These studies show the variability in the Pap test’s sensitivity from 52% to 84%, which demonstrates one of the key limitations of cytology and the Pap test.

          The predictive nature of human papillomavirus testing permits healthcare professionals 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 professional 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.

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

	•		July 2003: ACOG published new recommendations for cervical cancer screening that provide two screening options for women age 30 and older, one of which is the combined use of a cervical cytology test and an FDA-approved test for high-risk types of HPV;
	•		July 2003: a study involving 7,868 women in Mexico published in Cancer Causes and Control demonstrated the high sensitivity (98.0%) and excellent negative predictive value (99.9%) of our hc2 High-Risk HPV DNA Test in combination with the Pap test and concluded that HPV testing from clinician-collected samples “is an effective alternative that can be used to increase the sensitivity of cervical cancer screening in Mexico;”

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	•		May 2003: a study of 8,101 women age 30 and over in Germany published in the British Journal of Cancer found that the use of our hc2 High-Risk HPV DNA Test in conjunction with the Pap test was 100% sensitive for detecting high-grade cervical disease and cancer and also had a negative predictive value of 100%;
	•		April 2003: preliminary results of a study of over 12,000 women taking part in a screening trial in Switzerland presented at the EUROGIN 5th International Multidisciplinary Congress on “Preventing and Controlling Cervical Cancer in the New Millennium” showed a sensitivity for the detection of high grade cervical disease of 98.5% for the hc2 HPV Test, compared with 54.4% sensitivity for cytology;
	•		November 2002: ACS published cervical cancer screening guidelines that included a preliminary recommendation that HPV testing for high-risk HPV types, together with the Pap test, be used in primary screening of women age 30 and older;
	•		October 2002: a study involving 4,075 women ages 18 to 50 who attended Planned Parenthood clinics in Washington State published in JAMA demonstrated the high sensitivity (90.8%) and superior negative predictive value (99.6%) of our test compared with the Pap test (sensitivity of 61.3% and negative predictive value of 98.5%);
	•		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;
	•		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 test;
	•		March 2001: results of a National Cancer Institute ASC-US Low-Grade Triage Study showed that human papillomavirus testing for women with equivocal Pap test results was 96% sensitive for women with high-grade cervical disease, although the sensitivity of the Pap test was 85%; and
	•		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.

          Additionally, several studies that highlight the clinical and cost effectiveness of our DNAwithPap Test have been presented or published. In June 2003, the Journal of Obstetrics and Gynecology published two ASC-US Low-Grade Triage Study papers. One, which evaluated post-colposcopy management strategies, concluded that a single hc₂ High-Risk HPV DNA Test 12 months after a colposcopy appears to be the most efficient test for identifying women with high-grade cervical disease. The second ASC-US Low-Grade Triage Study paper, which compared our hc₂ High-Risk HPV DNA Test, repeat liquid cytology and immediate colposcopy for the management of ASC-US Pap test results, concluded that our test is at least as sensitive as immediate colposcopy for detecting CIN grade 3, refers less women to colposcopy than repeat liquid cytology and requires less follow-up visits than repeat liquid cytology. In May 2002, a study using a computer-based model published in JAMA concluded that adding an HPV Test to

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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.

          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. A majority of the studies were designed to assess the usefulness of our HPV Test in comparison to the Pap test for women age 30 and over. We believe that the completion and publication of the results of these clinical trials should help to accelerate further adoption of our HPV Test.

          Regulatory and Reimbursement Milestones. The FDA approved our PMA supplement for our DNAwithPap Test on March 31, 2003. The FDA approved our PMA supplement for our hc2 HPV Test for the detection of human papillomavirus in March 1999. In March 2000, the FDA approved our PMA supplement for our hc2 High-Risk HPV DNA Test. These approvals followed FDA approval of premarket approvals, or PMAs, to test for the presence of human papillomavirus in women with equivocal Pap tests in March 1995, and, in 1997, a PMA supplement for the use of our HPV Test using Cytyc Corporation’s ThinPrep® Pap Test sample collection system. In April 2002, we submitted a PMA supplement 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. We are working with TriPath to complete additional clinical studies and to submit results of these studies to the FDA for premarket approval.

          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, or 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 as a follow-up test to categorize equivocal Pap test results. Reimbursement for this indication is now available from more than 150 payors. Third-party payors and managed care entities that provide health insurance coverage to 50 million people currently authorize reimbursement for the recently FDA-approved use of our DNAwithPap Test to adjunctively screen women age 30 and older to assess the presence or absence of significant, cancer-causing HPV types. Reimbursement for this indication is now available from more than 25 payors.

          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. In addition, we have worked with our distribution network 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, we are working with

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government and ministry officials to establish appropriate reimbursement coverage for our products in the major countries in such territories.

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. Over the last several years, the majority of our sales and marketing investments have been directed to the launch of our hc₂ 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 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;
	•		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; and
	•		establishing a physician detailing sales organization in the United States.

North American Market

          There are five key elements to our initial DNAwithPap Test commercialization plan. First, we are working to formalize support of governmental agencies, medical societies and physician groups and to communicate such support to physicians and our customers. Examples of this program include recent public statements of support we have received from the Society of Gynecologic Oncologists and the Gynecologic Cancer Foundation. In July 2003, ACOG recommended the use of an FDA-approved high-risk HPV test for cervical cancer screening of women age 30 and older. In addition, several organizations are working to publish interim patient management guidelines. Second, we are partnering with women’s advocacy groups to communicate their support and to educate the public. Third, we plan to establish formalized programs to co-market the DNAwithPap Test to physicians and payors with our laboratory partners. Fourth, we plan to create demand through physician education programs, which will be

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driven by our recently-created physician detailing organization and third-party organizations working independently to educate physicians and women about the proper use of the combined tests. Finally, we are establishing comprehensive health insurance reimbursement, which builds on the first four parts of our strategy. These five key elements of our DNAwithPap Test commercialization plan are coordinated and balanced with our overall strategic marketing plan described in this “Sales and Marketing” section.

          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. In June 2003 we completed the initial launch of the DNAwithPap Test to the laboratory market in the U.S. The full product and promotional launch is scheduled for September 2003.

          In May 2003, we entered an agreement with PDI, Inc., or PDI, pursuant to which PDI is establishing a physician detailing sales organization dedicated to educating physicians about the benefits of the DNAwithPap Test in the U.S. PDI retained a sales force of approximately 34 sales professionals, who were in place as of August 2003. Under the agreement, PDI will manage the sales professionals, but we are responsible for decisions regarding marketing, planning, strategy and detailing of our products as well as for conducting training programs for the sales professionals. The term of the Agreement is until July 21, 2004 but may be extended for one year by Digene with PDI’s consent.

          In January 2001, we entered into an exclusive agreement with Cytyc Corporation for the promotion of our hc₂ HPV Test for use with Cytyc’s ThinPrep Pap Test in the United States and Puerto Rico, which expired on June 30, 2003. During the term of our agreement with Cytyc, we jointly promoted the benefits of testing for human papillomavirus with our HPV Test directly from Cytyc’s ThinPrep Pap Test sample collection vial for ASC-US screening.

          At the end of fiscal 2003, approximately 300 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 and ARUP Laboratories all have active programs for automatic follow-up human papillomavirus testing of equivocal results from Cytyc’s ThinPrep Pap Test specimens. These laboratories represent approximately 45% of the United States Pap testing market. In fiscal 2003, we generated approximately 28% of our total revenues from Quest Diagnostics and Laboratory Corporation of America. The combined single-sample approach enables the use of our HPV Test with Cytyc’s ThinPrep Pap Test to eliminate the need for a return office visit to collect a second sample for human papillomavirus testing.

International Markets

          Internationally, we continue to make progress in increasing the market penetration of our hc₂ HPV Test, marketed as the DNAPap^TM Test in cervical cancer screening programs throughout Europe, Central and South America and Asia. In fiscal 2003, we increased overall international revenue from our HPV Tests by 16% over the prior year. The foregoing comparison to fiscal

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2002 does not include revenues related to minimum purchase guarantees under a distribution contract that expired on June 30, 2002.

          Europe. During fiscal 2003 we established direct sales capabilities in four major European countries: Germany, France, Italy and Switzerland. We had established operations in the United Kingdom in fiscal 2002 and established operations in Spain in early fiscal 2004. The transition from a distributor sales model to direct sales should allow for better control of our marketing programs, higher test kit margins and improved customer support. In Germany, our largest European market, approximately 170 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, Ireland, Belgium and the Czech Republic, among other European countries. In the United Kingdom, our hc₂ High-Risk DNA 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.

          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 September 2003, in Europe, we have established distributor operations in 16 countries and subsidiaries in 6 countries. We currently offer our products, either directly or through distribution arrangements, in all European countries.

          South America. In Brazil, we are marketing our proprietary Universal Collection Medium, or 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 hc₂ High-Risk HPV DNA 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 was completed in December 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 hc₂ High-Risk DNA HPV Test throughout Brazil.

          Asia. 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 hc₂ test for chlamydia, or CT, and gonorrhea, or 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. We continue to work effectively with independent distributors throughout most of South America, Asia and the remaining countries in which we sell our products.

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          Significant Distribution Agreements. We had previously entered into marketing and distribution arrangements with Abbott Laboratories and Roche Molecular Systems, Inc. to distribute our products in Europe, Africa and the Middle East. 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.

          In May 1999, we entered into a 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 hc₂ Chlamydia and Gonorrhea Tests in the United States. On April 30, 2002 Abbott’s non-exclusive distribution wind-down period ended for our HPV and chlamydia and gonorrhea products in Europe, Africa and the Middle East. We terminated Abbott’s rights to distribute our CMV Tests in Europe on June 30, 2003, subject to a
non-exclusive wind down right to sell products in inventory until December 7, 2003. Under the marketing and distribution agreement, which expires on December 31, 2003, Abbott currently is a non-exclusive distributor for our HBV Tests.

          On April 29, 2001, we entered into a letter agreement with Roche Molecular Systems, which we refer to as the Roche Distribution Contract, that established Roche Molecular Systems, or 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 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. On December 20, 2002, we amended the Roche Distribution Contract to terminate the wind-down period on December 31, 2002 and to establish the procedures for our repurchase from Roche of HPV-related testing equipment purchased from us by Roche under the Roche Distribution Contract. We consummated the repurchase of the HPV equipment from Roche on January 6, 2003.

          Our revenues from North American operations for fiscal 2001, 2002 and 2003 were approximately 19,620,000, 30,592,000 and 46,280,000, respectively, while our revenues from foreign operations for fiscal 2001, 2002 and 2003 were approximately 14,577,000, 18,256,000 and 16,822,000, respectively.

Research and Development

          One of our key goals is to expand continually our core technology and expertise in molecular diagnostics in order to remain at the forefront of DNA testing for infectious diseases and to capture new high-growth and high-margin market opportunities. To achieve this goal, we have invested aggressively in research and development and particularly in clinical trials to validate the performance of our products, product candidates and new indications for our products.

          Our research and development programs are geared to deliver continuing improvements in the detection of cervical cancer and its precursors, and sexually transmitted infections, including human papillomavirus, chlamydia and gonorrhea, and we seek to enhance our technological strength in these areas. We have developed our tests so that they can be performed on samples collected for routine liquid-based Pap tests, and we have developed our proprietary single patient sample system for HPV, chlamydia and gonorrhea testing. We are developing

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UCM, which will allow simultaneous DNA testing for the infectious agents highlighted above, liquid cytology capabilities, gene expression analysis and detection of proteins by immunoassay methods.

          Our research and development investments continue to be directed at productivity improvements for HPV testing, new indications for our technology and associated regulatory approvals. In the first half of fiscal 2004 we expect to submit a PMA supplement for the use of the hc₂ High-Risk HPV DNA Test on the Rapid Capture System and we also expect to submit 510(k)’s to the FDA for approval to use the Cytyc ThinPrep vial as a specimen for testing with our Chlamydia and Gonorrhea tests. During fiscal 2004 we will continue development work on our next generation cervical cancer screening systems. These activities include work on Hybrid Capture 3, our UCM and new molecular markers for use in conjunction with our HPV tests.

          We spent approximately $8,120,000, $9,265,000 and $10,262,000 on research and development in fiscal 2001, 2002 and 2003, respectively.

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.

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	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 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.

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Advantages of Our Technology

          Our Hybrid Capture technology provides several advantages over existing technologies specific to the diagnostic testing market.

	•		Accuracy. In a clinical setting, tests based on our Hybrid Capture technology have proven in many cases 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 test, with similar specificity. In addition, our hc2 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, reducing patient anxiety associated with uncertainty and significantly reduces unnecessary invasive procedures. In addition, our tests can monitor the progression of a disease, detect an individual’s risk of developing a disease or, 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 risk. In addition, the simple form and automation capabilities of our tests allow ease of laboratory use, reducing overall processing costs.
	•		Scalable. Our hc2 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 is a robotic pipetting and microplate handling instrument that allows a single lab technician to run up to 4 microplates, or more than 350 specimens, in a single 8 hour lab shift, meeting the demands of high volume testing.

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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 also lease office and sales operations facilities in the United Kingdom, Germany, Switzerland, France, Italy and Spain, which run in length from month-to-month to five years. We also utilize third-party warehouse facilities in Germany and the United Kingdom to support our European operations.

          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, which are readily available from a variety of manufacturers, 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 our products are manufactured and tested in accordance with the FDA’s Quality System Regulation, or QSR, which imposes current Good Manufacturing Practice requirements. We received ISO 9001 certification in June 1999 and ISO 13485 certification in July 2003.

          Beginning December 7, 2003, to place our in vitro diagnostic products on the market in countries in the European Union, we must comply with the European Union’s IVDD regulations, which includes labeling our products with a CE mark to indicate compliance with certain European Community requirements, including product standards, and ensuring that our products meet those requirements. We are working to comply with the IVDD and expect to have our existing products compliant by December 7, 2003.

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

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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 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.

          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

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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 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 52 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.) to use human papillomavirus type 58 provided by Kanebo to develop, manufacture, use, distribute and sell products. 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.

Government Regulation

          The medical devices marketed and manufactured by us are subject to extensive regulation by the FDA and, in some instances, by foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the related regulations, the FDA regulates product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales and distribution of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances and/or approvals and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device that we manufacture or distribute.

          In the United States, medical devices and diagnostics are classified into one of three classes (class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Under FDA regulations, class I devices are subject to general controls (for example, labeling and adherence to quality and safety requirements, or QSR), and class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, class III devices are those which must receive premarket approval (PMA) by the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-

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supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices).

          Before a new device can be introduced into the market, the manufacturer generally must obtain premarketing clearance through the filing of a 510(k) notification or premarket approval through the filing of a PMA application.

          A 510(k) clearance will be granted if the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed class I or II medical device or to a pre-amendment class III medical device (i.e., on the market on or before May 28, 1976) for which the FDA has not called for a PMA. It generally takes from four to twelve months from the date of submission to obtain a 510(k) clearance, but it may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device or that additional information or data is needed before a substantial equivalence determination can be made, either of which could delay market introduction of a new product. A request for additional data may require that clinical studies of the device’s safety and effectiveness be performed. Additionally, any modifications or enhancements that could significantly affect the safety or effectiveness of the device or that constitutes a major change to the intended use of the device will require a new 510(k) notification or PMA application.

          A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device or if it is a pre-amendment class III device for which the FDA has called for a PMA. A PMA application must be supported by valid scientific evidence, including preclinical and clinical trial data, to demonstrate the safety and effectiveness of the device. The PMA application must also contain the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device in addition to device labeling and advertising literature.

          If a PMA application is accepted for filing, the FDA begins an in-depth review of the submission. FDA review of a PMA application generally takes one to two years from the date the PMA application is accepted for filing, but may take significantly longer. The PMA review process includes an inspection of the manufacturer’s facilities to ensure that the facilities are in compliance with the applicable QSR requirements. In addition, an advisory committee made up of clinicians and/or other appropriate experts is typically convened to evaluate the application and make recommendations to the FDA as to whether the device should be approved. The PMA process can be expensive, uncertain and lengthy.

          Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. PMA supplements often require the submission of the same type of information required for an initial PMA application, but limited to the information necessary to support the proposed change.

          Although clinical investigations of most devices are subject to the investigational device exemption, or IDE, requirements, clinical investigations of in vitro diagnostic (IVD) tests are exempt from the IDE requirements, including FDA approval of investigations, provided the testing meets certain exemption criteria. IVD manufacturers must also establish distribution

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controls to assure that IVDs distributed for the purpose of conducting clinical investigations are used only for that purpose and not improperly commercialized.

          Export of products subject to the 510(k) clearance requirements, but not yet cleared to market, are permitted provided certain requirements are met. Unapproved products subject to the PMA requirements must be approved by the FDA for export under certain circumstances. To obtain FDA export approval, certain requirements must be met and information must be provided to the FDA, including, with some exceptions, documentation demonstrating that the product is approved for import into the country to which it is to be exported and, in some instances, safety data for the devices.

          We are exporting our HPV Test as a stand-alone primary cervical cancer screening test prior to obtaining PMA approval for this use in the United States. We are also exporting our HBV Test for clinical use abroad prior to pursuing PMA approval in the United States. Exportation of the HPV Test as a primary cervical cancer screening test and export of the HBV Test can be undertaken without prior FDA approval of a PMA provided, among other things, that:

          •     the marketing of these tests is not contrary to the laws of the country to which they are intended for import,

          •     they are manufactured in substantial conformance with the QSR, and

          •     we have valid marketing authorization by any member country of the European Union, Australia, Canada, Israel, Japan, New Zealand, Switzerland or South Africa.

          We also must provide the FDA with simple notification indicating the products to be exported and the countries to which they will be exported. FDA approval must be obtained for exports of products subject to the PMA requirements if these export conditions are not met.

          Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences with the use of the device. Device manufacturers are required to register their establishments and list their devices with the FDA and are subject to periodic inspections by the FDA and certain state agencies.

          The FDA actively enforces regulations prohibiting the promotion of devices for unapproved (off label) uses and the promotion of devices for which premarket clearance or approval has not been obtained. Failure to comply with these requirements can result in regulatory enforcement action by the FDA and possible limitations on the promotion of our products.

          Our products and we are subject to a variety of state laws and regulations in those states and localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those states or localities. Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to

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incur significant costs to comply with such laws and regulations now or in the future and such laws or regulations may have a material adverse effect on our business, financial condition and results of operations.

          The introduction of our developmental stage test products in foreign markets will also subject us to foreign regulatory clearances, which may impose additional substantial costs and burdens. International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country and many countries also impose product standards, packaging requirements, labeling requirements and import restrictions on devices. In addition, each country has its own tariff regulations, duties and tax requirements.

          The approval by the FDA and foreign government authorities is unpredictable and uncertain, and the necessary approvals or clearances may not be granted on a timely basis or at all. Delays in receipt of, or a failure to receive, such approvals or clearances could have a material adverse effect on our business, financial condition and results of operations.

          The Federal Food, Drug, and Cosmetic Act requires devices to be manufactured in accordance with the QSR which imposes certain procedural and documentation requirements upon us with respect to manufacturing and quality assurance activities. Noncompliance with the QSR can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution.

          We must comply with similar registration requirements of foreign governments and with import and export regulations when distributing our products to foreign nations. Each foreign country’s regulatory requirements for product approval and distribution are unique and may require the expenditure of substantial time, money and effort. The regulation of medical devices in a number of such jurisdictions, particularly in the European Union, continues to develop and new laws or regulations may have a material adverse effect on our business, financial condition and results of operations. Noncompliance with state, local, federal, or foreign regulatory requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, delay or denial or withdrawal of premarket clearance or approval of devices and criminal prosecution.

          The European Union’s IVDD went into effect in June 2000. Beginning December 7, 2003, to place our in vitro diagnostic products on the market in countries in the European Union, we must comply with the IVDD regulations, which include labeling our products with a CE mark to indicate compliance with certain European Community requirements, including product standards, and ensuring that our products meet those requirements. We are working to comply with the IVDD and expect to have our existing products compliant by December 7, 2003.

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Competition

          The medical diagnostics and biotechnology industries are subject to intense competition. Our competitors in the United States and abroad for gene-based diagnostic probes include Roche Diagnostics, Abbott Laboratories, Bayer Corporation, Chiron Corporation and Gen-Probe Incorporated. We believe the primary competitive factors in the market for gene-based probe diagnostics and other screening devices are clinical performance and reliability, ease of use, cost, proprietary position, the competitor’s share of the existing market, access to distribution channels, regulatory approvals and availability of reimbursement.

          Other companies, including large pharmaceutical and biotechnology companies, may enter the market for gene-based probe diagnostics. Some of our products compete against existing screening, monitoring and diagnostic technologies, including the tissue culture and antigen-based diagnostic methodologies.

          In marketing our HPV Tests for the cervical cancer screening and prevention, we compete with well-established procedures, such as Pap testing, colposcopy and biopsy, that have a long history of use and are widely accepted as an inexpensive (in the case of the Pap test) and, with regular use, adequate screening tests for cervical cancer. Future technological advancements designed to improve quality control over sample collection and preservation and to reduce the Pap testing’s susceptibility to human error may serve to increase physician reliance on the Pap test and solidify its market acceptance. Further, when marketed as an adjunct to the Pap test for primary screening in the United States, our HPV Tests may be seen as adding unnecessary expense to the accepted cervical cancer screening methodology. Consequently, our HPV Tests may not be able to attain market acceptance as primary screening tests.

          In June 2002, Insitut Pasteur announced that it had 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.

          Our existing and potential competitors may be in the process of seeking FDA or foreign regulatory approval for their respective products or may also enjoy substantial advantages over us in terms of research and development expertise, experience in conducting clinical trials, experience in regulatory matters, manufacturing efficiency, name recognition, sales and marketing expertise and distribution channels. In addition, many of these companies may have established third-party reimbursement for their products. We may not be able to compete effectively against existing or future competitors, which may have a material adverse effect on our business, financial condition and results of operations.

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Employees

          At June 30, 2003, we had 297 employees, including 53 in research and development, 91 in manufacturing, including quality assurance, 78 in sales and marketing and 75 in accounting, finance, administration and regulatory affairs. 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.

Available Information

          For more information about us, visit our web site at www.digene.com. Our electronic filings with the U.S. Securities and Exchange Commission (including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports) are available free of charge through our web site as soon as reasonably practicable after we electronically file with or furnish them to the U.S. Securities and Exchange Commission.

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ADDITIONAL CONSIDERATIONS

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

          We have had substantial operating losses since incorporation in 1987. We turned profitable during the fourth quarter of fiscal 2003, but prior to that we never earned a profit. At June 30, 2003, our accumulated deficit was approximately $71,365,000. Previous 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 $6,480,997 in fiscal 2001 and $9,396,616 in fiscal 2002, and $4,323,511 in fiscal 2003. We expect to remain profitable through fiscal 2004, but we may be unable to generate sufficient revenues to remain profitable.

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 tests. This requires acceptance of our HPV Test as a clinically useful and cost-effective alternative to the Pap test and follow-up procedures, such as repeat Pap tests, 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 test’s susceptibility to human error may increase physician reliance on the Pap test and solidify its market position as the most widely used screen for cervical cancer. In particular, in marketing our HPV Test along with the Pap test 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

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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 may not be able to successfully maintain and grow our sales and marketing infrastructure in Europe.

          We had previously used third-party distributors to distribute and market our products in Europe. During the 2003 fiscal year, we continued and accelerated our establishment of sales and marketing infrastructure in Europe, Africa and the Middle East. We expect to continue to expend significant resources to grow and maintain that infrastructure. Our revenues and operating results could be hurt by our inability to successfully grow and maintain our distribution infrastructure or our inability to effectively market our diagnostic products in Europe.

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 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.

          Our cleared or approved devices, including our tests and related equipment, are subject to numerous post-market requirements. We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements, including the QSR. 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;

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	•		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 have developed viral tests that we distribute in the United States on a research use only, or RUO, basis. Failure by us or recipients of our RUO devices to comply with the regulatory limitations on the distribution and use of RUO devices could result in enforcement action by the FDA that would adversely affect our ability to distribute the tests prior to obtaining FDA clearance or approval for them.

          The FDA may refuse to grant export approval when such approval is necessary or may revoke such approval, and countries to which the devices are to be exported may not approve the devices for import. Failure on our part to obtain and maintain export approvals when required, could significantly delay and impair our ability to export our products, such as our HPV Test for primary cervical cancer screening, and could have a material adverse effect on our business, financial condition and results of operations.

          We may not be able to comply with the requirements for exporting our products to other countries without prior FDA approval, and the FDA may not grant specific export approval. Our failure to comply with the requirements for exporting our products to other countries without prior FDA approval, or otherwise to meet the FDA export approval requirements, could have a material adverse effect on our business, financial condition and results of operations.

          Changes in existing requirements or adoption of new requirements or policies could adversely affect our ability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. We may be required to incur significant costs to comply with laws and regulations in the future, and laws or regulations may have a material adverse effect upon our business, financial condition and results of operations.

          We must comply with the regulations of other governmental authorities in countries where we distribute our products. Any failure to comply with such regulations, including the IVDD regulations, could subject us to regulatory action and could adversely affect our ability to distribute our products outside the U.S., which could have a negative effect on our business.

We may be exposed to product liability claims, possible product recalls and improper product usage or product loss 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

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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.

          Additionally, product recalls have occurred from time to time in the past and may be necessary from time to time, either voluntarily on our part or at the direction of the FDA or other government agencies. We can provide no assurance that product recalls will not occur in the future or that, if such recalls occur, such recalls will not adversely affect our business, financial condition or reputation.

          Our products require refrigeration to maintain efficacy. Improper storage of our products by customers or inadequate refrigeration due to loss of electrical power or other factors beyond the control of our customers could lead to loss of product for which replacement products would be required. In the event of a widespread geographic loss of electrical power, the negative effect on our business could be substantial.

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.

          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

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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 hc2 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. 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 diverts 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. On October 18, 2002, we filed a motion to amend our complaint to add Beckman Coulter, Inc. as

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a co-defendant, as well as additional claims against Ventana. On March 5, 2003, the Court granted our motion to amend. No trial date has been set.

          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. The Court has denied Enzo Biochem’s motion to dismiss our counterclaims and has granted Digene’s motion to amend our counterclaims to include inequitable conduct claims. 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. The Court has indicated that a trial in this matter will be held on March 22, 2004.

          Such current litigation is expensive and we can provide no assurance that we will be successful. In addition, such litigation may result in financial losses or harm to our reputation and diverts management resources from our core business.

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

          In June 2002, Insitut Pasteur announced that it had 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. On October 18, 2002, we filed a motion to amend our complaint to add Beckman Coulter, Inc. as a co-

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defendant, as well as additional claims against Ventana. On March 5, 2003, the Court granted our motion to amend. No trial date has been set.

          We are also aware that a significant number of laboratory organizations and other companies are developing and using internally developed, or “home-brew,” human papillomavirus tests. We are monitoring these activities.

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 three components: first, Tropix, a subsidiary of Applied Biosystems Group, supplies us with chemiluminescent substrates (used to create a chemical reaction that causes light in connection with our Hybrid Capture signal amplified molecular technology), 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 and, third, Corning supplies us with the 96-well microplate. 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. Corning has been one of our suppliers since 1996. In some cases, 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, Qiagen Instruments and Corning. 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 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 may encounter difficulties expanding our manufacturing operations. We depend on a single facility for the manufacture of all of our products.

          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 the QSR and good manufacturing practices requirements. We may encounter difficulties expanding our manufacturing operations

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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, regulatory 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 2003, we derived approximately 19% 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 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;

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	•		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 test, 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:

	•		failure to successfully achieve our financial expectations;
	•		announcements of technological innovation or new diagnostic products by others;
	•		general market conditions;
	•		any failure of our research and development or regulatory approval process; and
	•		changes in government regulation or patent decisions.

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 turned profitable during the fourth quarter of fiscal 2003 and 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 2004. Net cash used in our operating activities was approximately $1,834,000 for the fiscal year ended June 30, 2003. However, if we incur operating losses during or after fiscal 2004 or if one or more of the events described in these “Additional Considerations” actually occurs, we may have to obtain additional funds through

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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, 2003, our Chairman and Chief Executive Officer and our President, Chief Operating Officer and Chief Financial Officer beneficially owned an aggregate of approximately 22.5% 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 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.

          We also lease office and sales operations facilities in the United Kingdom, Germany, Switzerland, France, Italy and Spain, which run in length from month-to-month to five years. We also utilize third-party warehouse facilities in Germany and the United Kingdom to support our European operations.

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. On October 18, 2002, we filed a motion to amend our complaint to add Beckman Coulter, Inc. as a co-defendant, as well as additional claims against Ventana. On March 5, 2003, the Court granted our motion to amend. No trial date has been set.

          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. The Court has denied Enzo Biochem’s motion to dismiss our counterclaims

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and has granted Digene’s motion to amend our counterclaims to include inequitable conduct claims. 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. The Court has indicated that a trial in this matter will be held on March 22, 2004.

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, 2003, the closing sale price for our common stock, as reported by the NASDAQ National Market, was $38.60. As of September 9, 2003, our common stock was held by 150 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, 2001, 2002 and 2003 and with respect to Digene’s Consolidated Balance Sheets at June 30, 2002 and 2003 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, 1999 and 2000 and Consolidated Balance Sheet data at June 30, 1999, 2000 and 2001 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)		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; dependence on third-party reimbursement from government entities, managed care organizations, and private insurance plans; our ability to scale up our manufacturing to the extent product sales increase; our limited sales and marketing experience; the extent of future expenditures for sales and marketing programs; uncertainty of clinical trial results for our products in development; risk that other companies may develop and market HPV tests competitive with our own; uncertainty regarding patents and propriety rights in connection with our products and products in development; delay in or failure to obtain regulatory approvals for our products in development; uncertainty of future profitability and cash generation from operations; our ability, if necessary, to obtain requisite additional financing to fund our operations beyond calendar year 2004; risks inherent in international transactions, including those relating to our expansion in Europe and elsewhere; and other factors as set forth under the caption “Additional Considerations” beginning on page 27.

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 have been derived primarily from the sales of our HPV Tests, which, for fiscal 2003, accounted for 81% of total revenues. We expect that the growing acceptance of our HPV Tests in both the United States and abroad will continue to drive the growth in revenues from our HPV Tests in the future.

          In fiscal 2003, our gross margins improved substantially over the prior fiscal year. In fiscal 2004, we believe that we will be able to sustain gross margins consistent with, or better than, fiscal 2003 as we continue to scale up our manufacturing operations and realize expanded margins as a result of our direct distribution efforts in Europe.

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          We believe that continuing to substantially increase 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 Tests and our core technology. We will continue to invest heavily in our direct sales organization and marketing activities in the United States while also expanding our direct European distribution operation. 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 2003.

          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 Tests 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 for our sales and marketing activities, to pay the anticipated expenses associated with our ongoing litigation matters, to support greater research and development activities and to support the overall growth of our business.

          Despite these anticipated increases in expenditures, we expect the turn to profitability we achieved in the fourth quarter of fiscal 2003 to continue through fiscal 2004 driven by continued strong gross margins. There can be no assurance that we will meet this goal.

Results of Operations

Comparison of Fiscal Year Ended June 30, 2003 to Fiscal Year Ended June 30, 2002

          Product sales increased over 36% to approximately $62,440,000 in fiscal 2003 from approximately $45,750,000 in fiscal 2002. The increase was due primarily to a 40% growth in sales of our HPV Tests over such sales in the corresponding period in fiscal 2002, partially offset by decreases in sales of equipment and certain non-core products. The majority of the growth in HPV product sales was in the United States (64% over such sales in the corresponding period in fiscal 2002) and in Europe (30% over such sales in the corresponding period in fiscal 2002).

          During fiscal 2003, we did not recognize any revenue related to minimum purchase guarantees under the Roche Distribution Contract, whereas in fiscal 2002 we recognized approximately $2,357,000. Please see “Liquidity and Capital Resources” below for a description of the Roche Distribution Contract.

          Other revenues included research and development contract revenues, equipment rental revenues and licensing revenues. Other revenues decreased almost 11% to approximately $662,000 in fiscal 2003 from approximately $741,000 in fiscal 2002. The decrease was due primarily to a reduction in research and development services revenue and licensing revenue. The decrease was partially offset by the recognition of certain equipment sales to Roche in Europe which were initially deferred in the fourth quarter of fiscal 2002. Please see “Liquidity and Capital Resources” below for a description of the Roche Distribution Contract.

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          Cost of product sales increased by 3% to approximately $13,383,000 in fiscal 2003 from approximately $12,938,000 in fiscal 2002. Gross margins on product sales increased to 79% in fiscal 2003 from 72% in fiscal 2002. The increase in gross margin percentage primarily related to increased sales of our higher margin reagent test kits, particularly HPV Tests, principally in the United States, as well as decreased sales of lower margin equipment products.

          Cost of product sales was negatively impacted in fiscal 2003 because of a voluntary product recall, resulting in a charge to Cost of product sales of approximately $425,000 during February 2003. We initiated a voluntary recall involving our hc₂ HPV DNA and Chlamydia, or CT, Tests. This recall was limited to certain product lots which were manufactured using a specific lot of raw material that had the potential to cause false positive patient specimen results. We informed the U.S. Food and Drug Administration (“FDA”) of the recall. We conducted an investigation into the root cause of this product performance issue for the hc₂ product line, and developed a raw material release testing corrective action plan. On June 20, 2003, the FDA approved the modification of our lot release testing procedures related to the component that relied on the raw material found to have been contaminated. Because this voluntary recall was limited to a certain identified lot of raw material, we were able to supply our customers with product manufactured from acceptable raw material lots. In addition, we have expanded our ongoing quality improvement program to ensure continued reliability as manufacturing volume increases to meet anticipated growth in demand for our HPV Tests.

          Research and development expenses increased 11% to approximately $10,262,000 in fiscal 2003 from approximately $9,265,000 in fiscal 2002. The increase in expenses was due primarily to a 305% increase in professional services and clinical trial expenses, to approximately $2,593,000, partially offset by a decrease in personnel costs, which decreased 11% to approximately $4,364,000, and laboratory supplies, which decreased 29% to approximately $815,000. The increase in professional services is due largely to costs incurred in preparation for compliance with the European Union In Vitro Diagnostic Directive (“IVDD”) regulations. We expect that compliance with the European Union IVDD regulations will continue to require investment during fiscal 2004. 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 track and maintain research and development expenses on a per-product or per-disease target basis.

          During fiscal 2003, we focused our research and development activities on completing regulatory activities to add new claims and indications to existing products in the U.S. and abroad, support and improvement of existing product lines, the development of several new products and core research efforts for next-generation technologies. Work is continuing on the development of a Hybrid Capture HPV Test application for our automated Rapid Capture System, including accommodating the use of multiple DNA-probes in a single run in conjunction with our current product lines; the development of methods to improve specimen processing procedures and throughput, including procedures for the improved processing of Cytyc Corporation’s ThinPrep specimens for HPV, CT and GC testing; improved equipment for faster specimen processing; and the development of our Universal Collection Medium, or UCM, that is expected to allow simultaneous testing for HPV, CT/GC and of other genetic and cellular material from a single patient sample. Verification was completed and clinical trials are in

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process for a method for converting specimens collected in TriPath Imaging’s SurePath liquid cytology medium. Clinical trials are also underway to validate CT/GC testing from Cytyc’s ThinPrep specimens, an HPV application for the Rapid Capture System, and a procedural modification to our hc₂ assay designed to improve test robustness. Work was completed on an HPV ThinPrep application using cervical specimens collected with a brush/spatula device and the data has been submitted to the FDA. Development is continuing on our next generation of Hybrid Capture technology, initially for the improved detection of HPV and the evaluation of certain molecular markers to complement our HPV Tests in cervical screening applications. We are continuing several basic research programs with the goal of developing improved molecular diagnostic assay systems for the detection of HPV and other targets of interest in the area of women’s cancers and infectious diseases.

          As part of our research and development activities, we submitted a PMA Supplement Amendment to the FDA in September 2002 to obtain market approval for the use of our hc₂ HPV Test in conjunction with the Pap test for adjunctive screening for women age 30 and older. We worked closely with the FDA and received an approval on March 31, 2003. This product indication is being marketed in the United States under the trade name DNAwithPap Test.

          Selling and marketing expenses increased 41% to approximately $27,913,000 in fiscal 2003 from approximately $19,835,000 in fiscal 2002. The increase in fiscal 2003 was due primarily to personnel costs, which increased 44% to approximately $8,776,000, and royalty expenses, which increased 34% to approximately $2,814,000. In addition, depreciation expense increased 140% to approximately $2,359,000 in fiscal 2003 due primarily to the May 2002 repurchase of equipment from Abbott Laboratories (“Abbott”) upon expiration of the non-exclusive wind-down period of our distribution agreement with Abbott (the “Abbott Agreement”). Additionally, professional services increased 79% to approximately $2,160,000 due largely to the use of consultants to assist with the rapid growth of our distribution infrastructure in Europe.

          Geographically, the majority of the increase in our selling and marketing expenses for fiscal 2003, excluding royalties, was incurred in Europe, which increased 79% to approximately $9,867,000 over the corresponding period in fiscal 2002 as we established subsidiaries, hired employees and continued to develop a distribution infrastructure.

          We expect our selling and marketing expenses to increase during fiscal 2004 as we expand our direct sales and marketing activities in the United States to increase HPV product sales, including the new indication, DNAwithPap used in conjunction with the Pap test, commercialize our CT/GC products and continue the build-up of our direct sales and marketing operations in Europe. As part of our commercialization program for the DNAwithPap Test, we have contracted to establish a 34-person detailing sales organization with PDI, Inc. dedicated to promoting the DNAwithPap Test to physicians. We expect to continue to increase our investment in physician education to promote the commercialization of the DNAwithPap Test.

          General and administrative expenses increased 19% to approximately $16,642,000 in fiscal 2003 from approximately $14,024,000 in fiscal 2002. The increase was due primarily to professional fees, which increased 26% to approximately $7,222,000, primarily related to costs associated with litigation matters; personnel costs, which increased 34% to approximately

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$6,577,000; and insurance, which increased 84% to approximately $952,000, principally related to increased costs for directors’ and officers’ insurance coverage. These increases were partially offset by a decrease in bad debt expense of $526,000 during fiscal 2003 due to strong collection efforts of outstanding receivables.

          Geographically, the majority of the increase in general and administrative expenses for fiscal 2003 was incurred in Europe, which increased 618% to approximately $2,461,000 over the corresponding period in fiscal 2002 due to our change to direct distribution, and in the United States, which increased 4% over the corresponding period in fiscal 2002 to approximately $13,869,000, due primarily to the aforementioned litigation expenditures.

          Interest income decreased 19% to approximately $593,000 in fiscal 2003 from approximately $729,000 in fiscal 2002. The decrease was primarily due to a decrease in average cash balances and lower interest rates in fiscal 2003 compared to the corresponding period in fiscal 2002.

          Interest expense increased to approximately $273,000 in fiscal 2003 compared to approximately $32,000 in fiscal 2002 primarily due to interest on long-term debt due to Abbott as part of the repurchase of equipment at the end of fiscal 2002, and interest on the note due to Roche as a result of the repurchase of inventory from Roche in January 2003.

          Other income increased to approximately $678,000 in fiscal 2003 from a loss of approximately $20,000 in fiscal 2002 primarily due to foreign exchange gains and losses.

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. Please see “Liquidity and Capital Resources” below for a description of the Roche Distribution Contract.

          Other revenues included 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 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.

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          Cost of product sales marginally increased to approximately $12,938,000 in fiscal 2002 from approximately $12,553,000 in fiscal 2001. Gross margins on product sales increased to 72% in fiscal 2002 from 62% 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 sold such products directly in fiscal 2002, 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%.

          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 DNAwithPap Test which involves the use of our hc2 HPV Test as a primary cervical cancer screening test to be performed in conjunction with the Pap test for women age 30 and older, which was subsequently approved on March 31, 2003; 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 from Cytyc’s PreservCyt™ specimens and HPV testing from the TriPath Imaging’s SurePath specimens; and the creation of our next generation of Hybrid Capture technology.

          Selling and marketing expenses increased to approximately $19,835,000 in fiscal 2002 from approximately $12,548,000 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.

          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 our 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.

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          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.

Liquidity and Capital Resources

          Since inception, our expenses have significantly exceeded our revenues, resulting in an accumulated deficit of approximately $75,688,000 at June 30, 2003. We have funded our operations primarily through the sale of equity securities and revenues from product sales and research and development contracts. At June 30, 2003, we had cash, cash equivalents and short-term investments aggregating approximately $34,292,000. We had negative cash flows from operations of approximately $1,834,000 for the year ending June 30, 2003 compared to negative cash flows from operations of approximately $8,637,000 for the year ending June 30, 2002. The negative cash flow for the year ending June 30, 2003 was primarily the result of non-recurring payments to professionals related to our terminated merger transaction with Cytyc Corporation, all of which were accrued during fiscal 2002, in addition to net loss for the period. Positive cash flows from financing activities for the year ending June 30, 2002 are primarily the result of a private offering of 588,235 shares of common stock on January 30, 2002, the net proceeds of which, after expenses, were approximately $14,920,000.

          Capital expenditures increased to approximately $3,764,000 for the year ended June 30, 2003 from approximately $1,543,000 for the corresponding period in fiscal 2002. A substantial portion of the capital expenditures in fiscal 2003 related to our repurchase of equipment from Roche, as described below. The capital expenditures for the year ended June 30, 2003 do not reflect the application of the remaining deferred revenues and deferred costs, which had been on the balance sheet related to the fiscal year 2002 sale of equipment to Roche, more fully described below.

          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 human papillomavirus (“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 HPV products in Europe, Africa and the Middle East, a combination of direct distribution through its 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 had the option,

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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 customer’s laboratories on June 30, 2002. In June 2002, as part of our strategic decision, we decided that we would exercise the option to repurchase the equipment.

          In recognition of the decision to repurchase the equipment, commencing in the fourth quarter of 2002, we deferred recognition of 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 were recorded as deferred revenue and deferred costs, respectively. The deferred revenue and deferred costs were being amortized over a four-year period to other revenue (as equipment rental) and selling and marketing expenses, respectively. For fiscal 2002, we recorded Other revenue and Selling and marketing expenses of $109,000 and $67,000, respectively related to the amortization of these balances. For fiscal 2003, we recorded other revenue and selling and marketing expenses of $288,000 and $177,000, respectively, related to the amortization of these balances prior to the commencement of the repurchase. At December 31, 2002, when amortization ceased, the remaining deferred revenue and deferred cost balances were $1,904,000 and $1,169,000, respectively, for a remaining net credit as of December 31, 2002 of $734,000.

          On December 20, 2002, we amended the Roche Distribution Contract to terminate the wind-down period on December 31, 2002 and to establish the procedures for our repurchase from Roche of HPV-related testing equipment purchased from us by Roche under the Roche Distribution Contract. The repurchase price for the equipment in use for HPV testing in customers’ laboratories is the equipments’ December 31, 2002 depreciated value, which is the net selling price less any amounts Roche recorded as depreciation based on a straight-line basis over a four-year period. The repurchase price for the equipment in inventory is a discount from the transfer price paid by Roche under the Roche Distribution Contract.

          The parties consummated the HPV equipment repurchase on January 6, 2003, subject to reconciliation. In January 2003 Digene and its affiliates paid Roche an aggregate of approximately $2.6 million for the HPV equipment in inventory and in use at customers’ laboratories in Europe. A portion of the purchase price was paid by the issuance of a note payable due to Roche, which will be paid in one installment in January 2004, and the remainder of the purchase price was paid in cash. A final settlement for the repurchased assets was completed with Roche in June 2003.

          The total consideration paid to Roche for the fixed assets and inventory after reaching a final settlement was $2,488,000, or $1,753,000 after consideration of the remaining net credit of $734,000 mentioned above.

          We anticipate that working capital requirements will increase moderately for the foreseeable future due to the investment necessary to support our European direct distribution operations, including the January 2003 buy back from Roche of equipment in Europe, as well as increasing 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

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fiscal 2004. Our future capital requirements and the adequacy of available funds may change, however, based on numerous factors, including our degree of success in commercializing 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, 2003:

(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 require 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 allow 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 require 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 $17,241,000, $24,451,000 and $17,381,000 during our fiscal years ended June 30, 2001, 2002 and 2003 instead of our reported net loss which approximated $6,481,000, $9,397,000 and $4,324,000, 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 not material for the years ended June 30, 2001, 2002 and 2003. Interest rate exposure is primarily limited to the $34.3 million of cash, cash equivalents and short- and long-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, 2002 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, 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.

McLean, Virginia
August 15, 2003

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DIGENE CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS