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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, 2002                                                 
|     |  |                                                                                         
|     |  | 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

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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-1536128                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|1201 Clopper Road
Gaithersburg, Maryland                       |  | 20878                               
|                                                               |  |                                     
|(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. [X]

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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





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Table of Contents

|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|Part I   |  |                                                                                                |  |     
|         |  |                                                                                                |  |     
|Item 1.  |  | Business                                                                                       |  | 1   
|         |  | Additional Considerations                                                                      |  | 22  
|Item 2.  |  | Properties                                                                                     |  | 32  
|Item 3.  |  | Legal Proceedings                                                                              |  | 32  
|Item 4.  |  | Submission of Matters to a Vote of Our Stockholders                                            |  | 32  
|         |  |                                                                                                |  |     
|Part II  |  |                                                                                                |  |     
|         |  |                                                                                                |  |     
|Item 5.  |  | Market for Our Common Equity and Related Stockholder Matters                                   |  | 34  
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 35  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  | 36  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 45  
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 46  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure           |  | 66  
|         |  |                                                                                                |  |     
|Part III |  |                                                                                                |  |     
|         |  |                                                                                                |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 66  
|Item 11. |  | Executive Compensation                                                                         |  | 66  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters |  | 66  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 66  
|Item 14. |  | Controls and Procedures                                                                        |  | 66  
|         |  |                                                                                                |  |     
|Part IV  |  |                                                                                                |  |     
|         |  |                                                                                                |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 67  





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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.

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

Recent Developments

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

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

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





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

Diagnostic Testing

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

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

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

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

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

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

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

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

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

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

3



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Our Technology

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

How Our Technology Works To Detect DNA

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





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

4



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

Advantages of Our Technology

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



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

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

Products

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

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

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

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

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

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

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Diagnostic Products

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

|                                               |  |                                                                                                                                 |  |                                                                                                                                                                                   |  |                                                    
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------
|Our
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 ASC-US
classifications.          |  | Marketed directly by us
as a primary test for
cervical cancer
screening. Also
distributed in Europe,
Africa and the Middle
East by Roche during a
non-exclusive wind-down
period. |  | 100-150 million(2)                                 
|                                               |  |                                                                                                                                 |  |                                                                                                                                                                                   |  |                                                    
|Chlamydia and Gonorrhea                        |  | Cleared by the FDA
in March 2000 and
marketed directly
by us.                                                                   |  | Marketed directly by us.                                                                                                                                                          |  | 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 on a
non-exclusive basis.                                                                                   |  | 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 on a
non-exclusive basis.                                                                                   |  | 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

7



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

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

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

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

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

8



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

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

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

9



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##### 



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

Performance Comparison of our HPV Test and the Pap Smear

|               |  |          |        |           |  |       |      |       |  |             |      |             |  |       |       |       |  |  |       |  |  |  |      |  |  |  |      |  |  |  |      | 
|-------------- |  | -------- | ------ | --------- |  | ----- | ---- | ----- |  | ----------- | ---- | ----------- |  | ----- | ----- | ----- |  |  | ----- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|               |  |          |        |           |  |       |      |       |  | Sensitivity |      | Specificity
|               |  |          |        |           |  |       |      |       |  | (%)         |      | (%)        
|               |  |          |        |           |  |       |      |       |  |             |      |            
|               |  | # of     |        |           |  |       |      |       |  |             |      |             |  |       |       |       |  |  |       |  |  |  |      |  |  |  |      |  |  | 
|               |  | Women    |        | Pr. %     |  | PAP   |      | HPV   |  | HPV +       |      | PAP         |  | HPV   |       | HPV +
|Population     |  | In Study |        | CIN 3+(1) |  | Alone |      | Alone |  | PAP         |      | Alone       |  | Alone |       | PAP  
|               |  |          |        |           |  |       |      |       |  |             |      |             |  |       |       |      
|Portland, OR   |  |          | 10,031 |           |  |       | 0.58 |       |  |             | 51.7 |             |  |       | 70.7  |       |  |  | 81.0  |  |  |  | 98.2 |  |  |  | 91.9 |  |  |  | 90.8 | 
|United Kingdom |  |          | 9,761  |           |  |       | 0.52 |       |  |             | 90.2 |             |  |       | 94.1  |       |  |  | 98.0  |  |  |  | 97.2 |  |  |  | 97.0 |  |  |  | 95.7 | 
|Mexico         |  |          | 6,115  |           |  |       | 1.26 |       |  |             | 58.4 |             |  |       | 94.8  |       |  |  | 97.4  |  |  |  | 98.7 |  |  |  | 93.9 |  |  |  | 93.4 | 
|Costa Rica     |  |          | 6,176  |           |  |       | 1.10 |       |  |             | 82.3 |             |  |       | 93.6  |       |  |  | 96.8  |  |  |  | 94.0 |  |  |  | 94.0 |  |  |  | 89.8 | 
|South Africa   |  |          | 2,925  |           |  |       | 3.66 |       |  |             | 84.1 |             |  |       | 89.7  |       |  |  | 92.5  |  |  |  | 86.4 |  |  |  | 80.0 |  |  |  | 76.4 | 
|China          |  |          | 1,936  |           |  |       | 2.17 |       |  |             | 97.6 |             |  |       | 100.0 |       |  |  | 100.0 |  |  |  | 76.3 |  |  |  | 83.0 |  |  |  | 68.0 | 
|Baltimore, MD  |  |          | 1,040  |           |  |       | 0.19 |       |  |             | 50.0 |             |  |       | 100.0 |       |  |  | 100.0 |  |  |  | 97.6 |  |  |  | 96.2 |  |  |  | 95.5 | 
|Germany        |  |          | 7,592  |           |  |       | 0.36 |       |  |             | 51.6 |             |  |       | 96.3  |       |  |  | 100.0 |  |  |  | 98.5 |  |  |  | 96.2 |  |  |  | 95.1 | 



---

|(1) |  | Represents the prevalence of high grade cervical disease in the tested
population expressed in terms of study participants with cervical
intraepithelial neoplasia, or CIN, grade three or higher.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

10



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



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



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



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



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



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



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



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



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



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



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

11



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

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

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

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

12



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The following is a summary of these trials:

|               |  |                                      |  |      |        |                   |  |                               |  |  |  | 
|-------------- |  | ------------------------------------ |  | ---- | ------ | ----------------- |  | ----------------------------- |  |  |  | 
|              
|Country        |  | Lead Investigator                    |  | Size |        | Trial Description
|              
|North
America  |  |                                      |  |      |        |                   |  |                               |  |  |  | 
|United States  |  | National Cancer Institute            |  |      | 5,000  |                   |  | ALTS Borderline
Pap Trial (1)
|United States  |  | Johns Hopkins University             |  |      | 1,000  |                   |  | HPV Primary
Screening (2)    
|Mexico         |  | Johns Hopkins University; Mexican    |  |      | 7,500  |                   |  | HPV Primary
Screening (2)    
|               |  | Government                           |  |      |        |                   |  |                               |  | 
|              
|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 Rio Grande do Sul      |  |      | 2,000  |                   |  | HPV Primary
Screening (2)    
|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.As described above under
Primary Cervical Cancer Screening, we are currently working to provide
information requested by the FDA in connection with our PMA supplement for
market approval for use of our DNA Pap. The FDA approved our HC 2 HPV Test for
the detection of human papillomavirus in March 1999. In March 2000, the FDA
approved our High-Risk HC 2 HPV Test. These approvals followed pre-market
approvals, or PMAs, to test for the presence of human papillomavirus in women
with equivocal Pap smears in April 1995, and, in 1997, a PMA supplement for the
use of our HPV Test using the ThinPrep Pap Test sample collection system. In
April 2002, we submitted a PMA supplement application with the FDA seeking
approval of the use of our HPV Test with TriPath Imaging, Inc.s SurePath Test
Pack sample collection system. In July 2002, we received notice from the FDA
that the PMA supplement was not approvable as submitted in April 2002. We are
working with TriPath to determine how best to respond to the FDAs concerns.

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

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

13



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

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

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

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

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

14



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

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

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

Genomics Research Products

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

15



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Sales and Marketing

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

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



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

North American Market

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

16



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##### 



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

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

International Markets

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

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

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

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

17



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##### 



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

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

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

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

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

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

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

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

Intellectual Property

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

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

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

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

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

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

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

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

Facilities and Manufacturing

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

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

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

Employees

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

Principal Executive Offices

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

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ADDITIONAL CONSIDERATIONS

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

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



| |                                                                  
| | -----------------------------------------------------------------
| |  expenses associated with our research and
development programs;



| |                                                                                   
| | ----------------------------------------------------------------------------------
| |  our sales and marketing activities in the United
States and internationally; and



| |                                                                 
| | ----------------------------------------------------------------
| |  other expenses, including administrative and
facilities costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

     general market conditions;

29



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

     changes in government regulation or patent decisions.

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

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

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

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

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

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

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

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

30



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##### 



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

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

31



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ITEM 2.      PROPERTIES

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

ITEM 3.      LEGAL PROCEEDINGS

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

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

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

Not applicable.

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EXECUTIVE OFFICERS OF DIGENE

|                             |  |     |    |                            |  |                                                               
|---------------------------- |  | --- | -- | -------------------------- |  | --------------------------------------------------------------
|Name                         |  | Age |    | Positions with the Company
|                             |  |     |    |                           
|Evan Jones(1)                |  |     | 45 |                            |  | Chief Executive Officer and Chairman of the Board             
|Charles M. Fleischman(2)     |  |     | 44 |                            |  | President, Chief Operating Officer and Chief
Financial Officer
|Robert McG. Lilley(3)        |  |     | 57 |                            |  | Senior Vice President, Global Sales and Marketing             
|Attila T. Lorincz, Ph.D.
(4) |  |     | 47 |                            |  | Senior Vice President and Chief Scientific Officer            
|Belinda O. Patrick
(5)       |  |     | 46 |                            |  | Senior Vice President, Manufacturing Operations               
|Joseph P. Slattery
(6)       |  |     | 37 |                            |  | Senior Vice President, Finance and Information
Systems        
|Donna Marie Seyfried
(7)     |  |     | 44 |                            |  | Vice President, Business Development                          



