##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2006
 OR
 o
    
    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
  Delaware
    
    52-1536128(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1201 Clopper RoadGaithersburg, Maryland
    
    20878(Address of principal executive offices)
    
    (Zip Code)
 (301) 944-7000
 Securities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, par value $.01 per share(Title of Class)
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Table of Contents
 PagePART IITEM 1.
    
    Business
    
    
    1ITEM 1A.
    
    Risk Factors
    
    
    27ITEM 1B.
    
    Unresolved Staff Comments
    
    
    36ITEM 2.
    
    Properties
    
    
    36ITEM 3.
    
    Legal Proceedings
    
    
    37ITEM 4.
    
    Submission of Matters to a Vote of Our Stockholders
    
    
    37Executive Officers of Digene
    
    
    38PART IIITEM 5.
    
    Market for Our Common Equity and Related Stockholder Matters
    
    
    40ITEM 6.
    
    Selected Consolidated Financial Data
    
    
    41ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    42ITEM 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    55ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    56ITEM 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    84ITEM 9A.
    
    Controls and Procedures
    
    
    84ITEM 9B.
    
    Other Information
    
    
    84PART IIIITEM 10.
    
    Directors and Executive Officers of the Registrant
    
    
    85ITEM 11.
    
    Executive Compensation
    
    
    85ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    85ITEM 13.
    
    Certain Relationships and Related Transactions
    
    
    85ITEM 14.
    
    Principal Accountant Fees and Services
    
    
    85PART IVITEM 15.
    
    Exhibits and Financial Statement Schedules
    
    
    86




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PART I
 ITEM 1. BUSINESS
 Overview
 ®
      
    
    building our U.S. HPV testing business to increase our share of the potential market
    
    capitalizing on international opportunities for HPV testing in Europe and the rest
of the world
    
    investing in research and development of our next generation products
    
    building our pipeline and portfolio of diagnostic tests through in-licensing and
acquisitions




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Ò ®
 Recent Developments
   Our Products
    2




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Diagnostic Test Kits:
 Product
    
    Target
    
    Market
    
    Marketed SinceThe Digene HPV Test
(hc2
High-RiskHPV DNA Test) (1)(2)
    
    HPV
    
    Worldwide
    
    2000 in U.S. (from June
2003 as the DNAwithPap
Test also known as the
hc2 High-Risk
HPV DNA Test)
July 2003 in Europehc2 HPV Test (3)
    
    HPV
    
    Worldwide
    
    1995hc2CT Test
    
    Chlamydia
    
    Worldwide
    
    1998 in Europe; 1999 in U.S.hc2GC Test
    
    Gonorrhea
    
    Worldwide
    
    1999hc2 CT/GC Test
    
    Chlamydia and Gonorrhea from same
sample
    
    Worldwide
    
    1999 in Europe; 2000 in U.S.hc1 CMV Test
    
    Cytomegalovirus
    
    U.S., Asia/Pacific (4)
    
    1998hc2HBV Test
    
    Hepatitis B virus
    
    Asia, primarily Korea; U.S. (4)
    
    1995
 Instrumentation and Accessories:
 Product
    
    Market
    
    Marketed Since:Rapid Capture System
    
    U.S., Europe
    
    May 2004 in U.S.; March 2005 in EuropeHybrid Capture Microplate System
    
    Worldwide
    
    1995
 Products in Development:
 Product
    
    Descriptionhc4
    
    Fully automated screening and
genotyping platform. Development work ongoing.HPV genotyping products
    
    Potential uses of these products include HPV genotyping in connection with HPV vaccines
and revised patient care management. First product launched in fiscal 2006; others
expected to be available over the next few years.Automated sample preparation processor
    
    Automates the front-end processing of relevant types of cervical specimens from ThinPrep®
PreservCytTM Solution (Cytyc Corporation). Expected commercial launch
in calendar 2007.Signature® Cystic Fibrosis tests (5)
    
    Molecular diagnostic tests for Cystic Fibrosis. Expected FDA submission in fiscal 2007.FAST
HPV Test
    
    HPV screening test for use in
resource-constrained countries being developed by Digene under the
product development and commercialization agreement with PATH.
 
 (1)
    
    Detects high-risk HPV types only.(2)
    
    Outside of the United States, this test is marketed under the name DNAPap and in this Form
10-K when we refer to The Digene HPV Test we also mean the DNAPap Test. 3




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(3)
    
    Detects high-risk and low-risk HPV types.(4)
    
    In December 2003 we ceased all marketing and sales in Europe and Canada of our diagnostic
test products for cytomegalovirus and Hepatitis B virus, and in June 2005 we ceased sales of
the hc2 HBV Test in the United States.(5)
    
    In March 2006 we entered into an exclusive worldwide agreement with Asuragen, Inc. to market
and distribute Asuragens Signature Cystic Fibrosis screening products. Our HPV Tests.
 2
    4




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Our Chlamydia and Gonorrhea Tests.
 2 2 2 2 2 2
 Our Blood Virus Tests.
 1 2
 Our Instrumentation and Accessory Products. 1 2
 5




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Our Products in Development.
 Cervical Cancer Screening
 Traditional Diagnostic Testing in Cervical Cancer Screening.
    HPV Testing in Cervical Cancer Screening.
 6




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
    
    demonstrates increased clinical sensitivity for high-grade cervical disease, thereby
increasing the number of women correctly diagnosed with disease;
    
    detects the presence of the cancer-causing types of HPV and allows the clinician to
identify women who, despite no overt signs of cervical disease, are at higher risk for
developing cervical disease or cervical cancer in the future;
    
    is a reproducible and objective test method that reduces or eliminates the
subjectivity inherent with Pap testing; and
    
    with its increased clinical performance, may also permit the healthcare professional
to contain or reduce costs associated with cervical cancer screening by more accurately
identifying women with cervical disease, or those who are at increased risk for
cervical disease, permitting healthcare professionals to more accurately direct
diagnostic screening and follow-up medical intervention.
 Clinical Validation of HPV Testing in Cervical Cancer Screening
 Archives of Pathology and Laboratory Medicine
 7




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International Journal of
Cancer www.sec.gov
 U.S. HPV Testing
  
    
    In March 2003, the FDA approved the use of our hc2 High-Risk HPV
DNAâ Test as a primary adjunctive screening test to be performed in conjunction
with the Pap test for women age 30 and older and used as an aid in cervical cancer
screening programs to assess patient risk of developing disease caused by high-risk HPV
infection. We market this high-risk HPV test under a number of product names in the
United States and abroad, including the DNAwithPapâ, the DNAPap and The Digene®
HPV Test. All references in this Form 10-K using these product names refer to our
hc2 High-Risk HPV DNA Test.
    
    In March 1999, the FDA approved the use of our hc2 HPV Test, an earlier
version of The Digene HPV Test, as a follow-up to an equivocal Pap test result for
women, independent of age.
   
    
    improving and refining our clinician sales organizations effectiveness in increasing
the knowledge base of healthcare professionals;
    
    establishing widespread laboratory distribution for our HPV test products through
direct sales programs, strategic alliances with major diagnostic companies and
co-marketing programs with clinical reference laboratories;
    
    continuing a direct-to-consumer advertising campaign in the United States, designed
to create awareness of the HPV-cervical cancer link and the beneficial role of The
Digene HPV Test;
    
    investing in accredited continuing medical education (CME) programs and hospital
grand rounds to build understanding of the clinical utility of HPV testing among
clinicians;
    
    sponsoring, or participating in, major multi-center clinical trials to establish the
clinical utility and cost effectiveness of our tests;
    
    promoting the presentation and publication of clinical trial results at prestigious
meetings and in leading medical and healthcare journals, while communicating the results
to the public and healthcare professionals;
 8




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
    
    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 HPV testing
and to educate consumers about the benefits of such testing.
  Significant Product Revenues and Assets
 Fiscal 2004
    
    %
    
    Fiscal 2005
    
    %
    
    Fiscal 2006
    
    %($ in thousands)Product revenues from U.S. operations
    
    $
    65,655
    
    
    
    74
    %
    
    $
    86,928
    
    
    
    77
    %
    
    $
    121,392
    
    
    
    80
    %Product revenues from Non U.S. operations
    
    
    23,160
    
    
    
    26
    %
    
    
    26,291
    
    
    
    23
    %
    
    
    29,436
    
    
    
    20
    %Revenues from HPV test products worldwide
    
    
    74,581
    
    
    
    84
    %
    
    
    97,437
    
    
    
    86
    %
    
    
    134,361
    
    
    
    88
    %Assets located in U.S.
    
    
    92,506
    
    
    
    90
    %
    
    
    92,654
    
    
    
    87
    %
    
    
    217,082
    
    
    
    94
    %Assets located outside U.S.
    
    
    10,764
    
    
    
    10
    %
    
    
    14,191
    
    
    
    13
    %
    
    
    14,804
    
    
    
    6
    %
   ®
  9




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10




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International Markets
    Europe.
   11




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Latin America.
  Asia/Pacific. 2 2
  Research and Development of Next Generation Products
  12




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2 ® TM
 TM
  13




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In-Licensing and Acquisitions
  ®
    in vitro
  14




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Our Markets and Competition
    15




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16




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Intellectual Property
  Hybrid Capture Technology
   Rights to HPV Types
  17




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HPV Type(s)
    
    Summary Description
    
    Status
    
    PatentsHPV 16, 18, 31, 45,
51, 59
    
    In public domain;
Digene has
ownership of unique
genetic material
    
    high-risk
    
    Not applicable.HPV 33, 39
    
    Institut Pasteur
issued patents;
cross-licensed to
Digene
    
    high-risk
    
    Cross-license rights under
multiple patents for HPV 33 and
HPV 39. U.S. and European
patents will expire between
2007 and 2017.HPV 35, 56
    
    Digene issued
patents;
cross-licensed to
Institut Pasteur
    
    high-risk
    
    Digene holds one U.S. patent to
HPV 35 (expires May 2007) and
multiple patents related to HPV
56 (expire between October 2007
and May 2008).HPV 52
    
    Georgetown-issued
patents;
exclusively
licensed to Digene
    
    high risk
    
    License under multiple issued
patents. U.S. patent expires
in 2014, European patents in
October 2009 and Japanese
patent in 2009.HPV 58
    
    Kanebo issued
patent; exclusively
licensed to Digene
    
    high-risk
    
    Patent expires in February 2009.HPV 68
    
    Institut Pasteur
issued U.S. patent;
exclusively
licensed to Digene
    
    high-risk
    
    Patent expires in February 2017.HPV 6, 11
    
    In public domain;
Digene has
ownership of unique
genetic material
    
    low-risk
    
    Not applicable.HPV 42
    
    Institut Pasteur
issued patents;
cross-licensed to
Digene
    
    low-risk
    
    Cross-license rights under
multiple issued patents. U.S.
patents will expire between
2012 and 2016 and European
patents will expire between
2007 and 2012.HPV 43, 44
    
    Digene issued
patents;
cross-licensed to
Institut Pasteur
    
    low-risk
    
    Digene held one U.S. patent to
HPV 43 (expired June 2006), and
holds one patent to HPV 44
(expires June 2007).
   18




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19




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Other Intellectual Property
    Registered Trademarks:
    
    DIGENEDIGENE DESIGNDNA WITH PAPHC2 HIGH-RISK HPV DNA TESTHYBRID CAPTURERAPID CAPTUREAdditional Trademarks:
    
    DNAPAPUCMHC2THE DIGENE HPV TEST & logoTHE HPV TEST & logo
 Facilities and Manufacturing
   20




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21




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Regulatory Approvals
  Product
    
    Regulatory Statushc2High-RiskHPV DNA Test
    
    FDA approved in March 2003 for adjunctive screening with
Pap for women age 30 and older; FDA approved in March
2000 for follow-up to an equivocal Pap test for all
women; CE-marked for use either as an adjunctive or
stand-alone primary screen in the European Union;
registered for use in Japan, Canada, the Russian
Federation, Argentina, Chile, Colombia, Costa Rica and
Ecuador. New distributor registration pending in
Mexico. Marketed under the name The Digene HPV Test in
the United States and DNAPap in the rest of the world.hc2 HPV Test
    
    FDA approved in March 1999 for detection of high and low
risk HPV for follow-up to an equivocal Pap test for all
women (the preceding hc1 version of this test
was approved for this same indication in March 1995 and
use of Cytyc Corporations PreservCyt specimens was
approved in August 1997); CE-marked for use either as an
adjunctive or stand-alone primary screen in the European
Union; registered for use in Japan, Canada, the Russian
Federation, Argentina, Chile, Colombia, Costa Rica and
Ecuador. New distributor registration pending in
Mexico.hc2CT Test
    
    FDA 510(k) marketing clearance granted in October 1999;
CE-marked for use in the European Union and the
additional indication for use of Cytyc Corporations
PreservCyt specimens in April 2005; marketing clearance
obtained in Brazil and Argentina (1999), and in Japan
(October 2001) and India (March 2001).hc2GC Test
    
    FDA 510(k) marketing clearance granted in November 1999;
CE-marked for use in the European Union and the
additional indication for use of Cytyc Corporations
PreservCyt specimens was attained in April 2005;
marketing clearance obtained in Brazil and Argentina
(1999), and in Japan (October 2001) and India (March
2001).hc2 CT/GC Test
    
    FDA 510(k) marketing clearance granted in February 2000;
CE-marked for use in the European Union and the
additional indication for use of Cytyc Corporations
PreservCyt specimens in April 2005; marketing clearance
obtained in Brazil and Argentina (1999), and in Japan
(October 2001) and India (March 2001).hc1 CMV Test
    
    FDA 510(k) marketing clearance granted in September 1998.Rapid Capture System
    
    FDA 510(k) marketing clearance for chlamydia and
gonorrhea testing granted in September 2001 and approved
for HPV testing in May 2004; CE-marking for use with
CT/GC testing was obtained March 2004 and for HPV
testing in January 2005.Hybrid Capture
Microplate System
    
    U.S. commercialization authority provided de factoas
part of the diagnostic test kit FDA approvals and
clearances; original CE mark certification completed as
part of the diagnostic test kits.
 2
 22




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Government Regulation
      23




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i.e.
 in vitro in
vitro in vitro
 2 2 2 2
 
    
    the marketing of these tests is not contrary to the laws of the country to which
they are intended for import,
    
    they are manufactured in substantial conformance with the quality and safety
requirements of the Federal Food, Drug, and Cosmetic Act, and
    
    we have valid marketing authorization by any member country of the European Union,
Australia, Canada, Israel, Japan, New Zealand, Switzerland or South Africa.
   24




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Employees
  25




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Principal Executive Offices
  Available Information
 www.digene.com
 26




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ITEM 1A. RISK FACTORS
 Investing in our securities involves a material degree of risk. Before making an investment
decision, you should carefully consider the risk factors set forth below.
 We will not be able to achieve significant increases in our revenues if HPV screening is not
increasingly accepted by physicians and laboratories.
     27




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We have the only fully commercialized and FDA-approved test for the detection of HPV, which
provides us with a competitive advantage that may be adversely impacted if other companies develop
and commercialize alternative HPV tests.
   in situ
  We are dependent on a relatively small number of national laboratories for a significant portion of
our sales to laboratory customers.
  28




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Changes in our senior management team could impact our ability to successfully operate and grow our
business.
  We may encounter difficulties expanding our manufacturing operations as demand for our products
increases, which would negatively impact our revenues. We depend on a single facility for the
manufacture of all of our diagnostic test kits and any temporary stoppage at that site would have a
material adverse effect on our business.
    We may not be able to successfully integrate future acquisitions.
  29




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Future acquisitions may harm our operating results, dilute our stockholders equity and create
other financial difficulties for us.
   
    
    use of significant amounts of cash;
    
    potential dilutive issuances of equity securities;
    
    incurrence of debt or amortization expenses related to certain intangible assets; and
    
    future impairment charges related to diminished fair value of businesses acquired as
compared to the price we pay for them.
  If more third-party health insurance payors do not adequately reimburse for our HPV test products,
the use of our HPV test products may not increase, thus negatively affecting our ability to grow
our revenues.
 2
   30




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We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and,
if we lose, may cause us to lose some, if not all, of our intellectual property rights, and thereby
impair our ability to compete.
  We may inadvertently infringe upon the intellectual property rights of third parties, which could
expose us to expensive intellectual property litigation, impose a significant strain on our
resources and prevent us from developing or marketing our products.
  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 manufacture sufficient product to
satisfy demand which would negatively impact our revenues.
  31




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We are required to obtain and maintain royalty-bearing licenses to third party patents or patent
applications, and loss of such licenses, or the need to obtain additional licenses, could
materially adversely affect our ability to commercialize our products.
    We have incurred cumulative net losses to date and need to continue to spend substantial funds. We
may not remain profitable and may need to seek additional financing.
  
    
    expenses associated with our research and development programs;
    
    our sales and marketing activities in the United States and internationally;
 32




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
    
    patent litigation costs and settlement and licensing expenses; and
    
    other expenses, including administrative and facilities costs.
  The growth of our European operations has been slower than expected, and we may not achieve the
desired increase in our profitability from such market.
   The time and expense needed to obtain regulatory approval and respond to changes in regulatory
requirements could adversely affect our ability to commercially distribute our products and
generate revenue therefrom.
  33




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in vitro 2
  We may be sued for product liability claims or face product recalls for which our insurance may be
inadequate.
   34




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Our international sales are subject to currency, market and regulatory risks that are beyond our
control.
    Compliance with changing corporate governance and public disclosure regulations result in
additional expenses.
  We have adopted anti-takeover provisions that may prevent or frustrate any attempt to replace or
remove our current management by the stockholders or discourage bids for our common stock. These
provisions may also affect the market price of our common stock.
  35




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ITEM
1B. UNRESOLVED STAFF COMMENTS.
  ITEM 2. PROPERTIES
   36




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ITEM 3. LEGAL PROCEEDINGS
 Pending Legal Proceedings:
 Digene Corporation v. Ventana Medical Systems, Inc. and Beckman Coulter, Inc.
     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERS
  37




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EXECUTIVE OFFICERS OF DIGENE
 Name
    
    Age
    
    Positions with the CompanyEvan Jones(1)
    
    
    49
    
    
    Chief Executive Officer and Chairman of the BoardCharles M. Fleischman(2)
    
    
    48
    
    
    President, Chief Operating Officer and Chief Financial OfficerRobert McG. Lilley(3)
    
    
    61
    
    
    Senior Vice President, Global Sales and MarketingAttila T. Lorincz, Ph.D.(4)
    
    
    51
    
    
    Senior Vice President and Chief Scientific OfficerBelinda O. Patrick(5)
    
    
    50
    
    
    Senior Vice President, Manufacturing OperationsVincent J. Napoleon(6)
    
    
    46
    
    
    Senior Vice President, General Counsel and SecretaryJoseph P. Slattery(7)
    
    
    41
    
    
    Senior Vice President, Finance and Information SystemsDonna Marie Seyfried(8)
    
    
    48
    
    
    Vice President, Business DevelopmentC. Douglas White(9)
    
    
    44
    
    
    Senior Vice President, Sales and Marketing  Americas and Asia
 
 (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 National Medical Center and Chairman of the Board of the Childrens Research
Institute at the Childrens National Medical Center. In June 2004, Mr. Jones became Chairman
of the Board of the Campaign for Public Health, an independent, not-for-profit organization
dedicated to conducting direct lobbying of the executive and legislative branches of the U.S.
government in support of the aggressive growth of the annual budget of the Center for Disease
Control and Prevention. 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. Mr. Jones has
announced his intention to retire from Digene during fiscal 2007.(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 August 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 is a member of the
Board of Directors of the Advanced Medical Technology Association (AdvaMed). 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. Mr. Fleischman has resigned from his position as Chief
Financial Officer, effective October 1, 2006, and from his positions as President and Chief
Operating Officer effective October 31, 2006.(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.(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. Napoleon has served as our Senior Vice President, General Counsel and Secretary since
January 2005. Prior to joining Digene, Mr. Napoleon most recently served as Senior Vice
President, Secretary and General Counsel of Synavant Inc. In addition, Mr. Napoleon previously
served as Assistant General 38




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Counsel/Managing Director of PricewaterhouseCoopers LLP, Chair of the Corporate Group of the
City of Philadelphia Law Department, and General Counsel, Aerospace Group Business Units of
Lockheed Martin Corporation. Mr. Napoleon received a B.S. from Georgetown University and a
J.D. from the University of Pittsburgh School of Law. Mr. Napoleon is a Colonel in the
United States Air Force Reserves.(7)
    
    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. On October 1, 2006, Mr.
Slattery will become our Chief Financial Officer.(8)
    
    Ms. Seyfried has served as our Vice President, Business Development since October 1996. Ms.
Seyfried served as Senior Director, Business Development of The Perkin-Elmer Corporation from
March 1993 to September 1996.(9)
    
    Mr. White has served as Digenes Senior Vice President, Sales and Marketing  Americas and
Asia Pacific since June 2006. Prior thereto, he served as our Vice President, Sales and
Marketing  Americas and Asia Pacific from February 2006 until June 2006, and our Vice
President, North American Sales and Marketing from March 2003 until February 2006. Prior to
joining Digene, Mr. White held positions in the diagnostic industry for 17 years, including
Vice President Sales and Marketing at Bayer Diagnostics from September 2000 to February 2002,
and Vice President, Marketing for Chiron Diagnostics from November 1998 to December 1999. 39




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PART II
 ITEM 5.
    
    MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  High
    
    LowFiscal 2006Fourth quarter
    
    $
    43.60
    
    
    $
    34.22Third quarter
    
    
    44.40
    
    
    
    28.76Second quarter
    
    
    31.44
    
    
    
    26.00First quarter
    
    
    32.14
    
    
    
    27.00
 High
    
    LowFiscal 2005Fourth quarter
    
    $
    29.66
    
    
    $
    16.94Third quarter
    
    
    26.82
    
    
    
    20.46Second quarter
    
    
    27.45
    
    
    
    18.50First quarter
    
    
    36.25
    
    
    
    19.88
   40




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
  Fiscal Year Ended June 30,(in thousands, except per share data)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006Consolidated
Statements of Operations Data: (1)Revenues:Product sales
    
    $
    45,750
    
    
    $
    62,440
    
    
    $
    88,815
    
    
    $
    113,219
    
    
    $
    150,828Distribution contract
    
    
    2,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other revenues
    
    
    741
    
    
    
    662
    
    
    
    1,346
    
    
    
    1,923
    
    
    
    2,060Total revenues
    
    
    48,848
    
    
    
    63,102
    
    
    
    90,161
    
    
    
    115,142
    
    
    
    152,888Costs and expenses:Cost of product sales
    
    
    12,938
    
    
    
    13,383
    
    
    
    16,717
    
    
    
    20,128
    
    
    
    21,888Royalty and technology
    
    
    2,093
    
    
    
    2,814
    
    
    
    1,705
    
    
    
    5,394
    
    
    
    7,572Research and development
    
    
    9,265
    
    
    
    10,262
    
    
    
    10,744
    
    
    
    12,964
    
    
    
    17,922Selling and marketing
    
    
    17,742
    
    
    
    25,099
    
    
    
    34,918
    
    
    
    45,933
    
    
    
    62,815General and administrative
    
    
    14,024
    
    
    
    16,642
    
    
    
    19,298
    
    
    
    20,265
    
    
    
    26,294Abbott termination fee
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Patent litigation settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,500
    
    
    
    Total costs and expenses
    
    
    58,712
    
    
    
    68,200
    
    
    
    83,382
    
    
    
    126,184
    
    
    
    136,491Income (loss) from operations
    
    
    (9,864
    )
    
    
    (5,098
    )
    
    
    6,779
    
    
    
    (11,042
    )
    
    
    16,397Interest income
    
    
    729
    
    
    
    593
    
    
    
    459
    
    
    
    808
    
    
    
    3,808Interest expense
    
    
    (32
    )
    
    
    (273
    )
    
    
    (184
    )
    
    
    (37
    )
    
    
    (803
    )Other income (expense)
    
    
    (20
    )
    
    
    678
    
    
    
    163
    
    
    
    (116
    )
    
    
    (48
    )Income (loss) from operations before minority interest
and income taxes
    
    
    (9,187
    )
    
    
    (4,100
    )
    
    
    7,217
    
    
    
    (10,387
    )
    
    
    19,354Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    (142
    )Income (loss) from operations before income taxes
    
    
    (9,187
    )
    
    
    (4,100
    )
    
    
    7,217
    
    
    
    (10,740
    )
    
    
    19,212Provision for (benefit from) income taxes
    
    
    210
    
    
    
    224
    
    
    
    (14,325
    )(3)
    
    
    (2,573
    )
    
    
    10,773Net income (loss)
    
    $
    (9,397
    )
    
    $
    (4,324
    )
    
    $
    21,542
    
    
    $
    (8,167
    )
    
    $
    8,439Basic net income (loss) per share (2)
    
    $
    (0.54
    )
    
    $
    (0.24
    )
    
    $
    1.13
    
    
    $
    (0.41
    )
    
    $
    0.39Diluted net income (loss) per share (2)
    
    $
    (0.54
    )
    
    $
    (0.24
    )
    
    $
    1.04
    
    
    $
    (0.41
    )
    
    $
    0.38Basic weighted average shares
outstanding (2)
    
    
    17,361
    
    
    
    18,136
    
    
    
    19,144
    
    
    
    19,965
    
    
    
    21,769Diluted weighted average shares outstanding (2)
    
    
    17,361
    
    
    
    18,136
    
    
    
    20,806
    
    
    
    19,965
    
    
    
    22,215
 2002
    
    2003
    
    2004
    
    2005
    
    2006Consolidated
Balance Sheet Data:Working capital
    
    $
    39,828
    
    
    $
    36,119
    
    
    $
    61,786
    
    
    $
    52,988
    
    
    $
    146,841Total assets
    
    
    67,241
    
    
    
    63,375
    
    
    
    103,270
    
    
    
    106,845
    
    
    
    231,886Long-term
debt and obligation, less current maturities
    
    
    3,690
    
    
    
    2,154
    
    
    
    686
    
    
    
    572
    
    
    
    19,773Accumulated deficit
    
    
    (71,365
    )
    
    
    (75,688
    )
    
    
    (54,146
    )
    
    
    (62,313
    )
    
    
    (53,874
    )Total stockholders equity
    
    
    39,639
    
    
    
    43,006
    
    
    
    86,063
    
    
    
    79,402
    
    
    
    177,046
 
 (1)
    
    Certain amounts have been reclassified to conform to current presentation.(2)
    
    Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements.(3)
    
    Includes the partial reversal of the deferred tax valuation allowance approximating $14.9
million. 41




---



##### 



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
     42




---



##### 



43




---



##### 



Results of Operations
 Fiscal 2006
    
    % change
    
    Fiscal 2005
    
    % change
    
    Fiscal 2004(in thousands)Total revenue
    
    $
    152,888
    
    
    
    33
    %
    
    $
    115,142
    
    
    
    28
    %
    
    $
    90,161Product sales
    
    
    150,828
    
    
    
    33
    %
    
    
    113,219
    
    
    
    28
    %
    
    
    88,815HPV test product revenue
    
    
    134,361
    
    
    
    38
    %
    
    
    97,437
    
    
    
    31
    %
    
    
    74,581Cost of product sales
    
    
    21,888
    
    
    
    9
    %
    
    
    20,128
    
    
    
    20
    %
    
    
    16,717Gross margin (1)
    
    
    85
    %
    
    
    4
    %
    
    
    82
    %
    
    
    1
    %
    
    
    81
    %Royalty and technology expense
    
    $
    7,572
    
    
    
    40
    %
    
    $
    5,394
    
    
    
    216
    %
    
    $
    1,705
 
 (1)
    
    We calculate gross margin as the difference between product
sales and the cost of product sales, which exclude royalty and technology
expense, as a percentage of product sales for the period. Comparison of Fiscal Year Ended June 30, 2006 to Fiscal Year Ended June 30, 2005
 Ô
    44




---



##### 



2 ® ® ®
 ® 2 ®
 ® ® ®
 45




---



##### 



46




---



##### 



47




---



##### 



Comparison of Fiscal Year Ended June 30, 2005 to Fiscal Year Ended June 30, 2004
     48




---



##### 



49




---



##### 



50




---



##### 



Liquidity and Capital Resources
      51




---



##### 



52




---



##### 



Less than OneContractual
    
    
    
    
    
    Year
    
    
    One to Three Years
    
    
    Four to Five Years
    
    
    After Five YearsObligations
    
    Total
    
    
    (Fiscal 2007)
    
    
    (Fiscal 2008-2010)
    
    
    (Fiscal 2011-2012)
    
    
    (After Fiscal 2013)Long-term debt
    
    $
    567
    
    
    $
    117
    
    
    $
    450
    
    
    $
    
    
    
    $
    Operating leases
    
    
    3,533
    
    
    
    1,005
    
    
    
    1,733
    
    
    
    629
    
    
    
    166Purchase obligations
    
    
    3,975
    
    
    
    2,725
    
    
    
    1,250
    
    
    
    
    
    
    
    Gaithersburg lease
obligations
    
    
    42,952
    
    
    
    4,041
    
    
    
    11,892
    
    
    
    8,368
    
    
    
    18,651Minimum royalty
payments
    
    
    12,608
    
    
    
    2,108
    
    
    
    10,500
    
    
    
    
    
    
    
    Total contractual
cash obligations
    
    $
    63,635
    
    
    $
    9,996
    
    
    $
    25,825
    
    
    $
    8,997
    
    
    $
    18,817
 CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
  
    
    Inventory.Our inventories are stated at the lower of cost or market. Cost is
determined using a weighted-average approach, which approximates actual cost. We
also record provisions for inventories which may not be salable due to anticipated
trends in sales volume and/or pricing, product expiration, 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, as well
as, we provide a reserve of approximately two percent of product sales for future
warranty costs.
    
    Accounting for employee stock options.Prior to July 1, 2005, we accounted for
stock-based compensation plans under the recognition and measurement provisions of
Opinion 25, and related interpretations, as permitted by Statement 123. Effective
July 1, 2005, we
 53




---



##### 



adopted the fair value recognition provisions of Statement 123(R), using the
modified-prospective-transition method. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing fair value model through
June 30, 2004 and a trinomial lattice option-pricing fair value model thereafter
(using the dividend yield, expected volatility, risk-free interest rate, expected
life of the option term and forfeiture rate variables).
    
    Income taxes.We provide for income taxes in accordance with the asset and
liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis 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. Realization of total
deferred tax assets is contingent upon the generation of future taxable income.
For our fiscal year ended June 30, 2004, we recognized an income tax benefit of
$14,325,000 primarily related to the reversal of a portion of the valuation
allowance previously established for our U.S. deferred tax asset. Due to the
uncertainty of realization of these tax benefits, in fiscal 2004 and 2005 we
retained a valuation allowance against the U.S. net operating loss carryforwards
related to the exercise of stock options as well as other U.S. net operating loss
carryforwards and tax credits expected to expire unused. We also recorded a
valuation allowance against foreign net operating loss carryforwards expected to
expire unused. For our fiscal year ended June 30, 2006, we have released the
valuation allowance related to U.S. net operating loss carryforwards related to the
exercise of stock options as management deems these carryforwards more likely than
not to be realized. Pursuant to Statement 123(R), the benefits were reflected as a
direct increase to stockholders equity, but only to the extent that the deductions
reduce taxes payable. We have adopted the tax law method for determining the
recognized benefit as we believe that this is the best method for recording
recognized benefits under this approach, the recognized benefit is determined based
on U.S. income tax return ordering rules and concepts. The approximately
$34,081,000 unrecognized balance is reflected as an offsetting reduction of both
deferred tax assets and valuation allowance on the Consolidated Balance Sheet; this
unrecognized balance as of June 30, 2006, is available for utilization in future
years, subject to expiration. In fiscal 2006 we retained a valuation allowance
against the U.S. research and other tax credits as well as foreign net operating
loss carryforwards expected to expire unused due to the uncertainty of realization
of these tax benefits. We review our deferred tax asset on a quarterly basis to
determine if a valuation allowance is required, primarily based on recent
historical financial trends and our estimates of future taxable income. Changes in
our assessment of the need for a valuation allowance could give rise to a valuation
allowance and an expense in the period of change. A significant portion of the
remaining deferred tax asset valuation allowance, if released, will impact the
Consolidated Statement of Operations.
 54




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##### 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  55




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 DIGENE CORPORATION
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    57Managements Report on Internal Control Over
Financial Reporting
    
    
    58Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
    
    
    59Consolidated balance sheets at June 30, 2006 and 2005
    
    
    61Consolidated statements of operations for each of the
three years in the period ended June 30, 2006
    
    
    62Consolidated statements of stockholders equity for each of the
three years in the period ended June 30, 2006
    
    
    63Consolidated statements of cash flows for each of the
three years in the period ended June 30, 2006
    
    
    64Notes to consolidated financial statements for each of the
three years in the period ended June 30, 2006
    
    
    65
 56




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/ Ernst & Young LLP
 
 57




---



##### 



Managements Report on Internal Control Over Financial Reporting
  58




---



##### 



Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
 
      59




---



##### 



/s/Ernst & Young LLP
 
 60




---



##### 



DIGENE CORPORATION
 CONSOLIDATED BALANCE SHEETS
 June 30,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,790
    
    
    $
    8,805Short-term investments
    
    
    30,292
    
    
    
    130,452Accounts receivable, less allowance of approximately $288
and $363 at June 30, 2005 and 2006, respectively
    
    
    20,296
    
    
    
    27,665Inventories, net
    
    
    7,197
    
    
    
    6,307Prepaid expenses and other current assets
    
    
    3,130
    
    
    
    3,718Deferred tax asset, current
    
    
    2,038
    
    
    
    4,275Total current assets
    
    
    78,743
    
    
    
    181,222Property and equipment, net
    
    
    10,104
    
    
    
    33,935Deposits and other assets
    
    
    2,237
    
    
    
    5,981Deferred tax asset, less current portion
    
    
    15,761
    
    
    
    10,748Total assets
    
    $
    106,845
    
    
    $
    231,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,807
    
    
    $
    10,716Accrued expenses
    
    
    11,996
    
    
    
    11,030Accrued payroll
    
    
    5,836
    
    
    
    11,190Current portion of long-term debt and lease obligation
    
    
    116
    
    
    
    1,445Total current liabilities
    
    
    25,755
    
    
    
    34,381Deferred rent
    
    
    763
    
    
    
    246Long-term debt, less current portion
    
    
    572
    
    
    
    450Lease obligation, less current portion
    
    
    
    
    
    
    19,323Minority interest
    
    
    353
    
    
    
    440Stockholders 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,
20,037,253 and 23,243,586 shares issued and outstanding at
June 30, 2005 and 2006, respectively
    
    
    200
    
    
    
    232Additional paid-in capital
    
    
    140,914
    
    
    
    229,996Accumulated other comprehensive income
    
    
    601
    
    
    
    692Accumulated deficit
    
    
    (62,313
    )
    
    
    (53,874
    )Total stockholders equity
    
    
    79,402
    
    
    
    177,046Total liabilities and stockholders equity
    
    $
    106,845
    
    
    $
    231,886
 See accompanying notes.
 61




---



##### 



DIGENE CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended June 30,2004
    
    
    2005
    
    
    2006Revenues:Product sales
    
    $
    88,815
    
    
    $
    113,219
    
    
    $
    150,828Other
    
    
    1,346
    
    
    
    1,923
    
    
    
    2,060Total revenues
    
    
    90,161
    
    
    
    115,142
    
    
    
    152,888Costs and expenses:Cost of product sales
    
    
    16,717
    
    
    
    20,128
    
    
    
    21,888Royalty and technology
    
    
    1,705
    
    
    
    5,394
    
    
    
    7,572Research and development
    
    
    10,744
    
    
    
    12,964
    
    
    
    17,922Selling and marketing
    
    
    34,918
    
    
    
    45,933
    
    
    
    62,815General and administrative
    
    
    19,298
    
    
    
    20,265
    
    
    
    26,294Patent litigation settlements
    
    
    -
    
    
    
    21,500
    
    
    
    -Total costs and expenses
    
    
    83,382
    
    
    
    126,184
    
    
    
    136,491Income (loss) from operations
    
    
    6,779
    
    
    
    (11,042
    )
    
    
    16,397Other income (expense):Interest income
    
    
    459
    
    
    
    808
    
    
    
    3,808Interest expense
    
    
    (184
    )
    
    
    (37
    )
    
    
    (803
    )Other income (expense)
    
    
    163
    
    
    
    (116
    )
    
    
    (48
    )Total other income (expense)
    
    
    438
    
    
    
    655
    
    
    
    2,957Income (loss) from operations before minority interest and income taxes
    
    
    7,217
    
    
    
    (10,387
    )
    
    
    19,354Minority Interest
    
    
    -
    
    
    
    (353
    )
    
    
    (142
    )Income (loss) from operations before income taxes
    
    
    7,217
    
    
    
    (10,740
    )
    
    
    19,212Provision for (benefit from) income taxes
    
    
    (14,325
    )
    
    
    (2,573
    )
    
    
    10,773Net income (loss)
    
    $
    21,542
    
    
    $
    (8,167
    )
    
    $
    8,439Basic net income (loss) per share
    
    $
    1.13
    
    
    $
    (0.41
    )
    
    $
    0.39Diluted net income (loss) per share
    
    $
    1.04
    
    
    $
    (0.41
    )
    
    $
    0.38Weighted average shares outstandingBasic
    
    
    19,144
    
    
    
    19,965
    
    
    
    21,769Diluted
    
    
    20,806
    
    
    
    19,965
    
    
    
    22,215
 See accompanying notes.
 62




---



##### 



DIGENE CORPORATION
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Deferred Stock
    
    
    Comprehensive
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Deficit
    
    
    EquityBalance at June 30, 2003
    
    
    18,325
    
    
    $
    183
    
    
    $
    118,535
    
    
    $
    (380
    )
    
    $
    356
    
    
    $
    (75,688
    )
    
    $
    43,006Comprehensive income:Foreign currency
translation, net of
income tax expense of $174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261
    
    
    
    
    
    
    
    261Unrealized loss on available
for-sale securities, net of
income tax benefit of $53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    21,542
    
    
    
    21,542Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,723Exercise of Common Stock
options
    
    
    1,559
    
    
    
    15
    
    
    
    20,883
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    20,898Compensatory stock options
earned by non-employees
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    217
    
    
    
    -
    
    
    
    
    
    
    
    436Balance at June 30, 2004
    
    
    19,884
    
    
    $
    198
    
    
    $
    139,637
    
    
    $
    (163
    )
    
    $
    537
    
    
    $
    (54,146
    )
    
    $
    86,063Comprehensive loss:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    37Unrealized gain on available
for-sale securities, net of
income tax benefit of $33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,167
    )
    
    
    (8,167
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,103
    )Exercise of Common Stock
options
    
    
    153
    
    
    
    2
    
    
    
    1,530
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,532Compensatory stock options
earned by non-employees
    
    
    
    
    
    
    
    
    
    
    (253
    )
    
    
    163
    
    
    
    -
    
    
    
    
    
    
    
    (90
    )Balance at June 30, 2005
    
    
    20,037
    
    
    $
    200
    
    
    $
    140,914
    
    
    $
    
    
    
    $
    601
    
    
    $
    (62,313
    )
    
    $
    79,402Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    220Unrealized loss on available
for-sale securities, net of
income tax benefit of $109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )
    
    
    
    
    
    
    (129
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,439
    
    
    
    8,439Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,530Exercise of Common Stock
options
    
    
    907
    
    
    
    9
    
    
    
    16,711
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    16,720Public offering of Common
Stock
    
    
    2,300
    
    
    
    23
    
    
    
    60,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,079Tax benefit from
stock-based compensation in
excess of book deductions
    
    
    
    
    
    
    
    
    
    
    6,634
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,634Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    5,681
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    5,681Balance at June 30, 2006
    
    
    23,244
    
    
    $
    232
    
    
    $
    229,996
    
    
    $
    
    
    
    $
    692
    
    
    $
    (53,874
    )
    
    $
    177,046
 See accompanying notes.
 63




---



##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended June 30,2004
    
    
    2005
    
    
    2006Operating activitiesNet income (loss)
    
    $
    21,542
    
    
    $
    (8,167
    )
    
    $
    8,439Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    3,914
    
    
    
    4,490
    
    
    
    4,767Amortization of discount on note payable
    
    
    36
    
    
    
    -
    
    
    
    -Loss on disposal of fixed assets
    
    
    178
    
    
    
    260
    
    
    
    209Stock-based compensation expense
    
    
    436
    
    
    
    (89
    )
    
    
    5,681Deferred tax benefit
    
    
    (14,899
    )
    
    
    (2,867
    )
    
    
    5,752Minority interest
    
    
    -
    
    
    
    353
    
    
    
    87Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,201
    )
    
    
    (2,681
    )
    
    
    (5,689
    )Inventories
    
    
    (1,036
    )
    
    
    1,009
    
    
    
    937Prepaid expenses and other current assets
    
    
    (203
    )
    
    
    (781
    )
    
    
    (535
    )Deposits and other assets
    
    
    (190
    )
    
    
    (89
    )
    
    
    (232
    )Accounts payable
    
    
    (2,066
    )
    
    
    2,174
    
    
    
    2,875Accrued expenses
    
    
    304
    
    
    
    8,204
    
    
    
    6,456Accrued patent litigation settlement
    
    
    -
    
    
    
    -
    
    
    
    (7,500
    )Accrued payroll
    
    
    1,205
    
    
    
    464
    
    
    
    5,298Deferred rent
    
    
    44
    
    
    
    284
    
    
    
    (517
    )Net cash provided by operating activities
    
    
    2,064
    
    
    
    2,564
    
    
    
    26,028Investing activitiesPurchases of short-term investments
    
    
    (52,712
    )
    
    
    (23,900
    )
    
    
    (212,648
    )Sales and maturities of short-term investments
    
    
    34,335
    
    
    
    38,308
    
    
    
    112,285Capital expenditures
    
    
    (6,139
    )
    
    
    (5,218
    )
    
    
    (9,075
    )Purchase of intangibles
    
    
    -
    
    
    
    -
    
    
    
    (3,500
    )Net cash provided by (used in) investing activities
    
    
    (24,516
    )
    
    
    9,190
    
    
    
    (112,938
    )Financing activitiesNet proceeds from issuance of Common Stock
    
    
    -
    
    
    
    -
    
    
    
    60,079Exercise of Common Stock options
    
    
    20,898
    
    
    
    1,532
    
    
    
    16,720Excess tax benefits from stock based compensation
    
    
    -
    
    
    
    -
    
    
    
    3,733Principal payments of long-term debt
    
    
    (2,684
    )
    
    
    (1,459
    )
    
    
    (603
    )Net cash provided by financing activities
    
    
    18,214
    
    
    
    73
    
    
    
    79,929Effect of currency translations
    
    
    435
    
    
    
    (117
    )
    
    
    (4
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,803
    )
    
    
    11,710
    
    
    
    (6,985
    )Cash and cash equivalents at beginning of year
    
    
    7,883
    
    
    
    4,080
    
    
    
    15,790Cash and cash equivalents at end of year
    
    $
    4,080
    
    
    $
    15,790
    
    
    $
    8,805Supplemental cash flow informationInterest paid
    
    $
    163
    
    
    $
    46
    
    
    $
    803Income taxes paid
    
    $
    345
    
    
    $
    202
    
    
    $
    298
 See accompanying notes.
 64




---



##### 



Notes to Consolidated Financial Statements
 1. Organization and Nature of Operations
 â
   2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Foreign Currencies
  Cash and Cash Equivalents
  65




---



##### 



Short-Term Investments
  Trade Receivables
  Segment Information
  Concentration of Credit Risk and Financial Instruments
  Fair Value of Financial Instruments
  Significant Suppliers
  66




---



##### 



Inventories
  Property and Equipment
  Intangible Assets
    Impairment of Long-Lived Assets and Recoverability of Intangibles
  67




---



##### 



Minority Interest
  Revenue Recognition
     Cost of Product Sales
  Shipping Costs
  Research and Development
  Selling and Marketing
  68




---



##### 



Advertising Costs
  Income Taxes
  Net Income (Loss) Per Share
   Comprehensive Income (Loss)
  Stock-Based Compensation
   69




---



##### 



Year Ended June 30,(in thousands, except for per share data)
    
    2004
    
    2005
    
    2006Net income (loss), as reported
    
    $
    21,542
    
    
    $
    (8,167
    )
    
    $
    8,439Add: Stock-based non-employee
compensation expense (income) included
in reported net income (loss), net of
taxes
    
    
    436
    
    
    
    (54
    )
    
    
    Deduct: Stock-based employee
compensation expense as if Statement 123
had been applied to all grants
    
    
    (6,898
    )
    
    
    (19,298
    )
    
    
    Pro forma net income (loss)
    
    $
    15,080
    
    
    $
    (27,519
    )
    
    $
    8,439Net income (loss) per share:Basic  as reported
    
    $
    1.13
    
    
    $
    (0.41
    )
    
    $
    0.39Basic  pro forma
    
    $
    0.79
    
    
    $
    (1.38
    )
    
    $
    0.39Diluted  as reported
    
    $
    1.04
    
    
    $
    (0.41
    )
    
    $
    0.38Diluted pro forma
    
    $
    0.73
    
    
    $
    (1.38
    )
    
    $
    0.38
  Year Ended June 30,2004
    
    2005
    
    2006Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    78
    %
    
    
    76
    %
    
    
    74
    %Risk-free interest rate
    
    
    3.7
    %
    
    
    4.0
    %
    
    
    4.2
    %Expected life of the option term (in years)
    
    
    5.9
    
    
    
    5.4
    
    
    
    4.2Forfeiture rate
    
    
    8.0
    
    
    
    5.4
    
    
    
    5.7
    70




---



##### 



Recent Accounting Pronouncements
   Reclassifications
  71




---



##### 



3. Other Balance Sheet Information
  Inventories
 June 30,2005
    
    
    2006Finished goods
    
    $
    4,642
    
    
    $
    4,204Work in process
    
    
    3,344
    
    
    
    2,739Raw materials
    
    
    1,187
    
    
    
    1,7739,173
    
    
    
    8,716Inventory reserve
    
    
    (1,976
    )
    
    
    (2,409
    )$
    7,197
    
    
    $
    6,307
 Property and Equipment
 June 30,2005
    
    
    2006Furniture, fixtures and office equipment
    
    $
    4,376
    
    
    $
    4,779Machinery and equipment
    
    
    4,986
    
    
    
    5,700Customer-use assets
    
    
    9,665
    
    
    
    11,707Construction in-process
    
    
    1,695
    
    
    
    28,696Leasehold improvements
    
    
    2,799
    
    
    
    15823,521
    
    
    
    51,040Accumulated depreciation and amortization
    
    
    (13,417
    )
    
    
    (17,105
    )$
    10,104
    
    
    $
    33,935
  Short-term Investments
 June 30, 2006Amortized
    
    
    Net Unrealized
    
    
    EstimatedAvailable-for-Sale
    
    Cost
    
    
    Losses
    
    
    Fair ValueU.S. Treasury and agencies
    
    $
    108,303
    
    
    $
    (248
    )
    
    $
    108,055Corporate debt securities
    
    
    22,439
    
    
    
    (42
    )
    
    
    22,397Total Short-term investments
    
    $
    130,742
    
    
    $
    (290
    )
    
    $
    130,452
 June 30, 2005Amortized
    
    
    Net Unrealized
    
    
    EstimatedAvailable-for-Sale
    
    Cost
    
    
    Losses
    
    
    Fair ValueU.S. Treasury and agencies
    
    $
    22,191
    
    
    $
    (51
    )
    
    $
    22,140Corporate debt securities
    
    
    8,187
    
    
    
    (35
    )
    
    
    8,152Total Short-term investments
    
    $
    30,378
    
    
    $
    (86
    )
    
    $
    30,292
 72




---



##### 



Amortized
    
    
    EstimatedMaturity
    
    Cost
    
    
    Fair ValueLess than one year
    
    $
    130,742
    
    
    $
    130,452
  Amortized
    
    
    EstimatedMaturity
    
    Cost
    
    
    Fair ValueLess than one year
    
    $
    25,087
    
    
    $
    25,003Due in one to two years
    
    
    5,291
    
    
    
    5,289$
    30,378
    
    
    $
    30,292
  Year Ended June 30,2004
    
    2005
    
    2006Gross proceeds
    
    $
    89,827
    
    
    $
    30,512
    
    
    $
    350Realized gains
    
    
    
    
    
    
    3
    
    
    
    
 Accrued Expenses
 June 30,2005
    
    
    2006Trade payables
    
    $
    5,934
    
    
    $
    7,329Other
    
    
    1,873
    
    
    
    3,387$
    7,807
    
    
    $
    10,716
 Accrued Expenses
 June 30,2005
    
    
    2006Accrued expenses
    
    $
    4,496
    
    
    $
    11,030Georgetown settlement
    
    
    7,500
    
    
    
    $
    11,996
    
    
    $
    11,030
 4. Long-term Debt
  73




---



##### 



Fiscal2007
    
    $
    1172008
    
    
    1172009
    
    
    1172010
    
    
    216Thereafter
    
    
    $
    567
 5. Income Taxes
  Year Ended June 30,2004
    
    
    2005
    
    
    2006Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    164State
    
    
    398
    
    
    
    
    
    
    
    17Foreign
    
    
    176
    
    
    
    360
    
    
    
    1,106Total current
    
    
    574
    
    
    
    360
    
    
    
    1,287Deferred:Federal
    
    
    (12,833
    )
    
    
    (2,636
    )
    
    
    8,127State
    
    
    (2,066
    )
    
    
    (297
    )
    
    
    1,359Foreign
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    (14,899
    )
    
    
    (2,933
    )
    
    
    9,486Total provision for
(benefit from) income
taxes
    
    $
    (14,325
    )
    
    $
    (2,573
    )
    
    $
    10,773
   74




---



##### 



Year Ended June 30,2004
    
    
    2005
    
    
    2006United States
    
    $
    21,546
    
    
    $
    (7,415
    )
    
    $
    21,624Foreign
    
    
    (14,329
    )
    
    
    (3,325
    )
    
    
    (2,412
    )$
    7,217
    
    
    $
    (10,740
    )
    
    $
    19,212
  Year Ended June 30,2004
    
    
    2005
    
    
    2006Tax expense (benefit) at statutory rates
    
    $
    2,472
    
    
    $
    (3,759
    )
    
    $
    6,724Effect of:State income tax, net
    
    
    686
    
    
    
    (194
    )
    
    
    584Foreign tax rate differential
    
    
    176
    
    
    
    (279
    )
    
    
    (257
    )Tax rate adjustments
    
    
    
    
    
    
    (1,831
    )
    
    
    775Net operating losses and tax credits
    
    
    
    
    
    
    792
    
    
    
    (192
    )Tax reserve adjustment
    
    
    
    
    
    
    
    
    
    
    751Permanent differences
    
    
    571
    
    
    
    751
    
    
    
    412Change in valuation allowance
    
    
    (18,230
    )
    
    
    1,947
    
    
    
    1,976Provision for (benefit from) income taxes
    
    $
    (14,325
    )
    
    $
    (2,573
    )
    
    $
    10,773
  75




---



##### 



June 30,2005
    
    
    2006Net operating loss carryforwards
    
    $
    51,941
    
    
    $
    13,910Research and development credits
    
    
    3,048
    
    
    
    3,101Fixed assets and intangibles
    
    
    900
    
    
    
    2,399Reserves
    
    
    1,360
    
    
    
    2,261Patent litigation settlement
    
    
    2,954
    
    
    
    Other tax credit
    
    
    42
    
    
    
    369Deferred equity compensation
    
    
    
    
    
    
    1,449Other
    
    
    2,422
    
    
    
    1,879Deferred tax assets
    
    
    62,667
    
    
    
    25,368Valuation allowance
    
    
    (44,868
    )
    
    
    (10,345
    )$
    17,799
    
    
    $
    15,023
      76




---



##### 



6. Public Offering of Common Stock
  7. Stockholders Equity
 Common Stock
   Year Ended June 30,(in thousands, except for per share data)
    
    2004
    
    
    2005
    
    
    2006Numerator:Net income (loss)
    
    $
    21,542
    
    
    $
    (8,167
    )
    
    $
    8,439Denominator:Weighted average shares outstanding  Basic
    
    
    19,144
    
    
    
    19,965
    
    
    
    21,769Dilutive securities  stock options
    
    
    1,662
    
    
    
    
    
    
    
    446Weighted average shares outstanding -
Diluted
    
    
    20,806
    
    
    
    19,965
    
    
    
    22,215Basic net income (loss) per share
    
    $
    1.13
    
    
    $
    (0.41
    )
    
    $
    0.39Diluted net income (loss) per share
    
    $
    1.04
    
    
    $
    (0.41
    )
    
    $
    0.38
  77




---



##### 



Stock-Based Compensation
      Stock Compensation Plans
   78




---



##### 



Year Ended June 30,2004
    
    
    2005
    
    
    2006Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of
year
    
    
    4,051,013
    
    
    $
    17.95
    
    
    
    3,234,018
    
    
    $
    23.74
    
    
    
    3,517,880
    
    
    $
    25.22Granted (1)
    
    
    888,200
    
    
    
    31.91
    
    
    
    662,750
    
    
    
    29.95
    
    
    
    376,124
    
    
    
    16.48Exercised
    
    
    (1,558,710
    )
    
    
    13.41
    
    
    
    (153,335
    )
    
    
    9.99
    
    
    
    (906,333
    )
    
    
    18.45Canceled or expired
    
    
    (146,485
    )
    
    
    23.12
    
    
    
    (225,553
    )
    
    
    28.44
    
    
    
    (131,166
    )
    
    
    29.86Outstanding at end of year
    
    
    3,234,018
    
    
    
    23.74
    
    
    
    3,517,880
    
    
    
    25.22
    
    
    
    2,856,505
    
    
    
    26.01Exercisable at year-end
    
    
    1,322,233
    
    
    
    25.00
    
    
    
    2,607,335
    
    
    
    27.35
    
    
    
    2,199,700
    
    
    
    28.01
 
 (1)
    
    For the year ended June 30, 2006, the number of shares granted includes
performance shares awarded at the 100% performance level, or 56,467. 79




---



##### 



8. Commitments and Contingencies
 Lease Commitments
    2007
    
    $
    5802008
    
    
    5552009
    
    
    4972010
    
    
    4342011
    
    
    349Thereafter
    
    
    446$
    2,861
  80




---



##### 



Royalty and Technology Expenses
      Repurchase of Equipment under prior Marketing and Distribution Agreements
   81




---



##### 



Contingencies
  9. Warranties
  For the Year Ended June 30,2005
    
    
    2006Balance, beginning of period
    
    $
    897
    
    
    $
    1,137Warranties issued during the period
    
    
    2,274
    
    
    
    3,007Changes in liability for pre-existing warranties during the period
    
    
    (2,034
    )
    
    
    (2,641
    )Balance, end of period
    
    $
    1,137
    
    
    $
    1,503
  10. Retirement Plan
  82




---



##### 



11. Significant Customers and Geographic Information
   2004
    
    
    2005
    
    
    2006Assets
    
    
    Revenues
    
    
    Assets
    
    
    Revenues
    
    
    Assets
    
    
    RevenuesNorth America
    
    $
    92,527
    
    
    $
    67,170
    
    
    $
    92,683
    
    
    $
    88,577
    
    
    $
    217,137
    
    
    $
    123,116Europe
    
    
    9,789
    
    
    
    15,841
    
    
    
    12,690
    
    
    
    18,222
    
    
    
    13,348
    
    
    
    19,383Latin America
    
    
    928
    
    
    
    3,293
    
    
    
    1,464
    
    
    
    3,973
    
    
    
    1,401
    
    
    
    4,681Pacific Rim
    
    
    26
    
    
    
    3,857
    
    
    
    8
    
    
    
    4,370
    
    
    
    
    
    
    
    5,708$
    103,270
    
    
    $
    90,161
    
    
    $
    106,845
    
    
    $
    115,142
    
    
    $
    231,886
    
    
    $
    152,888
 12. Quarterly Results of Operations (Unaudited)
  First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2006Revenues
    
    $
    33,352
    
    
    $
    37,093
    
    
    $
    39,130
    
    
    $
    43,311Net income
    
    $
    1,318
    
    
    $
    3,006
    
    
    $
    1,105
    
    
    $
    3,010Basic net income per share
    
    $
    0.07
    
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.13Diluted net income per share
    
    $
    0.06
    
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.132005Revenues
    
    $
    26,211
    
    
    $
    26,953
    
    
    $
    29,667
    
    
    $
    32,311Net income (loss)
    
    $
    (6,273
    )
    
    $
    304
    
    
    $
    1,565
    
    
    $
    (3,763
    )Basic net income (loss) per share
    
    $
    (0.32
    )
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    (0.19
    )Diluted net income (loss) per share
    
    $
    (0.32
    )
    
    $
    0.01
    
    
    $
    0.08
    
    
    $
    (0.19
    )
  83




---



##### 



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  ITEM 9A.
    
    CONTROLS AND PROCEDURES
    ITEM 9B.  OTHER INFORMATION
  84




---



##### 



PART III
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    ITEM 11.
    
    EXECUTIVE COMPENSATION
  ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  85




---



##### 



PART IV
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
    
    Consolidated Financial Statements of Digene Corporation:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of June 30, 2006 and 2005Consolidated Statements of Operations for the fiscal years ended June 30,
2004, 2005 and 2006Consolidated Statements of Stockholders Equity for the fiscal years
ended June 30, 2004, 2005 and 2006Consolidated Statements of Cash Flows for the fiscal years ended June 30,
2004, 2005 and 2006Notes to Consolidated Financial Statements
    
    Financial Statement Schedules:Schedule II  Valuation and Qualifying Accounts and ReservesAll 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:
 EXHIBIT INDEX
 Exhibit No.
    
    
    
    Description3.1
    
    
    
    Amended and Restated Certificate of Incorporation of
Digene (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File
No. 333-2968) dated March 29, 1996).3.2
    
    
    
    Amended and Restated Bylaws of Digene (Incorporated
by reference to Exhibit 3.2 to Digenes Annual
Report on Form 10-K for the fiscal year ended June
30, 1999).4.1
    
    
    
    Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).10.1
    
    
    
    Cross-License Agreement, dated April 1, 1990, among
Life Technologies, Inc. and Institut Pasteur
(Incorporated by reference to Exhibit 10.15 to
Digenes Registration Statement on Form S-1 (File
No. 333-2968) dated March 29, 1996).10.2
    
    
    
    License Agreement, dated December 19, 1990, between
Digene and Life Technologies, Inc. (Incorporated by
reference to Exhibit 10.18 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).10.3
    
    
    
    License Agreement, dated September 1, 1995, between
Digene and Institut Pasteur (Incorporated by
reference to Exhibit 10.14 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).
 86




---



##### 



Exhibit No.
    
    
    
    Description10.4
    
    
    
    License Agreement, dated September 27, 1995, between
Digene and Kanebo, Ltd. (Incorporated by reference
to Exhibit 10.28 to Digenes Registration Statement
on Form S-1 (File No. 333-2968) dated March 29,
1996).10.5
    
    +
    
    License Agreement, dated April 5, 2000, between
Digene and Institut Pasteur (Incorporated by
reference to Exhibit 10.39 to Digenes Annual Report
on Form 10-K for the fiscal year ended June 30,
2000).10.6
    
    
    
    Amended and Restated Reseller Agreement, dated
December 10, 2003, between Digene Corporation and
Applera Corporation, acting through its Applied
Biosystems Group (Incorporated by reference to
Exhibit 10.1 to Digenes Quarterly Report on Form
10-Q for the quarter ended December 31, 2003).10.7
    
    ++
    
    Original Equipment Manufacturer Supply Agreement,
dated January 23, 2001, between Digene and Qiagen
Instruments AG (Incorporated by reference to Exhibit
10.43 to Digenes Annual Report on Form 10-K for the
fiscal year ended June 30, 2001).10.8
    
    
    
    Registration Rights Agreement, dated as of May 24,
1996, between Digene, Armonk Partners, Murex
Diagnostics Corporation and Certain Other
Stockholders (Incorporated by reference to Exhibit
10.26 to Digenes Registration Statement on Form S-1
(File No. 333-2968) dated March 29, 1996).10.9
    
    
    
    Lease, dated as of March 2, 1998, by and between
Digene and ARE-Metropolitan Grove I, LLC
(Incorporated by reference to Exhibit 10.1 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).10.9(a)
    
    
    
    Fourth Amendment to Lease, dated November 15, 2005,
between ARE-Metropolitan Grove I, LLC and Digene
Corporation (Incorporated by reference to Exhibit
10.1 to Digenes Quarterly Report on Form 10-Q for
the quarter ended December 31, 2005).10.10
    
    ! *
    
    Amended and Restated 1996 Omnibus Plan.10.11
    
    *
    
    Amended and Restated 1997 Stock Option Plan.10.12
    
    !
    
    Amended and Restated Directors Equity Compensation
Plan (Incorporated by reference to Exhibit 4.2 to
Digenes Registration Statement on Form S-8 (File
No. 333-131592), filed on February 6, 2006).10.13
    
    ! *
    
    Amended and Restated 1999 Incentive Plan, as amended.10.13(a)
    
    ! *
    
    Amendment to the Amended and Restated 1999 Incentive
Plan, Stock Option and Restricted Stock Unit Awards
to Employees Working in France.10.14
    
    !
    
    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).10.15
    
    !
    
    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).
 87




---



##### 



Exhibit No.
    
    
    
    Description10.16
    
    !
    
    Form of Employment Agreement between Digene and each
of Evan Jones and Charles M. Fleischman
(Incorporated by reference to Exhibit 10.1 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).10.17
    
    !
    
    Form of Employment Agreement between each of Digene
or a Digene subsidiary and each of the officers listed on Exhibit 10.17(a)
(Incorporated by reference to Exhibit 10.2 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).10.17(a)
    
    !
    
    Schedule of officers of Digene entering into
Employment Agreement (Incorporated by reference to
Exhibit 10.2(a) to Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).10.18
    
    !
    
    Form of Change in Control Employment Agreement
between Digene and each of Evan Jones and Charles M.
Fleischman (Incorporated by reference to Exhibit
10.3 to Digenes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006).10.19
    
    !
    
    Form of Change in Control Employment Agreement
between Digene and each of the officers listed on
Exhibit 10.19(a) (Incorporated by reference to
Exhibit 10.4 to Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).10.19(a)
    
    !
    
    Schedule of officers of Digene entering into Change
in Control Employment Agreement (Incorporated by
reference to Exhibit 10.4(a) to Digenes Quarterly
Report on Form 10-Q for the quarter ended March 31,
2006).10.20
    
    !
    
    Employment Separation and Release Agreement, dated
August 15, 2006, between Digene Corporation and
Charles M. Fleischman (Incorporated by reference to
Exhibit 99.1 to Digenes Current Report on Form 8-K
filed August 24, 2006).10.21
    
    +++
    
    Settlement and License Agreement, executed October
13, 2004, among Digene Corporation and Enzo Biochem,
Inc. and Enzo Life Sciences, Inc. (Incorporated by
reference to Exhibit 10.1 to Digenes Quarterly
Report on Form 10-Q for the quarter ended September
30, 2004).10.22
    
    ++++
    
    Settlement and License Agreement, effective as of
July 1, 2005, between Digene Corporation and
Georgetown University (Incorporated by reference to
Exhibit 10.21 to Digenes Annual Report on Form 10-K
for the fiscal year ended June 30, 2005).10.23
    
    +++++    *
    
    Nonexclusive Sublicense Agreement under the Caskey
Patents, dated June 30, 2006, between Digene
Corporation and Abbott Laboratories.10.24
    
    ! *
    
    Non-Employee Director Compensation Policy.10.25
    
    !
    
    Form of Stock Option Award
Certificate (Incorporated by reference to Exhibit 10.1 to
Digenes Current Report on Form 8-K, filed August 3, 2005).10.26
    
    !
    
    Form of Restricted Stock Unit Award Certificate
(Incorporated by reference to Exhibit 10.3 to
Digenes Current Report on Form 8-K, filed June 9,
2006).10.27
    
    !
    
    Form of Performance Shares Award Certificate
(Incorporated by reference to Exhibit 99.1 to
Digenes Current Report on Form 8-K, filed July 31,
2006).10.28
    
    ! *
    
    Schedule of Fiscal 2007 Executive Salaries.
 88




---



##### 



Exhibit No.
    
    
    
    Description21
    
    *
    
    Subsidiaries of the Registrant.23.1
    
    *
    
    Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.31.1
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Executive Officer.31.2
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.32
    
    *
    
    Certification pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code.
 
 *
    
    Filed herewith.+
    
    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 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 pursuant to a Commission Order issued December 7, 2004.
Such provisions have been filed separately with the Commission.++++
    
    Confidential treatment has been granted for certain portions of this
agreement pursuant to a Commission Order issued May 19, 2006. Such
provisions have been filed separately with the Commission.+++++
    
    Confidential treatment has been requested for certain portions of
this agreement pursuant to an application for confidential treatment
filed with the Securities and Exchange Commission on September 12,
2006. 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. 89




---



##### 



SIGNATURES
  DIGENE CORPORATIONSeptember 12, 2006
    
    By:
    
    /s/ Evan JonesChairman and Chief Executive Officer
   Signature
    
    Title
    
    Date/s/ Evan Jones
    
    Chairman and Chief Executive
    
    September 12, 2006Evan Jones
    
    Officer (principal executive officer)/s/ Charles M. Fleischman
    
    President, Chief Operating Officer,
    
    September 12, 2006Charles M. Fleischman
    
    Chief Financial Officer andDirector (principal financial officer)/s/ Joseph P. Slattery
    
    Senior Vice President, Finance and
    
    September 12, 2006Joseph P. Slattery
    
    Information Systems(principal accounting officer)/s/ John H. Landon
    
    Director
    
    September 12, 2006John H. Landon/s/ Joseph M. Migliara
    
    Director
    
    September 12, 2006Joseph M. Migliara/s/ Frank J. Ryan
    
    Director
    
    September 12, 2006Frank J. Ryan
 90




---



##### 



Signature
    
    Title
    
    Date/s/ Cynthia L. Sullivan
    
    Director
    
    September 12, 2006Cynthia L. Sullivan/s/ Kenneth Weisshaar
    
    Director
    
    September 12, 2006Kenneth Weisshaar/s/ John J. Whitehead
    
    Director
    
    September 12, 2006John J. Whitehead
 91




---



##### 



Schedule II  Valuation and Qualifying Accounts and Reserves
(in thousands)
 Balance atBeginning of
    
    
    
    
    
    
    
    
    
    Balance atClassification
    
    Period
    
    Additions
    
    Deductions
    
    End of PeriodAllowance for doubtful accounts:Year ended June 30, 2004
    
    
    432
    
    
    
    199
    
    
    
    (31
    )(1)
    
    
    600Year ended June 30, 2005
    
    
    600
    
    
    
    95
    
    
    
    (407
    )(2)
    
    
    288Year ended June 30, 2006
    
    
    288
    
    
    
    146
    
    
    
    (71
    )(1)
    
    
    363Reserve for inventory:Year ended June 30, 2004
    
    
    2,417
    
    
    
    1,422
    
    
    
    (1,556
    )
    
    
    2,283Year ended June 30, 2005
    
    
    2,283
    
    
    
    1,463
    
    
    
    (1,770
    )
    
    
    1,976Year ended June 30, 2006
    
    
    1,976
    
    
    
    1,195
    
    
    
    (762
    )
    
    
    2,409
 
 (1)
    
    Deductions represent accounts written off during the period less recoveries of
accounts previously written off.(2)
    
    During the year ended June 30, 2005, the allowance for doubtful accounts included a
reduction of approximately $334,000 based on changes in reserve assumptions.




---



##### 



EXHIBIT INDEX
 Exhibit No.
    
    
    
    Description3.1
    
    
    
    Amended and Restated Certificate of Incorporation of
Digene (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File
No. 333-2968) dated March 29, 1996).3.2
    
    
    
    Amended and Restated Bylaws of Digene (Incorporated
by reference to Exhibit 3.2 to Digenes Annual
Report on Form 10-K for the fiscal year ended June
30, 1999).4.1
    
    
    
    Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).10.1
    
    
    
    Cross-License Agreement, dated April 1, 1990, among
Life Technologies, Inc. and Institut Pasteur
(Incorporated by reference to Exhibit 10.15 to
Digenes Registration Statement on Form S-1 (File
No. 333-2968) dated March 29, 1996).10.2
    
    
    
    License Agreement, dated December 19, 1990, between
Digene and Life Technologies, Inc. (Incorporated by
reference to Exhibit 10.18 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).10.3
    
    
    
    License Agreement, dated September 1, 1995, between
Digene and Institut Pasteur (Incorporated by
reference to Exhibit 10.14 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated
March 29, 1996).10.4
    
    
    
    License Agreement, dated September 27, 1995, between
Digene and Kanebo, Ltd. (Incorporated by reference
to Exhibit 10.28 to Digenes Registration Statement
on Form S-1 (File No. 333-2968) dated March 29,
1996).10.5
    
    +
    
    License Agreement, dated April 5, 2000, between
Digene and Institut Pasteur (Incorporated by
reference to Exhibit 10.39 to Digenes Annual Report
on Form 10-K for the fiscal year ended June 30,
2000).10.6
    
    
    
    Amended and Restated Reseller Agreement, dated
December 10, 2003, between Digene Corporation and
Applera Corporation, acting through its Applied
Biosystems Group (Incorporated by reference to
Exhibit 10.1 to Digenes Quarterly Report on Form
10-Q for the quarter ended December 31, 2003).10.7
    
    ++
    
    Original Equipment Manufacturer Supply Agreement,
dated January 23, 2001, between Digene and Qiagen
Instruments AG (Incorporated by reference to Exhibit
10.43 to Digenes Annual Report on Form 10-K for the
fiscal year ended June 30, 2001).10.8
    
    
    
    Registration Rights Agreement, dated as of May 24,
1996, between Digene, Armonk Partners, Murex
Diagnostics Corporation and Certain Other
Stockholders (Incorporated by reference to Exhibit
10.26 to Digenes Registration Statement on Form S-1
(File No. 333-2968) dated March 29, 1996).10.9
    
    
    
    Lease, dated as of March 2, 1998, by and between
Digene and ARE-Metropolitan Grove I, LLC
(Incorporated by reference to Exhibit 10.1 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).




---



##### 



Exhibit No.
    
    
    
    Description10.9(a)
    
    
    
    Fourth Amendment to Lease, dated November 15, 2005,
between ARE-Metropolitan Grove I, LLC and Digene
Corporation (Incorporated by reference to Exhibit
10.1 to Digenes Quarterly Report on Form 10-Q for
the quarter ended December 31, 2005).10.10
    
    ! *
    
    Amended and Restated 1996 Omnibus Plan.10.11
    
    *
    
    Amended and Restated 1997 Stock Option Plan.10.12
    
    !
    
    Amended and Restated Directors Equity Compensation
Plan (Incorporated by reference to Exhibit 4.2 to
Digenes Registration Statement on Form S-8 (File
No. 333-131592), filed on February 6, 2006).10.13
    
    ! *
    
    Amended and Restated 1999 Incentive Plan, as amended.10.13(a)
    
    ! *
    
    Amendment to the Amended and Restated 1999 Incentive
Plan, Stock Option and Restricted Stock Unit Awards
to Employees Working in France.10.14
    
    !
    
    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).10.15
    
    !
    
    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).10.16
    
    !
    
    Form of Employment Agreement between Digene and each
of Evan Jones and Charles M. Fleischman
(Incorporated by reference to Exhibit 10.1 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).10.17
    
    !
    
    Form of Employment Agreement between each of Digene
or a Digene subsidiary and each of the officers listed on Exhibit 10.17(a)
(Incorporated by reference to Exhibit 10.2 to
Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).10.17(a)
    
    !
    
    Schedule of officers of Digene entering into
Employment Agreement (Incorporated by reference to
Exhibit 10.2(a) of Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).10.18
    
    !
    
    Form of Change in Control Employment Agreement
between Digene and each of Evan Jones and Charles M.
Fleischman (Incorporated by reference to Exhibit
10.3 to Digenes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006).10.19
    
    !
    
    Form of Change in Control Employment Agreement
between Digene and each of the officers listed on
Exhibit 10.19(a) (Incorporated by reference to
Exhibit 10.4 to Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).10.19(a)
    
    !
    
    Schedule of officers of Digene entering into Change
in Control Employment Agreement (Incorporated by
reference to Exhibit 10.4(a) of Digenes Quarterly
Report on Form 10-Q for the quarter ended March 31,
2006).




---



##### 



Exhibit No.
    
    
    
    Description10.20
    
    !
    
    Employment Separation and Release Agreement, dated
August 15, 2006, between Digene Corporation and
Charles M. Fleischman (Incorporated by reference to
Exhibit 99.1 to Digenes Current Report on Form 8-K
filed August 24, 2006).10.21
    
    +++
    
    Settlement and License Agreement, executed October
13, 2004, among Digene Corporation and Enzo Biochem,
Inc. and Enzo Life Sciences, Inc. (Incorporated by
reference to Exhibit 10.1 to Digenes Quarterly
Report on Form 10-Q for the quarter ended September
30, 2004).10.22
    
    ++++
    
    Settlement and License Agreement, effective as of
July 1, 2005, between Digene Corporation and
Georgetown University (Incorporated by reference to
Exhibit 10.21 to Digenes Annual Report on Form 10-K
for the fiscal year ended June 30, 2005).10.23
    
    +++++
  *
    
    Nonexclusive Sublicense Agreement under the Caskey
Patents, dated June 30, 2006, between Digene
Corporation and Abbott Laboratories.10.24
    
    ! *
    
    Non-Employee Director Compensation Policy.10.25
    
    !
    
    Form of Stock Option Award
Certificate (Incorporated by reference to Exhibit 10.1 to
Digemes Current Report on Form 8-K, filed August 3,
2005).10.26
    
    !
    
    Form of Restricted Stock Unit Award Certificate
(Incorporated by reference to Exhibit 10.3 to
Digenes Current Report on Form 8-K, filed June 9,
2006).10.27
    
    !
    
    Form of Performance Shares Award Certificate
(Incorporated by reference to Exhibit 99.1 to
Digenes Current Report on Form 8-K, filed July 31,
2006).10.28
    
    ! *
    
    Schedule of Fiscal 2007 Executive Salaries.21
    
    *
    
    Subsidiaries of the Registrant.23.1
    
    *
    
    Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.31.1
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Executive Officer.31.2
    
    *
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.32
    
    *
    
    Certification pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code.
 
 *
    
    Filed herewith.+
    
    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 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 pursuant to a Commission Order issued December 7, 2004.
Such provisions have been filed separately with the Commission.++++
    
    Confidential treatment has been granted for certain portions of
this agreement pursuant to a Commission Order issued May 19, 2006.
Such provisions have been filed separately with the Commission.+++++
    
    Confidential treatment has been requested for certain portions of
this agreement pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission on
September 12, 2006. 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.