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

FORM 10-K

(Mark One)



|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------

For the fiscal year ended June 30, 2001

OR



|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------

For the transition period from ____________ to __________

Commission file number 0-28194

DIGENE CORPORATION(Exact name of registrant as specified in its charter)

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|Delaware                                                       |  | 52-1536128                          
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|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
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|1201 Clopper Road
Gaithersburg, Maryland                       |  | 20878                               
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|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (301) 944-7000

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share(Title of Class)

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

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

Based upon the last sale price of the registrants Common Stock on
September 4,2001, the aggregate market value of the 11,997,997 outstanding
shares of voting stock held by non-affiliates of the registrant was
$344,582,474.

As of September 4, 2001, 16,830,521 shares of the registrants Common
Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

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





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TABLE OF CONTENTS



|                                                 |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. BUSINESS                                                                             
|                                                 | ADDITIONAL CONSIDERATIONS                                                                    
|                                                 | ITEM 2. PROPERTIES                                                                           
|                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERS                                  
|PART II                                         
|                                                 | ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                         
|                                                 | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                 | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|                                                 | ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                    
|                                                 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                        
|                                                 | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                 | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                         
|                                                 | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|Letter Agreement                                
|Original Equipment Manufacturer Supply Agreement
|Subsidiaries of the Registrant                  
|Consent of Ernst & Young LLP                    



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Table of Contents

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|Part I   |  |                                                                         |  |  |    |  |      | 
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|Item 1.  |  | Business                                                                |  |  | 1  | 
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|         |  | Additional Considerations                                               |  |  | 19 | 
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|Item 2.  |  | Properties                                                              |  |  | 28 | 
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|Item 3.  |  | Legal Proceedings                                                       |  |  | 28 | 
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|Item 4.  |  | Submission of Matters to a Vote of Our Stockholders                     |  |  | 28 | 
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|Part II  |  |                                                                         |  |  |    |  |      | 
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|Item 5.  |  | Market for Our Common Equity and Related Stockholder Matters            |  |  | 30 | 
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|Item 6.  |  | Selected Consolidated Financial Data                                    |  |  | 31 | 
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|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results |  |  |    | 
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|         |  | of Operations                                                           |  |  | 32 | 
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|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk              |  |  | 37 | 
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|Item 8.  |  | Financial Statements and Supplementary Data                             |  |  | 38 | 
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|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and         |  |  | 55 | 
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|         |  | Financial Disclosure                                                    |  |  |    | 
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|Part III |  |                                                                         |  |  |    |  |      | 
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|Item 10. |  | Directors and Executive Officers of the Registrant                      |  |  | 55 | 
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|Item 11. |  | Executive Compensation                                                  |  |  | 55 | 
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|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management          |  |  | 55 | 
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|Item 13. |  | Certain Relationships and Related Transactions                          |  |  | 55 | 
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|Part IV  |  |                                                                         |  |  |    |  |      | 
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|Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K         |  |  | 56 | 





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PART I




ITEM 1. BUSINESS

Overview

We develop, manufacture and market our proprietary gene-based testing
systems for the screening, monitoring and diagnosis of human diseases. Our
primary focus is in womens cancers and infectious diseases. We have applied
our proprietary Hybrid Capture® technology to develop a successful diagnostic
test for human papillomavirus, or HPV, which is the primary cause of cervical
cancer and is found in greater than 99% of all cervical cancer cases. We have
created and are continuing to expand the worldwide market for human
papillomavirus testing. In addition to our HPV Test marketing efforts, we are
focusing our commercialization strategy in two areas: diagnostic testing and
genomics research.

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

In genomics research, our goal is to apply our unique technology platform
to develop gene expression DNA microarray products and services, expand our
clinical testing services for use in the pharmaceutical market and correlate
proprietary gene-based information with clinical diseases.

Diagnostic Testing

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

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





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

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

Pap smears have been the principal means of cervical cancer screening
since the 1940s. Approximately 50 million Pap smears are performed annually in
the United States, and we believe that 60 to 100 million are performed annually
in the rest of the world. Follow-up testing and treatment is based on the
classification of the Pap smear result. An equivocal, or ASCUS (Atypical
Squamous Cells of Undetermined Significance), classification is given to Pap
smear results that cannot be definitively classified as either normal or
abnormal. This classification occurs in approximately 5% to 7% of all cases.
Women with normal Pap smears do not undergo follow-up treatment beyond routine
Pap smear testing. In general, women with abnormal Pap smears undergo a
colposcopic examination (visual examination of the cervix with the aid of a
colposcope). Most of these women also undergo biopsy at the time of
colposcopy, and many go on to have any suspected lesions ablated (physically
removed with a scalpel or cauterizing instrument). In practice, women with
equivocal Pap smears undergo multiple, repeat Pap smears and many undergo
colposcopy and biopsy, even though more than 75% of these women do not have
cervical disease.

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

Our gene-based HPV Test is a reproducible, objective test for the primary cause of
cervical cancer that is not subject to the limitations of cytology. While our
HPV Test is currently utilized domestically as a follow-up test to categorize
equivocal Pap smear results, clinical studies have shown that our HPV Test,
used in conjunction with the traditional Pap smear, has excellent diagnostic
capabilities. Based on these studies, a woman with a negative Pap smear result
and a

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negative HPV Test result can be virtually certain that neither cervical
cancer nor its cause is present, alleviating patient anxiety and reducing
healthcare costs.

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

Genomics Research

In the past, scientists may have spent decades studying the function of a
single gene or protein, but it is now possible to study thousands of genes or
proteins at the same time. In addition, researchers are currently moving away
from individual DNA sequence analysis in a single experiment in favor of
studying multiple gene interactions simultaneously. The study of multiple gene
interactions significantly accelerates target discovery and characterization
and reduces research and development costs. Analysis of multiple gene
interactions is made possible by a DNA microarray platform, which is a surface
collection of immobilized genes that can be simultaneously examined with
specialized equipment. DNA microarrays enable high-throughput, parallel gene
expression analysis and assessment of changes in a genome. We believe DNA
microarray platforms will be used for genetic and genomics discovery strategies
and to focus screening strategies on validating novel therapeutics and
molecular diagnostic tests. DNA microarray screening will enable
pharmaceutical companies to focus clinical trials on patients who are most
likely to respond and to target effectively their drug development resources on
patients with unmet medical needs.

The DNA microarray market is comprised of microarrays and related
equipment used to manufacture and analyze the microarrays. Currently, gene
expression analysis accounts for 90% of the DNA microarray market.

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. Our Hybrid Capture technology
also uses DNA probes to detect RNA targets.

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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, a
protein, that, in the presence of chemicals such as dioxetanes,
produces light and acts as a signal amplification.                                                                                                     
|
| | 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 and the genomics research
markets.

Diagnostic Testing



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

Genomics Research



| |  |  | Industry Standardization.Researchers have indicated a strong
desire for a standardized hybridization and detection system that can
be universally applied across a variety of DNA microarray platforms so
that comparable data can be obtained from experiment to experiment and
laboratory to laboratory. We believe that our Hybrid Capture
technology
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | has the potential to become a widely used method for detection of gene
expression and testing for genetic variation.                                                                                                                                                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Quality of Results.Our universal hybridization and detection
technology is highly sensitive and reproducible because of its use of
signal amplification and, therefore, is less prone to error than target
amplification methods.                                                                                                                                  
|
| |  |  | Flexibility.The open platform of our Hybrid Capture technology is
compatible with a variety of sample types including DNA, RNA, messenger
RNA and unpurified cellular material. Our Hybrid Capture technology
can measure all RNA levels, even those found in bacteria and other
prokaryotic organisms, which cannot be detected using other
amplification methods.
|
| |  |  | Cost Effectiveness.Application of our Hybrid Capture technology
for hybridization and detection requires minimal sample processing
without the limitations typical of polymerase chain reaction sample
processing. Thus, our simple chemistry eliminates the need for
laborious sample handling, thereby significantly reducing the cost per
test.                 

Products

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

We have developed two versions of our gene-based testing systems, the
Hybrid Capture 1, or HC 1, and HC 2 systems. The HC 1 system, our
first-generation DNA hybrid detection system, tests individual samples in
polystyrene tubes. HC 1 is used for our CMV Test and lower-volume testing for
our HBV and HPV Tests. The HC 2 system, which is currently available for our
HPV, chlamydia and gonorrhea tests, uses a 96-well microplate format that
permits simultaneous screening of multiple samples from a single plate. The HC
2 system is more efficient, less expensive and easier to use than the HC 1
system. Our diagnostic kits include proprietary biochemicals and consumables.
We also provide instrumentation systems and proprietary consumables required
for specimen collection, automation, detection and analysis.

We are developing products and services for genomics and pharmaceutical
research based on our Hybrid Capture technology. Our Hybrid Capture Expression
Analysis System, or HC EAS, marketed by Applied Biosystems as Xpress
Screen, is offered as both a reagent kit and screening service. The kit
includes reagents, a coated microplate and custom probes and control reagents
that have been optimized for specific research applications. HC EAS is based
on a 96-or 384-well microplate format and provides ultra-sensitive detection of
messenger RNA for high-throughput gene expression screening. We are developing
our first reagent products for DNA microarray analysis that will include Hybrid
Capture reagents kits and standards for gene expression profiling on low,
moderate and high-density spotted and commercial DNA microarray systems.

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Diagnostic Products

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

|                                               |  |                                                                                                                                 |  |                                                                                                                                  |  |                                                    
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------
|Our Current Hybrid Capture Diagnostic Tests(1)
|                                              
|                                               |  |                                                                                                                                 |  |                                                                                                                                  |  | Potential                                          
|                                               |  |                                                                                                                                 |  |                                                                                                                                  |  | Worldwide                                          
|Disease Target                                 |  | United States                                                                                                                   |  | Outside United States                                                                                                            |  | Market                                             
|                                               |  |                                                                                                                                 |  |                                                                                                                                  |  |                                                    
|Human papillomavirus                           |  | Approved by the FDA
and marketed as an
adjunct to Pap
smears for cervical
cancer screening
for ASCUS
classifications.           |  | Marketed as a
primary test for
cervical cancer
screening.
Distributed in
Europe, Africa and
the Middle East by
Roche and Abbott. |  | 100-150 million(2)                                 
|                                              
|                                              
|                                              
|                                              
|Chlamydia and Gonorrhea                        |  | Cleared by the FDA
in March 2000.
Preparations for
marketing launch by
Abbott are ongoing.                                      |  | Marketed.
Distributed in
Europe, Africa and
the Middle East by
Abbott.                                                           |  | 89 million(3)
(chlamydia)
62 million(3)
(gonorrhea)
|                                              
|                                              
|                                              
|                                              
|Hepatitis B virus                              |  | Available for
research use only.                                                                                                |  | Marketed.
Distributed in
Europe, Africa and
the Middle East by
Abbott.                                                           |  | 350 million(4)                                     
|                                              
|                                              
|                                              
|                                              
|Cytomegalovirus                                |  | Cleared by the FDA
and marketed for
diagnosing
infection in organ
transplant, bone
marrow transplant
and HIV-positive
patients. |  | Marketed.
Distributed in
Europe, Africa and
the Middle East by
Abbott.                                                           |  | 1 million(5)                                       



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|(1) |  | Some of our products and product candidates have not received marketing
approvals or clearance from the FDA or the applicable foreign authorities.
There can be no assurance that any such products or product candidates
will receive approvals or clearance on a timely basis, if at all.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Represents estimate of the total number of Pap smears performed annually.                                                                                                                                                                                                                  
|   
|   
|   
|   
|(3) |  | Represents estimated number of new cases worldwide on an annual basis.                                                                                                                                                                                                                     
|   
|   
|   
|   
|(4) |  | Represents estimated number of cases worldwide of chronic hepatitis B
virus infection.                                                                                                                                                                                                     
|   
|   
|   
|   
|(5) |  | Represents estimated number of cases worldwide of active cytomegalovirus
infection.                                                                                                                                                                                                        

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

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

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

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

On December 8, 2000, the FDAs Microbiology Devices Panel of the Medical
Devices Advisory Committee held a public hearing to discuss and make
recommendations on issues concerning the types of information necessary to
determine the effectiveness of in vitrodiagnostic devices that detect human
papillomavirus in women thirty years or older when these devices are used: (1)
in conjunction with the Pap smear to increase the effectiveness of Pap smear
screening for cervical cancer, and (2) without the Pap smear to determine a
womans risk of cervical cancer. Preliminary scientific studies presented at
the meeting indicated that the use of human papillomavirus testing in
conjunction with the Pap smear for women ages thirty and older may allow
physicians to better determine their patients risk for developing cervical
cancer and to provide the appropriate follow-up treatment, including
further HPV and Pap smear testing, reducing patient
anxiety associated with repeat Pap smears and the need for unnecessary invasive
procedures.

Over the last several years, many general population screening studies
using our HPV tests have been conducted by prominent medical professionals and
academic and government institutions throughout the world, including the
National Cancer Institute, Columbia University and the Cleveland Clinic
Foundation. The majority of these studies assessed the usefulness
of

8



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##### Table of Contents



our HPV Test in comparison to the Pap smear for women ages thirty and
older. The following table, derived by us from these studies, demonstrates the
superior performance of our HPV Test when used for primary general population
screening alone, or in combination with Pap smear testing, to detect underlying
cervical disease as compared with the Pap smear alone. In all studies, human
papillomavirus testing alone, and in combination with the Pap smear, is
superior to the Pap smear alone in detecting underlying cervical disease. The
data show a minor decrease in specificity for cervical disease with the two
tests combined. Nevertheless, women ages thirty and older who test positive
for human papillomavirus and who do not have cervical disease are at
significant risk of developing cervical disease in the future.

Performance Comparison of our HPV Test and the Pap Smear

|                   |  |          |       |       |  |             |      |             |  |                  |       |       |  |       |       |       |  |       |      |       |  |  |      |  |  |  |      |  |  |          |      |  |  |  |       |  |  |  |       | 
|------------------ |  | -------- | ----- | ----- |  | ----------- | ---- | ----------- |  | ---------------- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ---- | ----- |  |  | ---- |  |  |  | ---- |  |  | -------- | ---- |  |  |  | ----- |  |  |  | ----- | 
|                   |  |          |       |       |  |             |      |             |  |                  |       |       |  |       |       |       |  |       |      |       |  |  |      |  |  |  |      |  |  | Negative
|                   |  |          |       |       |  | Sensitivity |      | Specificity |  | Predictive Value
|                   |  |          |       |       |  | (%)         |      | (%)         |  | (%)             
|                   |  |          |       |       |  |             |      |             |  |                 
|                   |  | # of     |       |       |  |             |      |             |  |                  |       |       |  |       |       |       |  |       |      |       |  |  |      |  |  |  |      |  |  |          |      |  |  |  |       |  |  | 
|                   |  | Women    |       | PAP   |  | HPV         |      | HPV +       |  | PAP              |       | HPV   |  | HPV + |       | PAP   |  | HPV   |      | HPV +
|                   |  | In Study |       | Alone |  | Alone       |      | PAP         |  | Alone            |       | Alone |  | PAP   |       | Alone |  | Alone |      | PAP  
|                   |  |          |       |       |  |             |      |             |  |                  |       |       |  |       |       |       |  |       |      |      
|Population         |  |          |       |       |  |             |      |             |  |                  |       |       |  |       |       |       |  |       |      |       |  |  |      |  |  |  |      |  |  |          |      |  |  |  |       |  |  |  |       | 
|Western European 1 |  |          | 7,592 |       |  |             | 51.6 |             |  |                  | 96.3  |       |  |       | 100.0 |       |  |       | 98.5 |       |  |  | 96.2 |  |  |  | 95.1 |  |  |          | 99.8 |  |  |  | 100.0 |  |  |  | 100.0 | 
|                  
|                  
|                  
|                  
|Western European 2 |  |          | 9,761 |       |  |             | 78.0 |             |  |                  | 98.2  |       |  |       | 100.0 |       |  |       | 95.7 |       |  |  | 92.7 |  |  |  | *    |  |  |          | 99.9 |  |  |  | 100.0 |  |  |  | 100.0 | 
|                  
|                  
|                  
|                  
|Western European 3 |  |          | 5,671 |       |  |             | 74.6 |             |  |                  | 100.0 |       |  |       | 100.0 |       |  |       | 95.0 |       |  |  | 88.9 |  |  |  | *    |  |  |          | 99.7 |  |  |  | 100.0 |  |  |  | 100.0 | 
|                  
|                  
|                  
|                  
|Latin American 1   |  |          | 6,115 |       |  |             | 58.4 |             |  |                  | 94.8  |       |  |       | 97.4  |       |  |       | 98.7 |       |  |  | 93.9 |  |  |  | 93.4 |  |  |          | 99.5 |  |  |  | 99.9  |  |  |  | 100.0 | 
|                  
|                  
|                  
|                  
|Latin American 2   |  |          | 6,176 |       |  |             | 77.9 |             |  |                  | 89.7  |       |  |       | 94.1  |       |  |       | 94.1 |       |  |  | 94.0 |  |  |  | 89.9 |  |  |          | 99.7 |  |  |  | 99.9  |  |  |  | 99.9  | 
|                  
|                  
|                  
|                  
|African            |  |          | 2,925 |       |  |             | 84.1 |             |  |                  | 89.7  |       |  |       | 92.5  |       |  |       | 86.4 |       |  |  | 80.0 |  |  |  | 76.4 |  |  |          | 99.3 |  |  |  | 99.5  |  |  |  | 99.6  | 
|                  
|                  
|                  
|                  
|Asian              |  |          | 1,936 |       |  |             | 97.6 |             |  |                  | 100.0 |       |  |       | 100.0 |       |  |       | 76.3 |       |  |  | 83.0 |  |  |  | 68.0 |  |  |          | 99.9 |  |  |  | 100.0 |  |  |  | 100.0 | 
|                  
|                  
|                  
|                  
|U.S.               |  |          | 1,040 |       |  |             | 50.0 |             |  |                  | 100.0 |       |  |       | 100.0 |       |  |       | 97.6 |       |  |  | 96.2 |  |  |  | 95.5 |  |  |          | 99.9 |  |  |  | 100.0 |  |  |  | 100.0 | 



---

|* |  | Not reported.
|- |  | -------------

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

These studies illustrate that the negative predictive value of human
papillomavirus testing alone and human papillomavirus testing in combination
with the Pap smear is higher in all studies than the Pap smear alone. The
negative predictive value is a measure of how often a test result showing no
disease is actually correct. This high negative predictive value assures women
and their physicians that a negative result indicates that a woman does not
currently have cervical disease or human papillomavirus infection. If a woman
tests negative for human papillomavirus using our HPV Test and receives a
negative Pap smear result, there is virtually no chance that she has cervical
disease; in each of the studies the negative predictive value of human
papillomavirus testing in conjunction with the Pap smear was at least 99.6%.
Small improvements in negative predictive value when extrapolated over large
populations represent thousands of cases of cervical cancer left undetected by
the Pap smear. The predictive nature of human papillomavirus testing permits
healthcare providers to classify women who test negative for human
papillomavirus as being unlikely to develop cervical disease in the foreseeable
future. This may safely permit increased screening intervals for such women,
saving total costs for the healthcare provider and permitting the allocation of
resources to those women who currently have cervical disease or are at
significant risk for developing cervical disease in the future.

9



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##### Table of Contents



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

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



| |  |  | June 2001:a study involving 7,932 women in France, and published in
The British Journal of Cancer, revealed that HPV testing on its own was
100% sensitive in detecting high-grade cervical lesions compared to 68%
for the traditional Pap smear.                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | March 2001:results of a National Cancer Institute ASCUS Low-Grade
Triage Study showed that human papillomavirus testing for women with
equivocal Pap smear results was 96% sensitive for women with disease,
although the sensitivity of the Pap smear was 85%;                                                                                                                           
|
| |  |  | January 2000:the Journal of the American Medical Association
reported that two independent studies, one performed by the National
Cancer Institute (involving 8,539 women in Costa Rica) and one by
Columbia University (involving 1,415 women in Cape Town, South Africa),
showed human papillomavirus testing was significantly more reliable for
detecting high-grade cervical lesions;
|
| |  |  | December 1999:a German study involving 247 women published in The
Lancet found that self-collection of cervical specimens by women is a
reliable method of testing for human papillomavirus using our HPV tests;                                                                                                                                                                          
|
| |  |  | November 1999:a study involving 118 women published in the New
England Journal of Medicine confirmed that persistent human
papillomavirus infection causes cervical cancer and a test for human
papillomavirus DNA can predict the risk of cervical cancer among women
with normal Pap smears;                                                                                            
|
| |  |  | September 1999:a study involving 2,988 women in the United Kingdom
published in The British Journal of Cancer demonstrated the high (95%)
sensitivity of our test compared with the Pap smear (79%) in screening
women over age thirty-five for cervical disease;                                                                                                                         
|
| |  |  | August 1999:a 22-country study completed by the International
Agency for Cancer Research confirmed that human papillomavirus is the
cause of cervical cancer in 99.7% of cases worldwide; and                                                                                                                                                                                             
|
| |  |  | July 1999:a study involving 1,518 European women published in The
British Journal of Cancer confirmed the high sensitivity (98%) of our
HPV Test.                                                                                                                                                                                                                                         

The results of multiple clinical studies confirming the benefits of human
papillomavirus testing using our HPV tests were presented, in July 2000, at the
18th International Papillomavirus Conference in Barcelona, Spain and in
December 2000 before the FDAs Microbiology Devices Panel of the Medical
Devices Advisory Committee. Additionally, at a Conference in February 2001
sponsored by the London-based Economists Advisory Group, and in an economics
study published in a June 2001 issue of the Journal of the American Medical
10Table of ContentsAssociation, findings from clinical studies showed HPV testing using
Digenes HC 2 HPV Test was a cost-effective method of testing, even in
low-resource settings.In addition, we have participated in human papillomavirus clinical trials
involving an aggregate of approximately 90,000 women on four continents for
which the final results are being prepared for publication. These studies have
been conducted by prominent medical professionals and academic and government
institutions throughout the world, including the National Cancer Institute,
Columbia University, the Johns Hopkins University and the Cleveland Clinic
Foundation. A majority of the studies were designed to assess the usefulness
of our HPV Test in comparison to the Pap smear for women over age thirty. We
believe that the completion and publication of the results of these clinical
trials should help to accelerate further adoption of our HPV Test. The
following is a summary of these trials:

|               |  |                                              |  |        |  |                              
|-------------- |  | -------------------------------------------- |  | ------ |  | -----------------------------
|              
|County         |  | Lead Investigator                            |  | Size   |  | Trial Description            
|              
|North America  |  |                                              |  |        |  |                              
|United States  |  | National Cancer Institute                    |  | 5,000  |  | ALTS Borderline Pap Trial (1)
|              
|              
|              
|              
|Untied States  |  | Johns Hopkins University                     |  | 1,000  |  | HPV Primary Screening (2)    
|              
|              
|              
|              
|Mexico         |  | Johns Hopkins University; Mexican
Government |  | 7,500  |  | HPV Primary Screening (2)    
|Europe         |  |                                              |  |        |  |                              
|Netherlands    |  | Free University of Amsterdam                 |  | 40,000 |  | HPV Primary Screening (3)    
|              
|              
|              
|              
|United Kingdom |  | Imperial Cancer Research Fund                |  | 10,000 |  | HPV Primary Screening (3)    
|              
|              
|              
|              
|Germany        |  | Universities of Hanover and Tübingen         |  | 8,000  |  | HPV Primary Screening (2)    
|Other          |  |                                              |  |        |  |                              
|Russia         |  | University of Turku, Finland                 |  | 12,000 |  | HPV Primary Screening (3)    
|              
|              
|              
|              
|Brazil         |  | University of Riio Grande do Soul            |  | 2,000  |  | HPV Primary Screening (3)    
|              
|              
|              
|              
|Argentina      |  | Institut Papanicolaou                        |  | 1,000  |  | HPV Primary Screening (2)    



---

|(1) |  | Trials have been completed and initial results have been published;
awaiting publication of additional results.
|--- |  | ---------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Trials have been completed and the results are being prepared for
publication.                                 
|   
|   
|   
|   
|(3) |  | Trials are in process.                                                                                         

Regulatory and Reimbursement Milestones.The FDA approved our HC 2 HPV
Test for the detection of human papillomavirus in March 1999. In March 2000,
the FDA approved our High-Risk HC 2 HPV Test. These approvals followed
premarket approvals, or PMAs, to test for the presence of human papillomavirus
in women with equivocal Pap smears in April 1995, and, in 1997, a PMA
supplement for the use of our HPV Test using the ThinPrep Pap Test sample
collection system. We intend to submit PMA supplements to the FDA during
fiscal 2002 to obtain market approval for the use of our HC 2 HPV Test as a
primary adjunctive cervical cancer screening test to be performed in
conjunction with the Pap smear for women ages 30 and older. 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 except for Japan, where
approval is currently pending.

In the United States, the American Medical Association has assigned
specific Current Procedural Terminology, or CPT codes, necessary for
reimbursement, for human papillomavirus testing, and the Centers for Medicare
and Medicaid Services (CMS) (formerly the Health Care
11Table of ContentsFinancing 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 200 million people currently
authorize reimbursement for our HPV Test, up from 50 million people in fiscal
1999 and 140 million people in fiscal 2000. Reimbursement is now available
from more than 90 payors, including Aetna U.S. Healthcare, United Healthcare,
Kaiser Permanente and more than 30 Blue Cross/Blue Shield plans.Outside the United States, we work with a network of distributors to
establish reimbursement from third-party payors in their respective
territories. We, together with our distributors, have established
reimbursement for our HPV Test in Germany, the Czech Republic and Brazil. In
Europe, Africa and the Middle East, we are working closely with Roche Molecular
Systems on advocacy efforts and with government and ministry officials to
establish appropriate reimbursement coverage for our products in the major
countries in such territories.Our Other Infectious Disease Tests.Chlamydia is the most common sexually
transmitted disease in the United States and is a major health problem
worldwide, with approximately 89 million new cases reported annually. Genital
chlamydia infection, if left untreated, has serious potential consequences,
including infertility, ectopic pregnancy, cervicitis and pelvic inflammatory
disease. Gonorrhea, with approximately 62 million new cases reported annually
worldwide, is the second-most common sexually transmitted disease in the United
States and may result in severe genital complications in both women and men if
left untreated. If properly detected, both chlamydia and gonorrhea are easily
treatable with low-cost antibiotic therapy. Nevertheless, routine and
broad-based screening for chlamydia and gonorrhea has been limited by the
insufficient sensitivity of some culture methods, the invasive and cumbersome
specimen collection methods frequently used and the time and cost associated
with performing these tests.Our chlamydia and gonorrhea tests are prescribed and performed by a
gynecologist or other healthcare professional using the same methods used to
perform our HPV Test. We are the first to provide FDA-approved tests for the
simultaneous detection of chlamydia and gonorrhea infections, in addition to
human papillomavirus, from a single patient sample. We believe the ability to
perform multiple tests from a single patient specimen provides greater
convenience to patients and their physicians and reduces healthcare costs by
decreasing the frequency of patient visits and testing. Our Hybrid Capture
tests detect the presence of both chlamydia and gonorrhea in women from
cervical swabs, as well as in men through the collection of urine samples.
Clinical studies on women have indicated that our HC 2 Chlamydia Test is
capable of detecting chlamydia in up to 98% of the cases in which the disease
is present and our HC 2 Gonorrhea Test is capable of detecting gonorrhea in up
to 92% of the cases in which it is present.In 1999, our portfolio of chlamydia and gonorrhea tests was cleared for
sale in almost every major European country and in Brazil and Argentina. In
the United States, the FDA granted us 510(k) clearance for our HC 2 Chlamydia
Test in October 1999; the FDA granted us 510(k) clearance for our HC 2
Gonorrhea Test in November 1999; and the FDA granted us 510(k) clearance for
our combination HC 2 Chlamydia/Gonorrhea Test in March 2000. Abbott
Laboratories, our distributor of these products in the United States, is
currently in the process of launching these products.12Table of ContentsOur Blood Virus Tests.Blood viruses, such as hepatitis B virus and
cytomegalovirus, are leading causes of morbidity and death and, previously,
were untreatable. Rapid, accurate and ongoing detection of blood viruses and
monitoring of viral load are essential for effective patient management. Over
the last several years, antiviral therapies have been developed to treat these
diseases. To maximize the efficacy of these expensive and sometimes toxic
therapies, physicians rely on viral load monitoring to measure the level of
virus present in the patient. By precise measurement of viral load and
identification of patients who are not responding to therapy early in their
treatment, physicians can tailor antiviral therapies through precise monitoring
of individual responses, recognize when a patient develops drug resistance and
project how quickly the infection will progress to chronic disease.We have developed unique testing products using our Hybrid Capture system
to detect the presence of hepatitis B virus and cytomegalovirus. Our HBV Test
and CMV Test are prescribed by a gastroenterologist, transplant surgeon or
other healthcare professional. The healthcare professional draws a blood
specimen from the patient. The specimen is then sent to the laboratory, where
specialized software programs provided with the HC 1 and HC 2 systems process
the results. The laboratory subsequently reports the test results to the
physician using standard reporting procedures and the physician advises the
patient of the test results and the appropriate follow-up treatment. Depending
on the level of hepatitis B virus in the patients blood, antiviral therapy
will be presented, modified or discontinued. For transplant patients, the
level of cytomegalovirus in the blood is used to determine the presence or
absence of cytomegalovirus infection. Patients with active cytomegalovirus
infections are prescribed antiviral therapy. Transplant patients are typically
monitored once per week for cytomegalovirus DNA for twelve weeks following the
initial organ transplant.The FDA granted us 510(k) clearance for our HC 1 CMV Test in September
1998 and our HC 2 HBV Test received marketing approval in France and
Switzerland in January 2000 and December 1999, respectively. Our CMV Test is
the only DNA test cleared for the detection of cytomegalovirus by the FDA.
Abbott Laboratories, one of the worlds leading providers of HBV tests, is
selling our HBV and CMV products in Europe, Africa and the Middle East.Genomics Research ProductsWe are developing unique Hybrid Capture-based reagents and DNA microarray
products and services to exploit microarray business opportunities in the
pharmaceutical and clinical research markets. We believe that our Hybrid
Capture technology has the potential to become a widely used method for
detection of gene expression and testing for genetic variation. Our strategy
is to capitalize on the competitive advantages of our Hybrid Capture technology
to develop high-value tools to address key application areas, such as gene
expression profiling, genotyping and molecular disease management. We
currently have two new business initiatives underway:
        
        We have applied our Hybrid Capture technology to develop
products for high-throughput gene expression analysis on DNA
microplate and microarray platforms. We plan to develop Hybrid
Capture microarray hybridization and detection kits for
ultra-sensitive gene expression analysis on commercial DNA microarray
systems. Our first product is the HC EAS Test based on 96- and
384-well microplate platforms,13Table of Contentswhich is currently marketed by our partner, Applied Biosystems, under
the tradename Xpress Screen.
        
        We offer clinical research testing services for gene-based
analysis and assay development to support clinical trials. We
believe expanding our clinical services will accelerate acceptance of
our future products by creating early product awareness.We expect to commercialize our technology to researchers and commercial
laboratories for gene analysis on DNA microarray chips and to pharmaceutical
companies for high volume testing of a subset of specific genes. Based on
knowledge gained from these efforts, we expect to identify and commercialize
innovative gene-based tests to help maintain our leadership position in the
infectious disease and cancer markets and to help us enter new diagnostic
testing markets.Sales and MarketingWe focus our sales and marketing strategy on achieving broad market
acceptance of our gene-based diagnostic tests. Our initial efforts have been
in the cervical cancer field where we have established our HPV Test as a
leading test for the primary cause of cervical cancer, and in cytomegalovirus and
hepatitis B virus testing where we have established strong market positions.
Over the last eighteen months, the majority of our sales and marketing
investments have been directed to the launch of our HC 2 HPV Test and to build
demand for our test among the medical profession, public health officials and
consumers through a demand-creation marketing campaign.Increasing awareness of cervical cancer and our cost-effective solution is
the first step in the demand-creation marketing campaign for our HPV Test. Our
strategy has involved:
        
        sponsoring, or participating in, major multi-center clinical
trials to establish the clinical utility and cost effectiveness of
our tests;
        
        promoting the publication of the results of these trials in
prestigious medical journals and communicating the results of these
trials to the public and physicians through media awareness programs;
        
        establishing the HPV Centers of Excellence program, a network
of key opinion leaders and leading United States academic centers,
which help educate physicians about the benefits of our HPV Test;
        
        establishing widespread laboratory distribution for our HPV
Test through direct sales programs, strategic alliances with major
diagnostic companies and co-marketing programs with clinical
reference laboratories;
        
        working with managed care providers, national governments and
reimbursement agencies to establish reimbursement; and
        
        supporting womens health advocacy groups to call for
widespread use of our HPV Test and educating consumers about the
benefits of human papillomavirus testing.14Table of ContentsNorth American MarketWe 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. For example, the
largest laboratory providers in the United States, such as American Medical
Laboratories, Laboratory Corporation of America, Quest Diagnostics, DIANON
Systems and UniLab, all have active programs for automatic follow-up human
papillomavirus testing of equivocal results from ThinPrep® Pap Test
specimens. These laboratories
represent approximately 40% of the United States Pap smear testing market. The
combined single-sample approach, which was approved by the FDA in September
1997, enables the use of our HPV Test with Cytyc Corporations ThinPrep Pap Test to eliminate
the need for a return office visit to collect a second sample for human
papillomavirus testing.In January 2001, we entered into an exclusive agreement with Cytyc
Corporation for the promotion of our HC 2 HPV Test for use with Cytycs
ThinPrep Pap Test in the United States and Puerto Rico. We will jointly
promote the benefits of testing for human papillomavirus with our HPV Test
directly from Cytycs ThinPrep Pap Test sample collection vial. Initially,
Cytycs greater than 100-person physician sales force will promote the combined
products to approximately 30,000 practicing gynecologists in the United States
for equivocal Pap smears. Subject to FDA submission and approval, we intend to
co-promote the combined products as the most effective primary screening method
for cervical cancer. The term of the agreement is until June 30, 2002 and will
automatically renew until June 30, 2003, unless it is terminated earlier by
either party.In fiscal 2001, Dynacare Inc., a leading national reference laboratory for
Canada and MDS, Inc., a leading provider of diagnostic services in Canada,
began offering our HC 2 HPV Test in Canada.During fiscal year 2000, we began our HPV Centers of Excellence program to
facilitate the education of healthcare providers and women about the clinical
applications of human papillomavirus DNA testing. Current participants in the
HPV Centers of Excellence program include the Cleveland Clinic Foundation,
Columbia University, the Johns Hopkins University, the Yale University Medical
Center and the Arizona Cancer Center at the University of Arizona. In
addition, we actively support the efforts of the American Medical Womens
Association and the National Cervical Cancer Public Education Campaign to
educate women about the link between human papillomavirus and cervical cancer.
We also support The National HPV and Cervical Cancer Prevention Resource
Center, which prepares expert consensus statements, drafts clinical guidelines
and operates patient hot lines.International MarketsInternationally, we are making significant progress in our efforts to
establish our HPV Test for primary cervical cancer screening. In Germany, our
largest European market, approximately 200 laboratories perform our HPV Test
and acceptance of our test continues to grow. Our success in Germany is due to
our coordinated sales and marketing program including: (i) a physician and
laboratory education program consisting of establishing payment guidelines,
clinical utility laboratory support, direct mail and web advertising, (ii)
direct-to-consumer public awareness with celebrity advocates and (iii)
government lobbying.15Table of ContentsIn November 2000, the Czech Republic became the first European country to
adopt human papillomavirus testing as a national primary screening test for
cervical cancer. The Czech Republic also enacted legislation calling for full
reimbursement of human papillomavirus testing by the National Health Insurance
program. In the United Kingdom, our HPV Test is being used in a pilot program
to use human papillomavirus testing as part of the national screening program
for cervical cancer. In Mexico, we are working with the Mexican National
Institute of Public Health, or NIPH, the Mexican Institute for Social Security,
or IMSS, and the Johns Hopkins School of Public Health to complete a clinical
trial involving 7,500 Mexican women in the State of Morelos to evaluate the use
of the HPV test as a primary cervical cancer screening test. In addition, in
June 2001 Rotary International launched a new humanitarian program called Test
for Lifethat will use Digenes HC 2 HPV Test to provide cervical cancer
screening to more than one million women in Mexico during the five-year
program.In Europe, Africa and the Middle East, we market and distribute all of our
diagnostic products through Roche Molecular Systems, Inc. and its affiliates
(Roche) and Abbott Laboratories. In May 1999, we entered into an exclusive
marketing and distribution agreement with Abbott Laboratories for the sale and
marketing of our HPV Test and other Hybrid Capture products in Europe, Africa
and the Middle East and our HC 2 Chlamydia and Gonorrhea Tests in the United
States. Abbott did not meet the HPV net sales thresholds established under the
marketing and distribution agreement for calendar year 2000 and, on April 30,
2001, Digene terminated Abbotts rights with respect to Digenes HPV Test under
the agreement. Such termination is subject to a 12 month non-exclusive
wind-down period. In addition, Digene converted Abbotts distributor status to
non-exclusive for Digenes HBV Tests under the agreement. On April 29, 2001,
Digene entered into a letter agreement with Roche Molecular Systems, Inc.,
which establishes Roche as the co-exclusive distributor of Digenes HPV
products in Europe, Africa and the Middle East from May 1, 2001 through June
30, 2002. The end of the distribution term will be subject to a six month
non-exclusive wind-down period. Under the agreement, Roche and Digene also
agreed to evaluate opportunities for a broader relationship.In Brazil, our products are sold by Digene do Brasil LTDA, a majority
owned subsidiary. We use independent distributors in the rest of South
America, Asia and the remaining countries in which we sell our products. In
Japan, our distributor, Mitsubishi Chemical Corporation, is working to obtain
regulatory approval and reimbursement for our HPV, Chlamydia and Gonorrhea
Tests.Intellectual PropertyPatents 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. A foreign counterpart of this
patent application has 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
16Table of Contentsaspects of our products. Under current law, patent applications filed in
the United States after November 29, 2000 are published eighteen months after
filing (unless no foreign counterparts are filed). Patent applications filed
before November 29, 2000 are maintained in secrecy until patents are issued.
Patent applications in some foreign countries are maintained in secrecy for a
period of time after filing. Any additional United States patents or foreign
patents relating to our Hybrid Capture technology or our products may not be
issued to us on a timely basis, or at all.We hold four issued United States patents relating to human papillomavirus
types 35, 43, 44 and 56. These patents expire in 2007. We have also filed
corresponding foreign patent applications in countries such as Germany, France,
Italy, the United Kingdom 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 patent applications relating to human papillomavirus
types 39 and 42 and foreign patents and applications relating to human
papillomavirus type 33. The United States patents expire in 2014 and 2016,
respectively. 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. 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.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 2016) and the detection of human
papillomavirus types 68 and 70 using DNA testing methods. Under the license we
can use our rights to develop and sell products using the licensed technology
and pay royalties on such products. The term of the license expires upon
expiration of the licensed patent, except that it continues for the commercial
life of the products in countries where there is no licensed patent.Through a license with Georgetown University, we have obtained exclusive,
worldwide rights to a United States patent application and corresponding
foreign patents and patent applications relating to human papillomavirus type
52 and to a United States patent and corresponding foreign patents relating to
the use of the L1 gene sequence to detect specific human papillomavirus types.
Unless terminated earlier, the Georgetown license will terminate
17Table of Contentsupon the last to expire of the licensed patent rights. All of the issued
foreign patents relating to human papillomavirus type 52 and the L1 related
patent will expire in 2008. We are obligated to make royalty payments to
Georgetown University based on the percentage of net sales of products
incorporating the licensed technologies.Through a license with Kanebo, Ltd., we have obtained exclusive worldwide
rights (except for Japan where Kanebo retained the right to grant a
non-exclusive sublicense to Toray Industries, Inc.) relating to human
papillomavirus type 58. Unless terminated earlier, the Kanebo license expires
on the later to occur of January 1, 2010 or the expiration of any patent
relating to human papillomavirus type 58 issued to Kanebo on its patent
application.Facilities and ManufacturingWe lease approximately 90,000 square feet of office and manufacturing
space in Gaithersburg, Maryland. Our lease expires December 31, 2009 and we
have the ability to extend the lease for two five-year terms.We combine more than 200 biological reagents, inorganic and organic
reagents and kit components to manufacture our finished test kits. Biological
reagents include DNA and RNA probes, antibodies and detection reagents. These
biological reagents are currently manufactured in our Gaithersburg facility,
which received validation approval from the FDA in September 2000. We purchase
many of these components and reagents from outside suppliers. We believe that
we currently have sufficient manufacturing capacity for our existing demand and
that the new facility will allow us to expand our production capability to
satisfy demand for the foreseeable future.We have established a quality control program, including a set of standard
manufacturing and documentation procedures, intended to ensure that, where
required, our products are manufactured in accordance with quality systems
regulations. We received ISO 9001 certification in June 1999.EmployeesAt June 30, 2001, we employed 193 persons, including 55 in research and
development, 66 in manufacturing, including quality assurance, 31 in sales and
marketing and 41 in accounting, finance, administration and regulatory affairs.
Seventeen of our employees hold Ph.D. or M.D. degrees. We are not a party to
any collective bargaining agreements, and we believe our relationships with our
employees are good.Principal Executive OfficesWe were incorporated in Delaware in 1987. Our principal executive offices
are located at 1201 Clopper Road, Gaithersburg, Maryland 20878.18Table of Contents
ADDITIONAL CONSIDERATIONSWe have incurred net losses to date and need to continue to spend substantial
funds. We may not become profitable.We have had substantial operating losses since incorporation in 1987 and
we have never earned a profit. At June 30, 2001, our accumulated deficit was
approximately $62.0 million. These losses have resulted principally from:
        
        expenses associated with our research and development programs;
        
        our sales and marketing activities in the United States and abroad; and
        
        other expenses, including administrative and facilities costs.Historically, our net losses were $9,304,216 in fiscal year 1999, $6,767,206 in
fiscal year 2000 and $6,480,997 in fiscal year 2001. We expect to continue to
incur operating losses in fiscal year 2002 and we may be unable to generate
sufficient revenues to become profitable around the end of fiscal year 2002 or
thereafter.Our HPV Test and other products may not be fully accepted by physicians,
laboratories and health insurance providers.Our growth and success will depend upon market acceptance by physicians,
laboratories and health insurance providers of our HPV Test as a primary
cervical cancer screening method and as a follow-up screening method for women
with equivocal Pap smears. This requires acceptance of our HPV Test as a
clinically useful and cost-effective alternative to the Pap smear and follow-up
procedures, such as repeat Pap smears, colposcopy and biopsy. A colposcopy is
a procedure where the healthcare professional uses a low-magnifying microscope
with a light source to visualize the cervix. 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 providers.Furthermore, technological advancements designed to improve quality
control over sample collection and preservation and to reduce the Pap smears
susceptibility to human error may increase physician reliance on the Pap smear
and solidify its market position as the most widely used screen for cervical
cancer. In particular, if marketed along with the Pap smear for primary
screening in the United States, our HPV Test may be seen as adding unnecessary
expense to the generally accepted cervical cancer screening methodology.If third-party payors do not reimburse for our tests, our tests may not be used
or purchased, thus negatively affecting our revenues.A significant portion of the sales of our products in the United States
and other markets depend, in large part, on the availability of adequate
reimbursement to users of our tests from government insurance plans, including
Medicare and Medicaid in the United States, managed care organizations and
private insurance plans. All of our FDA-approved products have some level of
reimbursement coverage. Third-party payors are often reluctant to reimburse
healthcare
19Table of Contentsproviders for the use of medical tests incorporating new technology. In
addition, third-party payors are increasingly limiting reimbursement coverage
for medical diagnostic products and, in many instances, are exerting pressure
on medical suppliers to reduce their prices. Thus, third-party reimbursement
may not be consistently available or financially adequate to cover the cost of
our products. This could limit our ability to sell our products, cause us to
reduce the prices of our products or otherwise adversely affect our operating
results.Because each third-party payor individually approves reimbursement,
obtaining such approvals is a time-consuming and costly process that requires
us to provide scientific and clinical support for the use of each of our
products to each payor separately with no assurance that such approval will be
obtained. This process can delay the broad market introduction of new products
and could have a negative effect on our revenues and operating results.Our sales are highly dependent on two major international distributors.In May 1999, we entered into an exclusive marketing and distribution
agreement with Abbott Laboratories for the sale and marketing of our HPV Test
and other Hybrid Capture products in Europe, Africa and the Middle East and our
HC 2 Chlamydia and Gonorrhea Tests in the United States. For fiscal years
1999, 2000, and 2001 we derived 50%, 39% and 28%, respectively of our total
revenues from sales to Abbott. Abbott did not meet the HPV net sales
thresholds established under the marketing and distribution agreement for
calendar year 2000 and, on April 30, 2001, Digene terminated Abbotts rights
with respect to Digenes HPV Test under the agreement. Such termination is
subject to a 12 month non-exclusive wind-down period. In addition, Digene
converted Abbotts distributor status to non-exclusive for Digenes HBV Tests
under the agreement. On April 29, 2001, Digene entered into an agreement with
Roche Molecular Systems, Inc., which establishes Roche as the co-exclusive
distributor of Digenes HPV products in Europe, Africa and the Middle East from
May 1, 2001 through June 30, 2002.Our revenues and operating results could be hurt by:
        
        the inability or unwillingness of Roche or Abbott to
successfully market our products; or
        
        the loss of Roche or Abbotts sales and marketing
infrastructure.Our strategy to develop and commercialize our products and product candidates
is dependent in part on collaborations with third parties. If we are unable to
develop such collaborations or if these collaborations are not successful, our
ability to derive revenues from these products will be hindered.We have entered into and intend to continue to enter into corporate
collaborations for the development of new products, clinical collaborations
with respect to trials using our products and product candidates and strategic
alliances for the distribution and co-promotion of our Hybrid Capture systems
and tests. We have entered into an agreement with Cytyc Corporation, as a
co-promoter of our HPV Test in connection with their ThinPrep Pap Test in the
United States and Puerto Rico. The Cytyc agreement may be terminated by either
party in the event of a change of control, by the party not in breach or
default in the event of a material breach or default, or at any time by a
written agreement by both parties. Roche is a co-exclusive distributor of our
HPV
20Table of Contentsproducts in Europe, Africa and Middle East until June 30, 2002 with a
six-month wind down period. Pursuant to our marketing and distribution
agreement with Abbott Laboratories, Abbott is currently a non-exclusive
distributor of our HBV Tests in Europe, Africa and the Middle East and the
exclusive distributor of our Chlamydia and Gonorrhea Tests in the United
States, Europe, Africa and the Middle East. If Abbott fails to achieve the net
sales thresholds at intervals specified for our Chlamydia and Gonorrhea Tests,
then we may, in our sole discretion, elect to convert Abbotts distribution
rights from exclusive to non-exclusive in the applicable territory with respect
to such test for a designated period of time thereafter. Also, our agreement
with Abbott may be terminated by the non-breaching party in the event of a
material breach and, under certain circumstances, by Abbott in the event of a
change in control of Digene. Our success depends in large part on the efforts
of these third parties in performing their responsibilities.We may be unable to enter into arrangements necessary to develop and
commercialize our products or realize any of the contemplated benefits from
these arrangements. Furthermore, we may not derive revenues or profits from
our collaborative or other arrangements.Our international sales are subject to currency, market and regulatory risks
that are beyond our control.For fiscal year 2001, we derived approximately 43% 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.21Table of ContentsWe have limited manufacturing experience and may encounter difficulties
expanding our operations. We depend on a single, newly-established facility
for the manufacture of all of our products.We have limited commercial manufacturing experience and capabilities. If
product sales increase, we will have to scale-up our manufacturing processes
and facilities. We may encounter difficulties in scaling-up manufacturing
processes and may be unsuccessful in overcoming such difficulties. In such
circumstances, our ability to meet product demand may be impaired or delayed.In April 2000, we relocated our manufacturing operations to our new
facility in Gaithersburg, Maryland. Difficulties in integrating our
manufacturing operations into this facility have included equipment
installation and facility validation efforts, employee turnover and other activities
that have limited the ability to utilize our manufacturing resources
effectively, all of which have, and may result in, problems involving reduced
production yield, quality difficulties, excessive disposal and product
backorders. This facility is subject, on an ongoing basis, to a variety of
quality systems regulations, international quality standards and other
regulatory requirements, including requirements for good manufacturing
practices, or GMPs. We may encounter difficulties expanding our manufacturing
operations in accordance with these regulations and standards, which could
result in a delay or termination of manufacturing or an inability to meet
product demand.We face risks inherent in operating as a single facility for the
manufacture of our products. We do not have alternative production plans in
place or alternative facilities available should our Gaithersburg, Maryland
manufacturing facility cease to function. These risks include unforeseen plant
shutdowns due to personnel, equipment or other factors, and the resulting
inability to meet customer orders on a timely basis.Single suppliers or a limited number of suppliers provide key components of our
products. If these suppliers fail to supply these components, we may be
unable to satisfy product demand which would negatively impact our revenues.Several key components of our products come from, or are manufactured for
us by, a single supplier or limited number of suppliers. This applies in
particular to two components: first, Tropix supplies us with chemiluminescent
substrates (used to create a chemical reaction that causes light in connection
with our Hybrid Capture signal amplified molecular technology), and second,
Qiagen Instruments will supply us with the Rapid CaptureTM System that serves as
the automation platform developed for large-scale diagnostic testing using the
Hybrid Capture technology. Tropix has been one of our suppliers since 1996.
We entered into an agreement with Qiagen Instruments in January 2001
pursuant to which they will supply us with the Rapid Capture System. We
acquire some of these and other key components on a purchase-order basis,
meaning that the supplier is not required to supply us with specified
quantities over longer periods of time or set-aside part of its inventory for
our forecasted requirements. We have not arranged for alternative supply
sources for some of these components and it may be difficult to find
alternative suppliers, especially to replace Tropix and Qiagen Instruments. We
have not had any suppliers terminate their relationship with us. If our
product sales increase beyond the forecast levels, or if our suppliers are
unable or unwilling to supply us on commercially22Table of Contentsacceptable 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.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 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 State 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
23Table of ContentsBecton, 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 October 1999, Enzo contacted us
to determine whether our HC 2 Gonorrhea Test might infringe such patent. We
have evaluated this matter and its potential impact on our Gonorrhea Test.
After consultation with our patent counsel, we believe that the Enzo United
States patent is invalid. We are also currently evaluating Enzos European
counterpart to this patent. In May 2001, Enzo contacted us regarding its
United States patent no. 6,221,581 B1 and requested that we evaluate whether
our Hybrid Capture tests might infringe such patent. After consultation with
our patent counsel, we do not believe we are infringing such patent. Our
discussions with Enzo are continuing. We could become involved in litigation
with Enzo or have to seek a license from Enzo.In July 2001, Institut Pasteur notified us that Institut Pasteur was
granted a new U.S. patent concerning the HBV genome and requested information
from Digene regarding products that may use the technology described in this
recently issued patent. We are currently in discussions with Institut Pasteur.We are subject to extensive government regulation and may not obtain approval
or clearance for our products and product candidates.Each of our products and product candidates are medical devices subject to
extensive regulation by the United States Food and Drug Administration, or FDA,
under the Federal Food, Drug and Cosmetic Act. Governmental bodies in other
countries have similar, extensive regulations. FDA regulations govern, among
other things, the activities that we perform, including product development,
product testing, product labeling, product storage, premarket clearance or
approval, manufacturing, advertising, promotion, product sales and
distribution.Each medical device that we wish to distribute commercially in the United
States will likely require either 510(k) clearance or premarket approval from
the FDA prior to marketing. The 510(k) clearance pathway usually takes from
three to twelve months, but can take longer. The premarket approval pathway is
much more costly, lengthy and uncertain. It generally takes from one to three
years, but can also take longer.We will be required to obtain premarket approval to market our HPV Test
for use as a primary adjunctive cervical cancer screening test in the United
States, either separate from or in conjunction with the Pap smear. Premarket
approval for this indication may not be obtained at all or in a timely fashion.Our cleared or approved devices,including our tests and related
equipment, are subject to numerous postmarket requirements. We are subject to
inspection and marketing surveillance by the FDA to determine our compliance
with regulatory requirements. If the FDA finds that we have failed to comply,
it can institute a wide variety of enforcement actions, ranging from a public
warning letter to more severe sanctions such as:
        
        fines, injunctions and civil penalties;
        
        recall or seizure of our products;
        
        operating restrictions, partial suspension or total shutdown of production;24Table of Contents
        
        denial of our requests for 510(k) clearance or premarket
approval of product candidates;
        
        withdrawal of 510(k) clearance or premarket approval already granted; and
        
        criminal prosecution.Any enforcement action by the FDA may also affect our ability to
commercially distribute our products in the United States. We believe we are
currently in substantial compliance with FDA requirements.We, or recipients of our products that are limited to research use only,
may fail to comply with the regulatory limitations placed on the distribution
and use of these devices, which could result in an enforcement action by the
FDA against us and/or recipients of our products. An enforcement action could
include criminal and/or civil sanctions and also could adversely affect our
ability to conduct the clinical trials necessary to support marketing clearance
or approval of these products.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 have fluctuated significantly in the past.
We believe that these results may continue to fluctuate significantly in the
future with lower product revenues in our first and second fiscal quarters
(July 1 through December 31) as compared with our third and fourth quarters of
each fiscal year. The lower demand for preventative diagnostic procedures,
like our HPV Test and the Pap smear, during the summer months and the December
holiday season in the United States and Europe primarily causes this
fluctuation.In addition, our quarterly operating results, as well as our annual
results, may fluctuate from period to period due to:
        
        the timing of our expenditures, such as research and development and marketing;
        
        variations in our distribution channels or purchasing patterns;
        
        the degree of market acceptance of our products;
        
        currency exchange rates;
        
        the timing of regulatory approvals and other regulatory decisions;
        
        the timing of new product introductions by us and our competitors; and
        
        product obsolescence resulting from new product introductions.Due to any one or more of these or other factors, in one or more future
quarters, our results of operations may fall below the expectations of
securities analysts or investors.25Table of ContentsWe may be exposed to product liability claims, possible product recalls and
improper product usage for which our insurance may be inadequate.We may be exposed to liability claims arising from the use of our products
and the commercial sale of our products, as well as from the use of our
products or product candidates in clinical trials. Consumers, our
collaborators or licensees or parties selling our products may bring these
claims. We currently carry product liability insurance coverage with a
combined single limit of $10,000,000. This coverage may not be adequate to
protect us against future product liability claims. Product liability
insurance may not be available to us in the future on commercially reasonable
terms, if at all.We may need to raise additional funds in the future. If we are unable to
obtain adequate funding, our operations may be adversely affected.We believe that our existing capital resources, will be sufficient to meet
the anticipated cash needs of our current business at least through calendar
year 2002. Net cash provided by our operating activities was approximately
$6.9 million for the fiscal year ended June 30, 2001. We expect our operating
losses to continue through fiscal year 2002. If our operating losses continue
beyond fiscal year 2002 or if one or more of the events described in these risk
factors actually occurs, we may have to obtain additional funds through equity
or debt financing, strategic alliances with corporate partners and others or
through alternative sources. Any equity financing would dilute our then
current stockholders. We do not have any committed sources of additional
financing. Additional funding, if necessary, may not be available on
acceptable terms, if at all. If adequate funds are not available, we may have
to delay, scale-back or eliminate aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others. This
may result in the relinquishment of our rights to some of our technologies,
product candidates, products or potential markets.Members of our management together own a substantial interest in us, giving
them effective control of the election of directors and stockholder matters.As of September 4, 2001, our Chairman and Chief Executive Officer and our
President, Chief Operating Officer and Chief Financial Officer beneficially
owned an aggregate of approximately 28.4% 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
26Table of Contentsmanagement 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.27Table of Contents
ITEM 2. PROPERTIESOn March 2, 1998, we entered into a lease for a new facility in
Gaithersburg, Maryland, comprising a total of approximately 90,000 square feet.
We relocated our operation to this new facility beginning in January 2000 and
completed the relocation in April 2000. The lease for the new facility has a
term of ten years, and we have two options to extend the term for a five-year
period each.
ITEM 3. LEGAL PROCEEDINGSWe are not a party to any material legal proceedings and are not aware of
any threatened litigation that could have a material adverse effect on our
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERSNot applicable.28Table of ContentsEXECUTIVE OFFICERS OF DIGENE

|                                |  |     |    |                            |  |                                                               
|------------------------------- |  | --- | -- | -------------------------- |  | --------------------------------------------------------------
|Name                            |  | Age |    | Positions with the Company
|                                |  |     |    |                           
|Evan Jones(1)                   |  |     | 44 |                            |  | Chief Executive Officer and Chairman of the Board             
|                               
|                               
|                               
|                               
|Charles M. Fleischman(2)        |  |     | 43 |                            |  | President, Chief Operating Officer and Chief
Financial Officer
|                               
|                               
|                               
|                               
|Robert McG. Lilley(3)           |  |     | 56 |                            |  | Senior Vice President, Global Sales and Marketing             
|                               
|                               
|                               
|                               
|Attila T. Lorincz, Ph.D.(4)     |  |     | 46 |                            |  | Senior Vice President and Chief Scientific Officer            
|                               
|                               
|                               
|                               
|Belinda O. Patrick(5)           |  |     | 45 |                            |  | Senior Vice President, Manufacturing Operations               
|                               
|                               
|                               
|                               
|Jeanmarie Curley(6)             |  |     | 51 |                            |  | Vice President, Manufacturing                                 
|                               
|                               
|                               
|                               
|William J. Payne, Jr., Ph.D.(7) |  |     | 50 |                            |  | Vice President, Research and Development                      
|                               
|                               
|                               
|                               
|Donna Marie Seyfried(8)         |  |     | 43 |                            |  | Vice President, Business Development                          
|                               
|                               
|                               
|                               
|Joseph P. Slattery(9)           |  |     | 36 |                            |  | Vice President, Finance                                       



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|(1) |  | Mr. Jones has served as our Chief Executive Officer since Armonk Partners
acquired a controlling interest in Digene in July 1990 and as Chairman of
the Board since September 1995. He also served as our President from July
1990 until June 1999.                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Mr. Fleischman has served as our President since June 1999, as Chief
Financial Officer since March 1996 and as Chief Operating Officer since
September 1995. He also served as our Executive Vice President from July
1990, when Armonk Partners acquired a controlling interest in Digene, to
June 1999.                                                                                                                                                                               
|   
|   
|   
|   
|(3) |  | Mr. Lilley has served as our Senior Vice President, Global Sales and
Marketing since June 1999, and before that as our Vice President, Sales
and Marketing from July 1998 until June 1999, and as General Manager for
Digene Europe from March 1997 until July 1998. From September 1994 to
February 1997, Mr. Lilley was General Manager for Europe, Middle East &
Africa for Alltel Healthcare Information Services.                                                                  
|   
|   
|   
|   
|(4) |  | Dr. Lorincz has served as our Senior Vice President and Chief Scientific
Officer since January 2000. He previously served as our Vice President,
Research and Development and Scientific Director from January 1991 to
January 2000. His research career includes postdoctoral fellowships at
the University of California. He also serves on a number of advisory
committees and is an Adjunct Associate Professor in the Georgetown
University Medical School Department of Pathology.
|   
|   
|   
|   
|(5) |  | Ms. Patrick has served as our Senior Vice President, Manufacturing
Operations since May 2001. Prior to joining Digene, Ms. Patrick served as
Vice President, Maryland Operations for Invitrogen Corporation from
September 2000 to January 2001 and for Life Technologies, Inc. from
February 1998 to September 2000. She previously served as Vice President,
Regulatory Affairs and Quality Assurance for Life Technologies, Inc. from
January 1995 to February 1998.                 
|   
|   
|   
|   
|(6) |  | Ms. Curley has served as our Vice President, Manufacturing since April
1998, and from December 1990 until April 1998, she was our Director of
Manufacturing.                                                                                                                                                                                                                                                                                                                            
|   
|   
|   
|   
|(7) |  | Dr. Payne has served as our Vice President, Research and Development
since January 2000. He previously served as our Vice President,
Development from July 1997 to January 2000. From August 1995 to July
1997, he was Vice President, Research and Development in the IVD Medical
Diagnostic division of Sigma Diagnostics.                                                                                                                                                            
|   
|   
|   
|   
|(8) |  | Ms. Seyfried has served as our Vice President, Business Development since
October 1996. Ms. Seyfried served as Senior Director, Business
Development of The Perkin-Elmer Corporation from March 1993 to September
1996.                                                                                                                                                                                                                                                                 
|   
|   
|   
|   
|(9) |  | Mr. Slattery has served as our Vice President, Finance since July 1999
and as Controller from February 1996 to July 2000.                                                                                                                                                                                                                                                                                                                                                               

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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.

|               |  |      |        |     |  |   |        | 
|-------------- |  | ---- | ------ | --- |  | - | ------ | 
|               |  | High |        | Low
|               |  |      |        |    
|Fiscal 2001    |  |      |        |     |  |   |        | 
|              
|Fourth quarter |  | $    | 41.000 |     |  | $ | 12.875 | 
|              
|              
|              
|              
|Third quarter  |  |      | 44.500 |     |  |   | 10.625 | 
|              
|              
|              
|              
|Second quarter |  |      | 45.000 |     |  |   | 31.188 | 
|              
|              
|              
|              
|First quarter  |  |      | 44.875 |     |  |   | 32.500 | 
|              
|Fiscal 2000    |  |      |        |     |  |   |        | 
|              
|Fourth quarter |  | $    | 51.625 |     |  | $ | 25.250 | 
|              
|              
|              
|              
|Third quarter  |  |      | 58.500 |     |  |   | 15.750 | 
|              
|              
|              
|              
|Second quarter |  |      | 20.125 |     |  |   | 11.250 | 
|              
|              
|              
|              
|First quarter  |  |      | 14.500 |     |  |   | 8.250  | 

On September 4, 2001, the closing sale price for our common stock, as
reported by the Nasdaq National Market, was $28.72. As of September 4, 2001,
our common stock was held by 156 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.



| | (a) |  | Recent Sales of Unregistered Securities.   
| | --- |  | -------------------------------------------
|
| |     |  | Not applicable.                            
|
| | (b) |  | Use of proceeds from Registered Securities.
|
| |     |  | Not applicable.                            

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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, 1999, 2000 and 2001 and with respect to Digenes Consolidated Balance
Sheets at June 30, 2000 and 2001 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,
1997 and 1998 and Consolidated Balance Sheet data at June 30, 1997, 1998 and
1999 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.

|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |        |        | 
|------------------------------------------ | ---------------------------------- | -------------- | ------- | ----- | ------ | ---- | ------- | ------------------------------------- | ------ | -------------- | ------- | ----------- | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                           |                                    |                |         |       |        |      |         | Fiscal Year Ended June 30,           
|                                           |                                    |                |         |       |        |      |         |                                      
|                                           |                                    |                |         | 1997  |        | 1998 |         | 1999                                  |        | 2000           |         | 2001       
|                                           |                                    |                |         |      
|                                           |                                    |                |         |       |        |      |         | (in thousands, except per share loss)
|Consolidated Statement of Operations
Data:
|                                          
|                                          
|                                          
|                                          
|Revenues:                                 
|                                          
|                                          
|                                          
|                                          
|                                           | Product sales                      |                | $       | 9,434 |        |      | $       | 11,980                                |        |                | $       | 17,014      |        |   | $       | 22,287 |        |   | $       | 33,544 |       
|                                          
|                                          
|                                          
|                                          
|                                           | Research and development contracts |                |         | 626   |        |      |         | 29                                    |        |                |         | 453         |        |   |         | 757    |        |   |         | 653    |       
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |       
|                                           |                                    | Total revenues |         |       | 10,060 |      |         |                                       | 12,009 |                |         |             | 17,467 |   |         |        | 23,044 |   |         |        | 34,197 | 
|                                          
|                                          
|                                          
|                                          
|Costs and expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           | Cost of product sales              |                |         | 3,441 |        |      |         | 3,848                                 |        |                |         | 6,112       |        |   |         | 7,641  |        |   |         | 12,089 |       
|                                          
|                                          
|                                          
|                                          
|                                           | Research and development           |                |         | 4,131 |        |      |         | 5,285                                 |        |                |         | 4,643       |        |   |         | 6,123  |        |   |         | 8,120  |       
|                                          
|                                          
|                                          
|                                          
|                                           | Selling and marketing              |                |         | 5,236 |        |      |         | 11,972                                | (2)    |                |         | 10,531      |        |   |         | 10,930 |        |   |         | 13,012 |       
|                                          
|                                          
|                                          
|                                          
|                                           | General and administrative         |                |         | 4,412 |        |      |         | 5,690                                 |        |                |         | 5,957       |        |   |         | 6,346  |        |   |         | 8,336  |       
|                                          
|                                          
|                                          
|                                          
|                                           | Amortization of intangible assets  |                |         | 241   |        |      |         | 386                                   |        |                |         | 150         |        |   |         | 150    |        |   |         | 150    |       
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |       
|Loss from operations                       |                                    |                | (7,401  | )     |        |      | (15,172 | )                                     |        |                | (9,926  | )           |        |   | (8,146  | )      |        |   | (7,510  | )     
|                                          
|                                          
|                                          
|                                          
|Other income (expense)                     |                                    |                | (36     | )     |        |      | (83     | )                                     |        |                | (184    | )           |        |   | 513     |        |        |   | (37     | )     
|                                          
|                                          
|                                          
|                                          
|Interest expense                           |                                    |                | (84     | )     |        |      | (164    | )                                     |        |                | (30     | )           |        |   |        |        |        |   | (11     | )     
|                                          
|                                          
|                                          
|                                          
|Interest income                            |                                    |                | 1,527   |       |        |      | 1,378   |                                       |        |                | 985     |             |        |   | 1,050   |        |        |   | 1,194   |       
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |       
|Loss from operations before income taxes   |                                    |                | (5,994  | )     |        |      | (14,041 | )                                     |        |                | (9,155  | )           |        |   | (6,583  | )      |        |   | (6,364  | )     
|                                          
|                                          
|                                          
|                                          
|Provision for income taxes                 |                                    |                |        |       |        |      | 48      |                                       |        |                | 149     |             |        |   | 184     |        |        |   | 117     |       
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |       
|Net loss                                   |                                    | $              | (5,994  | )     |        | $    | (14,089 | )                                     |        | $              | (9,304  | )           |        | $ | (6,767  | )      |        | $ | (6,481  | )     
|                                          
|                                          
|                                          
|                                          
|Basic and diluted net loss per
share(1)    |                                    | $              | (0.53   | )     |        | $    | (1.06   | )                                     |        | $              | (0.65   | )           |        | $ | (0.44   | )      |        | $ | (0.39   | )     
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |   |         |        |        |   |         |       
|Weighted average shares
outstanding(1)     |                                    |                | 11,394  |       |        |      | 13,236  |                                       |        |                | 14,354  |             |        |   | 15,296  |        |        |   | 16,557  |       
|                                          
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         | At June 30,
|                                           |                                    |                |         |       |        |      |         |                                       |        |                |         |             |        |  
|                                           |                                    | 1997           |         | 1998  |        | 1999 |         | 2000                                  |        | 2001          
|                                           |                                    |                |         |       |        |      |         |                                      
|                                           |                                    |                |         |       |        |      |         |                                       |        | (in thousands)
|Consolidated Balance Sheet Data:          
|                                          
|                                          
|                                          
|                                          
|Working capital                            |                                    | $              | 21,299  |       |        | $    | 28,428  |                                       |        | $              | 20,499  |             |        | $ | 24,268  |        |        | $ | 26,905  |       
|                                          
|                                          
|                                          
|                                          
|Total assets                               |                                    |                | 30,207  |       |        |      | 35,440  |                                       |        |                | 28,108  |             |        |   | 35,785  |        |        |   | 48,195  |       
|                                          
|                                          
|                                          
|                                          
|Long-term debt, less current maturities    |                                    |                | 553     |       |        |      |        |                                       |        |                |        |             |        |   |        |        |        |   | 1,000   |       
|                                          
|                                          
|                                          
|                                          
|Accumulated deficit                        |                                    |                | (25,327 | )     |        |      | (39,416 | )                                     |        |                | (48,720 | )           |        |   | (55,487 | )      |        |   | (61,968 | )     
|                                          
|                                          
|                                          
|                                          
|Total stockholders equity                 |                                    |                | 24,266  |       |        |      | 31,099  |                                       |        |                | 23,687  |             |        |   | 29,425  |        |        |   | 26,334  |       



---

|(1) |  | Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Restated to reclassify $1,915 relating to the impairment of an intangible
asset from the cumulative effect of change in accounting principle to
selling and marketing expenses. See Managements Discussion and Analysis
of Financial Condition and Results of Operations-Impairment of Intangible
Asset in Fiscal 1998.

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ITEM 7.           MANAGEMENTSDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                         AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and the related Notes to such Consolidated Financial Statements also
included in this Form 10-K. Some of the information that follows are not
statements of historical fact but merely reflect our intent, belief or
expectations regarding the anticipated effect of events, circumstances and
trends. Such statements should be considered as forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. We
believe that our expectations are based on reasonable assumptions within the
bounds of our knowledge of our business and operations. Factors that might
cause or contribute to differences between our expectations and actual results
include: uncertainty of market acceptance of our products by the worldwide
medical community; uncertainty of future profitability and cash generation from
operations; dependence on Roche Molecular Systems, Inc. and Abbott Laboratories
as our principal European distributors and dependence on Abbott Laboratories as
our distributor for our chlamydia and gonorrhea products in the United States;
dependence on third-party reimbursement from government entities, managed care
organizations, and private insurance plans; risks inherent in international
transactions, including those relating to our expansion in Europe and
elsewhere; our ability to scale up our manufacturing to the extent product
sales increase; uncertainty regarding patents and propriety rights in
connection with our products and products in development, 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; delay in or failure to obtain regulatory approvals for our
products in development; our ability to obtain requisite additional financing
to fund our operations beyond calendar 2002; and other factors as set forth
under the caption Additional Considerations beginning on page 19.

Overview

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

Our revenues to a significant extent have been derived from the sales of
our HPV Test, which, for fiscal year 2001, accounted for 57% of total revenues.
We expect that the growing acceptance of our HPV Test in both the United
States and abroad will continue to drive the growth in revenues from our HPV
Test in the future.

In fiscal year 2001, our gross margin was negatively impacted by the
effects of the relocation to our new manufacturing facility in April 2000,
including the installation of equipment, validation of the facility, employee
turnover and other activities, which resulted in reduced production yield,
quality difficulties, excessive disposal and product backorders. The issues
associated with our relocation were satisfactorily resolved during fiscal 2001.
Our gross margin was also negatively impacted by product mix. However, the
negative impact on our gross margins was partially mitigated by improved sales
during the second half of fiscal 2001 of HPV products in the United States,
where we sell such products directly. We expect gross margins to increase

32



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moderately during fiscal 2002 due to continuing shift of product sales to
sales of higher-margin HPV products in the United States.

We believe that increasing our investment in research and development and
sales and marketing is essential to allow us to capitalize more fully on the
potential of our HPV Test and our core technology. We also expect to increase
our expenditures in the development of our next-generation Hybrid Capture 3
platform, human papillomavirus screening clinical trial activities and in the
development of genomics and microarray detection products.

Our sales and marketing expenditures have been focused on accelerating the
adoption of human papillomavirus testing worldwide. We intend to capitalize on
the growing acceptance of our HPV Test in the United States and abroad 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 physician education,
through our direct efforts and pursuant to our co-promotion activities with
Cytyc Corporation, and consumer awareness.

We expect our general and administrative expenses to increase to provide
adequate infrastructure to support our increased research and development and
sales and marketing activities and to support the overall growth of our
business.

As a result of these increases in expenditures, we expect our operating
losses to continue through fiscal year 2002 with a turn to profitability toward
the end of fiscal year 2002. There can be no assurance that we will meet this
goal.

Results Of Operations

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

Product sales increased to approximately $33,544,000 in fiscal 2001 from
approximately $22,287,000 in fiscal 2000. The increase was due primarily to
the growth in sales of our HPV products (representing 81% of the total increase
and an increase of 92% over sales of HPV products in fiscal 2000) and growth in
sales of our equipment products (representing 12% of the total increase and an
increase of 36% over sales of equipment in fiscal 2000). The majority of the
growth in HPV products sales was due to increased sales in the United States
(142% over sales in fiscal 2000), along with increased sales in international
markets (39% over sales in fiscal 2000).

Research and development contract revenues decreased to approximately
$653,000 in fiscal 2001 from approximately $756,000 in fiscal 2000. The
decrease was due primarily to a reduction in revenue under an exclusive
contract, which was converted to non-exclusive during fiscal 2001. We expect
research and development contract revenues to decrease significantly in fiscal
2002 due to the expiration in January 2002 of a Small Business Innovation
Research, or SBIR, grant related to a herpes testing product.

Cost of product sales increased to approximately $12,089,000 in fiscal
2001 from approximately $7,641,000 in fiscal 2000. Gross margin on product
sales decreased to 64% in fiscal 2001 from 66% in fiscal 2000. In fiscal 2001,
our gross margin was negatively impacted by the effects of the relocation to
our new manufacturing facility in April 2000, including the installation of
equipment, validation of the facility, employee turnover and other activities,
which resulted in reduced production yield, quality difficulties, excessive
disposal and product backorders. The

33



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##### Table of Contents



issues associated with our relocation were satisfactorily resolved during
fiscal 2001. Our gross margin was also negatively impacted by product mix.
However, the negative impact on our gross margins was partially mitigated by
improved sales during the second half of fiscal 2001 of HPV products in the
United States, where we sell such products directly.

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

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

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

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

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

Comparison of Fiscal Year Ended June 30, 2000 to Fiscal Year Ended June 30, 1999

Product sales increased to $22,287,000 in fiscal 2000 from $17,014,000 in
fiscal 1999. The increase was due primarily to increased sales of our Hybrid
Capture tests, primarily HPV and HBV tests and related equipment, partially
offset by lower sales of our non-core products.

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##### Table of Contents



Research and development contract revenues increased to $757,000 in fiscal
2000 from $453,000 in fiscal 1999 due primarily to our performance of services
on several new contracts.

Cost of product sales increased to $7,641,000 in fiscal 2000 from
$6,112,000 in fiscal 1999 due primarily to increased sales volume. Gross
margin on product sales increased to 66% in fiscal 2000 from 64% in fiscal
1999. This increase was due primarily to increased sales volume of our Hybrid
Capture tests, partially offset by lower average unit prices.

Research and development expenses increased to $6,123,000 in fiscal 2000
from $4,643,000 in fiscal 1999 due primarily to increases in facilities costs,
clinical trials, outside professional fees and laboratory supplies.

Selling and marketing expenses increased to $10,930,000 in fiscal 2000
from $10,531,000 in fiscal 1999 due primarily to increased royalty expenses as
a result of increases in product sales, as well as increases in travel and
outside professional fees, partially offset by decreases in personnel costs.

General and administrative expenses increased to $6,346,000 in fiscal 2000
from $5,957,000 in fiscal 1999, due primarily to increases in personnel costs
and professional fees, partially offset by relatively lower facility costs as
compared to the prior year when accrual for expenses related to the occupation
of our new facility peaked.

Amortization of intangible assets remained constant at $150,000 in fiscal
years 2000 and 1999.

Other income increased to $513,000 in fiscal 2000 from Other expense of
$183,000 in fiscal 1999. This increase resulted from a gain of approximately
$515,000 from the sale, in March 2000, of our Molecular Biology Reagents
product line to KD Medical, Inc.

Interest expense decreased to $0 in fiscal 2000 from $30,000 in fiscal
1999 due primarily to the repayment in December 1998 of debt incurred in
February 1997.

Interest income increased to $1,050,000 in fiscal 2000 from $985,000 in
fiscal 1999 due primarily to higher average cash and cash equivalents balances
primarily as a result of the investment of the proceeds of our private
placement completed in December 1999, partially offset by negative cash flows
from operations.

Impairment of Intangible Asset in Fiscal 1998

In February 1997, we entered into an Agency Agreement with Murex
Diagnostics Corporation (Murex) to facilitate the creation of a Digene-direct
European sales operation for our products in Europe. As part of the Agency
Agreement, we purchased a customer list with the expectation that this list
could be used to benefit our direct management of sales activities in Europe
and would result in increased revenues and gross margins. We paid $2.5 million
for this customer list and capitalized it as an intangible asset. However, in
the fourth quarter of fiscal 1998, Abbott Laboratories (Abbott) purchased
Murex, which significantly reduced our expectation that we could implement the
Agency Agreement as contemplated and realize any benefit from our investment in
the customer list. Consequently, we believe that the asset was impaired and
would provide no future benefit. Accordingly, we wrote off the remaining
unamortized balance of approximately

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$1,915,000 in the fourth quarter of fiscal 1998. The write-off was
originally recorded in fiscal 1998 as the cumulative effect of a change in
accounting principle relating to the adoption of Statement of Position 98-5,
Reporting the Costs of Startup Activities. Subsequently, we believe this
adjustment should have been presented as an operating expense for the
impairment of an intangible asset. Accordingly, the charge has been
reclassified as an increase in Selling and marketing costs in fiscal 1998. As
a result of this reclassification, previously reported Loss from operations
before income taxes in fiscal 1998 increased to approximately $14,041,000 from
approximately $12,126,000. Net loss for fiscal 1998 was unchanged. On May 7,
1999, we entered into a Marketing and Distribution Agreement with Abbott with
respect to the marketing and distribution, and related customer services, of
our products in Europe, Africa and the Middle East. The terms of the Marketing
and Distribution Agreement effectively transferred direct management of sales
activities in Europe to Abbott. All rights and obligations of Digene and Murex
under the Agency Agreement and the related customer list were terminated by
such Abbott Agreement.

Liquidity And Capital Resources

Since inception, our expenses have significantly exceeded our revenues,
resulting in an accumulated deficit of approximately $62.0 million at June 30,
2001. We have funded our operations primarily through the sale of equity
securities. At June 30, 2001, we had cash, cash equivalents and short-term
investments aggregating approximately $29.6 million. Net cash provided by our
operating activities was $6.9 million for the fiscal year ended June 30, 2001.

Capital expenditures decreased to $1,819,000 in fiscal 2001 from
$2,307,000 in fiscal 2000, due primarily to fiscal 2000 expenditures associated
with our occupation of our new facility in Gaithersburg, Maryland that did not
continue into fiscal 2001.

In February 2000, we received an equipment loan facility of $1,000,000
from the State of Maryland. Approximately $503,000 worth of fixed asset
additions, previously financed with cash, was converted to this facility during
July 2000. The remaining $497,000 in funding available was converted to this
facility during September 2000.

We anticipate that working capital requirements will increase moderately
for the foreseeable future due to 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 calendar year 2002. Our future capital
requirements and the adequacy of available funds may change, however, based on
numerous factors, including the successful commercialization of our products,
progress in our product development efforts and the magnitude and scope of such
efforts, progress with preclinical studies and clinical trials, progress in our
regulatory affairs activities, the cost and timing of expansion of our
manufacturing capabilities, the development and maintenance of effective sales
and marketing activities, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, and the development and maturation of
strategic alliances for the marketing of our products. To the extent that our
existing capital resources and funds generated from operations are insufficient
to meet current or planned operating requirements, we will be required to
obtain additional funds through equity or debt financing, strategic alliances
with corporate partners and others, or through other sources. We do not have
any committed sources of additional financing,

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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.




ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Digene is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Our exchange rate risk comes from
our operations in Europe and South America. The net impact of foreign exchange
activities on earnings was immaterial for the years ended June 30, 1999, 2000
and 2001. Interest rate exposure is primarily limited to the $29.6 million of
cash, cash equivalents and short-term investments owned by us. Such securities
are debt instruments that generate interest income for Digene on cash balances.
We do not actively manage the risk of interest rate fluctuations; however,
such risk is mitigated by the relatively short term, less than twelve months,
nature 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

|                                                  |  |  |    |  |  |  |  | 
|------------------------------------------------- |  |  | -- |  |  |  |  | 
|Report of Ernst & Young LLP, Independent Auditors |  |  | 39 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Balance Sheets                       |  |  | 40 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Operations             |  |  | 41 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Stockholders Equity   |  |  | 42 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Cash Flows             |  |  | 43 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Notes to Consolidated Financial Statements        |  |  | 44 | 

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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, 2000 and 2001, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended June 30, 2001. Our audits also included the
financial statement schedule for the years ended June 30, 1999, 2000 and 2001
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digene
Corporation at June 30, 2000 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule for the years ended June 30, 1999, 2000 and 2001, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

|                                |  |                       |  | 
|------------------------------- |  | --------------------- |  | 
|                                |  | /s/ Ernst & Young LLP
|                               
|McLean, Virginia
August 3, 2001

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DIGENE CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |             |         |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ---------- | ------------------------------------ | ------- | -------- | ---------- | ----------- | ------- |  |  | 
|                                           |                                                                                                                                                     |                    |            |                                      |         | June 30,
|                                           |                                                                                                                                                     |                    |            |                                      |         |         
|                                           |                                                                                                                                                     |                    |            |                                      |         | 2000     |            | 2001       
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                           |                                                                                                                                                     |                    | ASSETS    
|                                          
|                                          
|                                          
|                                          
|Current assets:                           
|                                          
|                                          
|                                          
|                                          
|                                           | Cash and cash equivalents                                                                                                                           |                    | $          | 7,534,998                            |         |          | $          | 20,626,252  |        
|                                          
|                                          
|                                          
|                                          
|                                           | Short-term investments                                                                                                                              |                    |            | 12,678,819                           |         |          |            | 8,977,412   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts receivable, less allowance of approximately $263,000
          and $281,000 at June 30, 2000 and 2001, respectively                        |                    |            | 4,787,278                            |         |          |            | 5,694,648   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Note receivable, short-term                                                                                                                         |                    |            | 240,000                              |         |          |            |            |        
|                                          
|                                          
|                                          
|                                          
|                                           | Inventories                                                                                                                                         |                    |            | 4,400,297                            |         |          |            | 5,548,415   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid expenses and other current assets                                                                                                           |                    |            | 907,877                              |         |          |            | 1,685,767   |        
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|Total current assets                       |                                                                                                                                                     |                    | 30,549,269 |                                      |         |          | 42,532,494 |            
|                                          
|                                          
|                                          
|                                          
|Note receivable, net of current portion    |                                                                                                                                                     |                    | 160,000    |                                      |         |          | 406,500    |            
|                                          
|                                          
|                                          
|                                          
|Property and equipment, net                |                                                                                                                                                     |                    | 3,032,088  |                                      |         |          | 3,490,490  |            
|                                          
|                                          
|                                          
|                                          
|Intangible assets, net                     |                                                                                                                                                     |                    | 1,200,687  |                                      |         |          | 1,050,601  |            
|                                          
|                                          
|                                          
|                                          
|Deposits and other assets                  |                                                                                                                                                     |                    | 842,922    |                                      |         |          | 715,242    |            
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                          
|                                          
|                                          
|                                          
|Total assets                               |                                                                                                                                                     | $                  | 35,784,966 |                                      |         | $        | 48,195,327 |            
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                           |                                                                                                                                                     |                    |            | LIABILITIES AND STOCKHOLDERS EQUITY
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                      
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                                                                    |                    | $          | 3,828,138                            |         |          | $          | 3,260,186   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued expenses                                                                                                                                    |                    |            | 1,026,600                            |         |          |            | 2,709,490   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued payroll                                                                                                                                     |                    |            | 1,426,604                            |         |          |            | 1,865,777   |        
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenues                                                                                                                                   |                    |            |                                     |         |          |            | 7,792,000   |        
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                          
|                                          
|                                          
|                                          
|Total current liabilities                  |                                                                                                                                                     |                    | 6,281,342  |                                      |         |          | 15,627,453 |            
|                                          
|                                          
|                                          
|                                          
|                                          
|Deferred rent                              |                                                                                                                                                     |                    | 78,756     |                                      |         |          | 233,584    |            
|                                          
|                                          
|                                          
|                                          
|Long-term debt                             |                                                                                                                                                     |                    |           |                                      |         |          | 1,000,000  |            
|                                          
|                                          
|                                          
|                                          
|Deferred liability                         |                                                                                                                                                     |                    |           |                                      |         |          | 5,000,000  |            
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|Commitments                                |                                                                                                                                                     |                    |           |                                      |         |          |           |            
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|Stockholders equity:                     
|                                          
|                                          
|                                          
|                                          
|                                           | Preferred stock, $0.10 par value, 1,000,000 shares authorized,
          no shares issued and outstanding                                           |                    |            |                                     |         |          |            |            |        
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $0.01 par value, 50,000,000 shares authorized, 16,173,538
          and 16,755,339 shares issued and outstanding at June 30, 2000 and
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                     | 2001, respectively |            |                                      | 161,735 |          |            |             | 167,553 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                                                                          |                    |            | 84,846,747                           |         |          |            | 88,199,211  |        
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred stock compensation                                                                                                                         |                    |            | (96,411                              | )       |          |            | (64,274     | )      
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated deficit                                                                                                                                 |                    |            | (55,487,203                          | )       |          |            | (61,968,200 | )      
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                          
|                                          
|                                          
|                                          
|Total stockholders equity                 |                                                                                                                                                     |                    | 29,424,868 |                                      |         |          | 26,334,290 |            
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            
|                                          
|                                          
|                                          
|                                          
|Total liabilities and stockholders equity |                                                                                                                                                     | $                  | 35,784,966 |                                      |         | $        | 48,195,327 |            
|                                           |                                                                                                                                                     |                    |            |                                      |         |          |            |            

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |            |  
|---------------------------------------- | ---------------------------------- | - | ------------------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                         |                                    |   | Year ended June 30,
|                                         |                                    |   |                    
|                                         |                                    |   | 1999                |            | 2000 |   | 2001      
|                                         |                                    |   |                     |            |      |   |           
|Revenues:                               
|                                        
|                                        
|                                        
|                                        
|                                         | Product sales                      |   | $                   | 17,013,735 |      |   | $          | 22,287,483 |   |   | $          | 33,543,926 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development contracts |   |                     | 453,364    |      |   |            | 756,487    |   |   |            | 652,960    |  
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Total revenues                           |                                    |   | 17,467,099          |            |      |   | 23,043,970 |            |   |   | 34,196,886 |           
|                                        
|                                        
|                                        
|                                        
|                                        
|Costs and expenses:                     
|                                        
|                                        
|                                        
|                                        
|                                         | Cost of product sales              |   |                     | 6,111,774  |      |   |            | 7,641,304  |   |   |            | 12,088,715 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development           |   |                     | 4,643,458  |      |   |            | 6,123,027  |   |   |            | 8,120,114  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Selling and marketing              |   |                     | 10,531,187 |      |   |            | 10,929,506 |   |   |            | 13,012,401 |  
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative         |   |                     | 5,956,911  |      |   |            | 6,346,144  |   |   |            | 8,335,562  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Amortization of intangible assets  |   |                     | 150,086    |      |   |            | 150,087    |   |   |            | 150,086    |  
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Loss from operations                     |                                    |   | (9,926,317          | )          |      |   | (8,146,098 | )          |   |   | (7,509,992 | )         
|                                        
|                                        
|                                        
|                                        
|                                        
|Other income (expense):                 
|                                        
|                                        
|                                        
|                                        
|                                         | Other income (expense)             |   |                     | (183,394   | )    |   |            | 513,322    |   |   |            | (37,432    | )
|                                        
|                                        
|                                        
|                                        
|                                         | Interest expense                   |   |                     | (30,144    | )    |   |            | (320       | ) |   |            | (10,297    | )
|                                        
|                                        
|                                        
|                                        
|                                         | Interest income                    |   |                     | 984,708    |      |   |            | 1,050,258  |   |   |            | 1,193,941  |  
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Loss from operations before income taxes |                                    |   | (9,155,147          | )          |      |   | (6,582,838 | )          |   |   | (6,363,780 | )         
|                                        
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                                    |   | 149,069             |            |      |   | 184,368    |            |   |   | 117,217    |           
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Net loss                                 |                                    | $ | (9,304,216          | )          |      | $ | (6,767,206 | )          |   | $ | (6,480,997 | )         
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Basic and diluted net loss per share     |                                    | $ | (0.65               | )          |      | $ | (0.44      | )          |   | $ | (0.39      | )         
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           
|Weighted average shares outstanding      |                                    |   | 14,353,720          |            |      |   | 15,295,798 |            |   |   | 16,556,863 |           
|                                         |                                    |   |                     |            |      |   |            |            |   |   |            |           

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |          |  |   |          |   |  |       |             |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------ | ---------- | ------- |  | ------- | ------- | ------------ |  | ------------- | ---------- | -------- |  | - | -------- | - |  | ----- | ----------- | - |  | - | ---------- | -
|                                                                                  |  |              |            |         |  |         |         |              |  | Additional    |            | Deferred |  |   |          |   |  | Total
|                                                                                  |  | Common Stock |            | Paid-in |  | Stock   |         | Accumulated  |  | Stockholders'
|                                                                                  |  |              |            |         |  |         |         |              |  |              
|                                                                                  |  | Shares       |            | Amount  |  | Capital |         | Compensation |  | Deficit       |            | Equity  
|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |         
|Balance at June 30, 1998                                                          |  |              | 14,117,308 |         |  | $       | 141,173 |              |  | $             | 70,373,310 |          |  | $ |         |   |  | $     | (39,415,781 | ) |  | $ | 31,098,702 |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Exercise of Common Stock options                                                  |  |              | 266,745    |         |  |         | 2,667   |              |  |               | 326,595    |          |  |   |         |   |  |       |            |   |  |   | 329,262    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Issuance of Common Stock
     in connection with the
     acquisition of Viropath |  |              | 181,884    |         |  |         | 1,819   |              |  |               | 1,498,178  |          |  |   |         |   |  |       |            |   |  |   | 1,499,997  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Issuance of Common Stock options
     to non-employees                            |  |              |           |         |  |         |        |              |  |               | 316,500    |          |  |   | (316,500 | ) |  |       |            |   |  |   |           |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Compensatory stock
              options earned by
              non-employees    |  |              |           |         |  |         |        |              |  |               |           |          |  |   | 63,300   |   |  |       |            |   |  |   | 63,300     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net loss                                                                          |  |              |           |         |  |         |        |              |  |               |           |          |  |   |         |   |  |       | (9,304,216  | ) |  |   | (9,304,216 | )
|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |          |  |   |          |   |  |       |             |   |  |   |            |  
|Balance at June 30, 1999                                                          |  |              | 14,565,937 |         |  |         | 145,659 |              |  |               | 72,514,583 |          |  |   | (253,200 | ) |  |       | (48,719,997 | ) |  |   | 23,687,045 |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Exercise of Common Stock
              options                                    |  |              | 707,601    |         |  |         | 7,076   |              |  |               | 2,088,539  |          |  |   |         |   |  |       |            |   |  |   | 2,095,615  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Issuance of Common Stock,
              net of
offering costs                     |  |              | 900,000    |         |  |         | 9,000   |              |  |               | 10,344,905 |          |  |   |         |   |  |       |            |   |  |   | 10,353,905 |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Compensatory stock
             options
         canceled                         |  |              |           |         |  |         |        |              |  |               | (101,280   | )        |  |   | 101,280  |   |  |       |            |   |  |   |           |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Compensatory stock
              options earned
     by non-employees             |  |              |           |         |  |         |        |              |  |               |           |          |  |   | 55,509   |   |  |       |            |   |  |   | 55,509     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net loss                                                                          |  |              |           |         |  |         |        |              |  |               |           |          |  |   |         |   |  |       | (6,767,206  | ) |  |   | (6,767,206 | )
|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |          |  |   |          |   |  |       |             |   |  |   |            |  
|Balance at June 30, 2000                                                          |  |              | 16,173,538 |         |  |         | 161,735 |              |  |               | 84,846,747 |          |  |   | (96,411  | ) |  |       | (55,487,203 | ) |  |   | 29,424,868 |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Exercise of Common Stock options                                                  |  |              | 581,801    |         |  |         | 5,818   |              |  |               | 3,352,464  |          |  |   |         |   |  |       |            |   |  |   | 3,358,282  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Compensatory stock
              options earned
     by non-employees             |  |              |           |         |  |         |        |              |  |               |           |          |  |   | 32,137   |   |  |       |            |   |  |   | 32,137     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net loss                                                                          |  |              |           |         |  |         |        |              |  |               |           |          |  |   |         |   |  |       | (6,480,997  | ) |  |   | (6,480,997 | )
|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |          |  |   |          |   |  |       |             |   |  |   |            |  
|Balance at June 30, 2001                                                          |  |              | 16,755,339 |         |  | $       | 167,553 |              |  | $             | 88,199,211 |          |  | $ | (64,274  | ) |  | $     | (61,968,200 | ) |  | $ | 26,334,290 |  
|                                                                                  |  |              |            |         |  |         |         |              |  |               |            |          |  |   |          |   |  |       |             |   |  |   |            |  