---

|(1) |  | Mr. Jones joined Digene in July 1990 as Chief Executive Officer. He was
elected to serve on the Board of Directors in July 1990 and became
Chairman of the Board in September 1995. He served as our President from
July 1990 to June 1999. From 1988 to September 1990, Mr. Jones was
President of Neomorphics, Inc. Between 1987 and 1990, he was first an
associate and then a partner with the CW Group, a health care venture
capital firm. From 1983 to 1987, Mr. Jones was employed by The
Perkin-Elmer Corporation. Mr. Jones is a member of the Board of Directors
of the Childrens Research Institute at the Childrens National Medical
Center and the Board of Visitors of the University of Maryland College of
Life Sciences. Mr. Jones received a B.A. in Biochemistry from the
University of Colorado and an M.B.A. from The Wharton School at the
University of Pennsylvania. Mr. Jones is a stepbrother of Mr. Whitehead,
a member of Digenes Board of Directors.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 to June 1999. From 1987 to 1990, he was a Vice President and then
Associate Director in the Investment Banking Group of Furman Selz (now ING
Group), New York, New York. From 1986 to 1987, Mr. Fleischman was a
founder and Managing Director of Intercapital Brokers, Ltd., London,
England. Mr. Fleischman received an A.B. in History from Harvard
University and an M.B.A. from The Wharton School at the University of
Pennsylvania.                                                                                                                                                                                                                                                                                                                
|   
|(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) |  | Mr. Slattery has served as our Senior Vice President, Finance and
Information Systems since September 2002. Previously, he served as our
Vice President, Finance from July 1999 to September 2002 and as Controller
from February 1996 to July 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(7) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

33



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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 2002    |  |      |        |     |  |   |        | 
|Fourth quarter |  | $    | 36.570 |     |  | $ | 8.850  | 
|Third quarter  |  |      | 37.320 |     |  |   | 21.450 | 
|Second quarter |  |      | 39.000 |     |  |   | 24.760 | 
|First quarter  |  |      | 39.500 |     |  |   | 22.000 | 
|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 | 

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

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

34



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##### 



ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA

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

|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|---------------------------------------------------- | ------------------------------------------- | ---------------------------------- | ------- | ------ | ------ | ---- | ------- | --------------------------------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |       
|                                                     |                                             |                                    |         |        |        |      |         | Fiscal Year Ended June
        30,            |        |      |         |       
|                                                     |                                             |                                    |         | 1998   |        | 1999 |         | 2000                                          |        | 2001 |         | 2002  
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |       
|                                                     |                                             |                                    |         |        |        |      |         | (in thousands, except
        per share loss) |        |      |         |       
|Consolidated
          Statement of Operations Data: |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|Revenues:                                            |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|                                                     | Product
          sales (1)                 |                                    | $       | 11,980 |        |      | $       | 17,014                                        |        |      | $       | 22,287 |        |   | $       | 32,706 |        |   | $       | 45,750 |       
|                                                     | Distribution
          contract (1)         |                                    |         |       |        |      |         |                                              |        |      |         |       |        |   |         | 838    |        |   |         | 2,357  |       
|                                                     | Other
          revenues                    |                                    |         | 29     |        |      |         | 453                                           |        |      |         | 757    |        |   |         | 653    |        |   |         | 741    |       
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|                                                     |                                             | Total
          revenues           |         |        | 12,009 |      |         |                                               | 17,467 |      |         |        | 23,044 |   |         |        | 34,197 |   |         |        | 48,848 | 
|Costs
          and expenses:                        |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|                                                     | Cost of
          product sales             |                                    |         | 3,848  |        |      |         | 6,112                                         |        |      |         | 7,641  |        |   |         | 12,089 |        |   |         | 12,289 |       
|                                                     | Research
          and development          |                                    |         | 5,285  |        |      |         | 4,643                                         |        |      |         | 6,123  |        |   |         | 8,120  |        |   |         | 9,265  |       
|                                                     | Selling
          and marketing             |                                    |         | 11,972 | (2)    |      |         | 10,531                                        |        |      |         | 10,930 |        |   |         | 13,012 |        |   |         | 20,484 |       
|                                                     | General
          and administrative        |                                    |         | 5,690  |        |      |         | 5,957                                         |        |      |         | 6,346  |        |   |         | 8,336  |        |   |         | 14,024 |       
|                                                     | Abbott
          termination fee            |                                    |         |       |        |      |         |                                              |        |      |         |       |        |   |         |       |        |   |         | 2,500  |       
|                                                     | Amortization
          of intangible assets |                                    |         | 386    |        |      |         | 150                                           |        |      |         | 150    |        |   |         | 150    |        |   |         | 150    |       
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|                                                     |                                             | Total
          costs and expenses |         |        | 27,181 |      |         |                                               | 27,393 |      |         |        | 31,190 |   |         |        | 41,707 |   |         |        | 58,712 | 
|Loss from
          operations                       |                                             |                                    | (15,172 | )      |        |      | (9,926  | )                                             |        |      | (8,146  | )      |        |   | (7,510  | )      |        |   | (9,864  | )     
|Other
          income (expense)                     |                                             |                                    | (83     | )      |        |      | (184    | )                                             |        |      | 513     |        |        |   | (37     | )      |        |   | (20     | )     
|Interest
          expense                           |                                             |                                    | (164    | )      |        |      | (30     | )                                             |        |      |        |        |        |   | (11     | )      |        |   | (32     | )     
|Interest
          income                            |                                             |                                    | 1,378   |        |        |      | 985     |                                               |        |      | 1,050   |        |        |   | 1,194   |        |        |   | 729     |       
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from
          operations before income taxes   |                                             |                                    | (14,041 | )      |        |      | (9,155  | )                                             |        |      | (6,583  | )      |        |   | (6,364  | )      |        |   | (9,187  | )     
|Provision
          for income taxes                 |                                             |                                    | 48      |        |        |      | 149     |                                               |        |      | 184     |        |        |   | 117     |        |        |   | 210     |       
|                                                     |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                             |                                             | $                                  | (14,089 | )      |        | $    | (9,304  | )                                             |        | $    | (6,767  | )      |        | $ | (6,481  | )      |        | $ | (9,397  | )     
|Basic
          and diluted net loss per share (3)   |                                             | $                                  | (1.06   | )      |        | $    | (0.65   | )                                             |        | $    | (0.44   | )      |        | $ | (0.39   | )      |        | $ | (0.54   | )     
|Weighted
          average shares outstanding (3)    |                                             |                                    | 13,236  |        |        |      | 14,354  |                                               |        |      | 15,296  |        |        |   | 16,557  |        |        |   | 17,361  |       
|                                                     |                                             |                                    | 1998    |        |        |      | 1999    |                                               |        |      | 2000    |        |        |   | 2001    |        |        |   | 2002    |       
|Consolidated
          Balance Sheet Data:           |                                             |                                    |         |        |        |      |         |                                               |        |      |         |        |        |   |         |        |        |   |         |       
|Working
          capital                            |                                             | $                                  | 28,428  |        |        | $    | 20,499  |                                               |        | $    | 24,268  |        |        | $ | 26,905  |        |        | $ | 39,828  |       
|Total
          assets                               |                                             |                                    | 35,440  |        |        |      | 28,108  |                                               |        |      | 35,785  |        |        |   | 48,195  |        |        |   | 67,241  |       
|Long-term
          debt, less current maturities    |                                             |                                    |        |        |        |      |        |                                               |        |      |        |        |        |   | 1,000   |        |        |   | 3,690   |       
|Accumulated
          deficit                        |                                             |                                    | (39,416 | )      |        |      | (48,720 | )                                             |        |      | (55,487 | )      |        |   | (61,968 | )      |        |   | (71,365 | )     
|Total
          stockholders equity                 |                                             |                                    | 31,099  |        |        |      | 23,687  |                                               |        |      | 29,425  |        |        |   | 26,334  |        |        |   | 39,639  |       



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

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

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

Overview

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

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

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

36



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##### 



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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Impairment of Intangible Asset in Fiscal 1998

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

Liquidity And Capital Resources

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

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

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

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

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

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

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

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

(in thousands)

|                                   |  |       |        |       |  |               |       |               |  |               |       |              |  |   |       |  |  |   |       | 
|---------------------------------- |  | ----- | ------ | ----- |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------ |  | - | ----- |  |  | - | ----- | 
|                                   |  |       |        |       |  | Less Than One |       | One to Three  |  | Four to Five  |       | After Five  
|                                   |  |       |        |       |  | Year (Fiscal  |       | Years (Fiscal |  | Years (Fiscal |       | Years (After
|Contractual Obligations            |  | Total |        | 2003) |  | 2004-2006)    |       | 2007-2008)    |  | Fiscal 2008) 
|                                   |  |       |        |       |  |               |       |               |  |              
|Long-term debt                     |  | $     | 3,690  |       |  | $             | 1,430 |               |  | $             | 1,691 |              |  | $ | 236   |  |  | $ | 333   | 
|Operating leases                   |  |       | 20,768 |       |  |               | 2,833 |               |  |               | 8,023 |              |  |   | 5,500 |  |  |   | 4,412 | 
|                                   |  |       |        |       |  |               |       |               |  |               |       |              |  |   |       |  |  |   |       | 
|Total contractual cash obligations |  | $     | 24,458 |       |  | $             | 4,263 |               |  | $             | 9,714 |              |  | $ | 5,736 |  |  | $ | 4,745 | 

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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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



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

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ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DIGENE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                  |  |  |    | 
|------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent Auditors |  |  | 47 | 
|Consolidated Balance Sheets                       |  |  | 48 | 
|Consolidated Statements of Operations             |  |  | 49 | 
|Consolidated Statements of Stockholders Equity   |  |  | 50 | 
|Consolidated Statements of Cash Flows             |  |  | 51 | 
|Notes to Consolidated Financial Statements        |  |  | 52 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digene Corporation

