with increasing age because human papillomavirus infection is more likely to be persistent in more mature women. Clinical studies have shown that approximately 20% of women ages 30 and older with cancer-causing human papillomavirus have high grade cervical disease. Additionally, women ages 30 and older with persistent human papillomavirus infection and who do not have cervical disease are at significant risk of developing cervical disease in the future.

     On April 24, 2002, the Journal of the American Medical Association, or JAMA, published Consensus Guidelines recommending testing for human papillomavirus in the management of women with ASC-US Pap test results. These new “2001 Consensus Guidelines” were sponsored by the American Society for Colposcopy and Cervical Pathology, or ASCCP, and state that for managing women with ASC-US results, HPV testing is the “preferred approach” when it can be performed directly from a liquid-based pap test, also known as “reflex” HPV testing, or when the HPV test specimen can be collected during the initial office visit. According to the 2001 Consensus Guidelines, “Reflex HPV DNA testing offers significant advantages since women do not need an additional clinical examination for specimen collection, and 40% to 60% of women will be spared a colposcopic examination. Moreover, women testing negative for HPV DNA can be rapidly assured that they do not have a significant lesion.”

     Our gene-based HPV Test is a reproducible, objective test for the primary cause of cervical cancer that is not subject to the limitations of cytology. While our HPV Test is currently utilized domestically as a follow-up test to categorize equivocal Pap smear results, clinical studies have shown that our HPV Test, used in conjunction with the traditional Pap smear, has excellent diagnostic capabilities. Based on these studies, a woman with a negative Pap smear result and a negative HPV Test result can be virtually certain that neither cervical cancer nor its cause is present, alleviating patient anxiety and reducing healthcare costs. In addition, HPV testing and liquid Pap testing can be performed from the same clinical specimen, offering multiple testing options.

     This example illustrates that gene-based diagnostic tests, such as our HPV Test, can create a fundamental shift in the practice of medicine and the economics of the diagnostics industry.

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Our Technology

     Our Hybrid Capture technology combines two of the most significant technologies in the life sciences industry, DNA/RNA probes and monoclonal antibodies, to allow rapid, standardized gene-based testing in virtually any laboratory setting. Our Hybrid Capture technology is unique, patented and proven in clinical practice.

How Our Technology Works To Detect DNA

     The following is an example of our Hybrid Capture technology using an RNA probe to detect DNA targets in five sequential stages. The entire process takes approximately three and one-half hours.

	1.		Release DNA from cells. Alkali is added to the clinical specimen to make the target DNA molecules single-stranded and accessible for hybridization.
	2.		Hybridize DNA with RNA probe. The specimen is transferred to a container and a single-stranded RNA probe that is complementary to the target DNA sequence is added to the solution and heated. The RNA probe finds its complementary DNA target sequence and attaches or binds (hybridizes) to it, forming a double-stranded RNA:DNA hybrid complex. If there is no target DNA sequence in the sample, the RNA probe remains free in solution or unbound, and no RNA:DNA hybrid is formed.
	3.		Capture RNA:DNA hybrids onto a solid phase. The sample is then transferred to a second container that has been coated with our proprietary antibodies that specifically recognize and bind

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			to RNA:DNA hybrids. During this process, the RNA:DNA hybrids are captured or bound onto the microplate surface by the antibodies.
	4.		React captured hybrids with multiple antibody conjugates. A second antibody is added to the solution, which recognizes and binds to the RNA:DNA hybrids that are captured onto the surface of the container. This antibody is labeled with alkaline phosphatase, an enzyme, that, in the presence of chemicals such as dioxetanes, produces light and acts as a signal amplifier.
	5.		Detect amplified chemiluminescent or fluorescent signal. The container is washed to remove all of the unbound or free components while the RNA:DNA hybrids and the labeled antibody remain bound to the container. Chemicals are added that react with the alkaline phosphatase to produce light, and the light is detected with a highly sensitive instrument called a luminometer.

     Advantages of Our Technology

     Our Hybrid Capture technology provides several advantages over existing technologies specific to the diagnostic testing and the genomics research markets.

	•		Accuracy. In a clinical setting, tests based on our Hybrid Capture technology have proven to be superior to conventional diagnostic testing and to have sensitivity equal to or better than target amplification methods like polymerase chain reaction, with equal or better specificity. The results from the National Cancer Institute ASC-US Low-Grade Triage Study show that our HPV Test is 96% sensitive versus 85% for the Pap smear, with similar specificity. In addition, our Hybrid Capture 2, or HC 2, Chlamydia Test is capable of detecting chlamydia in up to 98% of the cases in which the disease is present. Tests based on our Hybrid Capture technology are highly reproducible and minimally susceptible to clinical variability.
	•		Single-Sample, Multi-Test Efficiency. We are the first to develop FDA-approved or cleared tests that detect human papillomavirus, chlamydia and gonorrhea from a single patient sample. The ability to perform multiple tests from a single patient sample provides greater convenience for patients and physicians, may reduce healthcare costs associated with frequent patient visits and testing and improves efficiency.
	•		Patient Care. Our tests help diagnose the presence or extent of disease at an early stage and clarify uncertain test results obtained under other diagnostic methods. For example, our HPV Test enables patients who are at risk of high-grade cervical disease to receive treatment early on, reduces patient anxiety associated with uncertainty and eliminates unnecessary invasive procedures. In addition, our tests can monitor the progression of a disease, detect an individual’s predisposition to a disease and, in the case of our blood virus tests, determine a patient’s response to a specific treatment.
	•		Cost Effectiveness. The higher accuracy and sensitivity of our tests may reduce the overall patient management costs and eliminate costs associated with late diagnosis of disease, equivocal test results and false negative diagnoses. This potential for cost reduction arises because the higher accuracy reduces the need for follow-up exams, allows healthcare resources to be focused on patients who have, or are at a higher risk of developing, disease and avoids the expenditure of resources on those patients at least

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			risk. In addition, the simple form and automation capabilities of our tests allow ease of laboratory use, reducing overall processing costs.
	•		Scalable. Our HC 2 platform offers potential automation with the Rapid Capture™ System, which serves as the automation platform we developed for large-scale diagnostic testing. The Rapid Capture System, or RCS, is a robotic liquid handling instrument that allows a single lab technician to run up to 4 microplates, or 350 specimens, in a single 8 hour lab shift, meeting the demands of high volume testing.

Products

     Our Hybrid Capture technology is the basis for all of our gene-based testing systems. Today, our products include diagnostic test kits and genomics research products.

     Our diagnostic kits include proprietary biochemicals and consumables. We also provide instrumentation systems and proprietary consumables required for specimen collection, detection and analysis. For diagnostic testing, we have developed two versions of our gene-based testing systems, the Hybrid Capture 1, or HC 1, and HC 2 systems.

     The HC 1 system, our first-generation DNA hybrid detection system, tests individual samples in polystyrene tubes. HC 1 is used for our CMV Test and lower-volume testing for our HBV and HPV Tests.

     The HC 2 system, which is currently available for our HPV, chlamydia and gonorrhea tests, uses a 96-well microplate format that permits simultaneous screening of multiple samples from a single plate. The HC 2 system is more efficient, less expensive and easier to use than the HC 1 system. In addition, the HC 2 system offers potential automation with the Rapid Capture System, the automation platform developed for high volume diagnostic testing using our Hybrid Capture technology.

     We have developed products and systems for the collection and preservation of cervical specimens for testing with our Hybrid Capture systems. Our Specimen Transport Medium, or STM, offers the lab the ability to perform multiple nucleic acid tests from a single sample. In addition, our Universal Collection Medium, or UCM™, consists of a liquid cytology vial optimized for nucleic acid testing, protein analysis and cytological testing of cervical specimens.

     We have also developed products and services for genomics and pharmaceutical research based on our Hybrid Capture technology. Our Hybrid Capture Expression Analysis System, or HC EAS includes reagents, a coated microplate and custom probes and control reagents that have been optimized for specific research applications and provide ultra-sensitive detection of messenger RNA for high-throughput gene expression screening. We have also developed and are marketing our Hybrid Capture ExpressArray™ Kit, a hybridization and detection kit for gene expression microarray analysis. The Hybrid Capture ExpressArray Kit enables researchers to study multiple genes and their expression in a single, easy-to-use assay. At the current time, we have no plans to continue development of additional products and services for genomics and pharmaceutical research as we are focusing our resources on our diagnostic testing products.

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Diagnostic Products

     The following table summarizes the commercial and regulatory status and potential worldwide market of our Hybrid Capture diagnostic tests:

     Our HPV Test. Major medical authorities worldwide now recognize that human papillomavirus is the primary cause of cervical cancer and the most common sexually transmitted virus. There are more than seventy distinct human papillomavirus types, approximately twenty-three of which are specific to the genital tract of both males and females. Human papillomavirus types that infect the genital tract can be divided into two categories, high-risk and low-risk, which indicate the chances of developing cervical cancer. Cancer-causing human papillomavirus types have been found in more than 99% of cervical

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cancers and can only be detected with a gene-based diagnostic test. Our HPV Test is the only FDA-approved and commercially available test for the detection of human papillomavirus.

     Our HC 2 HPV Test contains individual RNA probes that are mixed into cocktails of the significant cancer-causing, high-risk human papillomavirus types (types 16, 18, 31, 33, 35, 39, 45, 51, 52, 56, 58, 59 and 68), and low-risk human papillomavirus types which are not linked to the development of cervical cancer (types 6, 11, 42, 43 and 44). We have commercialized our High-Risk HPV Test to detect the presence of only the high-risk human papillomavirus types. All of our HPV Tests use a signal amplification process to detect small amounts of the human papillomavirus collected from the cervix. The test kit consists of RNA probes to specific human papillomavirus types, antibodies, detection reagents and either polystyrene tubes or 96-well microplates coated with antibodies.

     Our HPV Test is prescribed by a gynecologist or other healthcare professional. The healthcare professional collects the specimen by inserting the collection brush into the cervix, rotating the brush to collect cells, removing it and placing it into the transport tube device. The device is then sent to the laboratory, where specialized software programs provided with the HC 2 system produce results processed by a lab technician. The laboratory subsequently reports the test results to the physician using standard reporting procedures and the physician advises the woman of the test results and the appropriate follow-up treatment. The entire process can be completed in one day but is typically performed in two to three days. When our test is used with a liquid-based Pap smear, the entire process is the same except that only one specimen is collected for both our HPV Test and the Pap smear, permitting the laboratory to automatically perform follow-up human papillomavirus testing (reflex testing) should the woman have an equivocal or abnormal Pap smear test result. In addition, the 2001 Consensus Guidelines, published in the April 2002 issue of JAMA, stated that HPV testing was the “preferred approach” in the management of women with ASC-US Pap test results when it can be reflexed from a liquid-based Pap test or when the HPV test specimen can be collected during the initial office visit.

     Primary Cervical Cancer Screening. Our gene-based, objective HPV Test eliminates most limitations of the Pap smear. Our HPV Test is a reproducible, predictive test for the primary cause of cervical cancer that is not limited by cytology. In the United States, we are currently marketing our HPV Test as a follow-up test to equivocal Pap smears. We intend to establish it as the primary screen for cervical disease, initially in conjunction with the Pap smear and later independent of the Pap smear. Our HPV Test together with the Pap smear has excellent diagnostic capabilities. Internationally, we are working to replace the Pap smear with our HPV Test for primary screening.