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |        |           |            |  
|----------------------------------------------------------------------------------------- | ----------------- | ------------------------------------------------------- | ----------------------------------------- | ------ | ------- | --------- | ------------------- | ------ | --------- | ---------- | ----------- | ------ | --------- | ---------- | -
|                                                                                          |                   |                                                         |                                           |        |         |           | Year ended June 30, |        |          
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |          
|                                                                                          |                   |                                                         |                                           |        | 1999    |           | 2000                |        | 2001     
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |          
|Operating activities                                                                     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net loss                                                                                  |                   | $                                                       | (9,304,216                                | )      |         | $         | (6,767,206          | )      |           | $          | (6,480,997  | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   | Depreciation and amortization of property and
equipment |                                           |        | 951,364 |           |                     |        | 1,011,973 |            |             |        | 1,360,729 |           
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   | Amortization of intangible assets                       |                                           |        | 150,086 |           |                     |        | 150,087   |            |             |        | 150,086   |           
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   | Compensation expense related to stock options           |                                           |        | 63,300  |           |                     |        | 55,509    |            |             |        | 32,137    |           
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   | Gain on sale of product line                            |                                           |        |        |           |                     |        | (514,979  | )          |             |        |          |           
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   | Changes in operating assets and liabilities:           
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Accounts receivable                       |        |         | 715,687   |                     |        |           | (2,430,741 | )           |        |           | (913,870   | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Inventories                               |        |         | 1,547,736 |                     |        |           | (1,591,108 | )           |        |           | (1,148,118 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Prepaid expenses and other current assets |        |         | (827,518  | )                   |        |           | 480,347    |             |        |           | (777,890   | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Deposits and other assets                 |        |         | (3,241    | )                   |        |           | (742,765   | )           |        |           | 127,680    |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Accounts payable                          |        |         | 79,142    |                     |        |           | 1,324,751  |             |        |           | (567,952   | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Accrued expenses                          |        |         | 267,747   |                     |        |           | 216,789    |             |        |           | 1,682,890  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Accrued payroll                           |        |         | 352,746   |                     |        |           | 318,368    |             |        |           | 439,173    |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Deferred revenues                         |        |         |          |                     |        |           |           |             |        |           | 7,792,000  |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Accrued rent                              |        |         | (54,340   | )                   |        |           |           |             |        |           |           |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Deferred rent                             |        |         | (11,980   | )                   |        |           | 78,756     |             |        |           | 154,828    |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                   |                                                         | Deferred liability                        |        |         |          |                     |        |           |           |             |        |           | 5,000,000  |  
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|Net cash (used in) provided by operating activities                                       |                   |                                                         | (6,073,487                                | )      |         |           | (8,410,219          | )      |           |            | 6,850,696   |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Investing activities                                                                     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Purchases of short-term investments                                                       |                   |                                                         | (8,183,962                                | )      |         |           | (24,244,627         | )      |           |            | (14,719,120 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Sales of short-term investments                                                           |                   |                                                         | 11,018,450                                |        |         |           | 15,912,892          |        |           |            | 18,420,527  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Capital expenditures                                                                      |                   |                                                         | (933,934                                  | )      |         |           | (2,306,983          | )      |           |            | (1,819,131  | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from the sale of product line                                                    |                   |                                                         |                                          |        |         |           | 200,000             |        |           |            |            |       
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|Net cash provided by (used in) investing activities                                       |                   |                                                         | 1,900,554                                 |        |         |           | (10,438,718         | )      |           |            | 1,882,276   |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Financing activities                                                                     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net proceeds from issuance of Common Stock                                                |                   |                                                         |                                          |        |         |           | 10,353,905          |        |           |            |            |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Exercise of Common Stock options                                                          |                   |                                                         | 329,262                                   |        |         |           | 2,095,615           |        |           |            | 3,358,282   |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from long-term debt                                                              |                   |                                                         |                                          |        |         |           |                    |        |           |            | 1,000,000   |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Principal repayments on debt                                                              |                   |                                                         | (552,717                                  | )      |         |           |                    |        |           |            |            |       
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net cash (used in) provided by financing activities                                       |                   |                                                         | (223,455                                  | )      |         |           | 12,449,520          |        |           |            | 4,358,282   |       
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|Net (decrease) increase in cash and cash equivalents                                      |                   |                                                         | (4,396,388                                | )      |         |           | (6,399,417          | )      |           |            | 13,091,254  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at beginning of year                                            |                   |                                                         | 18,330,803                                |        |         |           | 13,934,415          |        |           |            | 7,534,998   |       
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at end of year                                                  |                   | $                                                       | 13,934,415                                |        |         | $         | 7,534,998           |        |           | $          | 20,626,252  |       
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|Supplemental cash flow information                                                       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Interest paid     |                                                         | $                                         | 30,000 |         |           | $                   | 1,000  |           |            | $           | 4,000  |          
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       
|                                                                                          | Income taxes paid |                                                         | $                                         | 40,000 |         |           | $                   | 82,000 |           |            | $           | 38,000 |          
|                                                                                          |                   |                                                         |                                           |        |         |           |                     |        |           |            |             |       

See accompanying notes.

43



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Nature of Operations
|-- |  | -------------------------------------

Digene Corporation (the Company or Digene) was incorporated in the state of
Delaware in 1987. The Company develops, manufactures and markets its
proprietary gene-based testing systems for the screening, monitoring and
diagnosis of human diseases. The Company has applied its proprietary Hybrid
Capture® technology to develop a successful diagnostic test for
human papillomavirus (HPV), which is the primary cause of cervical cancer and
is found in greater than 99% of all cervical cancer cases. Digenes product
portfolio also includes gene-based tests for the detection of chlamydia,
gonorrhea, hepatitis B virus, or HBV, and cytomegalovirus, or CMV. In
addition, the Company uses its technology platform to develop gene expression
DNA microarray products and services and to perform clinical testing services
for use in the pharmaceutical market.

On June 28, 1996, the Company entered into a joint venture agreement with a
Brazilian national to establish Digene do Brasil LTDA, a majority-owned
subsidiary of the Company. On October 29, 1997, the Company established a
wholly owned subsidiary, Digene B.V., for the distribution of the Companys
products in Europe. On March 3, 1998, the Company established a wholly owned
subsidiary, Digene Europe, Inc., for the marketing of the Companys products in
Europe. On July 1, 1998, the Company acquired Viropath B.V., a company with
limited liability, registered in Amsterdam, The Netherlands.



|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------

Management Estimates

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying financial statements include the accounts of Digene and its
subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.

Cash and Cash Equivalents

Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.

Short-Term Investments

The Company classifies its short-term investments as available-for-sale.
Investments in securities that are classified as available-for-sale and have
readily determinable fair values are measured at fair market value in the
consolidated balance sheets. As of June 30, 2000 and 2001, short-term
investments are stated at market, which approximates cost.

Concentration of Credit Risk

The Company performs ongoing credit evaluations on its customers financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within managements
expectations. As of June 30, 2000 and 2001, $1,575,000 and $1,333,000,
respectively, of accounts receivable were due from Abbott Laboratories.

44



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|2. |  | Summary of Significant Accounting Policies (continued)
|-- |  | ------------------------------------------------------

Impairment of Long-Lived Assets

In the event that facts and circumstances indicate that long-lived assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the assets carrying
amount to determine if a write-down is required. If a write-down is required,
the Company would prepare a discounted cash flow analysis to determine the
amount of the write-down.

Revenue Recognition

Revenue from product sales is recognized upon shipment of goods. Revenue from
research and development contracts is recognized as research and development
activities are performed.

Significant Customers

For the years ended June 30, 1999, 2000 and 2001, the Company generated 50%,
39% and 28%, respectively, of total revenues from a single customer.

Comprehensive Loss

Comprehensive loss includes all changes in equity during a period except those
resulting from the issuance of shares of stock. For the years ended June 30,
1999, 2000 and 2001 the Companys net loss approximates its comprehensive loss;
accordingly, no separate disclosure of comprehensive loss is presented.

Foreign Currency Valuation

The local currency is the functional currency for most of the Companys
international subsidiaries and, as such, assets and liabilities are translated
into U.S. dollars at year-end exchange rates. Income and expense items are
translated at average exchange rates during the year.

Research and Development

The Company expenses its research and development costs as incurred.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs amounted
to approximately $309,000, $76,000 and $19,000 during fiscal 1999, 2000, and
2001, respectively.

Income Taxes

The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

45



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|2. |  | Summary of Significant Accounting Policies (continued)
|-- |  | ------------------------------------------------------

Net Loss Per Share

The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which requires the Company to
present basic and fully diluted earnings per share. The Companys basic and
diluted loss per share is calculated by dividing the net loss by the weighted
average number of shares of common stock outstanding during all periods
presented. Other shares issuable upon the exercise of stock options have been
excluded from the computation because the effect of their inclusion would be
antidilutive.

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with the
provisions of APB No. 25 and has provided the pro forma disclosures of net loss
and net loss per share in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123)
in Note 13 to these Financial Statements.

Reclassification

Certain prior year amounts have been reclassified to conform to the fiscal 2001
presentation.

SEC Interpretations

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB Opinion No. 20, Accounting Changes. The Company adopted SAB 101 on July
1, 2000. The adoption of SAB 101 did not have a material impact on the
Companys financial position or results of operations.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 Business Combinations (FAS 141), and
No. 142, Goodwill and Other Intangible Assets (FAS 142), effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company does not anticipate that the adoption of FAS 141 and
FAS 142 will have a material impact on the Companys financial position or
results of operations.



|3. |  | Marketing and Distribution Agreements
|-- |  | -------------------------------------

On April 17, 1998, Abbott Laboratories (Abbott) and International Murex
Technologies Corporation (together with its affiliates, Murex) entered into
an agreement pursuant to which Abbott acquired all of the outstanding shares of
Murexs common stock. Effective May 7, 1999, the Company entered into a
Marketing and Distribution Agreement (Abbott Agreement) with Abbott, which
formed an exclusive marketing alliance for the Companys womens health and
blood virus testing products in certain geographic areas. The Abbott Agreement
called for Abbott to assume sales and marketing responsibility for all of the
Companys Hybrid Capture products in Europe, the Middle East and Africa and for
the Companys Hybrid Capture 2 chlamydia and gonorrhea tests in the United
States. Abbott acted as the sole distributor for the Companys HPV and
Hepatitis B (HBV) products in Europe, the Middle East and Africa through
April 30, 2001.

46



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | Marketing and Distribution Agreements (continued)
|-- |  | -------------------------------------------------

On April 30, 2001, the Company terminated Abbotts rights with respect to the
Companys HPV products under the Abbott Agreement in accordance with the terms
of the Abbott Agreement. This termination provides for a twelve-month
non-exclusive wind-down distribution period for HPV products. In addition on
April 30, 2001, the Company converted the distribution rights for the HBV
products under the Abbott Agreement to non-exclusive until December 31, 2003.

On April 29, 2001, the Company entered into an agreement (the Roche Letter
Agreement) with Roche Molecular Systems, Inc. (Roche). Under the Roche
Letter Agreement, Roche will act as a co-exclusive distributor for the
Companys HPV products in Europe, the Middle East and Africa from May 1, 2001
through June 30, 2002 and the parties agreed to evaluate opportunities for a
broader relationship. Roche has guaranteed minimum purchases over the term of
the Roche Letter Agreement. During the year ended June 30, 2001, the Company
received prepayments of $9.7 million for certain of these minimum purchases.
Roche did not meet its minimum purchase amount for the quarter ended June 30,
2001 and, as such, the Company recognized approximately $838,000 of the
prepayments as product sales for such quarter. As of June 30, 2001, the
Company is obligated to return approximately $1.1 million of the prepayments to
Roche due to offsetting revenue received by Digene from Abbott under the Abbott
Agreement. This obligation is recorded in accrued expenses on the Consolidated
Balance Sheet as of June 30, 2001.

Under the Roche Letter Agreement, Roche made a non-refundable payment of $5
million to the Company, which is recorded as a deferred liability on the
Consolidated Balance Sheet as of June 30, 2001. In the event that the Company
and Roche do not enter into the broader relationship referred to above and
subject to certain other conditions, on July 1, 2002, the $5 million payment
shall be converted into shares of Common Stock of the Company at a conversion
price of $35 per share.



|4. |  | Co-Promotion Agreement
|-- |  | ----------------------

In January 2001, the Company entered into an exclusive co-promotion agreement
with Cytyc Corporation (Cytyc) for the promotion of the
HC 2 HPV Test for use
with Cytycs ThinPrep Pap Test in the United States and Puerto Rico. The
companies will jointly promote the benefits of testing for HPV with the Digene
HPV Test directly from Cytycs ThinPrep Pap Test sample collection vial.
Subject to FDA approval, the companies intend to co-promote the combined
products as the most effective primary screening method for cervical cancer.
The term of the agreement is until June 30, 2002 and will automatically renew
until June 30, 2003, unless it is terminated earlier by either party. In
accordance with the co-promotion agreement, Digene pays Cytyc for its
co-promotion activities based on a product sales-derived formula.



|5. |  | Acquisition of Viropath B.V.
|-- |  | ----------------------------

On July 1, 1998, the Company issued 181,884 shares of its Common Stock, par
value $0.01 per share, as consideration for its purchase of all of the
outstanding capital stock (the Shares) of Viropath B.V., a company with
limited liability, registered in Amsterdam, The Netherlands (Viropath). In
addition, the Company is obligated to pay royalties on future sales of
Viropaths licensed products, not to exceed $1 million. Through June 30, 2001
the Company has not been required to pay any such royalties. The acquisition
was accounted for using the purchase method and resulted in an excess of
purchase price over the fair value of net assets acquired of approximately $1.5
million, which the Company recorded as goodwill, which is being amortized over
ten years using the straight-line method. As of June 30, 2001, goodwill and
the related accumulated amortization were $1,500,860 and $450,259,
respectively.

47



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | Acquisition of Viropath B.V. (continued)
|-- |  | ----------------------------------------

In addition, the Company granted options to purchase an aggregate of 50,000
shares of its Common Stock to the three Viropath individual shareholders in
connection with their execution of consulting agreements with the Company. The
options are exercisable in equal installments on each of June 30, 1999, 2000,
2001, 2002 and 2003 at an exercise price of $9.75 per share. The options
expire on June 29, 2008. The options were compensatory options and were valued
on July 1, 1998 at approximately $316,500. This amount will be expensed over
the service period. During fiscal 1999, 2000 and 2001, the Company recognized
$63,300, $55,509, and $32,137 of compensation expense related to these options,
respectively. In February 2000, one of these option holders died and his
unvested options expired. The total value of the unexpired options for this
holder, which was $101,280, is no longer included in deferred stock
compensation.



|6. |  | Sale of a Product Line
|-- |  | ----------------------

On March 24, 2000, the Company completed the sale of its Molecular Biology
Reagents (MBR) product line and related assets to KD Medical, Inc (KD
Medical). This transaction involved the sale of the Companys MBR product
line and the associated manufacturing equipment, as well as the raw material
and finished goods inventory for the product line. As consideration for this
sale, the Company received $200,000 in cash and a promissory note in the amount
of $400,000 payable in monthly installments of $20,000 plus 8% accrued interest
from July 1, 2000 through February 1, 2002. A gain of approximately $515,000
was recorded on the sale of this product line and is included in the Other
income (expense) line of the Consolidated Statements of Operations for the year
ended June 30, 2000.

On February 1, 2001, the Company entered into an amended and restated
promissory note with KD Medical for a total principal amount of $406,500. The
amended and restated promissory note is payable in monthly installments of
$2,700, commencing on March 10, 2001 and on the 10th day of each month
thereafter, with the payment credited first against interest on the unpaid
principal amount at a rate of 8% per annum and the balance of each payment
being applied to the unpaid principal balance. In addition to the monthly
$2,700 payment, KD Medical will pay an amount calculated as a percentage
(ranging from 2% to 15%) of its gross sales over a base amount. The unpaid
principal balance, together with accrued interest, is payable in full on
January 31, 2003.



|7. |  | Inventories
|-- |  | -----------

Inventories are stated at the lower of cost or market on a first-in, first-out
basis.

Inventories consist of the following:

|                     |  |          |            |      |  |   |            |  
|-------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                     |  | June 30,
|                     |  |         
|                     |  | 2000     |            | 2001
|                     |  |          |            |     
|Finished goods       |  | $        | 1,737,163  |      |  | $ | 3,087,651  |  
|                    
|                    
|                    
|                    
|Work in process      |  |          | 2,622,741  |      |  |   | 3,369,419  |  
|                    
|                    
|                    
|                    
|Raw materials        |  |          | 1,295,015  |      |  |   | 1,256,358  |  
|                     |  |          |            |      |  |   |            |  
|                     |  |          | 5,654,919  |      |  |   | 7,713,428  |  
|                    
|                    
|                    
|                    
|Obsolescence reserve |  |          | (1,254,622 | )    |  |   | (2,165,013 | )
|                     |  |          |            |      |  |   |            |  
|                     |  | $        | 4,400,297  |      |  | $ | 5,548,415  |  
|                     |  |          |            |      |  |   |            |  

48



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Property and Equipment
|-- |  | ----------------------

Property and equipment, including leasehold improvements, are stated at cost
and depreciated or amortized using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life.

Property and equipment consist of the following:

|                                          |  |          |            |      |  |   |            |  
|----------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                          |  | June 30,
|                                          |  |         
|                                          |  | 2000     |            | 2001
|                                          |  |          |            |     
|Furniture, fixtures and office equipment  |  | $        | 1,769,017  |      |  | $ | 1,984,609  |  
|Machinery and equipment                   |  |          | 5,098,655  |      |  |   | 6,632,511  |  
|                                         
|                                         
|                                         
|                                         
|Leasehold improvements                    |  |          | 103,798    |      |  |   | 173,481    |  
|                                          |  |          |            |      |  |   |            |  
|                                          |  |          | 6,971,470  |      |  |   | 8,790,601  |  
|                                         
|                                         
|                                         
|                                         
|Accumulated depreciation and amortization |  |          | (3,939,382 | )    |  |   | (5,300,111 | )
|                                          |  |          |            |      |  |   |            |  
|                                          |  | $        | 3,032,088  |      |  | $ | 3,490,490  |  
|                                          |  |          |            |      |  |   |            |  



|9. |  | Long term Debt
|-- |  | --------------

In February 2000, the Company received an equipment loan facility of $1,000,000
from the State of Maryland to finance a portion of the costs of equipment to be
installed at the Companys new office facility in Gaithersburg, Maryland. The
loan bears interest at 1% per annum and the Company is required to make
quarterly interest only payments with all unpaid principal and interest due by
December 31, 2009. Approximately $503,000 of fixed asset additions, previously
financed with cash, was converted to this facility during July 2000. The
remaining $497,000 was used during the year ended June 30, 2001. As of June
30, 2001, the Company had fully drawn upon these funds. The repayment of this
loan is secured by a lien on property and equipment purchased using the
proceeds from the loan facility.



|10. |  | Income Taxes
|--- |  | ------------

Significant components of the provision for income taxes attributable to
operations consist of the following:

|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|-------------------------------- | ------- | - | ------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                 |         |   | Year ended June 30,
|                                 |         |   |                    
|                                 |         |   | 1999                |         | 2000 |   | 2001   
|                                 |         |   |                     |         |      |   |        
|Current:                        
|                                
|                                
|                                
|                                
|                                 | Federal |   | $                   |        |      |   | $       |        |  |   | $       |        | 
|                                
|                                
|                                
|                                
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                
|                                
|                                
|                                
|                                 | Foreign |   |                     | 149,069 |      |   |         | 184,368 |  |   |         | 117,217 | 
|                                 |         |   |                     |         |      |   |         |         |  |   |        
|Total current                    |         |   | 149,069             |         |      |   | 184,368 |         |  |   | 117,217 |        
|                                
|                                
|                                
|                                
|Deferred:                       
|                                
|                                
|                                
|                                
|                                 | Federal |   |                     |        |      |   |         |        |  |   |         |        | 
|                                
|                                
|                                
|                                
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                
|                                
|                                
|                                
|                                 | Foreign |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 |         |   |                     |         |      |   |         |         |  |   |        
|                                
|                                
|                                
|                                
|Total deferred                   |         |   |                    |         |      |   |        |         |  |   |        |        
|                                 |         |   |                     |         |      |   |         |         |  |   |        
|                                
|                                
|                                
|                                
|Total provision for income taxes |         | $ | 149,069             |         |      | $ | 184,368 |         |  | $ | 117,217 |        
|                                 |         |   |                     |         |      |   |         |         |  |   |         |        

49



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Income Taxes (continued)
|--- |  | ------------------------

Income tax expense related to earnings of consolidated subsidiaries located
outside of the United States is provided at tax rates of the respective country
in which the subsidiaries are located. If the Company repatriates its
investment, then additional taxes may be incurred. No provision has been
reflected in the consolidated financial statements for the potential additional
taxes as the Company has no specific plans for a repatriation of these
investments.

The components of loss from operations before income taxes are as follows:

|              |  |                     |            |      |  |      |            |   |  |   |            |  
|------------- |  | ------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|              |  | Year ended June 30,
|              |  |                    
|              |  | 1999                |            | 2000 |  | 2001
|              |  |                     |            |      |  |     
|United States |  | $                   | (9,018,900 | )    |  | $    | (6,968,850 | ) |  | $ | (6,380,807 | )
|             
|             
|             
|             
|Foreign       |  |                     | (136,247   | )    |  |      | 386,012    |   |  |   | 17,027     |  
|              |  |                     |            |      |  |      |            |   |  |   |            |  
|              |  | $                   | (9,155,147 | )    |  |      | (6,582,838 | ) |  |   | (6,363,780 | )
|              |  |                     |            |      |  |      |            |   |  |   |            |  

Items, which caused recorded income taxes attributable to continuing operations
to differ from taxes computed using the statutory federal income tax rate, are
as follows:

|                              |                         |   |                     |           |      |   |            |            |   |   |            |            |  
|----------------------------- | ----------------------- | - | ------------------- | --------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                              |                         |   | Year ended June 30,
|                              |                         |   |                    
|                              |                         |   | 1999                |           | 2000 |   | 2001      
|                              |                         |   |                     |           |      |   |           
|Tax benefit at statutory rate |                         | $ | (3,204,000          | )         |      | $ | (2,290,000 | )          |   | $ | (2,227,000 | )         
|                             
|                             
|                             
|                             
|Effect of:                   
|                             
|                             
|                             
|                             
|                              | State income tax, net   |   |                     | (458,000  | )    |   |            | (327,000   | ) |   |            | (311,000   | )
|                             
|                             
|                             
|                             
|                              | Foreign tax             |   |                     | 149,069   |      |   |            | 184,368    |   |   |            | 117,217    |  
|                             
|                             
|                             
|                             
|                              | Stock options           |   |                     | (863,000  | )    |   |            | (5,700,000 | ) |   |            | (7,067,000 | )
|                             
|                             
|                             
|                             
|                              | Other                   |   |                     | 55,000    |      |   |            | (271,000   | ) |   |            | (161,000   | )
|                             
|                             
|                             
|                             
|                              | Foreign losses not used |   |                     | 37,000    |      |   |            |           |   |   |            |           |  
|                             
|                             
|                             
|                             
|                              | Valuation allowance     |   |                     | 4,433,000 |      |   |            | 8,588,000  |   |   |            | 9,766,000  |  
|                              |                         |   |                     |           |      |   |            |            |   |   |            |           
|Provision for income taxes    |                         | $ | 149,069             |           |      | $ | 184,368    |            |   | $ | 117,217    |           
|                              |                         |   |                     |           |      |   |            |            |   |   |            |           

The Companys net deferred tax assets are as follows:

|                                       |  |          |             |      |  |   |             |  
|-------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                       |  | June 30,
|                                       |  |         
|                                       |  | 2000     |             | 2001
|                                       |  |          |             |     
|Net operating loss carryforwards       |  | $        | 25,017,000  |      |  | $ | 32,152,000  |  
|                                      
|                                      
|                                      
|                                      
|Research and development credits       |  |          | 1,295,000   |      |  |   | 1,694,000   |  
|                                      
|                                      
|                                      
|                                      
|Patent costs, net                      |  |          | 365,000     |      |  |   | 322,000     |  
|                                      
|                                      
|                                      
|                                      
|Research and development deferral, net |  |          | 986,000     |      |  |   | 763,000     |  
|                                      
|                                      
|                                      
|                                      
|Murex customer lists                   |  |          | 754,000     |      |  |   | 699,000     |  
|                                      
|                                      
|                                      
|                                      
|Reserves                               |  |          | 814,000     |      |  |   | 1,400,000   |  
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |          | 1,321,000   |      |  |   | 3,288,000   |  
|                                       |  |          |             |      |  |   |             |  
|Deferred tax assets                    |  |          | 30,552,000  |      |  |   | 40,318,000  |  
|                                      
|                                      
|                                      
|                                      
|Valuation allowance                    |  |          | (30,552,000 | )    |  |   | (40,318,000 | )
|                                       |  |          |             |      |  |   |             |  
|Net deferred tax assets                |  | $        |            |      |  | $ |            |  
|                                       |  |          |             |      |  |   |             |  

The Company recognized a tax provision of $184,368 and $117,217 for the years
ended June 30, 2000 and 2001, respectively, which related to the Companys
foreign operations. At June 30, 2001, the Company had tax net operating loss
carryforwards for income tax purposes of approximately $80 million.
Approximately $40 million of the net operating loss carryforwards is
attributable to exercised stock options, the benefit of which, when realized,
will directly increase additional paid-in capital.

50



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Income Taxes (continued)
|--- |  | ------------------------

At June 30, 2001, the Company also had research and development credit
carryforwards of approximately $1,694,000. In 1990, the Company experienced a
change in ownership pursuant to Section 382 of the Internal Revenue Code, which
will cause the utilization of pre-change losses and credits to be limited.
Subject to this limitation, the Companys net operating loss carryforwards and
tax credits expire, if unused, at various dates from 2003 through 2021.
Realization of total deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these tax
benefits, the Company has provided a valuation allowance for the full amount of
its deferred tax assets.



|11. |  | Lease Commitments
|--- |  | -----------------

In January 2000, the Company moved into a new facility in Gaithersburg,
Maryland, compromising a total of approximately 90,000 square feet. The lease
for the new facility has a ten-year term and the Company has two consecutive
rights to extend the term of the lease for five years each. The former
Beltsville executive office and manufacturing facility lease expired on April
30, 2000. In addition, the lease on the Companys research and development
facility in Silver Spring, Maryland terminated upon the Companys relocation of
those activities to the new facility in January 2000.

In December 1999, the Company established an equipment leasing facility with
Mellon US Leasing with a total commitment of $750,000. The Company used such
facility to fund furniture and equipment leases, including telecommunications
equipment, for its new leased facility in Gaithersburg, Maryland. As of June
30, 2000, when this commitment expired, the Company had used approximately
$571,000 of the commitment. All of the equipment and furnishings leased under
this agreement have been accounted for as operating leases.

On July 6, 2000, the Company entered into an agreement to renew the lease of
its London, England facility. The term of the lease began July 1, 1999 and
expires on January 31, 2002.

Future minimum rental commitments under these and other operating lease
agreements, including the agreements mentioned above, are as follows as of June
30, 2001:

|           |  |  |             | 
|---------- |  |  | ----------- | 
|2002       |  |  | $2,826,795  | 
|          
|          
|          
|          
|2003       |  |  | 2,679,060   | 
|          
|          
|          
|          
|2004       |  |  | 2,550,413   | 
|          
|          
|          
|          
|2005       |  |  | 2,550,913   | 
|          
|          
|          
|          
|2006       |  |  | 2,669,722   | 
|          
|          
|          
|          
|Thereafter |  |  | 10,115,014  | 
|           |  |  |             | 
|           |  |  | $23,391,917 | 
|           |  |  |             | 

Rent expense under these leases was $678,394, $2,144,945, and $3,287,422 for
the years ended June 30, 1999, 2000 and 2001, respectively.



|12. |  | Common Stock
|--- |  | ------------

On December 23, 1999, the Company and certain of its stockholders completed a
private placement of 1,500,000 shares of common stock to selected institutional
and other accredited investors at $13.00 per share. Of these shares, 900,000
were sold by the Company and 600,000 were sold by the selling stockholders.
The net proceeds to the Company, after placement agent fees and expenses, were
approximately $10,354,000.

51



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DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | Common Stock Options
|--- |  | --------------------

In March 1996, the Company adopted the Digene Corporation Omnibus Plan (the
Omnibus Plan). Pursuant to the Omnibus Plan, officers or other employees of
the Company may receive options to purchase Common Stock. The Omnibus Plan is
administered by the Compensation Committee. 2,000,000 shares have been
reserved for issuance under the Omnibus Plan.

In October 1996, the Company adopted the Digene Corporation Directors Stock
Option Plan (the Directors Plan). Pursuant to the Directors Plan,
directors of the Company may receive options to purchase Common Stock. The
Directors Plan is administered by the Board of Directors. 500,000 shares have
been reserved for issuance under the Directors Plan.

In September 1997, the Company adopted the Digene Corporation 1997 Stock Option
Plan (the 1997 Stock Option Plan). Pursuant to the 1997 Stock Option Plan,
consultants and other non-employees of the Company may receive options to
purchase Common Stock. The 1997 Stock Option Plan is administered by the
Compensation Committee. 500,000 shares have been reserved for issuance under
the 1997 Stock Option Plan.

In October 1999, the Company adopted the Digene 1999 Incentive Plan (the 1999
Plan). Pursuant to the 1999 Plan, employees of the Company and its
subsidiairies may receive options to purchase Common Stock and other Common
Stock awards. The 1999 Plan is administered by the Compensation Committee.
2,000,000 shares have been reserved for issuance under the 1999 Plan.

Prior to March 1996, the Company had adopted Stock Option Plans (the Option
Plans) under which 2,622,821 shares of Common Stock were reserved for issuance
upon exercise of options granted to employees, officers and consultants of the
Company. The Option Plans provide for grants of stock options to employees
(including officers and employee directors), directors and consultants of the
Company. The Option Plans were previously administered by the Board of
Directors and presently are administered by the Compensation Committee, which
determines recipients and types of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof. The Company does not intend to grant further options under these
Option Plans.

As of June 30, 2001, 1,449,787 shares were available for issuance under the
plans.

The terms of all stock options granted may not exceed ten years. The exercise
price of options granted, as determined by the Compensation Committee,
approximates fair market value at the time of the grant.

Common stock options activity is as follows:

|                                 |  |                     |           |       |      |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|-------------------------------- |  | ------------------- | --------- | ----- | ---- | --------- | ----- | ----- |  | ------ | --------- | --------- |  | - | ----- |  |  | --------- | --------- | - |  | - | ----- | 
|                                 |  | Year ended June 30,
|                                 |  |                    
|                                 |  | 1999                |           |       | 2000 |           |       | 2001  |  |        |           |          
|                                 |  |                     |           |       |      |           |       |       |  |        |           |          
|                                 |  |                     |           |       |      | Weighted- |       |       |  |        |           | Weighted- |  |   |       |  |  | Weighted-
|                                 |  |                     |           |       |      | Average   |       |       |  |        |           | Average   |  |   |       |  |  | Average  
|                                 |  |                     |           |       |      | Exercise  |       |       |  |        |           | Exercise  |  |   |       |  |  | Exercise 
|                                 |  | Shares              |           | Price |      | Shares    |       | Price |  | Shares |           | Price    
|                                 |  |                     |           |       |      |           |       |       |  |        |           |          
|Outstanding at beginning of
year |  |                     | 2,712,162 |       |      | $         | 6.42  |       |  |        | 3,177,529 |           |  | $ | 7.31  |  |  |           | 2,995,087 |   |  | $ | 10.06 | 
|                                
|                                
|                                
|                                
|Options granted                  |  |                     | 933,250   |       |      |           | 8.77  |       |  |        | 607,500   |           |  |   | 16.38 |  |  |           | 792,500   |   |  |   | 32.53 | 
|                                
|                                
|                                
|                                
|Options exercised                |  |                     | (266,745  | )     |      |           | 1.23  |       |  |        | (707,601  | )         |  |   | 2.96  |  |  |           | (581,801  | ) |  |   | 5.77  | 
|                                
|                                
|                                
|                                
|Options canceled or expired      |  |                     | (201,138  | )     |      |           | 10.17 |       |  |        | (82,341   | )         |  |   | 11.29 |  |  |           | (76,511   | ) |  |   | 19.81 | 
|                                 |  |                     |           |       |      |           |       |       |  |        |           |           |  |   |       |  |  |           |           |  
|Outstanding at end of year       |  |                     | 3,177,529 |       |      |           | 7.31  |       |  |        | 2,995,087 |           |  |   | 10.06 |  |  |           | 3,129,275 |   |  |   | 16.32 | 
|                                 |  |                     |           |       |      |           |       |       |  |        |           |           |  |   |       |  |  |           |           |  
|Options exercisable at year-end  |  |                     | 1,434,192 |       |      |           | 4.72  |       |  |        | 1,278,648 |           |  |   | 7.54  |  |  |           | 1,477,776 |   |  |   | 10.06 | 
|                                 |  |                     |           |       |      |           |       |       |  |        |           |           |  |   |       |  |  |           |           |  

52



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##### Table of Contents



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | Common Stock Options (continued)
|--- |  | --------------------------------

The following table summarizes information about fixed-price stock options
outstanding at June 30, 2001:

|                  |  |                     |                   |                     |  |  |     |                    |  |                  |       |  |  |  |  |  |  |  |           |  |  |   |       | 
|----------------- |  | ------------------- | ----------------- | ------------------- |  |  | --- | ------------------ |  | ---------------- | ----- |  |  |  |  |  |  |  | --------- |  |  | - | ----- | 
|                  |  | Options Outstanding |                   | Options Exercisable
|                  |  |                     |                   |                     |  | 
|Range of Exercise |  | Number Outstanding  | Average Remaining | Weighted-Average    |  |  |     | Number Exercisable |  | Weighted-Average
|Prices            |  | at June 30, 2001    | Contractual Life  | Exercise Price      |  |  |     | at June 30, 2001   |  | Exercise Price  
|                  |  |                     |                   |                     |  |  |     |                    |  |                 
|$0.000- $10.00    |  |                     | 1,616,565         |                     |  |  | 5.9 |                    |  | $                | 9.05  |  |  |  |  |  |  |  | 1,233,017 |  |  | $ | 9.10  | 
|                 
|                 
|                 
|                 
|$10.01 - $20.00   |  |                     | 693,210           |                     |  |  | 7.8 |                    |  |                  | 13.23 |  |  |  |  |  |  |  | 221,091   |  |  |   | 12.85 | 
|                 
|                 
|                 
|                 
|$20.01 - $30.00   |  |                     | 117,000           |                     |  |  | 9.5 |                    |  |                  | 27.33 |  |  |  |  |  |  |  |          |  |  |   |      | 
|                 
|                 
|                 
|                 
|$30.01 - $40.00   |  |                     | 692,500           |                     |  |  | 9.3 |                    |  |                  | 34.13 |  |  |  |  |  |  |  | 23,668    |  |  |   | 34.58 | 
|                 
|                 
|                 
|                 
|$40.01- $44.25    |  |                     | 10,000            |                     |  |  | 9.1 |                    |  |                  | 44.25 |  |  |  |  |  |  |  |          |  |  |   |      | 
|                  |  |                     |                   |                     |  |  |     |                    |  |                  |       |  |  |  |  |  |  |  |           | 
|                  |  |                     | 3,129,275         |                     |  |  | 7.2 |                    |  |                  | 16.32 |  |  |  |  |  |  |  | 1,477,776 |  |  |   | 10.06 | 
|                  |  |                     |                   |                     |  |  |     |                    |  |                  |       |  |  |  |  |  |  |  |           | 

If compensation cost for the Companys stock option plans had been determined
based upon the fair market value at the grant date for options under the plans
consistent with the methodology prescribed under SFAS No. 123, the Companys
pro forma net loss in fiscal 1999, 2000 and 2001 would have been approximately
$12,842,000, $13,251,000 and $17,273,000 or $0.89, $0.86, and $1.04 per share,
respectively. The effect of applying SFAS No. 123 to the calculation of 1999,
2000 and 2001 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, (1) the vesting period of the stock options and the (2)
fair market value of additional stock options in future years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants:

|                                            |  |  |  |  |  |                     |      |      |  |      |      |   |  |  |      |  
|------------------------------------------- |  |  |  |  |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                            |  |  |  |  |  | Year ended June 30,
|                                            |  |  |  |  |  |                    
|                                            |  |  |  |  |  | 1999                |      | 2000 |  | 2001
|                                            |  |  |  |  |  |                     |      |      |  |     
|Dividend yield                              |  |  |  |  |  |                     | 0.00 | %    |  |      | 0.00 | % |  |  | 0.00 | %
|                                           
|                                           
|                                           
|                                           
|Expected volatility                         |  |  |  |  |  |                     | 77   | %    |  |      | 77   | % |  |  | 78   | %
|                                           
|                                           
|                                           
|                                           
|Risk-free interest rate                     |  |  |  |  |  |                     | 6.0  | %    |  |      | 6.0  | % |  |  | 5.5  | %
|                                           
|                                           
|                                           
|                                           
|Expected life of the option term (in years) |  |  |  |  |  |                     | 6.1  |      |  |      | 5.8  |   |  |  | 5.9  |  

The weighted-average fair values of the options granted during the years ended
June 30, 1999, 2000 and 2001 were $6.26, $11.84, and $23.04, respectively.



|14. |  | Retirement Plan
|--- |  | ---------------

The Company sponsors a 401(k) Profit Sharing Plan (the Plan), which covers
all employees who have completed 90 days of service. The Plan stipulates that
employees may elect an amount between 1% and 20% of their total compensation to
contribute to the Plan. Employee contributions are subject to Internal Revenue
Service limitations. All employees who have completed 1,000 hours of service
during the plan year and are employed by the Company on the last day of the
plan year are eligible to share in discretionary Company contributions.
Employees vest in employer contributions over five years. No contributions
were made by the Company during the years ended June 30, 1999, 2000 and 2001.

53



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DIGENE CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



|15. |  | Other Commitments and Contingencies
|--- |  | -----------------------------------

The Companys access to various probes, diagnostic techniques and a key product
component were acquired under agreements requiring the Company to pay future
royalties up to approximately 4.0% of applicable future net sales on certain
products. During fiscal 1999, 2000 and 2001, total royalties amounted to
$655,062, $947,628, and $1,283,021, respectively.



|16. |  | Segment Reporting
|--- |  | -----------------

The Company operates one business segment that develops, manufactures and
markets proprietary gene-based tests for the detection, screening and
monitoring of human diseases. Worldwide operations are summarized by
geographic region in the following table:

|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|------------- |  | ------ | ---------- | ---- |  | ---- |  | -------- |  | ------ | ---------- | -------- |  | ------ | ---------- | -------- |  | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|              |  | 1999   |            | 2000 |  | 2001
|              |  |        |            |      |  |     
|              |  | Assets |            |      |  |      |  | Revenues |  | Assets |            | Revenues |  | Assets |            | Revenues
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |         
|North America |  | $      | 27,575,447 |      |  |      |  |          |  | $      | 5,930,026  |          |  | $      | 34,568,195 |          |  | $ | 9,880,710  |  |  | $ | 46,890,764 |  |  | $ | 19,620,298 | 
|Europe        |  |        | 165,583    |      |  |      |  |          |  |        | 9,055,571  |          |  |        | 610,883    |          |  |   | 9,957,338  |  |  |   | 672,924    |  |  |   | 10,526,665 | 
|South America |  |        | 367,449    |      |  |      |  |          |  |        | 1,860,242  |          |  |        | 605,888    |          |  |   | 1,746,724  |  |  |   | 631,639    |  |  |   | 2,126,123  | 
|Pacific Rim   |  |        |           |      |  |      |  |          |  |        | 621,260    |          |  |        |           |          |  |   | 1,459,198  |  |  |   |           |  |  |   | 1,923,800  | 
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|              |  | $      | 28,108,479 |      |  |      |  |          |  | $      | 17,467,099 |          |  | $      | 35,784,966 |          |  | $ | 23,043,970 |  |  | $ | 48,195,327 |  |  | $ | 34,196,886 | 
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 



|17. |  | Quarterly Results of Operations (Unaudited)
|--- |  | -------------------------------------------

The following is a summary of quarterly results of operations for the fiscal
quarters: (in thousands, except per share amounts):

|                                     |          |   |         |        |         |   |         |        |         |   |       |        |   |   |       |        |  
|------------------------------------ | -------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ----- | ------ | - | - | ----- | ------ | -
|                                     |          |   | First   |        | Second  |   | Third   |        | Fourth 
|                                     |          |   | Quarter |        | Quarter |   | Quarter |        | Quarter
|                                    
|2001                                
|                                     | Revenues |   | $       | 7,172  |         |   | $       | 7,755  |         |   | $     | 9,010  |   |   | $     | 10,260 |  
|                                     | Net Loss |   | $       | (1,916 | )       |   | $       | (1,578 | )       |   | $     | (1,645 | ) |   | $     | (1,342 | )
|Basic and diluted net loss per share |          | $ | (0.12   | )      |         | $ | (0.10   | )      |         | $ | (0.10 | )      |   | $ | (0.08 | )     
|2000                                
|                                     | Revenues |   | $       | 5,218  |         |   | $       | 5,252  |         |   | $     | 6,123  |   |   | $     | 6,451  |  
|                                     | Net Loss |   | $       | (1,128 | )       |   | $       | (1,577 | )       |   | $     | (1,633 | ) |   | $     | (2,429 | )
|Basic and diluted net loss per share |          | $ | (0.08   | )      |         | $ | (0.11   | )      |         | $ | (0.10 | )      |   | $ | (0.15 | )     

The sum of basic and diluted net loss per share for the four quarters in each
of 2001 and 2000 may not equal basic and diluted net loss per share for the
year due to the changes in the number of weighted-average shares outstanding
during the year.

54



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##### Table of Contents






ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                         AND FINANCIAL DISCLOSURE

No change of accountants and/or disagreements on any matter of accounting
principles or financial statement disclosures has occurred within the last two
years.




PART III




ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



| |  |  | Directors. The information with respect to directors
required by this item is incorporated herein by reference to
Digenes definitive Proxy Statement for its Annual Meeting of
Stockholders, scheduled to be held on October 25, 2001, which shall
be filed with the Securities and Exchange Commission within 120 days
from the end of the Digenes fiscal year (the 2001 Proxy
Statement).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Executive Officers. The information with respect to
executive officers required by this item is set forth in Part I of
this report.                                                                                                                                                                                                                                                            




ITEM 11.         EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by
reference to the 2001 Proxy Statement.




ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this item is incorporated herein by
reference to the 2001 Proxy Statement.




ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement.

55



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##### Table of Contents






PART IV




ITEM 14.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)   |  | * |  | Consolidated Financial Statements of Digene Corporation:                                                                                                                                                                                                                                                                                                                                                                              
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      |  |   |  | Report of Independent Auditors
Consolidated Balance Sheets as of June 30, 2000 and 2001
Consolidated Statements of Operations for the fiscal years ended June 30, 1999, 2000 and 2001
Consolidated Statements of Stockholders Equity for the fiscal years ended June 30, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1999, 2000 and 2001
Notes to Consolidated Financial Statements
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      |  | * |  | Financial Statement Schedules:                                                                                                                                                                                                                                                                                                                                                                                                        
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      |  |   |  | Schedule II Valuation and Qualifying Accounts and Reserves                                                                                                                                                                                                                                                                                                                                                                           
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      |  |   |  | All other schedules for which provision is made in the
applicable accounting regulation of the Commission are not
required under the related instructions or are inapplicable
and therefore have been omitted.                                                                                                                                                                                                                        
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      |  | * |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                             
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3.1   |  |   |  | Amended and Restated Certificate of Incorporation of Digene.**                                                                                                                                                                                                                                                                                                                                                                        
|3.2   |  |   |  | Amended and Restated Bylaws of Digene. (Incorporated by
reference to Exhibit 3.2 of the Registrants Annual Report on Form
10-K for the fiscal year ended June 30, 1999 and filed with the SEC
on September 28, 1999.)                                                                                                                                                                                                                
|4.1   |  |   |  | Specimen Common Stock Certificate.**                                                                                                                                                                                                                                                                                                                                                                                                  
|10.6  |  |   |  | Amended and Restated 1996 Omnibus Plan. (Incorporated by
reference to Exhibit 10.3 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.)                                                                                                                                                                                                                                                               
|10.14 |  |   |  | License Agreement dated September 1, 1995 between Digene and
Institut Pasteur.**                                                                                                                                                                                                                                                                                                                                                      
|10.15 |  |   |  | Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.**                                                                                                                                                                                                                                                                                                                                     
|10.16 |  |   |  | License Agreement dated December 1, 1983 between Bethesda
Research Laboratories, a division of Life Technologies, Inc. and
Georgetown University.**                                                                                                                                                                                                                                                                                   
|10.18 |  |   |  | License Agreement dated December 19, 1990 between Digene and
Life Technologies, Inc.**                                                                                                                                                                                                                                                                                                                                                
|10.26 |  |   |  | Registration Rights Agreement dated as of May 24, 1996 between
Digene, Armonk Partners, Murex Diagnostics Corporation and Certain
Other Stockholders.**                                                                                                                                                                                                                                                                               
|10.28 |  |   |  | License Agreement dated September 27, 1995 between Digene and
Kanebo, Ltd.**                                                                                                                                                                                                                                                                                                                                                          
|10.30 |  |   |  | Amended and Restated Directors Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 of Digenes Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.)                                                                                                                                                                                                                                                    
|10.32 |  |   |  | Amended and Restated 1997 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.)                                                                                                                                                                                                                                                          

56



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##### Table of Contents



|            |  |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.33
10.34 |  |      |  | Stock Purchase Agreement dated as of June 30, 1998 by and
among Digene and Stichting Researchfonds Pathologie, Ewald C.R.M.
Keijser, Christophorus J.L.M. Meijer and Jan M. M. Walboomers.
(Incorporated by reference to Exhibit 10.37 of Digenes Annual Report
on Form 10-K for the fiscal year ended June 30, 1998.)
Lease dated as of March 2, 1998 by and between Digene and ARE
- Metropoliton Grove I, LLC. (Incorporated by reference to Exhibit
10.1 of Digenes Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.)
|10.35       |  | !    |  | Employment Agreement dated as of December 22, 1998 between
Digene and Joseph P. Slattery. (Incorporated by reference to Exhibit
10.2 of Digenes Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998.)                                                                                                                                                                                                                                                                                                                      
|10.36       |  | !    |  | Employment Agreement dated as of December 22, 1998 between
Digene and Jeanmarie P. Curley. (Incorporated by reference to Exhibit
10.1 of Digenes Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998.)                                                                                                                                                                                                                                                                                                                     
|10.37       |  | ***  |  | Marketing and Distribution Agreement dated May 7, 1999
between Digene and Abbott Laboratories. (Incorporated by reference
to Exhibit 10.41 of Digenes Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1999 and filed with the SEC on December
21, 1999.)                                                                                                                                                                                                                                                                     
|10.38       |  |      |  | Amended and Restated 1999 Incentive Plan. (Incorporated by
reference to Exhibit 10.4 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.)                                                                                                                                                                                                                                                                                                                                                                     
|10.39       |  | **** |  | License Agreement dated April 5, 2000 between Digene and
Institut Pasteur. (Incorporated by reference to Exhibit
10.39 of Digenes Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.)                                                                                                                                                                                                                                                                                                                                       
|10.40       |  | +    |  | Co-Promotion Agreement dated January 17, 2001 between
Digene and Cytyc Corporation. (Incorporated by reference
to Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.)                                                                                                                                                                                                                                                                                                                               
|10.41       |  | +    |  | Reseller Agreement dated July 22, 1996 between Digene and
Tropix, Inc. (Incorporated by reference to Exhibit 10.2
of Digenes Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.)                                                                                                                                                                                                                                                                                                                                            
|10.41(a)    |  | +    |  | First Amendment to Reseller Agreement dated July 24, 1997
between Digene and Tropix, Inc. (Incorporated by reference to
Exhibit 10.2(a) of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.)                                                                                                                                                                                                                                                                                                                      
|10.41(b)    |  | +    |  | Second Amendment to Reseller Agreement dated May 14, 1998
between Digene and Tropix, Inc. (Incorporated by reference to
Exhibit 10.2(b) of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.)                                                                                                                                                                                                                                                                                                                      
|10.42       |  | ++   |  | Letter Agreement dated April 29, 2001 between Digene and
Roche Molecular                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  | *    |  | Systems, Inc., as amended by an Amendment dated
September 7, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.43       |  | ++   |  | Original Equipment Manufacturer Supply Agreement dated
January 23, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |  | *    |  | between Digene and Qiagen Instruments AG.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|21          |  | *    |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|23.1        |  | *    |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

57



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##### Table of Contents



---



|*    |  | Filed herewith.                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   |  | Incorporated by reference to the like-numbered exhibits to Digenes
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.                                                               
|***  |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 21, 1999. Such provisions
have been filed separately with the Commission.                  
|**** |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 13, 2000. Such provisions
have been filed separately with the Commission.                  
|+    |  | Confidential treatment has been granted for certain portions thereof
by the Commission in a letter dated September 10, 2001. Such
provisions have been filed separately with the Commission.                   
|++   |  | Confidential treatment has been requested for certain provisions
thereof pursuant to a confidential treatment request filed September
27, 2001. Such provisions have been filed separately with the
Commission.
|!    |  | Constitutes a management contract or compensatory plan required to be
filed as an exhibit to this Form 10-K.                                                                                                   

|    |  |                     
|--- |  | --------------------
|(b) |  | Reports on Form 8-K.
|   
|    |  | None.               

58



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##### Table of Contents



SIGNATURES

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

|                   |  |  |     |  |  |                                     
|------------------ |  |  | --- |  |  | ------------------------------------
|                   |  |  |     |  |  | DIGENE CORPORATION                  
|                  
|September 27, 2001 |  |  | By: |  |  | /s/Evan Jones                       
|                   |  |  |     |  |  | Chairman and Chief Executive Officer

We, the undersigned directors and officers of Digene Corporation, do
hereby constitute and appoint each of Evan Jones and Charles M. Fleischman,
each with full power of substitution, our true and lawful attorney-in-fact and
agent to do any and all acts and things in our names and in our behalf in our
capacities stated below, which acts and things either of them may deem
necessary or advisable to enable Digene Corporation to comply with the
Securities Exchange Act of 1934, as amended, any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically, but not limited to, power
and authority to sign for any or all of us in our names, in the capacities
stated below, any and all amendments (including post-effective amendments)
hereto; and we do hereby ratify and confirm all that they shall do or cause to
be done by virtue hereof).

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

|                                               |  |                                                                                                        |  |                   
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ------------------
|Signature                                      |  | Title                                                                                                  |  | Date              
|                                              
|/s/Evan Jones
Evan Jones                       |  | Chairman and Chief Executive
Officer (principal executive officer)                                     |  | September 27, 2001
|                                              
|/s/Charles M. Fleischman
Charles M. Fleischman |  | President, Chief Operating Officer,
Chief Financial Officer and
Director (principal financial officer) |  | September 27, 2001
|                                              
|/s/Joseph P. Slattery
Joseph P. Slattery       |  | Vice President, Finance
(principal accounting officer)                                                 |  | September 27, 2001
|                                              
|/s/Wayne T. Hockmeyer
Wayne T. Hockmeyer       |  | Director                                                                                               |  | September 27, 2001
|                                              
|/s/John H. Landon
John H. Landon               |  | Director                                                                                               |  | September 27, 2001
|                                              
|/s/Joseph M. Migliara
Joseph M. Migliara       |  | Director                                                                                               |  | September 27, 2001
|                                              
|/s/John J. Whitehead
John J. Whitehead         |  | Director                                                                                               |  | September 27, 2001





---



##### Table of Contents



Schedule II  Valuation and Qualifying Accounts and Reserves
(in thousands)

|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|----------------------------------- | ------------------------ | ------------ | ------ | --------- |  | ---------- |  | ------------- |  |  |  | ---- | ---- |  |  | ----- | 
|Classification                      |                          | Balance at   |        | Additions |  | Deductions |  | Balance at   
|
|                                    |                          | Beginning of |        |           |  |            |  | End of Period
|                                    |                          |              | Period |           |  |            |  |               |  |  |  |      |     
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|Allowance for doubtful accounts:   
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 1999 |              |        | 209       |  |            |  |              |  |  |  | (39  | )(1) |  |  | 170   | 
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 2000 |              |        | 170       |  |            |  | 220           |  |  |  | (127 | )(1) |  |  | 263   | 
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 2001 |              |        | 263       |  |            |  | 128           |  |  |  | (110 | )(1) |  |  | 281   | 
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|Reserve for inventory obsolescence:
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 1999 |              |        | 339       |  |            |  | 399           |  |  |  |     |      |  |  | 738   | 
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 2000 |              |        | 738       |  |            |  | 517           |  |  |  |     |      |  |  | 1,255 | 
|                                    |                          |              |        |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|                                    | Year ended June 30, 2001 |              |        | 1,255     |  |            |  | 910           |  |  |  |     |      |  |  | 2,165 | 



---

|(1) |  | Deductions represent accounts written off during the period less
recoveries of accounts previously written off.
|--- |  | -----------------------------------------------------------------------------------------------------------------





---



##### Table of Contents



EXHIBIT INDEX

|               |  |                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.    |  | Description                                                                                                                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                        
|3.1            |  | Amended and Restated Certificate of Incorporation of Digene.**                                                                                                                                                                                                                                                         
|3.2            |  | Amended and Restated Bylaws of Digene. (Incorporated by reference to Exhibit
3.2 of the Registrants Annual Report on Form 10-K for the fiscal year ended
June 30, 1999 and filed with the SEC on September 28, 1999.)                                                                                                 
|4.1            |  | Specimen Common Stock Certificate.**                                                                                                                                                                                                                                                                                   
|10.6           |  | Amended and Restated 1996 Omnibus Plan. (Incorporated by reference to Exhibit
10.3 of Digenes Quarterly Report on Form 10-Q for the quarter ended September
30, 2000.)                                                                                                                                                
|10.14          |  | License Agreement dated September 1, 1995 between Digene and Institut Pasteur.**                                                                                                                                                                                                                                       
|10.15          |  | Cross-License Agreement dated April 1, 1990 among Life Technologies, Inc. and
Institut Pasteur.**                                                                                                                                                                                                                      
|10.16          |  | License Agreement dated December 1, 1983 between Bethesda Research
Laboratories, a division of Life Technologies, Inc. and Georgetown
University.**                                                                                                                                                                    
|10.18          |  | License Agreement dated December 19, 1990 between Digene and Life Technologies,
Inc.**                                                                                                                                                                                                                                 
|10.26          |  | Registration Rights Agreement dated as of May 24, 1996 between Digene, Armonk
Partners, Murex Diagnostics Corporation and Certain Other Stockholders.**                                                                                                                                                                
|10.28          |  | License Agreement dated September 27, 1995 between Digene and Kanebo, Ltd.**                                                                                                                                                                                                                                           
|10.30          |  | Amended and Restated Directors Stock Option Plan. (Incorporated by reference
to Exhibit 10.2 of Digenes Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.)                                                                                                                                     
|10.32          |  | Amended and Restated 1997 Stock Option Plan. (Incorporated by reference to
Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.)                                                                                                                                           
|10.33          |  | Stock Purchase Agreement dated as of June 30, 1998 by and among Digene and
Stichting Researchfonds Pathologie, Ewald C.R.M. Keijser, Christophorus J.L.M.
Meijer and Jan M. M. Walboomers. (Incorporated by reference to Exhibit 10.37
of Digenes Annual Report on Form 10-K for the fiscal year ended June 30,
1998.)
|10.34          |  | Lease dated as of March 2, 1998 by and between Digene and ARE Metropoliton
Grove I, LLC. (Incorporated by reference to Exhibit 10.1 of Digenes Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.)                                                                                                  
|10.35        ! |  | Employment Agreement dated as of December 22, 1998 between Digene and Joseph P.
Slattery. (Incorporated by reference to Exhibit 10.2 of Digenes Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998.)                                                                                               
|10.36        ! |  | Employment Agreement dated as of December 22, 1998 between Digene and Jeanmarie
P. Curley. (Incorporated by reference to Exhibit 10.1 of Digenes Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998.)                                                                                              
|10.37 ***      |  | Marketing and Distribution Agreement dated May 7, 1999 between Digene and
Abbott Laboratories. (Incorporated by reference to Exhibit 10.41 of the
Registrants Annual Report on Form 10-K/A for the fiscal year ended June 30,
1999 and filed with the SEC on December 21, 1999.)                                      
|10.38          |  | Amended and Restated 1999 Incentive Plan. (Incorporated by reference to
Exhibit 10.4 of Digenes Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.)                                                                                                                                              
|10.39 ****     |  | License Agreement dated April 5, 2000 between Digene and Institut Pasteur.
(Incorporated by reference to Exhibit 10.39 of Digenes Annual Report on Form
10-K for the fiscal year ended June 30, 2000.)                                                                                                                
|10.40        + |  | Co-Promotion Agreement dated January 17, 2001 between Digene and Cytyc
Corporation. (Incorporated by reference to Exhibit 10.1 of Digenes Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.)                                                                                                        
|10.41        + |  | Reseller Agreement dated July 22, 1996 between Digene and Tropix, Inc.
(Incorporated by reference to Exhibit 10.2 of Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.)                                                                                                                     
|10.41(a)   +   |  | First Amendment to Reseller Agreement dated July 24, 1997 between Digene and
Tropix, Inc. (Incorporated by reference to Exhibit 10.2(a) of Digenes
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.)                                                                                               
|10.41(b)   +   |  | Second Amendment to Reseller Agreement dated May 14, 1998 between Digene and
Tropix. Inc. (Incorporated by reference to Exhibit 10.2(b) of Digenes
Quarterly Report on                                                                                                                                                





---



##### Table of Contents



|                              |  |  |  |                                                                                                                                            
|----------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                              |  |  |  | Form 10-Q for the quarter ended March 31, 2001.)                                                                                           
|10.42      ++               * |  |  |  | Letter Agreement dated April 29, 2001 between Digene and Roche Molecular
Systems, Inc., as amended by an Amendment dated September 7, 2001.
|10.43      ++               * |  |  |  | Original Equipment Manufacturer Supply Agreement dated January 23, 2001 between
Digene and Qiagen Instruments AG.                          
|21           *                |  |  |  | Subsidiaries of the Registrant.                                                                                                            
|23.1        *                 |  |  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                        



---



|*    |  | Filed herewith.                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   |  | Incorporated by reference to the like-numbered exhibit to Digenes
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.                                                                
|***  |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 21, 1999. Such provisions
have been filed separately with the Commission.                  
|**** |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 13, 2000. Such provisions
have been filed separately with the Commission.                  
|+    |  | Confidential treatment has been granted for certain portions thereof by the Commission in a letter dated September 10,
2001. Such provisions have been filed separately with the Commission.                   
|++   |  | Confidential treatment has been requested for certain provisions thereof pursuant to a confidential treatment request filed
September 27, 2001. Such provisions have been filed separately with the Commission.
|!    |  | Constitutes a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K.