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

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

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

/s/ Ernst & Young LLP

McLean, Virginia
August 9, 2002

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DIGENE CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                              |   |            |             |          |   |            |             |   |  | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ---------- | ----------- | -------- | - | ---------- | ----------- | - |  | 
|                                           |                                                                                                                                                              |   |            |             | June 30,
|                                           |                                                                                                                                                              |   |            |             |         
|                                           |                                                                                                                                                              |   |            |             | 2001     |   | 2002      
|                                           |                                                                                                                                                              |   |            |             |          |   |           
|ASSETS                                     |                                                                                                                                                              |   |            |             |          |   |            |            
|Current assets:                            |                                                                                                                                                              |   |            |             |          |   |            |            
|                                           | Cash and cash equivalents                                                                                                                                    |   | $          | 20,626,252  |          |   | $          | 9,453,125   |  
|                                           | Short-term investments                                                                                                                                       |   |            | 8,977,412   |          |   |            | 30,140,114  |  
|                                           | Accounts receivable, less allowance of approximately $281,000
and $684,000 at June 30, 2001 and 2002, respectively                                           |   |            | 5,694,648   |          |   |            | 9,001,584   |  
|                                           | Inventories                                                                                                                                                  |   |            | 5,548,415   |          |   |            | 5,980,386   |  
|                                           | Prepaid expenses and other current assets                                                                                                                    |   |            | 1,685,767   |          |   |            | 2,195,264   |  
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|Total current assets                       |                                                                                                                                                              |   | 42,532,494 |             |          |   | 56,770,473 |            
|Note receivable                            |                                                                                                                                                              |   | 406,500    |             |          |   |           |            
|Property and equipment, net                |                                                                                                                                                              |   | 3,490,490  |             |          |   | 7,398,637  |            
|Deferred costs, net                        |                                                                                                                                                              |   |           |             |          |   | 1,345,763  |            
|Intangible assets, net                     |                                                                                                                                                              |   | 1,050,601  |             |          |   | 900,515    |            
|Deposits and other assets                  |                                                                                                                                                              |   | 715,242    |             |          |   | 825,941    |            
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|Total assets                               |                                                                                                                                                              | $ | 48,195,327 |             |          | $ | 67,241,329 |            
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                              |   |            |             |          |   |            |            
|Current liabilities:                       |                                                                                                                                                              |   |            |             |          |   |            |            
|                                           | Accounts payable                                                                                                                                             |   | $          | 3,260,186   |          |   | $          | 6,496,406   |  
|                                           | Accrued expenses                                                                                                                                             |   |            | 2,709,490   |          |   |            | 5,628,706   |  
|                                           | Accrued payroll                                                                                                                                              |   |            | 1,865,777   |          |   |            | 2,864,436   |  
|                                           | Current portion of long-term debt                                                                                                                            |   |            |            |          |   |            | 1,377,856   |  
|                                           | Deferred revenues                                                                                                                                            |   |            | 7,792,000   |          |   |            | 575,091     |  
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|Total current liabilities                  |                                                                                                                                                              |   | 15,627,453 |             |          |   | 16,942,495 |            
|Deferred rent                              |                                                                                                                                                              |   | 233,584    |             |          |   | 353,076    |            
|Deferred revenue, less current portion     |                                                                                                                                                              |   |           |             |          |   | 1,616,478  |            
|Long-term debt, less current portion       |                                                                                                                                                              |   | 1,000,000  |             |          |   | 3,690,496  |            
|Deferred liability                         |                                                                                                                                                              |   | 5,000,000  |             |          |   | 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, 16,755,339
and 17,972,728 shares issued and outstanding at June 30, 2001 and
2002, respectively |   |            | 167,553     |          |   |            | 179,727     |  
|                                           | Additional paid-in capital                                                                                                                                   |   |            | 88,199,211  |          |   |            | 110,856,010 |  
|                                           | Deferred stock compensation                                                                                                                                  |   |            | (64,274     | )        |   |            | (32,137     | )
|                                           | Accumulated deficit                                                                                                                                          |   |            | (61,968,200 | )        |   |            | (71,364,816 | )
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|Total stockholders equity                 |                                                                                                                                                              |   | 26,334,290 |             |          |   | 39,638,784 |            
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            
|Total liabilities and stockholders equity |                                                                                                                                                              | $ | 48,195,327 |             |          | $ | 67,241,329 |            
|                                           |                                                                                                                                                              |   |            |             |          |   |            |            

See accompanying notes.

48



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##### 



DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|---------------------------------------- | --------------------------------- | - | ------------------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                         |                                   |   | Year Ended June 30,
|                                         |                                   |   |                    
|                                         |                                   |   | 2000                |            | 2001 |   | 2002      
|                                         |                                   |   |                     |            |      |   |           
|Revenues:                                |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Product sales                     |   | $                   | 22,287,483 |      |   | $          | 32,706,349 |   |   | $          | 45,750,124 |  
|                                         | Distribution contract             |   |                     |           |      |   |            | 837,577    |   |   |            | 2,357,239  |  
|                                         | Other                             |   |                     | 756,487    |      |   |            | 652,960    |   |   |            | 740,414    |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Total revenues                           |                                   |   | 23,043,970          |            |      |   | 34,196,886 |            |   |   | 48,847,777 |           
|Costs and expenses:                      |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Cost of product sales             |   |                     | 7,641,304  |      |   |            | 12,088,715 |   |   |            | 12,289,037 |  
|                                         | Research and development          |   |                     | 6,123,027  |      |   |            | 8,120,114  |   |   |            | 9,264,548  |  
|                                         | Selling and marketing             |   |                     | 10,929,506 |      |   |            | 13,012,401 |   |   |            | 20,483,823 |  
|                                         | General and administrative        |   |                     | 6,346,144  |      |   |            | 8,335,562  |   |   |            | 14,024,276 |  
|                                         | Abbott termination fee            |   |                     |           |      |   |            |           |   |   |            | 2,500,000  |  
|                                         | Amortization of intangible assets |   |                     | 150,087    |      |   |            | 150,086    |   |   |            | 150,086    |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Total costs and expenses                 |                                   |   | 31,190,068          |            |      |   | 41,706,878 |            |   |   | 58,711,770 |           
|Loss from operations                     |                                   |   | (8,146,098          | )          |      |   | (7,509,992 | )          |   |   | (9,863,993 | )         
|Other income (expense):                  |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Other income (expense)            |   |                     | 513,322    |      |   |            | (37,432    | ) |   |            | (19,981    | )
|                                         | Interest expense                  |   |                     | (320       | )    |   |            | (10,297    | ) |   |            | (32,217    | )
|                                         | Interest income                   |   |                     | 1,050,258  |      |   |            | 1,193,941  |   |   |            | 729,681    |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Loss from operations before income taxes |                                   |   | (6,582,838          | )          |      |   | (6,363,780 | )          |   |   | (9,186,510 | )         
|Provision for income taxes               |                                   |   | 184,368             |            |      |   | 117,217    |            |   |   | 210,106    |           
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Net loss                                 |                                   | $ | (6,767,206          | )          |      | $ | (6,480,997 | )          |   | $ | (9,396,616 | )         
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Basic and diluted net loss per share     |                                   | $ | (0.44               | )          |      | $ | (0.39      | )          |   | $ | (0.54      | )         
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           
|Weighted average shares outstanding      |                                   |   | 15,295,798          |            |      |   | 16,556,863 |            |   |   | 17,360,725 |           
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |           

See accompanying notes.

49



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##### 



DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                        |  |              |            |            |  |          |         |              |  |               |             |        |  |   |          |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | -------- | ------- | ------------ |  | ------------- | ----------- | ------ |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                        |  | Common Stock |            | Additional |  | Deferred |         |              |  |               |             | Total 
|                                                                        |  |              |            | Paid-in    |  | Stock    |         | Accumulated  |  | Stockholders'
|                                                                        |  | Shares       |            | Amount     |  | Capital  |         | Compensation |  | Deficit       |             | Equity
|                                                                        |  |              |            |            |  |          |         |              |  |               |             |       
|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 |  
|Exercise of Common Stock options                                        |  |              | 541,281    |            |  |          | 5,413   |              |  |               | 5,244,020   |        |  |   |         |   |  |   |            |   |  |   | 5,249,433  |  
|Issuance of Common Stock in
connection with private placement
financing |  |              | 588,235    |            |  |          | 5,882   |              |  |               | 14,913,658  |        |  |   |          |   |  |   |            |   |  |   | 14,919,540 |  
|Issuance of Common Stock in
connection with Abbott agreement            |  |              | 87,873     |            |  |          | 879     |              |  |               | 2,499,121   |        |  |   |          |   |  |   |            |   |  |   | 2,500,000  |  
|Compensatory stock options earned
by non-employees                      |  |              |           |            |  |          |        |              |  |               |            |        |  |   | 32,137   |   |  |   |            |   |  |   | 32,137     |  
|Net loss                                                                |  |              |           |            |  |          |        |              |  |               |            |        |  |   |         |   |  |   | (9,396,616  | ) |  |   | (9,396,616 | )
|                                                                        |  |              |            |            |  |          |         |              |  |               |             |        |  |   |          |   |  |   |             |   |  |   |            |  
|Balance at June 30, 2002                                                |  |              | 17,972,728 |            |  | $        | 179,727 |              |  | $             | 110,856,010 |        |  | $ | (32,137  | ) |  | $ | (71,364,816 | ) |  | $ | 39,638,784 |  
|                                                                        |  |              |            |            |  |          |         |              |  |               |             |        |  |   |          |   |  |   |             |   |  |   |            |  

See accompanying notes.

50



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##### 



DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |        |           |            |  
|--------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ------ | --------------------------- | ---------- | ----------- | ------ | --------- | ---------- | ----------- | ------ | --------- | ---------- | -
|                                                                                                    |                             |                                                                   |                                                     |        | Year Ended June
        30,
|                                                                                                    |                             |                                                                   |                                                     |        |                            
|                                                                                                    |                             |                                                                   |                                                     |        | 2000                        |            | 2001        |        | 2002     
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |          
|Operating
          activities                                                                      |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net loss                                                                                            |                             | $                                                                 | (6,767,206                                          | )      |                             | $          | (6,480,997  | )      |           | $          | (9,396,616  | )     
|Adjustments
          to reconcile net loss to net cash (used in) provided by operating activities: |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|                                                                                                    |                             | Termination
          fee for distribution agreement              |                                                     |        |                            |            |             |        |          |            |             |        | 2,500,000 |           
|                                                                                                    |                             | Write-off
          of note receivable                            |                                                     |        |                            |            |             |        |          |            |             |        | 406,500   |           
|                                                                                                    |                             | Depreciation
          and amortization of property and equipment |                                                     |        | 1,011,973                   |            |             |        | 1,360,729 |            |             |        | 1,769,567 |           
|                                                                                                    |                             | Amortization
          of intangible assets                       |                                                     |        | 150,087                     |            |             |        | 150,086   |            |             |        | 150,086   |           
|                                                                                                    |                             | Compensation
          expense related to stock options           |                                                     |        | 55,509                      |            |             |        | 32,137    |            |             |        | 32,137    |           
|                                                                                                    |                             | Gain on
          sale of product line                            |                                                     |        | (514,979                    | )          |             |        |          |            |             |        |          |           
|                                                                                                    |                             | Changes
          in operating assets and liabilities:            |                                                     |        |                             |            |             |        |           |            |             |        |           |           
|                                                                                                    |                             |                                                                   | Accounts
          receivable                       |        |                             | (2,430,741 | )           |        |           | (913,870   | )           |        |           | (3,306,936 | )
|                                                                                                    |                             |                                                                   | Inventories                                         |        |                             | (1,591,108 | )           |        |           | (1,148,118 | )           |        |           | (431,971   | )
|                                                                                                    |                             |                                                                   | Prepaid
          expenses and other current assets |        |                             | 480,347    |             |        |           | (777,890   | )           |        |           | (509,497   | )
|                                                                                                    |                             |                                                                   | Deferred
          costs                            |        |                             |           |             |        |           |           |             |        |           | (1,412,524 | )
|                                                                                                    |                             |                                                                   | Deposits
          and other assets                 |        |                             | (742,765   | )           |        |           | 127,680    |             |        |           | (110,699   | )
|                                                                                                    |                             |                                                                   | Accounts
          payable                          |        |                             | 1,324,751  |             |        |           | (567,952   | )           |        |           | 3,236,220  |  
|                                                                                                    |                             |                                                                   | Accrued
          expenses                          |        |                             | 216,789    |             |        |           | 1,682,890  |             |        |           | 2,919,216  |  
|                                                                                                    |                             |                                                                   | Accrued
          payroll                           |        |                             | 318,368    |             |        |           | 439,173    |             |        |           | 998,659    |  
|                                                                                                    |                             |                                                                   | Deferred
          revenues                         |        |                             |           |             |        |           | 7,792,000  |             |        |           | (5,600,431 | )
|                                                                                                    |                             |                                                                   | Deferred
          rent                             |        |                             | 78,756     |             |        |           | 154,828    |             |        |           | 119,492    |  
|                                                                                                    |                             |                                                                   | Deferred
          liability                        |        |                             |           |             |        |           | 5,000,000  |             |        |           |           |  
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net cash
          (used in) provided by operating activities                                       |                             |                                                                   | (8,410,219                                          | )      |                             |            | 6,850,696   |        |           |            | (8,636,797  | )     
|Investing
          activities                                                                      |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Purchases
          of short-term investments                                                       |                             |                                                                   | (24,244,627                                         | )      |                             |            | (14,719,120 | )      |           |            | (35,755,094 | )     
|Sales
          of short-term investments                                                           |                             |                                                                   | 15,912,892                                          |        |                             |            | 18,420,527  |        |           |            | 14,592,392  |       
|Capital
          expenditures                                                                      |                             |                                                                   | (2,306,983                                          | )      |                             |            | (1,819,131  | )      |           |            | (1,542,601  | )     
|Proceeds
          from the sale of product line                                                    |                             |                                                                   | 200,000                                             |        |                             |            |            |        |           |            |            |       
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net cash
          (used in) provided by investing activities                                       |                             |                                                                   | (10,438,718                                         | )      |                             |            | 1,882,276   |        |           |            | (22,705,303 | )     
|Financing
          activities                                                                      |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net proceeds
          from issuance of Common Stock                                                |                             |                                                                   | 10,353,905                                          |        |                             |            |            |        |           |            | 14,919,540  |       
|Exercise
          of Common Stock options                                                          |                             |                                                                   | 2,095,615                                           |        |                             |            | 3,358,282   |        |           |            | 5,249,433   |       
|Proceeds
          from long-term debt                                                              |                             |                                                                   |                                                    |        |                             |            | 1,000,000   |        |           |            |            |       
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net cash
          provided by financing activities                                                 |                             |                                                                   | 12,449,520                                          |        |                             |            | 4,358,282   |        |           |            | 20,168,973  |       
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Net (decrease) increase
          in cash and cash equivalents                                      |                             |                                                                   | (6,399,417                                          | )      |                             |            | 13,091,254  |        |           |            | (11,173,127 | )     
|Cash and
          cash equivalents at beginning of year                                            |                             |                                                                   | 13,934,415                                          |        |                             |            | 7,534,998   |        |           |            | 20,626,252  |       
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Cash and
          cash equivalents at end of year                                                  |                             | $                                                                 | 7,534,998                                           |        |                             | $          | 20,626,252  |        |           | $          | 9,453,125   |       
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|Supplemental
          cash flow information                                                        |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|                                                                                                    | Interest
          paid     |                                                                   | $                                                   | 1,000  |                             |            | $           | 4,000  |           |            | $           | 13,000 |          
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       
|                                                                                                    | Income
          taxes paid |                                                                   | $                                                   | 82,000 |                             |            | $           | 38,000 |           |            | $           | 72,000 |          
|                                                                                                    |                             |                                                                   |                                                     |        |                             |            |             |        |           |            |             |       

See accompanying notes.

51



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##### 



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.

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. The Company initially established Digene B.V. in
October 1997 to act as the Companys European distributor; in 1999 Digene B.V.
was made dormant as a result of changes in the Companys distribution plans.
On April 26, 2002, the Company established a wholly owned subsidiary, Digene UK
(Holdings) Limited, to be a holding company for its European subsidiaries.
Digene UK (Holdings) Limited owns all the outstanding shares of Digene (UK)
Limited and Digene Germany GmbH which were incorporated in April and May of
2002, respectively. Through these newly incorporated entities, additional
future entities and the use of local distributors and agents, Digene will
market and distribute the Companys products throughout 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 consolidated 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 consolidated 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 consolidated financial statements include the accounts of
Digene and its subsidiaries. All significant intercompany accounts and
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. Substantially
all cash equivalents are held in short-term money market accounts with large
high-quality institutions.

52



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     Summary of Significant Accounting Policies (continued)

Short-Term Investments

Short-term investments consist of corporate and various government agency debt
securities, all of which mature within one year. Management classifies the
Companys short-term investments as available-for-sale. Such securities are
stated at market value, which approximates cost. Realized gains and losses and
declines in value judged to be other than temporary, if any, are included in
operations. A decline in the market value of any available for sale security
below cost that is deemed to be other than temporary results in a reduction in
fair value. The impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or accreted over
the life of the related available for sale security. Dividend and interest
income are recognized when earned. The cost of securities sold is calculated
using the specific identification method. As of June 30, 2001 and 2002,
short-term investments are stated at market, which approximates cost.

Intangible Assets

Intangible assets principally consist of goodwill arising from the Companys
acquisition of Viropath B.V. in 1998. The excess of the purchase price over
the identifiable tangible net assets acquired of approximately $1.5 million is
being amortized on a straight-line basis over ten years. Accumulated
amortization expense approximated $450,000 and $600,000 as of June 30, 2001 and
2002, respectively. The Company periodically evaluates the remaining
amortization period to determine whether later events and circumstances warrant
revised estimates of useful lives.

Impairment of Long-Lived Assets and Recoverability of Intangibles

The Company periodically evaluates the recoverability of the carrying value of
its long-lived assets and identifiable intangibles whenever events or changes
in circumstances indicate that the carrying value of the asset may not be
recoverable. Examples of events or changes in circumstances that indicate that
the recoverability of the carrying value of an assets should be assessed
include but are not limited to the following: a significant decrease in the
market value of an asset, a significant change in the extent or manner in which
an asset is used or a significant physical change in an asset, a significant
adverse change in legal factors or in the business climate that could affect
the value of an asset or an adverse action or assessment by a regulator, an
accumulation of costs significantly in excess of the amount originally expected
to acquire or construct an asset, and/or a current period operating or cash
flow loss combined with a history of operating or cash flow losses or a
projection or forecast that demonstrates continuing losses associated with an
asset used for the purpose of producing revenue. The Company considers
historical performance and anticipated future results in its evaluation of
potential impairment. Accordingly, when indicators of impairment are present,
the Company would evaluate the carrying amount of these assets in relation to
the operating performance of the business and estimated future undiscounted
cash flows associated with the asset. If a write-down is required, the Company
would prepare a discounted cash flow analysis to determine the amount of the
write-down. No such impairment losses have been recognized to date.

53



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     Summary of Significant Accounting Policies (continued)

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Staff
Accounting Bulletin No. 101,Revenue Recognition in Financial Statements,
whereby revenue is not recognized until it is realized or realizable and
earned. Revenue is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the price to the buyer is fixed and determinable and
collectibility is reasonably assured. Revenues from product sales are
recognized upon shipment. Allowances are established for estimated
uncollectible amounts, product returns and discounts. In addition, the Company
defers approximately two percent of its product sales as a reserve for future
warranty costs. At June 30, 2002, the warranty reserve was approximately
$490,000 and, historically, the reserve has been within management estimates.
The deferred warranties are recognized evenly over a one year period.

Other revenue consists of research and development contracts, equipment rental
and the licensing of various technologies. Research and development revenue is
recorded as earned based on the performance requirements of the contract.
Revenue associated with performance milestones is recognized based upon the
achievement of the milestones, as defined in the respective agreements. Revenue
under research and development cost reimbursement contracts is recognized as
the related costs are incurred.

Advance payments received in excess of amounts earned are classified as
deferred revenue until earned.

Concentration of Credit Risk and Financial Instruments

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 historically been within
managements expectations.

For the years ended June 30, 2000, and 2001, the Company generated 39% and 28%,
respectively, of total revenues from a single customer. For the year ended
June 30, 2002, two customers comprised 26% of total revenues. As of June 30,
2001 and 2002, the Company recorded receivable balances of $1,333,000 and
$1,686,000, respectively, from these customers.

The fair value of the Companys cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximate their carrying amount due to the relatively short maturity of these
items. The fair value of debt approximates its carrying amount as of June 30,
2001 and 2002 based on rates currently available to the Company for debt with
similar terms and maturities.

Comprehensive Loss

Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income, requires the presentation of comprehensive income or loss
and its components as part of the consolidated financial statements.
Comprehensive loss includes all changes in equity during a period except those
resulting from transactions with stockholders. For the years ended June 30,
2000, 2001 and 2002 the Companys net loss approximates its comprehensive loss;
accordingly, no separate disclosure of comprehensive loss is required.

54



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     Summary of Significant Accounting Policies (continued)

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 $76,000, $19,000 and $963,000 during fiscal 2000, 2001, and
2002, respectively.

Shipping Costs

The Companys shipping and handling costs are included in selling and marketing
expense for all periods presented.

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.

Net Loss Per Share

The Company follows the provisions of SFAS No. 128, Earnings Per Share, which
require the Company to present basic and fully diluted loss 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. The Companys diluted net loss per share is the
same as basic net loss per share as the 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 Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. Accordingly, compensation
cost is recognized for the excess of the estimated fair value of the stock at
the grant date over the exercise price, if any. Pro forma disclosures of net
loss and net loss per share in accordance with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation(SFAS No. 123) are included in Note
12 to these consolidated financial statements.

55



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     Summary of Significant Accounting Policies (continued)

The Company accounts for equity instruments issued to non-employees in
accordance with EITF 96-18,Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods,
or Services.Accordingly, the estimated fair value of the equity instrument is
recorded on the earlier of the performance commitment date or the date the
services required are completed.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets,
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 these statements. Other intangible assets will continue to be
amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first fiscal quarter of 2003. The Company
will begin to perform the first of the required impairment tests of goodwill as
of July 1, 2002 and has not yet determined what effect these tests may have on
the earnings and financial position of the Company. Amortization of goodwill
for the year ended June 30, 2002 approximated $150,000 and will no longer be
recorded subsequent to June 30, 2002.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year
presentation.

3.     Marketing and Distribution Agreements

Effective May 7, 1999, the Company entered into a Marketing and Distribution
Agreement (Abbott Agreement) with Abbott Laboratories (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, Africa and the Middle East and for
the Companys Hybrid Capture 2 chlamydia and gonorrhea tests in the United
States. Abbott acted as the exclusive distributor of the Companys HPV and HBV
products in Europe, Africa and the Middle East through April 30, 2001.

On April 30, 2001, the Company terminated Abbotts rights with respect to the
Companys HPV products under 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 January 28, 2002, in accordance with an amendment to the Abbott Agreement,
the Company terminated Abbotts exclusive rights to market, sell and distribute
the Companys chlamydia and gonorrhea products worldwide, subject to a
non-exclusive wind-down period for Abbotts activities with respect to such
products in Europe, Africa and the Middle East that ended April 30, 2002. In
connection with this amendment, the Company issued 87,873 shares of Common
Stock to Abbott in a private placement transaction representing an agreed upon
termination fee paid to Abbott of $2.5 million. At the expiration of the
non-exclusive wind-down period the Company repurchased Digene equipment placed
with customers by Abbott.

56



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.     Marketing and Distribution Agreements (continued)

On April 29, 2001, the Company entered into an agreement (the Roche
Distribution Contract) with Roche Molecular Systems, Inc. (Roche). Under
the Roche Distribution Contract, Roche acted as a co-exclusive distributor for
the Companys HPV products in Europe, Africa and the Middle East from May 1,
2001 through June 30, 2002 and the parties agreed to evaluate opportunities for
a broader relationship. Roche guaranteed combined minimum purchases of
equipment and HPV products over the term of the Roche Distribution Contract.
The minimum purchase guarantee was funded and accounted for as follows:

|                            |        |   |                            |        |      |   |        |        |  
|--------------------------- | ------ | - | -------------------------- | ------ | ---- | - | ------ | ------ | -
|                            |        |   | For the Year Ended June 30
|                            |        |   |                           
|                            |        |   | 2001                       |        | 2002
|                            |        |   |                            |        |     
|Beginning deferred revenue  |        |   |                           |        |      | $ | 7,792  |       
|Prepayments from Roche      |        | $ | 9,728                      |        |      |   | 7,272  |       
|Product sales revenue from: |        |   |                            |        |      |   |        |       
|                            | Roche  |   |                            |       |      |   |        | (5,947 | )
|                            | Abbott |   |                            | (1,098 | )    |   |        | (6,760 | )
|Other revenue to Digene     |        |   | (838                       | )      |      |   | (2,357 | )     
|                            |        |   |                            |        |      |   |        |       
|Ending deferred revenue     |        | $ | 7,792                      |        |      | $ |       |       
|                            |        |   |                            |        |      |   |        |       

Under the terms of the Roche Distribution Contract, Digene was required to
remit to Roche the total amount the Company receives from sales made to Abbott,
subject to certain limitations. Accordingly, the Consolidated Balance Sheets
as of June 30, 2001 and 2002 include amounts payable to Roche of approximately
$1.1 million and $1.9 million, respectively, representing the balance of
product sales revenue from Abbott which is owed to Roche.

On April 30, 2001, in accordance with the provisions of the Roche Distribution
Contract, Roche made a non-refundable payment of $5.0 million to the Company,
which was recorded as a non-current liability in the accompanying Consolidated
Balance Sheets. The Company and Roche did not enter into the broader
relationship referred to above and, therefore, in accordance with the
provisions of the Roche Distribution Contract, on July 1, 2002, the $5.0
million payment was converted into 142,857 shares of Common Stock of the
Company at $35 per share.

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

57



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.     Tender Offer and Co-Promotion Agreement

On February 19, 2002, the Company, Cytyc Corporation (Cytyc) and Cruiser,
Inc., a wholly-owned subsidiary of Cytyc, entered into an Agreement and Plan of
Merger (the Merger Agreement), which provided for, among other things: (i)
the commencement by Cytyc of a stock and cash tender offer for all of the
outstanding shares of Digene for $4.00 in cash plus 1.1969 shares of Cytyc
Common Stock for each Digene share (the Offer); and (ii) following
consummation of the Offer, the merger of Cruiser, Inc. with and into Digene.
The closing of the transaction was subject to the successful completion of the
Offer, the receipt of all necessary regulatory approvals, including the
expiration of waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the HSR Act), and other customary
closing conditions.

On June 30, 2002, Digene delivered to Cytyc a formal notice of Digenes
termination of the Merger Agreement. This action by the Company followed
the U.S. Federal Trade Commission (FTC) informing Digene and Cytyc that, if
the parties sought to close the transactions contemplated by the Merger
Agreement, the FTC would seek an injunction to block the closing. Under the
terms of the Merger Agreement, either of Cytyc or Digene had the right to
terminate the Merger Agreement. Notwithstanding such termination, the Merger
Agreement provides that should the Company take any of the following actions
prior to July 1, 2003, (i) decide to sell its business, (ii) dispose of assets
in excess of specified percentages or (iii) consolidate, or combine with
another entity that would result in the existing shareholders retaining 85% or
less of the Company; then Digene would be required to pay Cytyc approximately
$19.8 million as a termination fee. For the year ended June 30, 2002, the
Company incurred incremental costs of approximately $3.0 million for merger
related expenditures such as legal services, accounting fees and consultancy.
These costs were charged to operations as incurred.

In January 2001, the Company entered into an exclusive co-promotion agreement
with Cytyc for the promotion of the Companys HC2 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 original term of
the agreement expired June 30, 2002 and was allowed to automatically renew
until June 30, 2003, unless either party terminates it earlier. In accordance
with the co-promotion agreement, Digene pays Cytyc for its co-promotion
activities based on a product sales-derived formula. For the years ended June
30, 2001 and 2002, the Company recorded expenses of approximately $36,000 and
$1.8 million, respectively, related to payments due to Cytyc for these
co-promotion activities.

5.     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. 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. In June 2002, the Company determined the balance
outstanding on the promissory note was uncollectible and took a charge against
operations for the unpaid principal and accrued interest of $406,500.

58



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.     Inventories

Inventories are stated at the lower of cost or market on a standard cost basis,
which approximates average cost.

Inventories consist of the following:

|                     |  |          |            |      |  |   |            |  
|-------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                     |  | June 30,
|                     |  | 2001     |            | 2002
|                     |  |          |            |     
|Finished goods       |  | $        | 3,087,651  |      |  | $ | 2,388,153  |  
|Work in process      |  |          | 3,369,419  |      |  |   | 3,460,359  |  
|Raw materials        |  |          | 1,256,358  |      |  |   | 1,339,470  |  
|                     |  |          |            |      |  |   |            |  
|                     |  |          | 7,713,428  |      |  |   | 7,187,982  |  
|Obsolescence reserve |  |          | (2,165,013 | )    |  |   | (1,207,596 | )
|                     |  |          |            |      |  |   |            |  
|                     |  | $        | 5,548,415  |      |  | $ | 5,980,386  |  
|                     |  |          |            |      |  |   |            |  

7.     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. Repairs and
maintenance expenditures are charged to operations as incurred.

Property and equipment consist of the following:

|                                          |  |   |            |          |  |      |            |   |  | 
|----------------------------------------- |  | - | ---------- | -------- |  | ---- | ---------- | - |  | 
|                                          |  |   |            | June 30,
|                                          |  |   |            | 2001     |  | 2002
|                                          |  |   |            |          |  |     
|                                          |  |   |            |          |  |      |            |  
|Furniture, fixtures and office equipment  |  | $ | 1,984,609  |          |  | $    | 2,357,887  |  
|Machinery and equipment                   |  |   | 6,632,511  |          |  |      | 11,786,019 |  
|Leasehold improvements                    |  |   | 173,481    |          |  |      | 223,200    |  
|                                          |  |   |            |          |  |      |            |  
|                                          |  |   | 8,790,601  |          |  |      | 14,367,106 |  
|Accumulated depreciation and amortization |  |   | (5,300,111 | )        |  |      | (6,968,469 | )
|                                          |  |   |            |          |  |      |            |  
|                                          |  | $ | 3,490,490  |          |  | $    | 7,398,637  |  
|                                          |  |   |            |          |  |      |            |  

8.     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
installed at the Companys 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 of the
facility was drawn down in the year ended June 30, 2001 for additional capital
expenditures. The repayment of this loan is secured by a lien on property and
equipment purchased using the proceeds from the loan facility.

In June 2002, in conjunction with the termination of Abbotts rights with
respect to the Companys HPV and chlamydia and gonorrhea products under the
Abbott Agreement as discussed in Note 3, the Company repurchased equipment it
sold to Abbott. In order to satisfy this obligation, the Company issued a
promissory note to Abbott for $4,033,904. The note bears interest at 7% per
annum and the Company is required to make quarterly installment payments of
$336,159 commencing on July 1, 2002 and ending on April 1, 2005.

59



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.     Income Taxes

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

|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|-------------------------------- | ------- | - | ------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                 |         |   | Year Ended June 30,
|                                 |         |   |                    
|                                 |         |   | 2000                |         | 2001 |   | 2002   
|                                 |         |   |                     |         |      |   |        
|Current:                         |         |   |                     |         |      |   |         |         |  |   |         |        
|                                 | Federal |   | $                   |        |      |   | $       |        |  |   | $       |        | 
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | Foreign |   |                     | 184,368 |      |   |         | 117,217 |  |   |         | 210,106 | 
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total current                    |         |   | 184,368             |         |      |   | 117,217 |         |  |   | 210,106 |        
|Deferred:                        |         |   |                     |         |      |   |         |         |  |   |         |        
|                                 | Federal |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | Foreign |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total deferred                   |         |   |                    |         |      |   |        |         |  |   |        |        
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total provision for income taxes |         | $ | 184,368             |         |      | $ | 117,217 |         |  | $ | 210,106 |        
|                                 |         |   |                     |         |      |   |         |         |  |   |         |        

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, |            |   |  |  
|              |  |     
|              |  | 2000 |            | 2001 |  | 2002               
|              |  |      |            |      |  |                    
|United States |  | $    | (6,968,850 | )    |  | $                   | (6,336,249 | ) |  | $ | (9,249,838 | )
|Foreign       |  |      | 386,012    |      |  |                     | (27,531    | ) |  |   | 63,328     |  
|              |  |      |            |      |  |                     |            |   |  |   |            |  
|              |  | $    | (6,582,838 | )    |  | $                   | (6,363,780 | ) |  | $ | (9,186,510 | )
|              |  |      |            |      |  |                     |            |   |  |   |            |  

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,
|                              |                       |   |                    
|                              |                       |   | 2000                |            | 2001 |   | 2002      
|                              |                       |   |                     |            |      |   |           
|Tax benefit at statutory rate |                       | $ | (2,290,000          | )          |      | $ | (2,227,000 | )          |   | $ | (2,676,000 | )         
|Effect of:                    |                       |   |                     |            |      |   |            |            |   |   |            |           
|                              | State income tax, net |   |                     | (327,000   | )    |   |            | (311,000   | ) |   |            | (804,000   | )
|                              | Foreign tax           |   |                     | 184,368    |      |   |            | 117,217    |   |   |            | 210,106    |  
|                              | Stock options         |   |                     | (5,700,000 | )    |   |            | (7,067,000 | ) |   |            | (1,604,000 | )
|                              | Other                 |   |                     | (271,000   | )    |   |            | (161,000   | ) |   |            | 1,503,000  |  
|                              | Valuation allowance   |   |                     | 8,588,000  |      |   |            | 9,766,000  |   |   |            | 3,581,000  |  
|                              |                       |   |                     |            |      |   |            |            |   |   |            |           
|Provision for income taxes    |                       | $ | 184,368             |            |      | $ | 117,217    |            |   | $ | 210,106    |           
|                              |                       |   |                     |            |      |   |            |            |   |   |            |           

60



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Income Taxes (continued)

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

|                                       |  |          |             |      |  |   |             |  
|-------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                       |  | June 30,
|                                       |  |         
|                                       |  | 2001     |             | 2002
|                                       |  |          |             |     
|Net operating loss carryforwards       |  | $        | 32,152,000  |      |  | $ | 37,021,092  |  
|Research and development credits       |  |          | 1,694,000   |      |  |   | 2,232,967   |  
|Patent costs, net                      |  |          | 322,000     |      |  |   | 262,283     |  
|Research and development deferral, net |  |          | 763,000     |      |  |   | 479,320     |  
|Murex customer lists                   |  |          | 699,000     |      |  |   | 614,621     |  
|Reserves                               |  |          | 1,400,000   |      |  |   | 1,257,702   |  
|Other                                  |  |          | 3,288,000   |      |  |   | 2,031,015   |  
|                                       |  |          |             |      |  |   |             |  
|Deferred tax assets                    |  |          | 40,318,000  |      |  |   | 43,899,000  |  
|Valuation allowance                    |  |          | (40,318,000 | )    |  |   | (43,899,000 | )
|                                       |  |          |             |      |  |   |             |  
|Net deferred tax assets                |  | $        |            |      |  | $ |            |  
|                                       |  |          |             |      |  |   |             |  

The Company recognized a tax provision of $117,217 and $210,106 for the years
ended June 30, 2001 and 2002, respectively, which related to the Companys
foreign operations. At June 30, 2002, the Company had tax net operating loss
carryforwards for income tax purposes of approximately $97.4 million.
Approximately $5.3 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.

At June 30, 2002, the Company also had research and development credit
carryforwards of approximately $2.2 million. 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.

10.     Lease and Other Commitments

In January 2000, the Company moved into a new facility in Gaithersburg,
Maryland, comprising a total of approximately 90,000 square feet. The lease
for the Gaithersburg 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 Gaithersburg 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 November 7, 2001, the Company entered into a lease for its new London
facility. The term of the lease expires on November 7, 2011.

61



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.     Lease and Other Commitments (continued)

Future minimum rental commitments under these and other operating lease
agreements, including the agreements mentioned above, are as follows as of June
30, 2002:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 2,832,995  | 
|2004       |  |   | 2,680,177  | 
|2005       |  |   | 2,652,574  | 
|2006       |  |   | 2,689,962  | 
|2007       |  |   | 2,729,655  | 
|Thereafter |  |   | 7,182,743  | 
|           |  |   |            | 
|           |  | $ | 20,768,106 | 
|           |  |   |            | 

Rent expense under these leases was $2,144,945, $3,287,422, and $2,926,098 for
the years ended June 30, 2000, 2001 and 2002, respectively.

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. For the years ending June 30, 2000, 2001 and 2002, total royalties
amounted to $947,628, $1,283,021, and $2,093,434, respectively.

11.     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.

On January 28, 2002, the Company issued 87,973 shares of Common Stock, valued
at $2.5 million, to Abbott in consideration for the acquisition of Abbotts
exclusive marketing and distribution rights for the Companys chlamydia and
gonorrhea products that were initially provided for in the Abbott Agreement.
The Company accounted for the issuance of these shares as a non-cash charge to
operations in its Consolidated Statement of Operations for the year ended June
30, 2002.

On January 30, 2002, the Company completed a private placement of 588,235
shares of Common Stock to certain institutional investors at $25.50 per share.
The net proceeds to the Company were approximately $14.9 million.

12.     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.

62



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.     Common Stock Options (continued)

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.
Additionally, immediately following the Companys Annual Meeting of
Stockholders, each non-employee director of the Company automatically is
granted an option to purchase 5,000 shares of Common Stock under the Directors
Plan. 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
subsidiaries may receive options to purchase Common Stock and other Common
Stock awards. The 1999 Plan is administered by the Compensation Committee.
3,000,000 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
determined recipients and types of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof. All of these option plans have expired.

As of June 30, 2002, 1,771,919 shares were available for grant or award under
the Omnibus Plan, the Directors Plan, the 1997 Stock Option Plan, the 1999
Plan and the Option 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,
|                                 |                    
|                                 |                     | 2000   |           | 2001  |  | 2002     
|                                 |                     |        |           |       |  |          
|                                 |                     |        |           |       |  | Weighted- |       |  |  |  |           |       |  |  |        | Weighted- |       |   |       |  | Weighted-
|                                 |                     |        |           |       |  | Average   |       |  |  |  |           |       |  |  |        | Average   |       |   |       |  | Average  
|                                 |                     |        |           |       |  | Exercise  |       |  |  |  |           |       |  |  |        | Exercise  |       |   |       |  | Exercise 
|                                 |                     | Shares |           | Price |  | Shares    |       |  |  |  |           | Price |  |  | Shares |           | Price
|                                 |                     |        |           |       |  |           |       |  |  |  |           |       |  |  |        |           |      
|Outstanding at beginning of
year |                     |        | 3,177,529 |       |  | $         | 7.31  |  |  |  | 2,995,087 |       |  |  |        |           |       | $ | 10.06 |  |           |  | 3,129,275 |   |  | $ | 16.32 | 
|Options granted                  |                     |        | 607,500   |       |  |           | 16.38 |  |  |  | 792,500   |       |  |  |        |           |       |   | 32.53 |  |           |  | 770,500   |   |  |   | 31.39 | 
|Options exercised                |                     |        | (707,601  | )     |  |           | 2.96  |  |  |  | (581,801  | )     |  |  |        |           |       |   | 5.77  |  |           |  | (541,281  | ) |  |   | 9.70  | 
|Options canceled or expired      |                     |        | (82,341   | )     |  |           | 11.29 |  |  |  | (76,511   | )     |  |  |        |           |       |   | 19.81 |  |           |  | (92,632   | ) |  |   | 29.03 | 
|                                 |                     |        |           |       |  |           |       |  |  |  |           |       |  |  |        |           |       |   |       |  |           |  |           |   |  |   |      
|Outstanding at end of year       |                     |        | 2,995,087 |       |  |           | 10.06 |  |  |  | 3,129,275 |       |  |  |        |           |       |   | 16.32 |  |           |  | 3,265,862 |   |  |   | 20.62 | 
|                                 |                     |        |           |       |  |           |       |  |  |  |           |       |  |  |        |           |       |   |       |  |           |  |           |   |  |   |       | 
|Options exercisable at year-end  |                     |        | 1,278,648 |       |  |           | 7.54  |  |  |  | 1,477,776 |       |  |  |        |           |       |   | 10.06 |  |           |  | 1,647,089 |   |  |   | 13.16 | 
|                                 |                     |        |           |       |  |           |       |  |  |  |           |       |  |  |        |           |       |   |       |  |           |  |           |   |  |   |       | 

63



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##### 



DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Common Stock Options (continued)

The following table summarizes information about fixed-price stock options
outstanding at June 30, 2002:

|                  |  |                    |                     |                   |                     |                  |     |                    |  |                  |       |  |  |  |  |  |  |  |           |  |  |   |       |  | 
|----------------- |  | ------------------ | ------------------- | ----------------- | ------------------- | ---------------- | --- | ------------------ |  | ---------------- | ----- |  |  |  |  |  |  |  | --------- |  |  | - | ----- |  | 
|                  |  |                    | Options Outstanding |                   | Options Exercisable
|                  |  |                    |                     |                   |                    
|Range of Exercise |  | Number Outstanding |                     | Average Remaining |                     | Weighted-Average |     | Number Exercisable |  | Weighted-Average
|Prices            |  | at June 30, 2002   |                     | Contractual Life  |                     | Exercise Price   |     | at June 30, 2002   |  | Exercise Price  
|                  |  |                    |                     |                   |                     |                  |     |                    |  |                 
|$0.00-$10.00      |  |                    | 1,707,694           |                   |                     |                  | 5.5 |                    |  | $                | 10.35 |  |  |  |  |  |  |  | 1,428,560 |  |  | $ | 9.97  | 
|$10.01-$20.00     |  |                    | 44,500              |                   |                     |                  | 8.6 |                    |  |                  | 17.37 |  |  |  |  |  |  |  |          |  |  |   |      | 
|$20.01-$30.00     |  |                    | 215,000             |                   |                     |                  | 8.8 |                    |  |                  | 26.25 |  |  |  |  |  |  |  |          |  |  |   |      | 
|$30.01-$40.00     |  |                    | 1,288,668           |                   |                     |                  | 8.8 |                    |  |                  | 33.21 |  |  |  |  |  |  |  | 218,529   |  |  |   | 33.98 | 
|$40.01-$44.25     |  |                    | 10,000              |                   |                     |                  | 8.1 |                    |  |                  | 44.25 |  |  |  |  |  |  |  |          |  |  |   |      | 
|                  |  |                    |                     |                   |                     |                  |     |                    |  |                  |       |  |  |  |  |  |  |  |           |  |  |   |       | 
|                  |  |                    | 3,265,862           |                   |                     |                  | 7.0 |                    |  |                  | 20.62 |  |  |  |  |  |  |  | 1,647,089 |  |  |   | 13.16 | 
|                  |  |                    |                     |                   |                     |                  |     |                    |  |                  |       |  |  |  |  |  |  |  |           |  |  |   |       | 

If compensation cost for the Companys stock option plans had been determined
based upon the fair market value at the grant date as prescribed under SFAS No.
123, the Companys pro forma net loss in fiscal 2000, 2001 and 2002 would have
been approximately $13,251,000, $17,273,000 and $24,482,852 or $0.86, $1.04 and
$1.41 per share, respectively. The effect of applying SFAS No. 123 to the
calculation of 2000, 2001 and 2002 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,
|                                            |  |                    
|                                            |  | 2000                |      | 2001 |  | 2002
|                                            |  |                     |      |      |  |     
|Dividend yield                              |  |                     | 0.00 | %    |  |      | 0.00 | % |  |  | 0.00 | %
|Expected volatility                         |  |                     | 77   | %    |  |      | 78   | % |  |  | 79   | %
|Risk-free interest rate                     |  |                     | 6.0  | %    |  |      | 5.5  | % |  |  | 5.4  | %
|Expected life of the option term (in years) |  |                     | 5.8  |      |  |      | 5.9  |   |  |  | 5.9  |  

The weighted-average fair values of the options granted during the years ended
June 30, 2000, 2001 and 2002 were $11.84, $23.04 and $22.36, respectively.

64



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DIGENE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     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, 2000, 2001 and 2002.

14.     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:

|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|------------- |  | ------ | ---------- | ---- |  | ---- |  | -------- |  | ------ | ---------- | -------- |  | ------ | ---------- | -------- |  | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|              |  | 2000   |            | 2001 |  | 2002
|              |  |        |            |      |  |     
|              |  | Assets |            |      |  |      |  | Revenues |  | Assets |            | Revenues |  | Assets |            | Revenues
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |         
|North America |  | $      | 34,568,195 |      |  |      |  |          |  | $      | 9,880,710  |          |  | $      | 46,890,764 |          |  | $ | 19,620,298 |  |  | $ | 61,961,002 |  |  | $ | 30,591,741 | 
|Europe        |  |        | 610,883    |      |  |      |  |          |  |        | 9,957,338  |          |  |        | 672,924    |          |  |   | 10,526,665 |  |  |   | 4,381,207  |  |  |   | 13,137,284 | 
|South America |  |        | 605,888    |      |  |      |  |          |  |        | 1,746,724  |          |  |        | 631,639    |          |  |   | 2,126,123  |  |  |   | 899,120    |  |  |   | 2,878,867  | 
|Pacific Rim   |  |        |           |      |  |      |  |          |  |        | 1,459,198  |          |  |        |           |          |  |   | 1,923,800  |  |  |   |           |  |  |   | 2,239,885  | 
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|              |  | $      | 35,784,966 |      |  |      |  |          |  | $      | 23,043,970 |          |  | $      | 48,195,327 |          |  | $ | 34,196,886 |  |  | $ | 67,241,329 |  |  | $ | 48,847,777 | 
|              |  |        |            |      |  |      |  |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 

15.     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
|                                     |          |   |         |        |         |   |         |        |        
|2002                                 |          |   |         |        |         |   |         |        |         |   |       |        |   |   |       |       
|                                     | Revenues |   | $       | 10,382 |         |   | $       | 11,584 |         |   | $     | 14,213 |   |   | $     | 12,669 |  
|                                     | Net loss |   | $       | (535   | )       |   | $       | (1,074 | )       |   | $     | (3,319 | ) |   | $     | (4,468 | )
|Basic and diluted net loss per share |          | $ | (0.03   | )      |         | $ | (0.06   | )      |         | $ | (0.19 | )      |   | $ | (0.25 | )     
|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 | )     

The sum of basic and diluted net loss per share for the four quarters in each
of 2002 and 2001 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.

65



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##### 



|        |  |                                                                                     
|------- |  | ------------------------------------------------------------------------------------
|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 our
definitive Proxy Statement for our Annual Meeting of Stockholders,
scheduled to be held on October 24, 2002, which shall be filed with
the Securities and Exchange Commission within 120 days from the end
of the Digenes fiscal year (the 2002 Proxy Statement).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Executive Officers. The information with respect to
executive officers required by this item is set forth in Part I of
this Form 10-K.                                                                                                                                                                                                                                                    

ITEM 11.      EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by
reference to the 2002 Proxy Statement.

|         |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required under this item is incorporated herein by
reference to the 2002 Proxy Statement.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference
to the 2002 Proxy Statement.

ITEM 14.      CONTROLS AND PROCEDURES

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the last
date they were evaluated by us, and there have been no corrective actions with
regard to significant deficiencies and material weaknesses.

66



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##### 



PART IV

ITEM 15.      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, 2001
and 2002                                                                                                                                                                                                                                                
|     |  |   |  | Consolidated Statements of Operations for the
fiscal years ended June 30, 2000, 2001 and 2002                                                                                                                                                                                                           
|     |  |   |  | Consolidated Statements of Stockholders Equity
for the fiscal years ended June 30, 2000, 2001
and 2002                                                                                                                                                                                                 
|     |  |   |  | Consolidated Statements of Cash Flows for the
fiscal years ended June 30, 2000, 2001 and 2002                                                                                                                                                                                                           
|     |  |   |  | 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:                                                                                                                                                                                                                                                                                               
|2.1  |  |   |  | Agreement and Plan of Merger, dated February 19,
2002, by and among Cytyc Corporation, Cruiser,
Inc. and Digene Corporation (as corrected)
(Incorporated by reference to Exhibit 2.1 to
Digenes Current Report on Form 8-K/A filed
February 21, 2002).                                                 
|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.**                                                                                                                                                                                                                                                                    
|4.2  |  |   |  | Stock Purchase Agreement between Digene and
Abbott Laboratories, dated January 28, 2002
(Incorporated by reference to Exhibit 4.2 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001).                                                                                   
|4.3  |  |   |  | Form of Purchase Agreement dated January 28,
2002, between Digene and Acqua Wellington Private
Placement Fund, Ltd. and Acqua Wellington
Opportunity I Limited (Incorporated by reference
to Exhibit 4.3 to Digenes Quarterly Report on
Form 10-Q for the quarter ended December 31,
2001).            
|4.4  |  |   |  | Form of Registration Rights Agreement, dated
January 28, 2002, between Digene and Acqua
Wellington Private Placement Fund, Ltd. and Acqua
Wellington Opportunity I Limited (Incorporated by
reference to Exhibit 4.4 to Digenes Quarterly
Report on Form 10-Q for the quarter ended
December 31, 2001).
|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).                                                                                                                                  

67



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##### 



|             |  |  |  |                                                                                                                                                                                                                                                                                                                       
|------------ |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).                                                                                                 
|10.37 +      |  |  |  | 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, as
amended (Incorporated by reference to Exhibit
10.2 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001).                                                                                                                                  
|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).                                                                                              

68



---



##### 



|            |  |  |  |                                                                                                                                                                                                                                                                                          
|----------- |  |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 ++++  |  |  |  | Letter Agreement dated April 29, 2001 between
Digene and Roche Molecular Systems, Inc., as
amended by an Amendment dated September 7, 2001
(Incorporated by reference to Exhibit 10.42 of
Digenes Annual Report on Form 10-K for the
fiscal year ended June 30, 2001).                  
|10.43 ++++  |  |  |  | Original Equipment manufacturer Supply Agreement
dated January 23, 2001 between Digene and Qiagen
Instruments AG (Incorporated by reference to
Exhibit 10.43 of Digenes Annual Report on Form
10-K for the fiscal year ended June 30, 2001).                                            
|10.44 +++++ |  |  |  | Amendment No. 2 to Letter Agreement between
Digene and Roche Molecular Systems, Inc., dated
October 24, 2001 (Incorporated by reference to
Exhibit 10.1 to Digenes Quarterly on Form 10-Q
for the quarter ended September 30, 2001).                                                    
|10.45       |  |  |  | Amendment No. 1 to Marketing and Distribution
Agreement between Digene and Abbott Laboratories,
dated January 28, 2002 (Incorporated by reference
to Exhibit 10.1 to Digenes Quarterly Report on
Form 10-Q for the quarter ended December 31,
2001).                                    
|10.46 !     |  |  |  | Employment Agreement, dated February 19, 2002,
between Digene and Evan Jones (Incorporated by
reference to Exhibit 99(e)(6) to Digenes
Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).                                               
|10.47 !     |  |  |  | Noncompetition, Nondisclosure and Developments
Agreement, dated February 19, 2002, between
Digene and Evan Jones (Incorporated by reference
to Exhibit 99(e)(7) to Digenes
Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).           
|10.48 !     |  |  |  | Employment Agreement, dated February 19, 2002,
between Digene and Charles M. Fleischman
(Incorporated by reference to Exhibit 99(e)(8) to
Digenes Solicitation/Recommendation Statement on
Schedule 14D-9, File No. 005-46641, dated March
1, 2002).                                    
|10.49 !     |  |  |  | Noncompetition, Nondisclosure and Developments
Agreement, dated February 19, 2002, between
Digene and Charles M. Fleischman (Incorporated by
reference to Exhibit 99(e)(9) to Digenes
Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).
|10.50 !     |  |  |  | Employment Agreement, dated February 19, 2002,
between Digene and Donna Marie Seyfried
(Incorporated by reference to Exhibit 99(e)(10)
to Digenes Solicitation/Recommendation Statement
on Schedule 14D-9, File No. 005-46641, dated
March 1, 2002).                                    
|10.51 !     |  |  |  | Noncompetition, Nondisclosure and Developments
Agreement, dated February 19, 2002, between
Digene and Donna Marie Seyfried (Incorporated by
reference to Exhibit 99(e)(11) to Digenes
Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).
|10.52 !     |  |  |  | Employment Agreement, dated February 19, 2002,
between Digene and Joseph P. Slattery
(Incorporated by reference to Exhibit 99(e)(12)
to Digenes Solicitation/Recommendation Statement
on Schedule 14D-9, File No. 005-46641, dated
March 1, 2002).                                      
|10.53 !     |  |  |  | Noncompetition, Nondisclosure and Developments
Agreement, dated February 19, 2002, between
Digene and Joseph P. Slattery (Incorporated by
reference to Exhibit 99(e)(13) to Digenes
Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).  
|21 *        |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                          
|23.1 *      |  |  |  | Consent of Ernst & Young LLP, Independent
Auditors.                                                                                                                                                                                                                                      
|99.1 *      |  |  |  | Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, by Chief Executive Officer.                                                                                                                                                             

69



---



##### 



|       |  |  |  |                                                                                                                             
|------ |  |  |  | ----------------------------------------------------------------------------------------------------------------------------
|99.2 * |  |  |  | Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, by Chief Financial Officer.



---

|*     |  | 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 granted for certain provisions
thereof pursuant to a Commission Order issued November 30, 2001.
Such provisions have been filed separately with the Commission.
|     
|+++++ |  | Confidential treatment has been granted for certain provisions
thereof by the Commission in a letter dated February 1, 2002. 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.

|         |  |             |   |                |  |                |  |              |  |  |  | 
|-------- |  | ----------- | - | -------------- |  | -------------- |  | ------------ |  |  |  | 
|Report   |  | Item(s) No. |   | Date of Report |  | Date Filed    
|         |  |             |   |                |  |               
|Form 8-K |  | 5 and 7     |   | April 11, 2002 |  | April 11, 2002
|Form 8-K |  | 5 and 7     |   | April 24, 2002 |  | April 24, 2002
|Form 8-K |  | 5 and 7     |   | April 25, 2002 |  | April 25, 2002
|Form 8-K |  | 5 and 7     |   | May 9, 2002    |  | May 9, 2002   
|Form 8-K |  | 5 and 7     |   | May 23, 2002   |  | May 23, 2002  
|Form 8-K |  | 5 and 7     |   | May 31, 2002   |  | May 31, 2002  
|Form 8-K |  | 5 and 7     |   | June 6, 2002   |  | June 11, 2002 
|Form 8-K |  | 5 and 7     |   | June 7, 2002   |  | June 7, 2002  
|Form 8-K |  | 5 and 7     |   | June 21, 2002  |  | June 21, 2002 
|Form 8-K |  | 5 and 7     |   | June 25, 2002  |  | June 25, 2002 
|Form 8-K |  |             | 5 |                |  | June 30, 2002  |  | July 1, 2002

70



---



##### 



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 30, 2002 |  | By:       /s/ Evan JonesChairman 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 JonesEvan Jones                       |  | Chairman and Chief Executive
Officer (principal executive officer)                                     |  | September 30, 2002
|                                              
|/s/ Charles M. FleischmanCharles M. Fleischman |  | President, Chief Operating Officer,
Chief Financial Officer and
Director (principal financial officer) |  | September 30, 2002
|                                              
|/s/ Joseph P. SlatteryJoseph P. Slattery       |  | Senior Vice President, Finance and
Information Systems
(principal accounting officer)                  |  | September 30, 2002
|                                              
|/s/ Wayne T. HockmeyerWayne T. Hockmeyer       |  | Director                                                                                               |  | September 30, 2002
|                                              
|/s/ John H. LandonJohn H. Landon               |  | Director                                                                                               |  | September 30, 2002
|                                              
|/s/ Joseph M. MigliaraJoseph M. Migliara       |  | Director                                                                                               |  | September 30, 2002
|                                              
|Cynthia L. Sullivan                            |  | Director                                                                                               |  | September__, 2002 
|                                              
|/s/ John J. WhiteheadJohn J. Whitehead         |  | Director                                                                                               |  | September 30, 2002





---



##### 



CERTIFICATIONS

Certification of Principal Executive Officer

I, Evan Jones, Chief Executive Officer of Digene Corporation, certify that:



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of Digene Corporation;                                                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
|
| | 3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.                       

|                         |  |                                                 
|------------------------ |  | ------------------------------------------------
|Date: September 30, 2002 |  | /s/ Evan JonesEvan Jones
Chief Executive Officer

Certification of Principal Financial Officer

I, Charles M. Fleischman, Chief Financial Officer of Digene Corporation,
certify that:



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of Digene Corporation;                                                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
|
| | 3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.                       

|                         |  |                                                                       
|------------------------ |  | ----------------------------------------------------------------------
|Date: September 30, 2002 |  | /s/ Charles M. FleischmanCharles M. Fleischman
Chief Financial Officer





---



##### 



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

|                                    |                          |                     |  |           |  |            |  |               |  |  |  |      |      |  |  |       | 
|----------------------------------- | ------------------------ | ------------------- |  | --------- |  | ---------- |  | ------------- |  |  |  | ---- | ---- |  |  | ----- | 
|Classification                      |                          | Balance at          |  | Additions |  | Deductions |  | Balance at   
|                                    |                          | Beginning of Period |  |           |  |            |  | End of Period
|Allowance for doubtful accounts:    |                          |                     |  |           |  |            |  |               |  |  |  |      |      |  |  |      
|                                    | Year ended June 30, 2000 |                     |  | 170       |  |            |  | 220           |  |  |  | (127 | )(1) |  |  | 263   | 
|                                    | Year ended June 30, 2001 |                     |  | 263       |  |            |  | 128           |  |  |  | (110 | )(1) |  |  | 281   | 
|                                    | Year ended June 30, 2002 |                     |  | 281       |  |            |  | 482           |  |  |  | (79  | )    |  |  | 684   | 
|Reserve for inventory obsolescence: |                          |                     |  |           |  |            |  |               |  |  |  |      |      |  |  |      
|                                    | Year ended June 30, 2000 |                     |  | 738       |  |            |  | 517           |  |  |  |     |      |  |  | 1,255 | 
|                                    | Year ended June 30, 2001 |                     |  | 1,255     |  |            |  | 910           |  |  |  |     |      |  |  | 2,165 | 
|                                    | Year ended June 30, 2002 |                     |  | 2,165     |  |            |  |              |  |  |  | (957 | )    |  |  | 1,208 | 



---

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





---



##### 



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                         
|2.1         |  | Agreement and Plan of Merger, dated February 19, 2002, by
and among Cytyc Corporation, Cruiser, Inc. and Digene
Corporation (as corrected) (Incorporated by reference to
Exhibit 2.1 to Digenes Current Report on Form 8-K/A filed
February 21, 2002).                                                 
|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.**                                                                                                                                                                                                                                                                    
|4.2         |  | Stock Purchase Agreement between Digene and Abbott
Laboratories, dated January 28, 2002 (Incorporated by
reference to Exhibit 4.2 to Digenes Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001).                                                                                   
|4.3         |  | Form of Purchase Agreement dated January 28, 2002, between
Digene and Acqua Wellington Private Placement Fund, Ltd.
and Acqua Wellington Opportunity I Limited (Incorporated by
reference to Exhibit 4.3 to Digenes Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001).            
|4.4         |  | Form of Registration Rights Agreement, dated January 28,
2002, between Digene and Acqua Wellington Private Placement
Fund, Ltd. and Acqua Wellington Opportunity I Limited
(Incorporated by reference to Exhibit 4.4 to Digenes
Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001).
|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).                                                                                                                             





---



##### 



|             |  |                                                                                                                                                                                                                                                                                                                       
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  | Description                                                                                                                                                                                                                                                                                                           
|             |  |                                                                                                                                                                                                                                                                                                                       
|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).                                                                                                 
|10.37 +      |  | 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, as amended
(Incorporated by reference to Exhibit 10.4 of Digenes
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).                                                                                                                                  
|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 (Incorporated by reference to
Exhibit 10.42 of Digenes Annual Report on Form 10-K for
the fiscal year ended June 30, 2001).                                               
|10.43 ++++   |  | Original Equipment Manufacturer Supply Agreement dated
January 23, 2001 between Digene and Qiagen Instruments AG
(Incorporated by reference to Exhibit 10.43 of Digenes
Annual Report on Form 10-K for the fiscal year ended June
30, 2001).                                                                         
|10.44 +++++  |  | Amendment No. 2 to Letter Agreement between Digene and
Roche Molecular Systems, Inc., dated October 24, 2001
(Incorporated by reference to Exhibit 10.1 to Digenes
Quarterly on Form 10-Q for the quarter ended September 30,
2001).                                                                                 
|10.45        |  | Amendment No. 1 to Marketing and Distribution Agreement
between Digene and Abbott Laboratories, dated January 28,
2002 (Incorporated by reference to Exhibit 10.1 to Digenes
Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001).                                                                 

2



---



##### 



|            |  |                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                          
|10.46 !     |  | Employment Agreement, dated February 19, 2002, between
Digene and Evan Jones (Incorporated by reference to Exhibit
99(e)(6) to Digenes Solicitation/Recommendation Statement
on Schedule 14D-9, File No. 005-46641, dated March 1,
2002).                                               
|10.47 !     |  | Noncompetition, Nondisclosure and Developments Agreement,
dated February 19, 2002, between Digene and Evan Jones
(Incorporated by reference to Exhibit 99(e)(7) to Digenes
Solicitation/Recommendation Statement on Schedule 14D-9,
File No. 005-46641, dated March 1, 2002).           
|10.48 !     |  | Employment Agreement, dated February 19, 2002, between
Digene and Charles M. Fleischman (Incorporated by reference
to Exhibit 99(e)(8) to Digenes Solicitation/Recommendation
Statement on Schedule 14D-9, File No. 005-46641, dated
March 1, 2002).                                    
|10.49 !     |  | Noncompetition, Nondisclosure and Developments Agreement,
dated February 19, 2002, between Digene and Charles M.
Fleischman (Incorporated by reference to Exhibit 99(e)(9)
to Digenes Solicitation/Recommendation Statement on
Schedule 14D-9, File No. 005-46641, dated March 1,
2002).
|10.50 !     |  | Employment Agreement, dated February 19, 2002, between
Digene and Donna Marie Seyfried (Incorporated by reference
to Exhibit 99(e)(10) to Digenes
Solicitation/Recommendation Statement on Schedule 14D-9,
File No. 005-46641, dated March 1, 2002).                                    
|10.51 !     |  | Noncompetition, Nondisclosure and Developments Agreement,
dated February 19, 2002, between Digene and Donna Marie
Seyfried (Incorporated by reference to Exhibit 99(e)(11) to
Digenes Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).
|10.52 !     |  | Employment Agreement, dated February 19, 2002, between
Digene and Joseph P. Slattery (Incorporated by reference to
Exhibit 99(e)(12) to Digenes Solicitation/Recommendation
Statement on Schedule 14D-9, File No. 005-46641, dated
March 1, 2002).                                      
|10.53 !     |  | Noncompetition, Nondisclosure and Developments Agreement,
dated February 19, 2002, between Digene and Joseph P.
Slattery (Incorporated by reference to Exhibit 99(e)(13) to
Digenes Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).  
|21 *        |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                          
|23.1 *      |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                      
|99.1 *      |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, by Chief Executive
Officer.                                                                                                                                                             
|99.2 *      |  | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, by Chief Financial
Officer.                                                                                                                                                             



---

|*  |  | 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.

3



---



##### 



|++    |  | 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 granted for certain provisions
thereof pursuant to a Commission Order issued November 30, 2001.
Such provisions have been filed separately with the Commission.
|     
|+++++ |  | Confidential treatment has been granted for certain provisions
thereof by the Commission in a letter dated February 1, 2002. 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.                                                                                   

4