     In October 2001, leading medical experts at the European Research Organization on Genital Infection and Neoplasia, or EUROGIN, International Experts Meeting on “Global Challenges and Opportunities in Cervical Cancer Prevention,” held in Nice, France, issued findings that reinforce the growing role of testing for human papillomavirus in cervical screening and patient management. The findings presented at the meeting included the following conclusions:

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	•		Human papillomavirus is responsible for effectively 100% of cervical cancers and detection of persistent human papillomavirus infection is the best endpoint for measuring risk for the development of cervical cancer.
	•		Human papillomavirus diagnosis is increasingly indicative of cervical disease as age increases. Specifically, as the population ages, human papillomavirus prevalence decreases while cervical cancer cases increase or stay the same.
	•		Human papillomavirus detection is always a more sensitive marker for cervical disease than cytology, and human papillomavirus use in primary screening should be explored, particularly in conjunction Cytyc Corporation’s ThinPrep® Pap Test™ or other liquid-based cytology.

     We submitted a Pre Market Approval (PMA) supplement application to the FDA in October 2001 to obtain market approval for the use of our HC 2 HPV Test as a primary adjunctive cervical cancer screening test to be performed in conjunction with the Pap smear for women ages 30 and older. We call the use of our HPV Test in conjunction with the Pap smear as a primary screen the “DNA Pap™.” On March 8, 2002, we presented preliminary scientific data from our PMA supplement for the DNA Pap to the FDA’s Microbiology Devices Panel. The use of the HPV Test in this indication may allow physicians to better determine their patient’s risk for developing cervical cancer and to provide the appropriate follow-up treatment, including further HPV and Pap smear testing, reducing patient anxiety associated with repeat Pap smears and the need for unnecessary invasive procedures. Following the FDA advisory panel meeting, the FDA Microbiology Devices Panel recommended the FDA approve our PMA supplement, provided that we make certain additional information available to the FDA. Following the FDA advisory panel meeting, on April 2, 2002, the FDA notified us that our PMA supplement for the DNA Pap would not be approvable until we submit an amendment to the PMA supplement providing the additional information recommended by the FDA Microbiology Devices Panel. The additional information required by the FDA includes additional data and analyses to support use of our HPV Test for the expanded indication for use, i.e., in conjunction with the Pap smear as a primary screening test for cervical cancer and its precursors in women ages 30 and older; an educational program that communicates information regarding this expanded indication and use of our DNA Pap to clinicians and patients; and a post-market study plan designed to confirm the DNA Pap’s performance in the U.S. and to measure the impact of such high-risk human papillomavirus testing on screening program outcomes. We intend to provide the requested information in the form of an amendment to our PMA supplement in September 2002 and may provide additional information later in 2002.

     Over the last several years, many general population screening studies using our HPV Tests have been conducted by prominent medical professionals and academic and government institutions throughout the world, including the National Cancer Institute, Columbia University and the Cleveland Clinic Foundation. The majority of these studies assessed the usefulness of our HPV Test in comparison to the Pap smear for women ages 30 and older. The following table, derived by us from these studies and presented by us at the FDA Panel hearing on March 8, 2002, demonstrates the superior performance of our HPV Test when used for primary general population screening alone, or in combination with Pap smear testing, to detect underlying cervical disease as compared with the Pap smear alone. In all studies, human papillomavirus

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testing alone, and in combination with the Pap smear, is superior to the Pap smear alone in detecting underlying cervical disease. The data show a minor decrease in specificity for cervical disease with the two tests combined. Nevertheless, women ages 30 and older who test positive for human papillomavirus and who do not have cervical disease are at significant risk of developing cervical disease in the future.

Performance Comparison of our HPV Test and the Pap Smear

     The human papillomavirus testing in these studies was conducted using our HC 2 HPV Test except for the Costa Rica study, which also used our earlier-generation HC 1 HPV Test. The variation in results is partially attributable to the subjective methods of determining and adjudicating actual underlying disease in the tested population.

     These studies show the variability in the Pap smear’s sensitivity from 50.0% to 97.6%, which demonstrates one of the key limitations of cytology and the Pap smear.

     The predictive nature of human papillomavirus testing permits healthcare providers to classify women who test negative for human papillomavirus as being unlikely to develop cervical disease in the foreseeable future. This may safely permit increased screening intervals, within the current guidelines, for such women, saving total costs for the healthcare provider and permitting the allocation of resources to those women who currently have cervical disease or are at significant risk for developing cervical disease in the future.

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     Clinical Trial Data. Clinical evidence and medical practice guidelines published in medical journals and presented at important medical meetings has validated our products and technology platform and the role of human papillomavirus in cervical cancer. These studies include:

•	April 2002: 2001 Consensus Guidelines published in JAMA recommend HPV DNA testing in the management of women with ASC- US Pap test results. The Guidelines were sponsored by the American Society for Colposcopy and Cervical Pathology;

•	November 2001: a study involving 1,997 women in rural China published in Gynecologic Oncology found that our HPV Test was 95% sensitive for identifying women with high-grade cervical disease and 100% sensitive for identifying women with cervical cancer;

•	October 2001: a study involving 278 women in the Netherlands published in the Journal of Pathology demonstrated that our test was more effective then the Pap smear at determining which women with borderline Pap smear results were truly at risk;

•	June 2001: a study involving 7,932 women in France, and published in The British Journal of Cancer, revealed that HPV testing on its own was 100% sensitive in detecting high-grade cervical lesions compared to 68% for the traditional Pap smear;

•	March 2001: results of a National Cancer Institute ASC-US Low-Grade Triage Study showed that human papillomavirus testing for women with equivocal Pap smear results was 96% sensitive for women with disease, although the sensitivity of the Pap smear was 85%;

•	January 2000: JAMA reported that two independent studies, one performed by the National Cancer Institute (involving 8,539 women in Costa Rica) and one by Columbia University (involving 1,415 women in Cape Town, South Africa), showed human papillomavirus testing was significantly more reliable for detecting high-grade cervical lesions;

•	December 1999: a German study involving 247 women published in The Lancet found that self-collection of cervical specimens by women is a reliable method of testing for human papillomavirus using our HPV Tests;

•	November 1999: a study involving 118 women published in the New England Journal of Medicine confirmed that persistent human  papillomavirus infection causes cervical cancer and a test for human papillomavirus DNA can predict the risk of cervical cancer among  women with normal Pap smears;

•	September 1999: a study involving 2,988 women in the United Kingdom published in The British Journal of Cancer demonstrated the high (95%) sensitivity of our test compared with the Pap smear (79%) in screening women over age 35 for cervical disease;

•	August 1999: a 22-country study completed by the International Agency for Cancer Research confirmed that human papillomavirus is the cause of cervical cancer in 99.7% of cases worldwide; and

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•	July 1999: a study involving 1,518 European women published in The British Journal of Cancer confirmed the high sensitivity (98%) of our HPV Test.

     The results of multiple clinical studies confirming the benefits of human papillomavirus testing using our HPV Tests were presented, in March 2002 at the FDA’s Microbiology Devices Panel review of the DNA Pap PMA supplement and in September 2001 at the 19th International Papillomavirus Conference in Florianopolis, Brazil.

     Additionally, several studies that highlight the cost effectiveness of our HPV Test have been presented or published. In May 2002, a study using a computer-based model published in JAMA concluded that adding an HPV test to routine biennial Pap tests appears to save additional years of life at reasonable costs compared to Pap testing alone. A second study using a computer-based model, also published in the May 2002 issue of JAMA, concluded that a biennial screening program using liquid-based cytology combined with ‘reflex’ HPV DNA testing for women with ASC-US is more effective and less costly than annual conventional cytology coupled with either repeat Pap tests or colposcopy for women with ASC-US. Findings from the National Cancer Institute ASC-US Low-Grade Triage Study published in the January 16, 2002 issue of the Journal of the National Cancer Institute confirmed that our HPV Test was a more effective way to manage women in high-risk age groups who have equivocal Pap smear results because our test resulted in dramatically fewer referrals for such women. In December 2001, a study involving 353 women in the Netherlands was published in The Lancet that concluded follow-up testing for human papillomavirus for women with abnormal Pap smear results can improve patient management by helping to prevent over-treatment of women with abnormal Pap smear results. Moreover, at a conference in February 2001 sponsored by the London-based Economists Advisory Group, and in an economics study published in a June 2001 issue of the Journal of the American Medical Association, findings from clinical studies showed HPV testing using Digene’s HC 2 HPV Test was a cost-effective method of testing, even in low-resource settings.

     In addition, we have participated in human papillomavirus clinical trials involving an aggregate of approximately 90,000 women on four continents for which the final results are being prepared for publication. These studies have been conducted by prominent medical professionals and academic and government institutions throughout the world, including the National Cancer Institute, Columbia University, the Johns Hopkins University and the Cleveland Clinic Foundation. A majority of the studies were designed to assess the usefulness of our HPV Test in comparison to the Pap smear for women over age 30. We believe that the completion and publication of the results of these clinical trials should help to accelerate further adoption of our HPV Test.

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                              The following is a summary of these trials:

     Regulatory and Reimbursement Milestones. As described above under “Primary Cervical Cancer Screening,” we are currently working to provide information requested by the FDA in connection with our PMA supplement for market approval for use of our DNA Pap. The FDA approved our HC 2 HPV Test for the detection of human papillomavirus in March 1999. In March 2000, the FDA approved our High-Risk HC 2 HPV Test. These approvals followed pre-market approvals, or PMAs, to test for the presence of human papillomavirus in women with equivocal Pap smears in April 1995, and, in 1997, a PMA supplement for the use of our HPV Test using the ThinPrep Pap Test sample collection system. In April 2002, we submitted a PMA supplement application with the FDA seeking approval of the use of our HPV Test with TriPath Imaging, Inc.’s SurePath™ Test Pack sample collection system. In July 2002, we received notice from the FDA that the PMA supplement was not approvable as submitted in April 2002. We are working with TriPath to determine how best to respond to the FDA’s concerns.

     Outside of the United States, we can market our HPV Test for use in all European countries, in South America and in all major Asian countries, including Japan where we received marketing approval in February 2002.

     In the United States, the American Medical Association has assigned specific Current Procedural Terminology, or CPT, codes, necessary for reimbursement, for human papillomavirus testing, and the Centers for Medicare and Medicaid Services (CMS) (formerly the Health Care Financing Administration, or HCFA) has established Medicaid and Medicare reimbursement for our HPV Test. Third-party payors and managed care entities that provide health insurance coverage to 225 million people currently authorize reimbursement for our HPV Test, up from 140 million people in fiscal 2000 and 200 million people in fiscal 2001. Reimbursement is now

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available from more than 150 payors, including Aetna U.S. Healthcare, United Healthcare, Kaiser Permanente and more than 30 Blue Cross/Blue Shield plans.

     Outside the United States, we have worked with our network of distributors to establish reimbursement from third-party payors in their respective territories. We, together with our distributors, have established reimbursement for our HPV Test in Germany, the Czech Republic and Brazil. In Europe, Africa and the Middle East, we are working with government and ministry officials to establish appropriate reimbursement coverage for our products in the major countries in such territories.

     Our Other Infectious Disease Tests. Chlamydia is the most common sexually transmitted disease in the United States and is a major health problem worldwide, with approximately 89 million new cases reported annually. Genital chlamydia infection, if left untreated, has serious potential consequences, including infertility, ectopic pregnancy, cervicitis and pelvic inflammatory disease. Gonorrhea, with approximately 62 million new cases reported annually worldwide, is the second-most common sexually transmitted disease in the United States and may result in severe genital complications in both women and men if left untreated. If properly detected, both chlamydia and gonorrhea are easily treatable with low-cost antibiotic therapy. Nevertheless, routine and broad-based screening for chlamydia and gonorrhea has been limited by the insufficient sensitivity of some culture methods, the invasive and cumbersome specimen collection methods frequently used and the time and cost associated with performing these tests.

     Our chlamydia and gonorrhea tests are prescribed and performed by a gynecologist or other healthcare professional using the same methods used to perform our HPV Test. We are the first to provide FDA-approved tests for the simultaneous detection of chlamydia and gonorrhea infections, in addition to human papillomavirus, from a single patient sample. We believe the ability to perform multiple tests from a single patient specimen provides greater convenience to patients and their physicians and reduces healthcare costs by decreasing the frequency of patient visits and testing. Our Hybrid Capture tests detect the presence of both chlamydia and gonorrhea in women from cervical swabs, as well as in men through the collection of urine samples. Clinical studies on women have indicated that our HC 2 Chlamydia Test is capable of detecting chlamydia in up to 98% of the cases in which the disease is present and our HC 2 Gonorrhea Test is capable of detecting gonorrhea in up to 92% of the cases in which it is present.

     In 1999, our portfolio of chlamydia and gonorrhea tests was cleared for sale in almost every major European country and in Brazil and Argentina. In October 2001, we received clearance to market our combination HC 2 Chlamydia/Gonorrhea Test in Japan. In the United States, the FDA granted us 510(k) clearance for our HC 2 Chlamydia Test in October 1999; the FDA granted us 510(k) clearance for our HC 2 Gonorrhea Test in November 1999; and the FDA granted us 510(k) clearance for our combination HC 2 Chlamydia/Gonorrhea Test in March 2000. The FDA granted us marketing clearance in October 2001 for a high-volume sample throughput instrument application for HC 2 Chlamydia/Gonorrhea testing using the Rapid Capture System, which serves as the automation platform we developed for large-scale diagnostic testing using our Hybrid Capture technology. We are currently in the process of launching these products in the United States.

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     Our Blood Virus Tests. Blood viruses, such as hepatitis B virus and cytomegalovirus, are leading causes of morbidity and death and, previously, were untreatable. Rapid, accurate and ongoing detection of blood viruses and monitoring of viral load are essential for effective patient management. Over the last several years, antiviral therapies have been developed to treat these diseases. To maximize the efficacy of these expensive and sometimes toxic therapies, physicians rely on viral load monitoring to measure the level of virus present in the patient. By precise measurement of viral load and identification of patients who are not responding to therapy early in their treatment, physicians can tailor antiviral therapies through precise monitoring of individual responses, recognize when a patient develops drug resistance and project how quickly the infection will progress to chronic disease.

     We have developed unique testing products using our Hybrid Capture system to detect the presence of hepatitis B virus and cytomegalovirus. Our HBV Test and CMV Test are prescribed by a gastroenterologist, transplant surgeon or other healthcare professional. The healthcare professional draws a blood specimen from the patient. The specimen is then sent to the laboratory, where specialized software programs provided with the HC 1 and HC 2 systems process the results. The laboratory subsequently reports the test results to the physician using standard reporting procedures and the physician advises the patient of the test results and the appropriate follow-up treatment. Depending on the level of hepatitis B virus in the patient’s blood, antiviral therapy will be presented, modified or discontinued. For transplant patients, the level of cytomegalovirus in the blood is used to determine the presence or absence of cytomegalovirus infection. Patients with active cytomegalovirus infections are prescribed antiviral therapy. Transplant patients are typically monitored once per week for cytomegalovirus DNA for twelve weeks following the initial organ transplant.

     The FDA granted us 510(k) clearance for our HC 1 CMV Test in September 1998 and our HC 2 HBV Test received marketing approval in France and Switzerland in January 2000 and December 1999, respectively. Our CMV Test is the only DNA test cleared for the detection of cytomegalovirus by the FDA. Abbott Laboratories, one of the world’s leading providers of HBV tests, is selling our HBV and CMV products in Europe, Africa and the Middle East on a non-exclusive basis.

Genomics Research Products

     We have developed unique Hybrid Capture-based reagents and DNA microarray products and services to exploit microarray business opportunities in the pharmaceutical and clinical research markets. We have applied our Hybrid Capture technology to develop products for high-throughput gene expression analysis on DNA microplate and microarray platforms. Our products include the Hybrid Capture ExpressArray Kit, a hybridization and detection kit for gene expression microarray analysis, and the HC EAS Test based on 96- and 384-well microplate platforms, which was marketed until June 30, 2002 by our partner, Applied Biosystems, under the tradename “Xpress Screen.” At the current time we have no plans to continue development of additional products and services for genomics and pharmaceutical research. We are evaluating potential strategic partners for our genomics research products.

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Sales and Marketing

     We focus our sales and marketing strategy on achieving broad market acceptance of our gene-based diagnostic tests. Our initial efforts have been in the cervical cancer field where we have established our HPV Test as a leading test for the primary cause of cervical cancer, and in cytomegalovirus and hepatitis B virus testing where we have established strong market positions. Over the last two and a half years, the majority of our sales and marketing investments have been directed to the launch of our HC 2 HPV Test and to build demand for our test among the medical profession, public health officials and consumers through a demand-creation marketing campaign.

     Increasing awareness of cervical cancer and our cost-effective solution is the first step in the demand-creation marketing campaign for our HPV Test. Our strategy has involved:

	•		sponsoring, or participating in, major multi-center clinical trials to establish the clinical utility and cost effectiveness of our tests;
	•		promoting the publication of the results of these trials in prestigious medical journals and communicating the results of these trials to the public and physicians through media awareness programs;
	•		establishing the HPV Centers of Excellence program, a network of key opinion leaders and leading United States academic centers, which help educate physicians about the benefits of our HPV Test;
	•		establishing widespread laboratory distribution for our HPV Test through direct sales programs, strategic alliances with major diagnostic companies and co-marketing programs with clinical reference laboratories;
	•		working with managed care providers, national governments and reimbursement agencies to establish reimbursement; and
	•		supporting women’s health advocacy groups to call for widespread use of our HPV Test and educating consumers about the benefits of human papillomavirus testing.

North American Market

     We currently market our products in the United States to clinical reference laboratories through a direct sales force supported by technical and customer service representatives. We market our HPV Test to physicians through joint marketing programs with clinical reference laboratories and through co-marketing arrangements with other strategic partners. At the end of fiscal 2002, over 200 clinical laboratories in the United States provided testing using our HPV Test. The largest laboratory providers in the United States, such as Quest Diagnostics, Laboratory Corporation of America, UniLab, ARUP Laboratories and DIANON Systems, all have active programs for automatic follow-up human papillomavirus testing of equivocal results from ThinPrep Pap Test specimens. These laboratories represent approximately 45% of the United States Pap smear testing market. The combined single-sample approach, which was

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approved by the FDA in September 1997, enables the use of our HPV Test with Cytyc Corporation’s ThinPrep Pap Test to eliminate the need for a return office visit to collect a second sample for human papillomavirus testing.

     In January 2001, we entered into an exclusive agreement with Cytyc Corporation for the promotion of our HC 2 HPV Test for use with Cytyc’s ThinPrep Pap Test in the United States and Puerto Rico. We jointly promote the benefits of testing for human papillomavirus with our HPV Test directly from Cytyc’s ThinPrep Pap Test sample collection vial. Cytyc’s greater than 100-person physician sales force has promoted the combined products to approximately 30,000 practicing gynecologists in the United States for equivocal Pap smears. Subject to FDA approval, we intend to co-promote the combined products as the most effective primary screening method for cervical cancer. The term of the agreement will expire on June 30, 2003, unless terminated earlier if the parties mutually agree to terminate the agreement, either party is involved in a change in control or either party breaches the terms of the agreement.

International Markets

     Internationally, we continue to make progress in increasing the market penetration of our HC 2 HPV Test in cervical cancer screening programs throughout Europe, Central and South America and Asia. In fiscal 2002, we increased overall international revenue from our HC 2 HPV Test by 77% over the prior year.

     In Germany, our largest European market, approximately 200 laboratories perform our HPV Test. Acceptance of our HPV Test continues to grow among healthcare providers for use as both a primary and secondary cervical cancer screen. Our progress in Germany is due to our coordinated sales and marketing program, which includes a comprehensive physician and laboratory education program, direct-to-consumer public awareness campaigns and government education efforts.

     We also continue to focus our efforts in the United Kingdom, Belgium and the Czech Republic, among other European countries. In the United Kingdom, our HC 2 HPV Test is being used in a pilot program to incorporate HPV testing into the National Health Services’ national cervical cancer screening program. In October 2001, Belgium’s Chamber of Representatives unanimously approved a resolution calling for introduction of HPV testing into its national cervical cancer screening program. The Czech Republic enacted legislation calling for full reimbursement of HPV testing by its National Health Insurance program. In November 2000, the Czech Republic became the first European country to adopt HPV testing as a national primary screening test for cervical cancer. In addition, the European Parliament announced in June 2002 that its Medical Service will reimburse for HPV testing in annual medical examinations for female Parliament Members and their staff in Brussels.

     In Latin America, Mexico offers significant potential for our HC 2 HPV Test, as it has the world’s second-highest rate of cervical cancer. We are working with the Mexican National Institute of Public Health, the Mexican Institute for Social Security and the Johns Hopkins School of Public Health to complete a clinical trial involving 7,500 Mexican women to evaluate the use of HPV testing as a primary cervical cancer screening test. In addition, member clubs of Rotary International are implementing a program called “Test for Life” to bring HPV testing to

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under-served women in central Mexico. The program launch was delayed in early 2002, but we expect the program to resume in September 2002.

     In Brazil, we are experiencing positive results with our proprietary Universal Collection Medium (UCM), which enables both cytology and HPV DNA testing to be done from one patient sample. This product was launched there in March 2002 by Digene do Brazil LTDA, our majority-owned subsidiary, and in November 2001, the Brazilian National Cancer Institute initiated a study (the INCA study) evaluating the effectiveness of both the HC 2 HPV Test alone and in conjunction with our UCM Pap. The UCM Pap testing system allows for molecular diagnostic testing of HPV and other infectious agents and liquid-based Pap testing from a single clinical specimen. The INCA study is expected to conclude at the end of 2002, and the results will be used to aid the Brazilian Ministry of Health in its decision regarding the implementation of the UCM system and the HC 2 HPV Test throughout Brazil.

     We expect sales growth in Japan where, in October 2001, we received approval from the Japanese Ministry of Health, Labor and Welfare to market our HC 2 test for chlamydia (CT) and gonorrhea (GC) and in February 2002, we received marketing approval for our HPV Test. Mitsubishi Chemical Corporation distributes both our HPV and CT/GC Tests in Japan.

     In Europe, Africa and the Middle East, we had previously entered into marketing and distribution arrangements with Abbott Laboratories and Roche Molecular Systems, Inc. to distribute our products. As further described below, in fiscal 2002 both of these arrangements terminated as to our HPV products, subject to a non-exclusive wind-down distribution period for Roche. We are currently establishing our own sales and marketing infrastructure in Europe, Africa and the Middle East and expect to expend significant resources to establish a sufficient distribution infrastructure in such markets.

     In May 1999, we entered into an exclusive marketing and distribution agreement with Abbott Laboratories for the sale and marketing of our HPV Test and other Hybrid Capture products in Europe, Africa and the Middle East and our HC 2 Chlamydia and Gonorrhea Tests in the United States. Abbott did not meet the HPV net sales thresholds established under the marketing and distribution agreement for calendar year 2000 and, on April 30, 2001, we terminated Abbott’s rights with respect to our HPV Test under the agreement. Such termination was subject to a 12 month non-exclusive wind-down period that ended on April 30, 2002. In addition, we converted Abbott’s distributor status to non-exclusive for our HBV Tests for the remainder of the agreement which expires on December 31, 2003. On January 28, 2002, in accordance with an amendment to the agreement, we terminated Abbott’s exclusive rights to market, sell and distribute our chlamydia and gonorrhea products worldwide, subject to a non-exclusive wind-down period for Abbott’s activities with respect to such products in Europe, Africa and the Middle East that ended on April 30, 2002. In connection with this amendment, we issued 87,873 shares of common stock to Abbott in a private placement transaction representing an agreed upon termination fee paid to Abbott. At the expiration of the non-exclusive wind-down period for our HPV and Chlamydia and Gonorrhea Tests, we repurchased Digene equipment placed with customers by Abbott.

     On April 29, 2001, we entered into a letter agreement with Roche Molecular Systems (the “Roche Distribution Contract”) which established Roche Molecular Systems (“Roche”) as

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the co-exclusive distributor of our HPV products in Europe, Africa and the Middle East from May 1, 2001 through June 30, 2002. In June 2002, we adopted as our sole strategy the direct distribution of our products in Europe, Africa and the Middle East. On June 30, 2002, the term of the Roche Distribution Contract expired, subject to a non-exclusive wind-down period. Under the Roche Distribution Contract, we have the option, exercisable within 30 days after December 31, 2002, to buy back from Roche equipment purchased from us by Roche and in use for HPV testing in customers’ laboratories on June 30, 2002. If we repurchase the equipment, the non-exclusive wind-down period will expire on December 31, 2002. If we do not repurchase the equipment, the non-exclusive wind-down period will extend to December 31, 2004. In June 2002, as part of our strategic decision, we decided we would exercise our option to repurchase the equipment.

     As we continue to build international sales of our products, we believe that a direct sales presence in Europe will be key to accelerating penetration of our products there. As of August 2002, we have established operations in 18 countries in Europe and our multilingual call center in the United Kingdom is established and taking orders. We plan to offer our products, either directly or through distribution arrangements, in all European countries by the end of fiscal 2003. We continue to work effectively with independent distributors throughout most of South America, Asia and the remaining countries in which we sell our products.

Intellectual Property

     Patents and other proprietary rights are essential to our business. In May 2001, we received a United States patent for the Hybrid Capture assay from the United States Patent and Trademark Office. Foreign counterparts of this patent application have been granted in Europe, Japan and Australia. We have also filed United States patent applications relating to other aspects of our Hybrid Capture technology. We have an exclusive license with the University of Hawaii for two patents covering monoclonal antibodies for the detection of RNA:DNA hybrid complexes. We also have United States patents and pending patent applications, and corresponding foreign patents and patent applications, in the areas of direct DNA probe labeling, signal amplification and biotin-avidin probe chemistry and our continuous amplification method. The inventions claimed by these patents and applications may be used in our DNA probes and any patents that issue from such applications may provide some ancillary protection for specific aspects of our products. Under current law, patent applications filed in the United States after November 29, 2000 are published eighteen months after filing (unless no foreign counterparts are filed). Patent applications filed before November 29, 2000 are maintained in secrecy until patents are issued. Patent applications in some foreign countries are maintained in secrecy for a period of time after filing. Any additional United States patents or foreign patents relating to our Hybrid Capture technology or our products may not be issued to us on a timely basis, or at all.

     We hold issued United States patents relating to human papillomavirus types 35, 43, 44 and 56. The patents relating to types 35, 44 and 56 expire in 2007, and the patent on type 43 expires in 2006. We also hold issued European patents in countries such as Germany, France, Italy and the United Kingdom and have pending foreign patent applications in Europe and Japan. We have licensed the patents relating to human papillomavirus types 35, 43 and 56 to Institut Pasteur (see cross license discussion below). In addition, we are the exclusive, worldwide licensee of a United States patent application and corresponding foreign patents and patent

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applications relating to human papillomavirus type 52 and a United States patent and corresponding foreign patents relating to the use of the L1 gene sequence to detect specific human papillomavirus types (see Georgetown license discussion below) as well as trade secrets relating to human papillomavirus type 58 (see Kanebo license discussion below).

     Through a cross license with Institut Pasteur, we have obtained a worldwide license to United States patents and patent applications and corresponding foreign patents and patent applications relating to human papillomavirus types 33, 39 and 42. The United States patents relating to human papillomavirus type 33 begin to expire in 2007, and the United States patents relating to human papillomavirus types 39 and 42 begin to expire in 2012. The European patents relating to human papillomavirus types 33, 39 and 42 begin to expire in 2007. In return, we have granted to Institut Pasteur a worldwide license to our three United States patents and corresponding foreign patents and applications relating to human papillomavirus types 35, 43 and 56. We have granted Institut Pasteur the right to extend the scope of the cross license to include the United States patent and corresponding patent applications relating to human papillomavirus type 44 at such time as Institut Pasteur shall have discovered and developed an additional human papillomavirus type which is equivalent in value to human papillomavirus type 44. In return for such an extension, we will receive a license to the new human papillomavirus type discovered and developed by Institut Pasteur. The cross license is non-exclusive. Under the cross license, Institut Pasteur has the right to grant a sublicense of its rights under the cross license, without the right to grant further sublicenses, to Beckman Instruments (now known as Beckman Coulter, Inc.) and to affiliates of Institut Pasteur. Under the agreement, both parties are restricted from granting additional licenses to the intellectual property subject to the cross licenses. We believe that the cross license terminates on the last to expire of the underlying patent rights. Any prior termination of the cross license could have a material adverse effect on our business, financial condition and results of operations. In June 2002, we were notified by Institut Pasteur that it had transferred to F. Hoffman-La Roche Ltd. the human papillomavirus intellectual property estate of Institut Pasteur, which included an assignment of the cross license to Roche. On September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired Beckman Coulter, Inc.’s human papillomavirus business and corresponding assets, including the assignment of the human papillomavirus intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a 1991 sublicense agreement. We currently do not have access to the details of the announced acquisition.

     On April 5, 2000, we entered into an exclusive worldwide license with Institut Pasteur relating to the genetic sequence of human papillomavirus types 68 and 70 (including the use of the United States patent relating thereto issued November 9, 1999 and expiring in 2017) and the detection of human papillomavirus types 68 and 70 using DNA testing methods. Under the license we can use our rights to develop and sell products using the licensed technology and pay royalties on such products. The term of the license expires upon expiration of the licensed patent, except that it continues for the commercial life of the products in countries where there is no licensed patent.

     Through a license with Georgetown University, we have obtained exclusive, worldwide rights to a United States patent application and corresponding foreign patents and patent applications relating to human papillomavirus type 52 and to a United States patent and corresponding foreign patents relating to the use of the L1 gene sequence to detect specific

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human papillomavirus types. Unless terminated earlier, the Georgetown license will terminate upon the last to expire of the licensed patent rights. The issued patents relating to human papillomavirus type 52 will expire in 2014 in the United States and in 2009 in Europe. A corresponding foreign patent relating to human papillomavirus type 42 was issued in Japan in 2000. The L1-related patent will expire in 2008 in the United States and in 2006 in Europe. We are obligated to make royalty payments to Georgetown University based on the percentage of net sales of products incorporating the licensed technologies.

     Through a license with Kanebo, Ltd., we have obtained exclusive worldwide rights (except for Japan where Kanebo retained the right to grant a non-exclusive sublicense to Toray Industries, Inc.) relating to human papillomavirus type 58. Unless terminated earlier, the Kanebo license expires on the later to occur of January 1, 2010 or the expiration of any patent relating to human papillomavirus type 58 issued to Kanebo on its patent application.

Facilities and Manufacturing

     We lease approximately 90,000 square feet of office and manufacturing space in Gaithersburg, Maryland. Our lease expires December 31, 2009 and we have the ability to extend the lease for two five-year terms.

     We combine more than 200 biological reagents, inorganic and organic reagents and kit components to manufacture our finished test kits. Biological reagents include DNA and RNA probes, antibodies and detection reagents. These biological reagents are currently manufactured in our Gaithersburg facility, which received validation approval from the FDA in September 2000. We purchase many of these components and reagents from outside suppliers. We believe that we currently have sufficient manufacturing capacity for our existing demand and that our Gaithersburg facility will allow us to expand our production capability to satisfy demand for the foreseeable future.

     We have established a quality control program, including a set of standard manufacturing and documentation procedures, intended to ensure that, where required, our products are manufactured in accordance with quality systems regulations. We received ISO 9001 certification in June 1999.

Employees

     At June 30, 2002, we employed 243 persons, including 67 in research and development, 71 in manufacturing, including quality assurance, 52 in sales and marketing and 53 in accounting, finance, administration and regulatory affairs. Eighteen of our employees hold Ph.D. or M.D. degrees. We are not a party to any collective bargaining agreements, and we believe our relationships with our employees are good.

Principal Executive Offices

     We were incorporated in Delaware in 1987. Our principal executive offices are located at 1201 Clopper Road, Gaithersburg, Maryland 20878.

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ADDITIONAL CONSIDERATIONS

We have incurred net losses to date and need to continue to spend substantial funds. We may not become profitable.

     We have had substantial operating losses since incorporation in 1987 and we have never earned a profit. At June 30, 2002, our accumulated deficit was approximately $71.4 million. These losses have resulted principally from:

	• expenses associated with our research and development programs;

	• our sales and marketing activities in the United States and internationally; and

	• other expenses, including administrative and facilities costs.

Historically, our net losses were $6,767,206 in fiscal 2000, $6,480,997 in fiscal 2001 and $9,396,616 in fiscal 2002. We expect to continue to incur operating losses in fiscal 2003 and we may be unable to generate sufficient revenues to become profitable near the end of fiscal 2003 or thereafter.

We may not be able to successfully and promptly establish our sales and marketing infrastructure in Europe.

     We had previously entered into distribution and marketing arrangements with Abbott Laboratories and Roche Molecular Systems, Inc. for the marketing and distribution of our products in Europe. As of June 30, 2002, Roche Molecular Systems is distributing our HPV products during a non-exclusive wind-down period in Europe, Africa and the Middle East and Abbott Laboratories is a non-exclusive distributor of our blood virus tests in Europe, Africa and the Middle East. We are currently establishing our sales and marketing infrastructure in Europe, Africa and the Middle East and expect to expend significant resources to establish a sufficient infrastructure. Our revenues and operating results could be hurt by our inability to successfully and promptly establish a distribution infrastructure or our inability to effectively market our diagnostic products in Europe.

Our HPV Test and other products may not be fully accepted by physicians, laboratories and health insurance providers.

     Our growth and success will depend upon market acceptance by physicians, laboratories and health insurance providers of our HPV Test as a primary cervical cancer screening method and as a follow-up screening method for women with equivocal Pap smears. This requires acceptance of our HPV Test as a clinically useful and cost-effective alternative to the Pap smear and follow-up procedures, such as repeat Pap smears, colposcopy and biopsy. Because human papillomavirus testing applies a new gene-based technology and testing approach, our HPV Test may not be readily accepted. Our products and product candidates, other than our HPV Test, are similarly dependent upon acceptance by physicians, laboratories and health insurance payors.

     Furthermore, technological advancements designed to improve quality control over sample collection and preservation and to reduce the Pap smear’s susceptibility to human error

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may increase physician reliance on the Pap smear and solidify its market position as the most widely used screen for cervical cancer. In particular, if marketed along with the Pap smear for primary screening in the United States, our HPV Test may be seen as adding unnecessary expense to the generally accepted cervical cancer screening methodology.

If third-party payors do not reimburse for our tests, our tests may not be used or purchased, thus negatively affecting our revenues.

     A significant portion of the sales of our products in the United States and other markets depend, in large part, on the availability of adequate reimbursement to users of our tests from government insurance plans, including Medicare and Medicaid in the United States, managed care organizations and private insurance plans. All of our FDA-approved products have some level of reimbursement coverage. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests incorporating new technology. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical suppliers to reduce their prices. Thus, third-party reimbursement may not be consistently available or financially adequate to cover the cost of our products. This could limit our ability to sell our products, cause us to reduce the prices of our products or otherwise adversely affect our operating results.

     Because each third-party payor individually approves reimbursement, obtaining such approvals is a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of our products to each payor separately with no assurance that such approval will be obtained. This process can delay the broad market introduction of new products and could have a negative effect on our revenues and operating results.

We are subject to extensive government regulation and may not obtain approval or clearance for our products and product candidates.

     Each of our products and product candidates are medical devices subject to extensive regulation by the United States Food and Drug Administration, or FDA, under the Federal Food, Drug and Cosmetic Act. Governmental bodies in other countries have similar, extensive regulations. FDA regulations govern, among other things, the activities that we perform, including product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales and distribution.

     Each medical device that we wish to distribute commercially in the United States will likely require either 510(k) clearance or premarket approval from the FDA prior to marketing. The 510(k) clearance pathway usually takes from three to twelve months, but can take longer. The premarket approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three years, but can also take longer.

     We will be required to obtain premarket approval to market our HPV Test for use as a primary adjunctive cervical cancer screening test in the United States, either separate from or in conjunction with the Pap smear. We submitted a PMA supplement to the FDA in October 2001 to obtain market approval for the use of our HC 2 HPV Test as a primary adjunctive cervical cancer screening test to be performed in conjunction with the Pap smear for women ages 30 and

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older. In April 2002, the FDA notified us that this PMA supplement would not be approvable until we submit an amendment to the PMA supplement providing additional information recommended during a March 2002 FDA Microbiology Devices Panel hearing. We intend to provide the requested information in the form of an amendment to our PMA supplement in September 2002 and may provide additional information later in 2002. We cannot assure you that we will receive premarket approval for this indication in a timely fashion or at all.

     Our cleared or approved devices, including our tests and related equipment, are subject to numerous postmarket requirements. We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:

	•		fines, injunctions and civil penalties;
	•		recall or seizure of our products;
	•		operating restrictions, partial suspension or total shutdown of production;
	•		denial of our requests for 510(k) clearance or premarket approval of product candidates;
	•		withdrawal of 510(k) clearance or premarket approval already granted; and
	•		criminal prosecution.

     Any enforcement action by the FDA may also affect our ability to commercially distribute our products in the United States. We believe we are currently in substantial compliance with FDA requirements.

     We, or recipients of our products that are limited to research use only, may fail to comply with the regulatory limitations placed on the distribution and use of these devices, which could result in an enforcement action by the FDA against us and/or recipients of our products. An enforcement action could include criminal and/or civil sanctions and also could adversely affect our ability to conduct the clinical trials necessary to support marketing clearance or approval of these products.

Third parties may own or control patents or patent applications that are related to our current or proposed products or processes, which would require us to obtain a royalty-bearing license or which will prevent us from commercializing such products.

     We may not have rights under some patents or patent applications related to our products or product candidates that are held by third parties. We have in-licensed patents to a number of cancer-causing human papillomavirus types, which, together with the patents to cancer-causing human papillomavirus types that we own, provide us with a competitive advantage. We may lose this competitive advantage if these licenses terminate or if the patents licensed thereunder expire or are declared invalid.

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     In addition, we may discover that we need to obtain rights to a patent in order to begin or continue selling a product. We may be unable to obtain such rights on commercially reasonable terms or at all.

We may inadvertently infringe the intellectual property rights of third parties and become involved in expensive intellectual property litigation. This could impose a significant strain on our resources and could prevent us from developing or marketing our products.

     There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries because of the uncertainties and complex legal, scientific and factual questions related to the protection of intellectual property. We have received inquiries regarding possible patent infringements relating to, among other things, aspects of our Hybrid Capture technology. We believe that the patents of others to which these inquiries relate are either not infringed by our Hybrid Capture technology or are invalid. However, we may be subject to further claims that our technology, including our Hybrid Capture technology, or our products infringe the patents or proprietary rights of third parties. In addition, we have licenses to various patents covering intellectual property that we use in conjunction with applications of our Hybrid Capture technology. Third parties may have claims to these patents. An adverse outcome to such claims could subject us to significant liabilities to third parties or require us to obtain royalty-bearing licenses from third parties, cease sales of related products or revise the applications or products which employ the patented technology. Any licenses required for any such third party patents or proprietary rights may not be made available to us on commercially reasonable terms, if at all. Furthermore, we may be unable to make the necessary revisions to our applications or products. We may also be forced to initiate legal proceedings to protect our patent position or other proprietary rights. These proceedings are often expensive and time-consuming, even if we were to prevail.

     In June 1999, Enzo Biochem, Inc. filed an action in the United States District Court for the Southern District of New York against the following defendants, Chugai Pharmaceutical Co., Ltd. and its subsidiaries, Chugai Pharma U.S.A., Inc. and Gen-Probe Incorporated, bioMerieux, Inc. and Becton Dickinson and Company for infringement of Enzo’s United States patent no. 4,900,659. In January 2001, the court granted a summary judgment motion in favor of each of the defendants. In July 2002, a panel of the Federal Circuit, after having previously affirmed the district court’s decision, granted Enzo’s petition for rehearing, reversed the district court’s order granting summary judgment and remanded the case to the district court for further proceedings and factual findings. In October 1999, Enzo contacted us to determine whether our HC 2 Gonorrhea Test might infringe such patent. We have evaluated this matter and its potential impact on our Gonorrhea Test. After consultation with our patent counsel, we believe that the Enzo United States patent is invalid and not infringed. We have also consulted with German counsel regarding Enzo’s European counterpart to this patent and believe that, like the U.S. patent, the European counterpart patent is also invalid and not infringed. It is possible that we could become involved in litigation with Enzo and/or have to seek a license from Enzo.

     In July 2001, Institut Pasteur notified us that Institut Pasteur was granted a new U.S. patent concerning the HBV genome and requested information from Digene regarding products that may use the technology described in this recently issued patent. We are currently in

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discussions with Institut Pasteur. It is possible that we may have to seek a license from Institut Pasteur.

Ongoing litigation may result in financial losses or harm to our reputation and may divert management resources.

     On November 19, 2001, we filed an action for patent infringement against Ventana Medical Systems, Inc. The action was filed in the United States District Court for the District of Delaware. In the action, we allege that Ventana Medical Systems, Inc. has made, used, sold and/or offered for sale products embodying our patented inventions thereby infringing our United States Patent No. 4,849,332 entitled “Human Papilloma Virus 35 Nucleic Acid Hybridization Probes and Methods for Employing the Same” and our United States Patent No. 4,849,331 entitled “Human Papilloma Virus 44 Nucleic Acid Hybridization Probes and Methods for Employing the Same.” We are seeking a permanent injunction and monetary damages for past infringement. On September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired Beckman Coulter, Inc.’s human papillomavirus business and corresponding assets, including the assignment of the human papillomavirus intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a 1991 sublicense agreement. Digene currently does not have access to the details of the announced acquisition. We are currently evaluating the impact, if any, of such announcement on the pending litigation.

     On March 15, 2002, we filed an action for declaratory judgment against Enzo Biochem, Inc. The action was filed in the United States District Court for the District of Delaware. We filed this action after having received direct threats from Enzo Biochem of infringement of U.S. Patent No. 6,221,581 entitled “Processes for Detecting Polynucleotides, Determining Genetic Mutations or Defects in Genetic Material, Separating or Isolating Nucleic Acid of Interest from Samples, and Useful Compositions of Matter and Multihybrid Complex Compositions.” We are seeking a judgment that the patent is invalid and has not been infringed by us. On March 20, 2002, in response to our complaint, Enzo Biochem filed a motion to dismiss our complaint for lack of subject matter jurisdiction, based on assertions that Enzo Diagnostics, Inc. (a wholly owned subsidiary of Enzo Biochem), not Enzo Biochem, was the holder of the patent in question. On the same day, Enzo Diagnostics, Inc. also filed a complaint for patent infringement against us in the Delaware District Court. Enzo Diagnostics, Inc. asserts in its complaint that we have infringed U.S. Patent No. 6,221,581 through the manufacture, sale and offer for sale of our Hybrid Capture products. The two cases have now been consolidated and discovery has commenced. We have filed counterclaims against Enzo Biochem for various business-related tortious conduct. We do not believe we are infringing such patent and will go forward with the action for declaratory judgment and continue vigorously defending against Enzo’s claim of patent infringement.

     Such current litigation is expensive and we cannot assure you that we will be successful. In addition, such litigation may result in financial losses or harm to our reputation and may divert management resources from our core business.

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Other companies may develop and market human papillomavirus tests competitive with our HPV Test.

     In June 2002, Insitut Pasteur transferred its human papillomavirus intellectual property estate to F. Hoffman-La Roche Ltd., which included an assignment of the cross license between Digene and Institut Pasteur. Based upon the human papillomavirus types Roche acquired access to as a result of the transfer by Institut Pasteur, the human papillomavirus types covered by Roche’s own patents and the human papillomavirus types that are publicly available, we believe Roche has the ability to develop a human papillomavirus test that would be competitive with our HPV Test in the marketplace. We can provide no assurance that we will be able to compete successfully against Roche if it markets a human papillomavirus test competitive with our HPV Test.

     On September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired Beckman Coulter, Inc.’s human papillomavirus business and corresponding assets, including the assignment of the human papillomavirus intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a 1991 sublicense agreement. We currently do not have access to the details of the announced acquisition. We are currently evaluating the impact, if any, of such announcement on our pending patent infringement litigation against Ventana Medical Systems, Inc. and the possible impact on the competitive market for human papillomavirus testing.

Single suppliers or a limited number of suppliers provide key components of our products. If these suppliers fail to supply these components, we may be unable to satisfy product demand which would negatively impact our revenues.

     Several key components of our products come from, or are manufactured for us by, a single supplier or limited number of suppliers. This applies in particular to two components: first, Tropix supplies us with chemiluminescent substrates (used to create a chemical reaction that causes light in connection with our Hybrid Capture signal amplified molecular technology), and second, Qiagen Instruments supplies us with the Rapid Capture System that serves as the automation platform developed for large-scale diagnostic testing using the Hybrid Capture technology. Tropix has been one of our suppliers since 1996. We entered into an agreement with Qiagen Instruments in January 2001 pursuant to which they supply us with the Rapid Capture System. We acquire some of these and other key components on a purchase-order basis, meaning that the supplier is not required to supply us with specified quantities over longer periods of time or set-aside part of its inventory for our forecasted requirements. We have not arranged for alternative supply sources for some of these components and it may be difficult to find alternative suppliers, especially to replace Tropix and Qiagen Instruments. We have not had any suppliers terminate their relationship with us. If our product sales increase beyond the forecast levels, or if our suppliers are unable or unwilling to supply us on commercially acceptable terms, we may not have access to sufficient quantities of key components on a timely basis and may be unable to satisfy product demand.

     In addition, if any of the components of our products are no longer available in the marketplace, we may be forced to further develop our products or technology to incorporate

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alternate components. The incorporation of new components into our products may require us to seek approvals from the FDA or foreign regulatory agencies prior to commercialization.

We have limited manufacturing experience and may encounter difficulties expanding our operations. We depend on a single facility for the manufacture of all of our products.

     We have limited commercial manufacturing experience and capabilities. If product sales increase, we will have to scale-up our manufacturing processes and facilities. We may encounter difficulties in scaling-up manufacturing processes and may be unsuccessful in overcoming such difficulties. In such circumstances, our ability to meet product demand may be impaired or delayed.

     We have a single manufacturing facility located in Gaithersburg, Maryland. This facility is subject, on an ongoing basis, to a variety of quality systems regulations, international quality standards and other regulatory requirements, including requirements for good manufacturing practices, or GMPs. We may encounter difficulties expanding our manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand.

     We face risks inherent in operating as a single facility for the manufacture of our products. We do not have alternative production plans in place or alternative facilities available should our Gaithersburg, Maryland manufacturing facility cease to function. These risks include unforeseen plant shutdowns due to personnel, equipment or other factors, and the resulting inability to meet customer orders on a timely basis.

Our international sales are subject to currency, market and regulatory risks that are beyond our control.

     For fiscal 2002, we derived approximately 6% of our consolidated revenues from the international sales of our products and services in foreign currencies and we expect that international sales will continue to account for a large portion of our sales. Changes in the rate of exchange of foreign currencies into United States dollars have and may hurt our revenues and results of operations.

     In particular, we sell products in, and derive revenues from, less economically developed countries. Many of these countries have suffered from economic and political crisis or instability, including countries in Latin America, Asia and Eastern Europe. During such times, the value of local currency in such countries has decreased, sometimes dramatically, negatively impacting our average unit prices, at the same time that unit sales of our products have also decreased in such countries. In the past, this has adversely affected our revenues and operating results. Future economic and political instability in foreign countries may affect demand for our products and the value of the local currency, and thus, negatively affect our revenues and results of operations.

     The extent and complexity of medical products regulation are increasing worldwide, particularly in Europe, with regulation in some countries nearly as extensive as in the United States. Further, we must comply with import and export regulations when distributing our products to foreign nations. Each foreign country’s regulatory requirements for product approval

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and distribution are unique and may require the expenditure of substantial time, money and effort. As a result, we may not be able to successfully commercialize our products in foreign markets at or beyond the level of commercialization we have already achieved.

Our operating results have fluctuated and may continue to fluctuate significantly. These fluctuations may cause similar fluctuations in the market value of our common stock.

     Our quarterly operating results, as well as our annual results, may fluctuate from period to period due to:

	•		the timing of our expenditures, such as research and development and marketing;
	•		variations in our distribution channels or purchasing patterns;
	•		the degree of market acceptance of our products;
	•		currency exchange rates;
	•		the timing of regulatory approvals and other regulatory decisions;
	•		the timing of new product introductions by us and our competitors; and
	•		product obsolescence resulting from new product introductions.

     Due to any one or more of these or other factors, in one or more future quarters, our results of operations may fall below the expectations of securities analysts or investors.

     In addition, our quarterly operating results have fluctuated in the past. We believe that these results may continue to fluctuate in the future with lower product revenues in our first and second fiscal quarters (July 1 through December 31) as compared with our third and fourth quarters of each fiscal year. The lower demand for preventative diagnostic procedures, like our HPV Test and the Pap smear, during the summer months and the December holiday season in the United States and Europe primarily causes this fluctuation.

We expect that our common stock price will be highly volatile.

     The realization of any of the risks described in this “Additional Considerations” section or other unseen risks could have a dramatic and adverse effect on the market price of our common stock. Additionally, market prices for securities of biotechnology and diagnostic companies, including ours, have historically been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that are unrelated to the operating performance of any one company. In particular and in addition to the other risks described elsewhere in this “Additional Considerations” section, the following factors can adversely affect the market price of our common stock:

•     announcements of technological innovation or new diagnostic products by others;

•     general market conditions;

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•     any failure of our research and development or regulatory approval process; and

•     changes in government regulation or patent decisions.

We may be exposed to product liability claims, possible product recalls and improper product usage for which our insurance may be inadequate.

We may be exposed to liability claims arising from the use of our products and the commercial sale of our products, as well as from the use of our products or product candidates in clinical trials. Consumers, our collaborators or licensees or parties selling our products may bring these claims. We currently carry product liability insurance coverage with a combined single limit of $10,000,000. This coverage may not be adequate to protect us against future product liability claims. Product liability insurance may not be available to us in the future on commercially reasonable terms, if at all.

We may need to raise additional funds in the future. If we are unable to obtain adequate funding, our operations may be adversely affected.

     We believe that our existing capital resources will be sufficient to meet the anticipated cash needs of our current business at least through calendar year 2003. Net cash used in our operating activities was approximately $8,637,000 for the fiscal year ended June 30, 2002. We expect our operating losses to continue through fiscal 2003. If our operating losses continue beyond fiscal 2003 or if one or more of the events described in these “Additional Considerations” actually occurs, we may have to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others or through alternative sources. Any equity financing would dilute our then current stockholders. We do not have any committed sources of additional financing. Additional funding, if necessary, may not be available on acceptable terms, if at all. If adequate funds are not available, we may have to delay, scale-back or eliminate aspects of our operations or attempt to obtain funds through arrangements with collaborative partners or others. This may result in the relinquishment of our rights to some of our technologies, product candidates, products or potential markets.

Members of our management together own a substantial interest in us, giving them effective control of the election of directors and stockholder matters.

     As of September 9, 2002, our Chairman and Chief Executive Officer and our President, Chief Operating Officer and Chief Financial Officer beneficially owned an aggregate of approximately 25.9% of our outstanding shares of common stock. As a result, these officers, acting together, effectively control the election of directors and matters requiring approval by our stockholders.

We have adopted antitakeover provisions that may prevent or frustrate any attempt to replace or remove our current management by the stockholders. These provisions may also affect the market price of our common stock.

     Our board of directors has the authority, without further action by the stockholders, to issue, from time to time, up to 1,000,000 shares of preferred stock in one or more classes or series and to fix the rights and preferences of such preferred stock. Our certificate of

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incorporation also provides for staggered terms for members of the board of directors. Additionally, our bylaws establish an advance-notice procedure for stockholder proposals and for nominating candidates for election as directors. These provisions of our certificate of incorporation and bylaws may prevent or frustrate any attempt to replace or remove our current management by stockholders, which may have the effect of delaying, deterring or preventing a change in our control.

     Further, we are subject to provisions of Delaware corporate law, which, subject to limited exceptions, will prohibit us from engaging in any “business combination” with a person who, together with affiliates and associates, owns 15% or more of our common stock, referred to as an interested stockholder, for a period of three years following the date that such person became an interested stockholder, unless the business combination is approved in a prescribed manner. These provisions of Delaware law may make business combinations more time consuming or expensive and therefore discourage bids for our common stock.

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ITEM 2.      PROPERTIES

     On March 2, 1998, we entered into a lease for a facility in Gaithersburg, Maryland, comprising a total of approximately 90,000 square feet. We relocated our operation to this facility beginning in January 2000 and completed the relocation in April 2000. The lease for the facility has a term of ten years, and we have two options to extend the term for a five-year period each.

ITEM 3.      LEGAL PROCEEDINGS

     On November 19, 2001, we filed an action for patent infringement against Ventana Medical Systems, Inc. The action was filed in the United States District Court for the District of Delaware. In the action, we allege that Ventana Medical Systems, Inc. has made, used, sold and/or offered for sale products embodying our patented inventions thereby infringing our United States Patent No. 4,849,332 entitled “Human Papilloma Virus 35 Nucleic Acid Hybridization Probes and Methods for Employing the Same” and our United States Patent No. 4,849,331 entitled “Human Papilloma Virus 44 Nucleic Acid Hybridization Probes and Methods for Employing the Same.” We are seeking a permanent injunction and monetary damages for past infringement. On September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired Beckman Coulter, Inc.’s human papillomavirus business and corresponding assets, including the assignment of the human papillomavirus intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a 1991 sublicense agreement. We currently do not have access to the details of the announced acquisition. We are currently evaluating the impact, if any, of such announcement on the pending litigation.

     On March 15, 2002, we filed an action for declaratory judgment against Enzo Biochem, Inc. The action was filed in the United States District Court for the District of Delaware. We filed this action after having received direct threats from Enzo Biochem of infringement of U.S. Patent No. 6,221,581 entitled “Processes for Detecting Polynucleotides, Determining Genetic Mutations or Defects in Genetic Material, Separating or Isolating Nucleic Acid of Interest from Samples, and Useful Compositions of Matter and Multihybrid Complex Compositions.” We are seeking a judgment that the patent is invalid and has not been infringed by us. On March 20, 2002, in response to our complaint, Enzo Biochem filed a motion to dismiss our complaint for lack of subject matter jurisdiction, based on assertions that Enzo Diagnostics, Inc. (a wholly owned subsidiary of Enzo Biochem), not Enzo Biochem, was the holder of the patent in question. On the same day, Enzo Diagnostics, Inc. also filed a complaint for patent infringement against us in the Delaware District Court. Enzo Diagnostics, Inc. asserts in its complaint that we have infringed U.S. Patent No. 6,221,581 through the manufacture, sale and offer for sale of our Hybrid Capture products. The two cases have now been consolidated and discovery has commenced. We have filed counterclaims against Enzo Biochem for various business-related tortious conduct.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERS

     Not applicable.

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EXECUTIVE OFFICERS OF DIGENE

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PART II

ITEM 5.      MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since our initial public offering of common stock on May 22, 1996, our common stock has been traded on the Nasdaq National Market under the symbol “DIGE.” The following table sets forth, for the fiscal quarters indicated, the high and low bid prices for our common stock, as reported by the Nasdaq National Market.

     On September 9, 2002, the closing sale price for our common stock, as reported by the Nasdaq National Market, was $8.55. As of September 9, 2002, our common stock was held by 157 holders of record.

     We have never paid dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data set forth below with respect to Digene’s Consolidated Statements of Operations for the fiscal years ended June 30, 2000, 2001 and 2002 and with respect to Digene’s Consolidated Balance Sheets at June 30, 2001 and 2002 are derived from the audited Consolidated Financial Statements of Digene, which are included elsewhere in this Form 10-K. Consolidated Statements of Operations data for the fiscal years ended June 30, 1998 and 1999 and Consolidated Balance Sheet data at June 30, 1998, 1999 and 2000 are derived from Consolidated Financial Statements of Digene not included herein. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements, the related Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.

(1)		Certain amounts have been reclassified to conform to current year presentation.
(2)		Restated to reclassify $1,915 relating to the impairment of an intangible asset from the cumulative effect of change in accounting principle to selling and marketing expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Impairment of Intangible Asset in Fiscal 1998.”
(3)		Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements.

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ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related Notes to such Consolidated Financial Statements also included in this Form 10-K. Some of the information that follows are not statements of historical fact but merely reflect our intent, belief or expectations regarding the anticipated effect of events, circumstances and trends. Such statements should be considered as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations. Factors that might cause or contribute to differences between our expectations and actual results include: uncertainty of market acceptance of our products by the worldwide medical community; uncertainty of future profitability and cash generation from operations; our limited sales and marketing experience; the extent of future expenditures for sales and marketing programs; delay in or failure to obtain regulatory approvals for our products in development; uncertainty regarding patents and propriety rights in connection with our products and products in development; dependence on third-party reimbursement from government entities, managed care organizations, and private insurance plans; risks inherent in international transactions, including those relating to our expansion in Europe and elsewhere; our ability to scale up our manufacturing to the extent product sales increase; uncertainty of clinical trial results for our products in development; our ability to obtain requisite additional financing to fund our operations beyond calendar year 2003; and other factors as set forth under the caption “Additional Considerations” beginning on page 22.

Overview

     Since our incorporation in 1987, we have devoted substantially all of our resources to developing, manufacturing and marketing our proprietary gene-based testing systems using our patented Hybrid Capture technology for the screening, monitoring and diagnosis of human diseases. Since our inception, we have incurred substantial operating losses, resulting principally from expenses associated with our research and development programs, including preclinical studies, clinical trials and regulatory submissions for our products, the expansion of our manufacturing facilities and our global sales and marketing activities.

     Our revenues to a significant extent have been derived from the sales of our HPV Test, which, for fiscal 2002, accounted for 74% of total revenues. We expect that the growing acceptance of our HPV Test in both the United States and internationally will continue to drive the growth in revenues from our HPV Test in the future.

     In fiscal 2002, our gross margins improved substantially over the prior fiscal year. In the coming fiscal year, we believe that we will be able to sustain gross margins consistent with, or better than, fiscal 2002 as we continue to scale up our manufacturing operations and realize expanded margins as a result of our direct distribution efforts in Europe. Our margins may be negatively impacted by increased sales of lower margin chlamydia and gonorrhea tests.

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     We believe that increasing our investment in sales and marketing and in research and development is essential to allow us to capitalize more fully on the potential of our HPV Test and our core technology. We expect to invest heavily in our direct European distribution operation during fiscal 2003 and beyond while also expanding our direct sales organization in the United States. We also expect to moderately increase our expenditures in the development of our next-generation Hybrid Capture 3 and 4 platforms and clinical trial activities for human papillomavirus screening in the coming fiscal year as compared to fiscal 2002.

     Our sales and marketing expenditures have been and will continue to be focused on accelerating the adoption of human papillomavirus testing worldwide. We intend to capitalize on the growing acceptance of our HPV Test in the United States and internationally by physicians, laboratories and health insurance providers by materially increasing expenditures on sales and marketing over the next several quarters. The increase in expenditures will be primarily directed at expanded direct sales and marketing efforts in the United States and Europe.

     We expect our general and administrative expenses will increase to provide adequate infrastructure to support greater research and development and sales and marketing activities, to pay the anticipated expenses associated with our ongoing litigation matters and to support the overall growth of our business.

     As a result of these anticipated increases in expenditures, we expect our operating losses to continue through fiscal 2003 with a turn to profitability near the end of fiscal 2003. There can be no assurance that we will meet this goal.

Results of Operations

Comparison of Fiscal Year Ended June 30, 2002 to Fiscal Year Ended June 30, 2001

     Product sales increased to approximately $45,750,000 in fiscal 2002 from approximately $32,706,000 in fiscal 2001. The increase was due primarily to an 83% growth in sales of our HPV Tests and testing services over such sales in the corresponding period in fiscal 2001, partially offset by decreases in sales of equipment and non-core products. The majority of the growth in HPV products sales was in the United States (96% over such sales in the corresponding period in fiscal 2001) and in Europe (62% over such sales in the corresponding period in fiscal 2001).

     During fiscal 2002, we recognized revenue of approximately $2,357,000 related to minimum purchase guarantees under the Roche Distribution Contract as compared to approximately $838,000 in fiscal 2001. Under the Roche Distribution Contract, Roche has no further minimum purchase obligations after June 30, 2002, which may adversely affect our product revenues unless we are able to increase product sales. Please see “Liquidity and Capital Resources” below for a description of the Roche Distribution Contract.

     Other revenues include research and development contract revenues, equipment rental revenues and licensing revenues. Other revenues increased to approximately $740,000 in fiscal 2002 from approximately $653,000 in fiscal 2001. The increase was due primarily to the recognition of equipment sales in Europe which were initially deferred in the fourth quarter of

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fiscal 2002, and additional research and development revenue under an existing contract, partially offset by a reduction in licensing revenue under an exclusive contract, which was converted to non-exclusive during fiscal 2001. We expect other revenues to decrease in fiscal 2003 principally due to the expiration in July 2002 of a Small Business Innovation Research, or SBIR, grant related to a herpes testing product.

     Cost of product sales marginally increased to approximately $12,289,000 in fiscal 2002 from approximately $12,089,000 in fiscal 2001. Gross margins on product sales increased to 73% in fiscal 2002 from 63% in fiscal 2001. The increase in gross margin percentage primarily related to increased sales of our HPV Test products, principally in the United States where we sell such products directly, and decreased sales of lower margin equipment products, as well as the elimination, by the first quarter of fiscal 2002, of certain expenses associated with the relocation to our new manufacturing facility in April 2000 (which negatively impacted our gross margins during fiscal 2001), improved inventory management and the recognition of minimum purchase guarantees by Roche, partially offset by European value added taxes on inventory purchases.

     Research and development expenses increased to approximately $9,265,000 in fiscal 2002 from approximately $8,120,000 in fiscal 2001. The increase in expenses was due primarily to personnel costs, which increased 23%, professional services and clinical trial expenses, which increased 18% and laboratory supplies, which increased 8%. Our research and development activities focus on our platform technology, including different or modified uses of such technology, and improvements to our diagnostic test and equipment products. Because our research and development expenditures tend to benefit multiple product offerings, we do not account for research and development expenses on a per-product or per-disease target basis.

     During fiscal 2002, we focused our research and development activities principally on: the development of our Rapid Capture System for automated processing of our Hybrid Capture tests, initially related to HPV and CT/GC; activities related to the preparation of a PMA supplement that we submitted to the U.S. Food and Drug Administration (FDA) in October 2001 to obtain market approval for the DNA Pap which involves the use of our Hybrid Capture 2 HPV Test as a primary cervical cancer screening test to be performed in conjunction with the Pap smear for women ages 30 and older; the development of our universal collection medium (UCM) that is expected to allow the simultaneous testing for HPV, chlamydia and gonorrhea and of other genetic and cellular material from a single patient sample; clinical trials related to CT/GC testing for ThinPrep specimens and HPV testing from the TriPath Prep system; and the creation of our next generation of Hybrid Capture technology.

     As indicated above, as part of our research and development activities, we submitted a Pre Market Approval (PMA) supplement application to the FDA in October 2001 to obtain market approval for the use of our DNA Pap. On March 8, 2002, we presented preliminary scientific data from our PMA supplement for the DNA Pap to the FDA’s Microbiology Devices Panel. Following the FDA advisory panel meeting, the FDA Microbiology Devices Panel recommended the FDA approve our PMA supplement, provided that we make certain additional information available to the FDA. Following the FDA advisory panel meeting, the FDA notified us that our PMA supplement for the DNA Pap would not be approvable until we submit an amendment to the PMA supplement providing the additional information recommended by the FDA Microbiology Devices Panel. We intend to provide the requested information in the form

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of an amendment to our PMA supplement in September 2002 and may provide additional information later in 2002.

     Selling and marketing expenses increased to approximately $20,484,000 in fiscal 2002 from approximately $13,012,000 in fiscal 2001. The increase was due primarily to various marketing programs and associated professional expenses, which increased 110%, royalty costs, which increased 63%, and personnel costs, which increased 26%. In fiscal 2002, we retained the services of an advertising agency. All of the costs associated with this agency were treated as advertising costs. We expect our selling and marketing expenses to increase during fiscal 2003 as we establish direct sales and marketing operations in Europe due to the expiration, on April 30, 2002, of Abbott’s non-exclusive distribution wind-down period for our HPV and CT/GC products in Europe, Africa and the Middle East and the expiration of the Roche Distribution Contract on June 30, 2002, and as we expand our direct sales organization in the United States to increase HPV product sales and commercialize our CT/GC products.

     General and administrative expenses increased to approximately $14,024,000 in fiscal 2002 from approximately $8,336,000 in fiscal 2001. The increase was due primarily to professional fees, which increased 142%, and personnel costs, which increased 21%. The increase in professional fees was primarily attributable to legal and accounting fees associated with the proposed merger with Cytyc Corporation, as well as our litigation proceedings with Ventana Medical Systems, Inc. and with Enzo Biochem, Inc. and its subsidiary, Enzo Diagnostics, Inc. In addition, in June 2002, we determined the balance outstanding on the promissory note with KD Medical, Inc. was uncollectible and took a charge against operations for the unpaid principal and accrued interest of approximately $407,000.

     In connection with an amendment to the Abbott Agreement, on January 28, 2002, Digene issued 87,873 shares of common stock to Abbott in a private placement transaction representing an agreed upon termination fee paid to Abbott as consideration for the termination of Abbott’s exclusive rights to sell our chlamydia and gonorrhea products worldwide. Digene recognized a one-time expense of $2,500,000 in the third quarter of fiscal 2002 representing the fair market value of the shares issued to Abbott in this transaction.

     Interest income decreased to approximately $730,000 in fiscal 2002 from approximately $1,194,000 in fiscal 2001. The decrease was primarily due to lower interest rates in fiscal 2002 compared to the corresponding period in fiscal 2001. The cash received from Roche associated with advance minimum payments was held in an account that did not provide interest income to Digene.

Comparison of Fiscal Year Ended June 30, 2001 to Fiscal Year Ended June 30, 2000

     Product sales increased to approximately $32,706,000 in fiscal 2001 from approximately $22,287,000 in fiscal 2000. The increase was due primarily to the growth in sales of our HPV products (representing 80% of the total increase and an increase of 83% over sales of HPV products in fiscal 2000) and growth in sales of our equipment products (representing 13% of the total increase and an increase of 36% over sales of equipment in fiscal 2000). The majority of the growth in HPV products sales was due to increased sales in the United States (142% over

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sales in fiscal 2000), along with increased sales in international markets (21% over sales in fiscal 2000).

     During fiscal 2001, we recognized revenue of approximately $838,000 related to minimum purchase guarantees under the Roche Distribution Contract.

     Research and development contract revenues decreased to approximately $653,000 in fiscal 2001 from approximately $756,000 in fiscal 2000. The decrease was due primarily to a reduction in revenue under an exclusive contract, which was converted to non-exclusive during fiscal 2001.

     Cost of product sales increased to approximately $12,089,000 in fiscal 2001 from approximately $7,641,000 in fiscal 2000. Gross margin on product sales decreased to 64% in fiscal 2001 from 66% in fiscal 2000. In fiscal 2001, our gross margin was negatively impacted by the effects of the relocation to our new manufacturing facility in April 2000, including the installation of equipment, validation of the facility, employee turnover and other activities, which resulted in reduced production yield, quality difficulties, excessive disposal and product backorders. The issues associated with our relocation were satisfactorily resolved during fiscal 2001. Our gross margin was also negatively impacted by product mix. However, the negative impact on our gross margins was partially mitigated by improved sales during the second half of fiscal 2001 of HPV products in the United States, where we sell such products directly.

     During fiscal 2001, we focused our research and development activities principally on: the development of our Rapid Capture System for automated processing of our Hybrid Capture tests, initially related to chlamydia and gonorrhea; activities related to the preparation of FDA filings that we intend to submit to obtain market approval for the use of our Hybrid Capture 2 HPV Test as a primary cervical cancer screening test to be performed in conjunction with the Pap smear for women ages 30 and older; the development of our UCM; activities utilizing our Hybrid Capture technology for microarray-based genomics analysis in the areas of gene expression profiling, genotyping and molecular disease management; and the creation of our next generation of Hybrid Capture technology. Research and development expenses increased to approximately $8,120,000 in fiscal 2001 from approximately $6,123,000 in fiscal 2000. The increase in expenses was due primarily to a 55% increase in purchases of laboratory supplies, a 25% increase in personnel costs, and a 90% increase in facilities costs, partially offset by a 26% decrease in outside professional services and clinical trial expenses.

     Selling and marketing expenses increased to approximately $13,012,000 in fiscal 2001 from approximately $10,930,000 in fiscal 2000. The increase was due primarily to a 29% increase in personnel costs, a 50% increase in facilities costs and a 35% increase in royalty costs, partially offset by decreases in costs of marketing programs of 4%.

     General and administrative expenses increased to approximately $8,336,000 in fiscal 2001 from approximately $6,346,000 in fiscal 2000. The increase was due primarily to a 67% increase in professional fees primarily as a result of expenses of approximately $500,000 related to a planned follow-on public offering of our common stock, which was withdrawn in March 2001. Additional increases included facilities costs consisting of a 28% increase in rent and related expenses associated with our new facility, and a 26% increase in personnel costs.

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     Other expense was approximately $37,000 in fiscal 2001 as compared to other income of approximately $513,000 in fiscal 2000. The other income in fiscal 2000 resulted from a gain of approximately $515,000 from the sale, in March 2000, of our Molecular Biology Reagents product line to KD Medical, Inc.

     Interest income increased to approximately $1,194,000 in fiscal 2001 from approximately $1,050,000 in fiscal 2000. The increase was due to higher average cash and cash equivalents balances, primarily as a result of the investment of the proceeds of our private placement completed in December 1999.

Impairment of Intangible Asset in Fiscal 1998

     In February 1997, we entered into an Agency Agreement with Murex Diagnostics Corporation (Murex) to facilitate the creation of a Digene-direct European sales operation for our products in Europe. As part of the Agency Agreement, we purchased a customer list with the expectation that this list could be used to benefit our direct management of sales activities in Europe and would result in increased revenues and gross margins. We paid $2.5 million for this customer list and capitalized it as an intangible asset. However, in the fourth quarter of fiscal 1998, Abbott Laboratories (Abbott) purchased Murex, which significantly reduced our expectation that we could implement the Agency Agreement as contemplated and realize any benefit from our investment in the customer list. Consequently, we believe that the asset was impaired and would provide no future benefit. Accordingly, we wrote off the remaining unamortized balance of approximately $1,915,000 in the fourth quarter of fiscal 1998. The write-off was originally recorded in fiscal 1998 as the cumulative effect of a change in accounting principle relating to the adoption of Statement of Position 98-5, “Reporting the Costs of Startup Activities.” Subsequently, we believe this adjustment should have been presented as an operating expense for the impairment of an intangible asset. Accordingly, the charge has been reclassified as an increase in selling and marketing costs in fiscal 1998. As a result of this reclassification, previously reported loss from operations before income taxes in fiscal 1998 increased to approximately $14,041,000 from approximately $12,126,000. Net loss for fiscal 1998 was unchanged. On May 7, 1999, we entered into a Marketing and Distribution Agreement with Abbott with respect to the marketing and distribution, and related customer services, of our products in Europe, Africa and the Middle East. The terms of the Marketing and Distribution Agreement effectively transferred direct management of sales activities in Europe to Abbott. All rights and obligations of Digene and Murex under the Agency Agreement and the related customer list were terminated by such Abbott Agreement.

Liquidity And Capital Resources

     Since inception, our expenses have significantly exceeded our revenues, resulting in an accumulated deficit of approximately $71.4 million at June 30, 2002. We have funded our operations primarily through the sale of equity securities. At June 30, 2002, we had cash, cash equivalents and short-term investments aggregating approximately $39.6 million. Net cash used in our operating activities was approximately $8.6 million for the fiscal year ended June 30, 2002.

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     Capital expenditures increased to $5,621,000 in fiscal 2002 from $1,819,000 in fiscal 2001, due primarily to our repurchase from Abbott Laboratories of equipment used for HPV, chlamydia and gonorrhea testing and previously purchased by Abbott under our marketing and distribution agreement with Abbott (the “Abbott Agreement”). Pursuant to the terms of the Abbott Agreement, upon expiration of the non-exclusive wind-down period we were obligated, at Abbott’s option, to repurchase equipment placed with customers by Abbott. We satisfied this obligation by issuing a promissory note to Abbott on June 7, 2002 for $4,033,904, bearing interest at 7% per annum and payable in quarterly installments of $336,159 until April 1, 2005.

     On April 29, 2001, we entered into a letter agreement with Roche Molecular Systems (the “Roche Distribution Contract”), which established Roche Molecular Systems (“Roche”) as the co-exclusive distributor of our HPV products in Europe, Africa and the Middle East from May 1, 2001 through June 30, 2002. In June 2002, we adopted as our sole strategy for the distribution of our products in Europe, Africa and the Middle East, a combination of direct distribution through our European infrastructure and the use of local distributors and agents. On June 30, 2002, the term of the Roche Distribution Contract expired, subject to a non-exclusive wind-down period. Under the Roche Distribution Contract, we have the option, exercisable within 30 days after December 31, 2002, to buy back from Roche equipment purchased from us by Roche and in use for HPV testing in customers’ laboratories on June 30, 2002. If we repurchase the equipment, the non-exclusive wind-down period will expire on December 31, 2002. If we do not repurchase the equipment, the non-exclusive wind-down period will extend to December 31, 2004. In June 2002, as part of our strategic decision, we decided that we would exercise the option to repurchase the equipment. The Roche Distribution Contract sets the repurchase price for the equipment as the net selling price less any amounts recorded as depreciation on a straight-line basis over a four-year period. In recognition of the possible repurchase of the equipment, commencing in the fourth quarter of 2002, we deferred recognition of revenue from equipment sold to Roche. Equipment sold during this time period had a sales price of $2.3 million and a cost of $1.4 million, which amounts have been recorded as deferred revenue and deferred costs, respectively. The deferred revenue and deferred costs are being amortized over a four-year period to other revenue (as equipment rental) and selling and marketing expenses, respectively. For the year ended June 30, 2002, we recorded other revenue and selling and marketing expenses of $109,000 and $67,000, respectively related to the amortization of these balances.

     On January 28, 2002, we issued 87,873 shares of common stock to Abbott Laboratories in a private placement transaction as consideration for the termination of Abbott’s exclusive rights to sell our chlamydia and gonorrhea products worldwide. We recognized a one-time expense of $2,500,000 in the third quarter of fiscal 2002 representing the fair market value of the shares issued to Abbott in this transaction.

     On January 30, 2002, we completed a private offering of 588,235 shares of common stock, the net proceeds of which, after expenses, were approximately $14,920,000. We intend to use the net proceeds from this offering for general corporate purposes, including to support our sales and marketing and research and development activities.

     We anticipate that working capital requirements will increase moderately for the foreseeable future due to investment necessary to support our European direct distribution operations, including the buy back from Roche of equipment in Europe, as well as increasing

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accounts receivable as a result of expected revenue growth. We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts, expand our sales and marketing activities and expand our manufacturing capabilities. We expect that our existing capital resources will be adequate to fund our operations through calendar year 2003. Our future capital requirements and the adequacy of available funds may change, however, based on numerous factors, including the successful commercialization of our products, progress in our product development efforts and the magnitude and scope of such efforts, progress with preclinical studies and clinical trials, progress in our regulatory affairs activities, the cost and timing of expansion of our manufacturing capabilities, the development and maintenance of effective sales and marketing activities, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, and the development and maturation of strategic alliances for the marketing of our products. To the extent that our existing capital resources and funds generated from operations are insufficient to meet current or planned operating requirements, we will be required to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through other sources. We do not have any committed sources of additional financing, and there can be no assurance that additional funding, if necessary, will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, scale back or eliminate certain aspects of our operations or attempt to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates, products or potential markets. Under such conditions, our business, financial condition and results of operations will be materially adversely affected.

     We have summarized below our material contractual obligations as of June 30, 2002:

(in thousands)

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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

     We prepare our financial statements in conformity with accounting principles generally accepted in the United States. Such accounting principles requires that our management make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our actual results could differ materially from those estimates. The items in our consolidated financial statements that have required us to make significant estimates and judgments are as follows:

	•		Inventory management. Our inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach, which approximates the first-in first-out method of inventory management. We also record provisions for inventories which may not be salable due to anticipated trends in sales volume and/or pricing and our estimates of net realizable value. These provisions are determined based on significant estimates.
	•		Revenue recognition. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. We establish allowances for estimated uncollectible amounts, product returns and discounts based on historical default rates and specifically identified problem accounts.
	•		Accounting for employee stock options. We account for our employee stock-based compensation in accordance with the provisions of APB No. 25, and related interpretations, which allows us to recognize compensation costs for the excess of the estimated fair value of the stock option at the grant date over the exercise price, if any. An alternative method of accounting would apply the principles of SFAS No. 123 which requires the fair value of the stock option to be recognized at the date of grant and amortized to compensation expense over the stock options’ vesting period. Had we applied the principles of SFAS No. 123 for our employee options, our net loss would have been approximately $13,251,000, $17,273,000 and $24,483,000 during our fiscal years ended June 30, 2000, 2001 and 2002 instead of our reported net loss which approximated $6,767,000, $6,481,000 and $9,397,000, respectively.

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ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to market risk associated with changes in foreign currency exchange rates and interest rates. Our exchange rate risk comes from our operations in Europe and South America. The net impact of foreign exchange activities on earnings was immaterial for the years ended June 30, 2000, 2001 and 2002. Interest rate exposure is primarily limited to the $36.0 million of cash, cash equivalents and short-term investments owned by us. Such securities are debt instruments that generate interest income for us on cash balances. We do not actively manage the risk of interest rate fluctuations; however, such risk is mitigated by the relatively short term nature, less than twelve months, of certain investments. We do not consider the present rate of inflation to have a significant impact on our business.

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ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DIGENE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digene Corporation

We have audited the accompanying consolidated balance sheets of Digene Corporation as of June 30, 2001 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Digene Corporation at June 30, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

McLean, Virginia
August 9, 2002

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DIGENE CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS