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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

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

For the fiscal year ended June 30, 2003

OR

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

For the transition period from ___________to _________

Commission file number 0-28194

DIGENE CORPORATION




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-1536128                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

|                                                                                  |  |                 
|--------------------------------------------------------------------------------- |  | ----------------
|1201 Clopper Road
Gaithersburg, Maryland
(Address of principal executive offices) |  | 20878
(Zip Code)

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No
[   ]

As of December 31, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $153,491,962. Such
aggregate market value was computed by reference to the closing price of the
Common Stock as reported on the NASDAQ National Market on December 31, 2002.

As of September 9, 2003, 18,547,613 shares of the registrants Common
Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

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





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Table of Contents

|         |  |                                                                                                |  |      |    | 
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                |  | Page
|PART I   |  |                                                                                                |  |      | 1  | 
|Item 1.  |  | Business                                                                                       |  |      | 1  | 
|         |  | Additional Considerations                                                                      |  |      | 27 | 
|Item 2.  |  | Properties                                                                                     |  |      | 37 | 
|Item 3.  |  | Legal Proceedings                                                                              |  |      | 37 | 
|Item 4.  |  | Submission of Matters to a Vote of Our Stockholders                                            |  |      | 38 | 
|PART II  |  |                                                                                                |  |      | 40 | 
|Item 5.  |  | Market for Our Common Equity and Related Stockholder Matters                                   |  |      | 40 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  |      | 41 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  |      | 42 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  |      | 52 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  |      | 53 | 
|Item 9.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure           |  |      | 75 | 
|Item 9A. |  | Controls and Procedures                                                                        |  |      | 75 | 
|PART III |  |                                                                                                |  |      | 75 | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  |      | 75 | 
|Item 11. |  | Executive Compensation                                                                         |  |      | 75 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  |      | 75 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  |      | 76 | 
|Item 14. |  | Principal Accountant Fees and Services                                                         |  |      | 76 | 
|PART IV  |  |                                                                                                |  |      | 77 | 
|ITEM 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  |      | 77 | 





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PART I

ITEM 1. BUSINESS

Overview

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

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

Recent Developments

On March 31, 2003, the U.S. Food and Drug Administration, or FDA, approved
our premarket approval supplement, or PMA supplement, for the use of our Hybrid
Capture 2, or hc2 High-Risk HPV DNA Test, called the DNAwithPap Test, with
a Pap test to adjunctively screen women age 30 and older to assess the presence
or absence of significant, cancer-causing, high-risk HPV types. Our HPV Test
is a reproducible, objective test for the primary cause of cervical cancer that
is not limited by the subjective nature or visual limitations of cytology and
can be used to predict the risk of developing cervical cancer. Based on
clinical studies, a woman with a negative Pap test result and a negative HPV
Test result can be virtually certain that neither cervical cancer nor its cause
is present, alleviating patient anxiety and reducing healthcare costs.

On July 31, 2003, The American College of Obstetricians and Gynecologists,
or ACOG, published new recommendations for cervical cancer screening that
include the use of an FDA-approved high-risk HPV DNA test for women age 30 and
older. Our DNAwithPap Test is the only FDA-approved high-risk HPV DNA test.

Diagnostic Testing

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





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

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

Traditional Diagnostic Testing in Cervical Cancer Screening.Worldwide,
cervical cancer affects over 400,000 women annually and, after breast cancer,
is the second most common malignancy found in women. The treatment of cervical
cancer after it reaches the advanced stage may require chemotherapy, radiation
treatment or surgery, including hysterectomy. If detected in the precancerous
stage, a vast majority of cases of cervical cancer are preventable. The United
States has a relatively low incidence of cervical cancer due to widespread use
of cervical cancer screening and significant expenditures on screening
infrastructure, which include sophisticated laboratory facilities, highly
trained cytotechnologists and extensive regulatory oversight. Nonetheless,
approximately 4,100 women in the United States die annually of this preventable
disease. Outside the United States, limited resources and underdeveloped or
non-standardized testing infrastructure often lead to underdiagnosis of
cervical disease, resulting in a significantly higher incidence of cervical
cancer.

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

Although the use of the Pap test has been successful in reducing deaths
due to cervical cancer in the United States, Pap testing has significant
limitations, including:

2



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| |  |  | false negative diagnoses;                                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | failure to identify cervical disease in a significant number of women;                                    
|
| |  |  | limited predictive value; and                                                                             
|
| |  |  | inability to detect the presence of the cancer-causing types
of HPV, the primary cause of cervical cancer,

and, consequently, do not allow the clinician to identify women with no overt
signs of cervical disease but who are at higher risk for developing cervical
disease or cervical cancer in the future.

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

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

The benefits of using our HPV Test in conjunction with the Pap test as a
primary screen for cervical cancer have been recognized by important medical
organizations. In November 2002, the American Cancer Society, or ACS,
published preliminary cervical cancer screening guidelines that included a
preliminary recommendation that HPV testing for high-risk HPV types, together
with the Pap test, can be used in primary screening of women age 30 and older.
The ACS guidelines state that HPV DNA testing has greater sensitivity than
cytology for detecting clinically relevant lesions and that the high negative
predictive value resulting from concomitant screening with cytology and HPV DNA
testing could safely permit increasing screening intervals, thus lowering
costs.

On March 31, 2003, the FDA approved our PMA supplement for the use of our
hc2 High-Risk HPV DNA Test, called the DNAwithPap Test, as a primary
adjunctive cervical cancer
3screening test to be performed in conjunction with the Pap test for women
age 30 and older. The DNAwithPap Test is a reproducible, objective test for
the primary cause of cervical cancer that is not limited by the subjective
nature or visual limitations of cytology and can be used to predict the risk of
developing cervical cancer. We intend to establish it as the primary screen
for cervical disease, initially in conjunction with the Pap test and later
independent of the Pap test. The DNAwithPap Test together with the Pap test
has excellent diagnostic capabilities. Internationally, we are working to
replace the Pap test with our HPV Test for primary screening.On July 31, 2003, ACOG, published new recommendations for cervical cancer
screening that include the use of an FDA-approved high-risk HPV DNA test for
women age 30 and older. Our DNAwithPap Test is the only FDA-approved high-risk
HPV DNA test.The new recommendations provide two recommendations for women age 30 and
older:
    
    Testing using cervical cytology alone. If a woman age 30 or
older has negative results on three consecutive annual cervical
cytology tests, then she may be rescreened with cervical cytology
alone every two to three years.
    
    The combined use of a cervical cytology test and an
FDA-approved test for high-risk types of HPV. Under this option
women age 30 and older receive both a cervical cytology test and a
genetic test that looks for certain high-risk types of the HPV known
to cause cancer (an HPV DNA test). Once women test negative on both
tests they should be rescreened with the combined tests no more
frequently than every three years. If only one of the tests is
negative, however, more frequent screening will be necessary.The ACOG recommendations stressed that more frequent cervical screening
may be required for higher-risk women who are infected with HIV, are
immunosuppressed (such as those receiving organ transplants), were exposed to
diethylstilbestrol, or DES, in utero, or were previously diagnosed with
cervical cancer. Regardless of the frequency of cervical cancer screening,
annual gynecologic examinations, including pelvic exams, are still recommended.ProductsOur Hybrid Capture technology is the basis for all of our gene-based
testing systems. Our diagnostic test kits include proprietary biochemicals and
consumables. We also provide instrumentation systems and proprietary
consumables required for specimen collection, detection and analysis.Our
hc2 system, which is currently available for our HPV, Chlamydia and
Gonorrhea Tests, uses a 96-well microplate format that permits simultaneous
testing of multiple samples from a single plate. In addition, the
hc2 system
offers potential automation with the Rapid Capture System, an automated
pipetting and microplate handling platform developed for high volume diagnostic
testing using our Hybrid Capture technology.We have developed products and systems for the collection and preservation
of cervical specimens for testing with our Hybrid Capture systems. Our
Specimen Transport Medium, or STM, offers the lab the ability to perform
multiple nucleic acid tests from a single sample. In4addition, our Universal Collection Medium, or UCM, consists of a liquid
cytology vial optimized for nucleic acid testing, protein analysis and
cytological testing of cervical specimens.Our HPV Test.Major medical authorities worldwide now recognize that
human papillomavirus is the primary cause of cervical cancer and the most
common sexually transmitted virus. There are more than seventy distinct human
papillomavirus types, approximately twenty-three of which are specific to the
genital tract of both males and females. Human papillomavirus types that
infect the genital tract can be divided into two categories, high-risk and
low-risk, which indicate the chances of developing cervical cancer.
Cancer-causing human papillomavirus types have been found in more than 99% of
cervical cancers and can only be detected with a gene-based diagnostic test.
Our HPV Test is the only FDA-approved and commercially available test for the
detection of human papillomavirus.Our hc2 HPV Test contains individual RNA probes that are mixed into
cocktails of the significant cancer-causing, high-risk human papillomavirus
types (types 16, 18, 31, 33, 35, 39, 45, 51, 52, 56, 58, 59 and 68), and
low-risk human papillomavirus types which are not linked to the development of
cervical cancer (types 6, 11, 42, 43 and 44). We have commercialized our
DNAwithPap Test to detect the presence of only the high-risk human
papillomavirus types. All of our HPV Tests use a signal amplification process
to detect small amounts of the human papillomavirus collected from the cervix.
The test kit consists of RNA probes to specific human papillomavirus types,
antibodies, detection reagents and 96-well microplates coated with antibodies.Our DNAwithPap Test is prescribed by a gynecologist or other healthcare
professional. The healthcare professional collects the specimen by inserting
the collection brush into the cervix, rotating the brush to collect cells,
removing it and placing it into the transport tube device. The device is then
sent to the laboratory, where specialized software programs provided with the
hc2 system produce results processed by a lab technician. The laboratory
subsequently reports the test results to the physician using standard reporting
procedures and the physician advises the woman of the test results and the
appropriate follow-up treatment. The entire process can be completed in one
day but is typically performed in two to three days. When our test is used
with an FDA-approved liquid-based Pap test, the entire process is the same
except that only one specimen is collected for both our HPV Test and the Pap
test, permitting the laboratory to perform follow-up human papillomavirus
testing (reflex testing) without the need for additional specimen collection
should the woman have an equivocal or abnormal Pap test result.Clinical studies have shown that our HPV Test, used in conjunction with
the Pap test, has excellent diagnostic capabilities and a high negative
predictive value. Negative predictive value is a measure of how often a test
result indicating no disease is actually correct. This high negative
predictive value assures women and their physicians that, with a negative
result, they can be virtually certain that neither cervical cancer nor its
cause is present, alleviating patient anxiety and reducing healthcare costs.Since infection with HPV is necessary for the development of effectively
all cervical cancer, HPV testing with our DNAwithPap Test identifies women at
higher risk for the development of cervical disease and cervical cancer. This
predictive nature of human papillomavirus testing permits healthcare
professionals to classify women who test negative for5

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

We believe our DNAwithPap Test, when used in conjunction with the Pap test
for women age 30 and over, or as a follow-up to an equivocal Pap test for all
women regardless of age, enhances cervical cancer screening by overcoming the
shortcomings of the Pap test alone. Our DNAwithPap Test:



| |  |  | demonstrates increased sensitivity for high-grade cervical
disease, reducing false negative diagnoses;                                                                                                                                                                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | detects the presence of the cancer-causing types of HPV and
allows the clinician to identify women with no overt signs of
cervical disease but who are at higher risk for developing cervical
disease or cervical cancer in the future;                                                                                                                                               
|
| |  |  | is a reproducible and objective process 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 at increased risk for cervical disease,
permitting healthcare professionals to more accurately direct
diagnostic screening and follow-up medical intervention.

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

Our chlamydia and gonorrhea tests are prescribed and performed by a
gynecologist or other healthcare professional using the same methods used to
perform our HPV Test. We are the first to provide FDA-approved tests for the
simultaneous detection of chlamydia and gonorrhea infections, in addition to
human papillomavirus, from a single patient sample. We believe the ability to
perform multiple tests from a single patient specimen provides greater
convenience to patients and their physicians and reduces healthcare costs by
decreasing the frequency of patient visits and testing. Our Hybrid Capture
tests detect the presence of both chlamydia and gonorrhea
6in women. Clinical studies on women have indicated that our hc2 Chlamydia
Test is capable of detecting chlamydia in up to 98% of the cases in which the
disease is present and our hc2 Gonorrhea Test is capable of detecting gonorrhea
in up to 92% of the cases in which it is present.In the United States, the FDA granted us marketing clearance, known as
510(k) clearance, for our hc2 Chlamydia Test in October 1999; the FDA granted
us 510(k) clearance for our hc2 Gonorrhea Test in November 1999; and the FDA
granted us 510(k) clearance for our combination hc2 Chlamydia/Gonorrhea Test in
February 2000. The FDA granted us 510(k) clearance in September 2001 for a
high-volume sample throughput instrument application for hc2
Chlamydia/Gonorrhea testing using the Rapid Capture System, which serves as the
automation platform we developed for large-scale diagnostic testing using our
Hybrid Capture technology.In 1999, our portfolio of chlamydia and gonorrhea tests was cleared for
sale in almost every major European country and in Brazil and Argentina. In
October 2001, we received clearance to market our combination hc2
Chlamydia/Gonorrhea Test in Japan.Our Blood Virus Tests.Blood viruses, such as hepatitis B virus and
cytomegalovirus, are leading causes of morbidity and death and, previously,
were untreatable. Rapid, accurate and ongoing detection of blood viruses and
monitoring of viral load are essential for effective patient management. Over
the last several years, antiviral therapies have been developed to treat these
diseases. To maximize the efficacy of these expensive and sometimes toxic
therapies, physicians rely on viral load monitoring to measure the level of
virus present in the patient. By precise measurement of viral load and
identification of patients who are not responding to therapy early in their
treatment, physicians can tailor antiviral therapies through precise monitoring
of individual responses, recognize when a patient develops drug resistance and
project how quickly the infection will progress to chronic disease.We have developed unique testing products using our Hybrid Capture system
to detect the presence of hepatitis B virus and cytomegalovirus. Our HBV Test
and CMV Test are prescribed by a gastroenterologist, transplant surgeon or
other healthcare professional. The healthcare professional draws a blood
specimen from the patient. The specimen is then sent to the laboratory, where
specialized software programs provided with the hc1 and hc2 systems process the
results. The laboratory subsequently reports the test results to the physician
using standard reporting procedures and the physician advises the patient of
the test results and the appropriate follow-up treatment. Depending on the
level of hepatitis B virus in the patients blood, antiviral therapy will be
presented, modified or discontinued. For transplant patients, the level of
cytomegalovirus in the blood is used to determine the presence or absence of
cytomegalovirus infection. Patients with active cytomegalovirus infections are
prescribed antiviral therapy. Transplant patients are typically monitored once
per week for cytomegalovirus DNA for twelve weeks following the initial organ
transplant.The
FDA granted us 510(k) clearance for our hc1 CMV Test in September 1998
and our hc2 HBV Test received marketing approval in France and Switzerland in
January 2000 and December 1999, respectively. Our CMV Test is the only DNA
test cleared for the detection of cytomegalovirus by the FDA and our HBV Test
is permitted in the United States for research use only. Abbott Laboratories,
one of the worlds leading providers of HBV tests, is selling our HBV products in Europe, Africa and the Middle East on a non-exclusive basis under7an agreement that will expire on December 31, 2003. We do not intend to
market our HBV Test in Europe after the In Vitro Diagnostic Directive, or IVDD,
regulations take effect on December 7, 2003. We terminated Abbotts
distribution rights for our CMV products in Europe on June 30, 2003, subject to
a non-exclusive wind down right to sell products in inventory until December 7,
2003.Our Instrumentation and Accessory Products.We manufacture
instrumentation and accessories for performing our tests in clinical
laboratories. For our hc2 tests, customers use the DML 2000 luminometer, plate
washers, heaters and additional accessories. The Rapid Capture system is an
automated pipetting and microplate handling platform developed for high volume
diagnostic testing using our Hybrid Capture technology. Our Chlamydia and
Gonorrhea Tests are 510(k) cleared by the FDA for the Rapid Capture System, and
work is on-going to submit a PMA supplement to the FDA for approval for use of
the Rapid Capture System with our HPV Tests, including the DNAwithPap Test.Clinical Validation and Regulatory AccomplishmentsOver the last several years, many general population screening studies
using our HPV Tests have been conducted by prominent medical professionals and
academic and government institutions throughout the world, including the
National Cancer Institute, Columbia University and the Cleveland Clinic
Foundation. Many of these studies assessed the usefulness of our HPV Test in
comparison to the Pap test for women age 30 and older. The following table,
derived from meta-analysis of these studies that was published in the August
2003 Archives of Pathology and Laboratory Medicine, demonstrates the superior
performance of our HPV Test when used for primary general population screening
alone, or in combination with Pap test, to detect underlying cervical disease
as compared with the Pap test alone. In all studies, human papillomavirus
testing alone, and in combination with the Pap test, is superior to the Pap
test alone in detecting underlying cervical disease. Women age 30 and older
who test negative for human papillomavirus and have normal Pap test results are
at very low risk of developing cervical disease in the future. The data show a
minor decrease in specificity for cervical disease with the two tests combined.
Nevertheless, women age 30 and older who test positive for high-risk human
papillomavirus are at significant risk of developing cervical disease.8Performance Comparison of our HPV Test and the Pap Test(1)

|                  |  |          |       |           |  |       |      |       |  |             |    |             |  |             |     |       |  |       |     |       |  |                     |      |     |  |  |      |     |  |  |      |     |  |  |    |     |  |  |    |     |  |       |    | 
|----------------- |  | -------- | ----- | --------- |  | ----- | ---- | ----- |  | ----------- | -- | ----------- |  | ----------- | --- | ----- |  | ----- | --- | ----- |  | ------------------- | ---- | --- |  |  | ---- | --- |  |  | ---- | --- |  |  | -- | --- |  |  | -- | --- |  | ----- | -- | 
|                  |  |          |       |           |  |       |      |       |  |             |    |             |  |             |     |       |  |       |     |       |  | Negative Predictive |      |     |  |  |      |     |  |  |      |     |  | 
|                  |  |          |       |           |  |       |      |       |  | Sensitivity |    | Value (NPV) |  | Specificity
|                  |  |          |       |           |  |       |      |       |  | (%)         |    | (%)         |  | (%)        
|                  |  | # of     |       |           |  |       |      |       |  |             |    |            
|                  |  | Women    |       | Pr. %     |  | PAP   |      | HPV   |  | HPV +       |    | PAP         |  | HPV         |     | HPV + |  | PAP   |     | HPV   |  | HPV +              
|Population        |  | In Study |       | CIN 3+(2) |  | Alone |      | Alone |  | PAP         |    | Alone       |  | Alone       |     | PAP   |  | Alone |     | Alone |  | PAP                
|                  |  |          |       |           |  |       |      |       |  |             |    |             |  |             |     |       |  |       |     |       |  |                    
|France            |  |          | 5,671 |           |  |       | 1.25 | (3)   |  |             | 84 |             |  |             | 100 |       |  |       | 100 | (4)   |  |                     | 99.8 |     |  |  | 100  |     |  |  | 100  | (5) |  |  | 95 |     |  |  | 89 |     |  | NA(6)
|Germany(7)        |  |          | 7,592 |           |  |       | 0.36 |       |  |             | 52 |             |  |             | 96  |       |  |       | 100 |       |  |                     | 99.8 |     |  |  | 100  |     |  |  | 100  |     |  |  | 99 |     |  |  | 96 |     |  |       | 95 | 
|Mexico(7)         |  |          | 7,732 |           |  |       | 1.00 |       |  |             | 58 |             |  |             | 95  |       |  |       | 97  |       |  |                     | 99.5 |     |  |  | 99.9 |     |  |  | 100  |     |  |  | 99 |     |  |  | 94 |     |  |       | 93 | 
|Costa Rica(7) (8) |  |          | 8,554 |           |  |       | 0.79 |       |  |             | 78 |             |  |             | 90  |       |  |       | 94  |       |  |                     | 99.7 |     |  |  | 99.9 |     |  |  | 99.9 |     |  |  | 94 |     |  |  | 94 |     |  |       | 90 | 
|South Africa      |  |          | 1,365 |           |  |       | 3.66 | (4)   |  |             | 84 | (4)         |  |             | 90  | (4)   |  |       | 93  |       |  |                     | 99.3 | (4) |  |  | 99.5 | (4) |  |  | 99.6 |     |  |  | 86 | (4) |  |  | 80 | (4) |  |       | 76 | 



---

|(1) |  | The variation in results is partially attributable to the subjective
methods of determining and adjudicating actual underlying disease in the
tested population.                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents the prevalence of high-grade cervical disease in the tested
population expressed in terms of study participants with cervical
intraepithelial neoplasia, or CIN, grade three or higher (unless otherwise
noted).
|   
|(3) |  | CIN grade 2 or higher.                                                                                                                                                                                                     
|   
|(4) |  | Reanalysis of raw data at Digenenot reported in literature.                                                                                                                                                               
|   
|(5) |  | By extrapolation.                                                                                                                                                                                                          
|   
|(6) |  | Calculation not performed in this study.                                                                                                                                                                                   
|   
|(7) |  | Study included women under age 30.                                                                                                                                                                                         
|   
|(8) |  | This study was conducted using
both our hc2 High-Risk HPV DNA Test and
earlier-generation hc1 HPV Test.                                                                                                                    

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

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

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



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

9



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##### 





| |  |  | May 2003: a study of 8,101 women age 30 and over in Germany
published in the British Journal of Cancer found that the use of our hc2
High-Risk HPV DNA Test in conjunction with the Pap test was 100%
sensitive for detecting high-grade cervical disease and cancer and also
had a negative predictive value of 100%;                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | April 2003: preliminary results of a study of over 12,000 women
taking part in a screening trial in Switzerland presented at the EUROGIN
5th International Multidisciplinary Congress on Preventing and
Controlling Cervical Cancer in the New Millennium showed a sensitivity
for the detection of high grade cervical disease of 98.5% for the hc2
HPV Test, compared with 54.4% sensitivity for cytology;
|
| |  |  | November 2002: ACS published cervical cancer screening guidelines
that included a preliminary recommendation that HPV testing for
high-risk HPV types, together with the Pap test, be used in primary
screening of women age 30 and older;                                                                                                                                                                    
|
| |  |  | October 2002: a study involving 4,075 women ages 18 to 50 who
attended Planned Parenthood clinics in Washington State published in
JAMA demonstrated the high sensitivity (90.8%) and superior negative
predictive value (99.6%) of our test compared with the Pap test
(sensitivity of 61.3% and negative predictive value of
98.5%);                                                                        
|
| |  |  | April 2002: 2001 Consensus Guidelines published in JAMA recommend
HPV DNA testing in the management of women with ASC-US Pap test results.
The Guidelines were sponsored by the American Society for Colposcopy and
Cervical Pathology;                                                                                                                                                                       
|
| |  |  | June 2001:a study involving 7,932 women in France, and published in
The British Journal of Cancer, revealed that HPV testing on its own was
100% sensitive in detecting high-grade cervical lesions compared to 68%
for the traditional Pap test;                                                                                                                                                             
|
| |  |  | March 2001:results of a National Cancer Institute ASC-US Low-Grade
Triage Study showed that human papillomavirus testing for women with
equivocal Pap test results was 96% sensitive for women with high-grade
cervical disease, although the sensitivity of the Pap test was 85%;
and                                                                                                                        
|
| |  |  | August 1999:a 22-country study completed by the International
Agency for Cancer Research confirmed that human papillomavirus is the
cause of cervical cancer in 99.7% of cases worldwide.                                                                                                                                                                                                                     

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

10



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routine biennial Pap tests appears to save additional years of life at
reasonable costs compared to Pap testing alone. A second study using a
computer-based model, also published in the May 2002 issue of JAMA, concluded
that a biennial screening program using liquid-based cytology combined with
reflex HPV DNA testing for women with ASC-US is more effective and less
costly than annual conventional cytology coupled with either repeat Pap tests
or colposcopy for women with ASC-US.

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

Regulatory and Reimbursement Milestones.The FDA approved our PMA
supplement for our DNAwithPap Test on March 31, 2003. The FDA approved our PMA
supplement for our hc2 HPV Test for the detection of human papillomavirus in
March 1999. In March 2000, the FDA approved our PMA supplement for our hc2
High-Risk  HPV DNA Test. These approvals followed FDA approval of premarket
approvals, or PMAs, to test for the presence of human papillomavirus in women
with equivocal Pap tests in March 1995, and, in 1997, a PMA supplement for the
use of our HPV Test using Cytyc Corporations ThinPrep® Pap Test sample
collection system. In April 2002, we submitted a PMA supplement with the FDA
seeking approval of the use of our HPV Test with TriPath Imaging, Inc.s
SurePath Test Pack sample collection system. In July 2002, we received notice
from the FDA that the PMA supplement was not approvable as submitted. We are
working with TriPath to complete additional clinical studies and to submit
results of these studies to the FDA for premarket approval.

In the United States, the American Medical Association has assigned
specific Current Procedural Terminology, or CPT, codes, necessary for
reimbursement, for human papillomavirus testing and the Centers for Medicare
and Medicaid Services, or CMS (formerly the Health Care Financing
Administration, or HCFA), has established Medicaid and Medicare reimbursement
for our HPV Test. Third-party payors and managed care entities that provide
health insurance coverage to 225 million people currently authorize
reimbursement for our HPV Test as a follow-up test to categorize equivocal Pap
test results. Reimbursement for this indication is now available from more
than 150 payors. Third-party payors and managed care entities that provide
health insurance coverage to 50 million people currently authorize
reimbursement for the recently FDA-approved use of our DNAwithPap Test to
adjunctively screen women age 30 and older to assess the presence or absence of
significant, cancer-causing HPV types. Reimbursement for this indication is
now available from more than 25 payors.

Outside of the United States, we can market our HPV Test for use in all
European countries, in South America and in all major Asian countries,
including Japan. In addition, we have worked with our distribution network to
establish reimbursement from third-party payors in their respective
territories. We, together with our distributors, have established
reimbursement for our HPV Test in Germany, the Czech Republic and Brazil. In
Europe, we are working with

11



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

Sales and Marketing

We focus our sales and marketing strategy on achieving broad market
acceptance of our gene-based diagnostic tests. Our initial efforts have been
in the cervical cancer field where we have established our HPV Test as a
leading test for the primary cause of cervical cancer, and in cytomegalovirus
and hepatitis B virus testing. Over the last several years, the majority of
our sales and marketing investments have been directed to the launch of our hc2
HPV Test and to build demand for our test among the medical profession, public
health officials and consumers through a demand-creation marketing campaign.

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



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

North American Market

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

12



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##### 



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

We currently market our products in the United States to clinical
reference laboratories through a direct sales force supported by technical and
customer service representatives. We market our HPV Test to physicians through
joint marketing programs with clinical reference laboratories and through
co-marketing arrangements with other strategic partners. In June 2003 we
completed the initial launch of the DNAwithPap Test to the laboratory market in
the U.S. The full product and promotional launch is scheduled for September
2003.

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

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

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

International Markets

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

13



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

Europe.During fiscal 2003 we established direct sales capabilities in
four major European countries: Germany, France, Italy and Switzerland. We had
established operations in the United Kingdom in fiscal 2002 and established
operations in Spain in early fiscal 2004. The transition from a distributor
sales model to direct sales should allow for better control of our marketing
programs, higher test kit margins and improved customer support. In Germany,
our largest European market, approximately 170 laboratories perform our HPV
Test. Acceptance of our HPV Test continues to grow among healthcare providers
for use as both a primary and secondary cervical cancer screen. Our progress
in Germany is due to our coordinated sales and marketing program, which
includes a comprehensive physician and laboratory education program,
direct-to-consumer public awareness campaigns and government education efforts.

We also continue to focus our efforts in the United Kingdom, Ireland,
Belgium and the Czech Republic, among other European countries. In the United
Kingdom, our hc2 High-Risk DNA HPV Test is being used in a pilot program to
incorporate HPV testing into the National Health Services national cervical
cancer screening program. In October 2001, Belgiums Chamber of
Representatives unanimously approved a resolution calling for introduction of
HPV testing into its national cervical cancer screening program. The Czech
Republic enacted legislation calling for full reimbursement of HPV testing by
its National Health Insurance program. In November 2000, the Czech Republic
became the first European country to adopt HPV testing as a national primary
screening test for cervical cancer.

As we continue to build international sales of our products, we believe
that a direct sales presence in Europe will be key to accelerating penetration
of our products there. As of September 2003, in Europe, we have established
distributor operations in 16 countries and subsidiaries in 6 countries. We
currently offer our products, either directly or through distribution
arrangements, in all European countries.

South America.In Brazil, we are marketing our proprietary Universal
Collection Medium, or UCM, which enables both cytology and HPV DNA testing to
be done from one patient sample. This product was launched there in March 2002
by Digene do Brazil LTDA, our majority-owned subsidiary, and in November 2001,
the Brazilian National Cancer Institute initiated a study (the INCA study)
evaluating the effectiveness of both the hc2 High-Risk HPV DNA Test alone and
in conjunction with our UCM Pap. The UCM Pap testing system allows for
molecular diagnostic testing of HPV and other infectious agents and
liquid-based Pap testing from a single clinical specimen. The INCA study was
completed in December of 2002, and the results will be used to aid the
Brazilian Ministry of Health in its decision regarding the implementation of
the UCM system and the hc2 High-Risk DNA HPV Test throughout Brazil.

Asia.We expect sales growth in Japan where, in October 2001, we received
approval from the Japanese Ministry of Health, Labor and Welfare to market our
hc2 test for chlamydia, or CT, and gonorrhea, or GC, and, in February 2002, we
received marketing approval for our HPV Test. Mitsubishi Chemical Corporation
distributes both our HPV and CT/GC Tests in Japan. We continue to work
effectively with independent distributors throughout most of South America,
Asia and the remaining countries in which we sell our products.

14



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Significant Distribution Agreements.We had previously entered into
marketing and distribution arrangements with Abbott Laboratories and Roche
Molecular Systems, Inc. to distribute our products in Europe, Africa and the
Middle East. As further described below, in fiscal 2002 both of these
arrangements terminated as to our HPV products, subject to a non-exclusive
wind-down distribution period for Roche.

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

On April 29, 2001, we entered into a letter agreement with Roche Molecular
Systems, which we refer to as the Roche Distribution Contract, that established
Roche Molecular Systems, or Roche, as the co-exclusive distributor of our HPV
products in Europe, Africa and the Middle East from May 1, 2001 through June
30, 2002. In June 2002, we adopted as our sole strategy the direct
distribution of our products in Europe, Africa and the Middle East. On June
30, 2002, the term of the Roche Distribution Contract expired, subject to a
non-exclusive wind-down period. On December 20, 2002, we amended the Roche
Distribution Contract to terminate the wind-down period on December 31, 2002
and to establish the procedures for our repurchase from Roche of HPV-related
testing equipment purchased from us by Roche under the Roche Distribution
Contract. We consummated the repurchase of the HPV equipment from Roche on
January 6, 2003.

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

Research and Development

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

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

15



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##### 



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

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

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

Our Technology

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

How Our Technology Works To Detect DNA

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

16



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(HC2 TECHNOLOGY)



| | 1. |  | Release DNA from cells.Alkali is added to the clinical
specimen to make the target DNA molecules single-stranded and
accessible for hybridization.                                                                                                                                                                                                                                                                                                                                       
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Hybridize DNA with RNA probe.The specimen is transferred to
a container and a single-stranded RNA probe that is complementary to
the target DNA sequence is added to the solution and heated. The
RNA probe finds its complementary DNA target sequence and attaches
or binds (hybridizes) to it, forming a double-stranded RNA:DNA
hybrid complex. If there is no target DNA sequence in the sample,
the RNA probe remains free in solution or unbound, and no RNA:DNA
hybrid is formed.
|
| | 3. |  | Capture RNA:DNA hybrids onto a solid phase.The sample is
then transferred to a second container that has been coated with our
proprietary antibodies that specifically recognize and bind to
RNA:DNA hybrids. During this process, the RNA:DNA hybrids are
captured or bound onto the microplate surface by the antibodies.                                                                                                                                                              
|
| | 4. |  | React captured hybrids with multiple antibody conjugates.A
second antibody is added to the solution, which recognizes and binds
to the RNA:DNA hybrids that are captured onto the surface of the
container. This antibody is labeled with alkaline phosphatase, an
enzyme, that, in the presence of chemicals such as dioxetanes,
produces light and acts as a signal amplifier.                                                                                                         
|
| | 5. |  | Detect amplified chemiluminescent or fluorescent signal.The
container is washed to remove all of the unbound or free components
while the RNA:DNA hybrids and the labeled antibody remain bound to
the container. Chemicals are added that react with the alkaline
phosphatase to produce light, and the light is detected with a
highly sensitive instrument called a luminometer.                                                                                                      

17



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Advantages of Our Technology

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



| |  |  | Accuracy.In a clinical setting, tests based on our Hybrid Capture
technology have proven in many cases to be superior to conventional
diagnostic testing and to have sensitivity equal to or better than
target amplification methods like polymerase chain reaction, with equal
or better specificity. The results from the National Cancer Institute
ASC-US Low-Grade Triage Study show that our HPV Test is 96% sensitive
versus 85% for the Pap test, with similar specificity. In addition,
our hc2 Chlamydia Test is capable of detecting chlamydia in up to 98%
of the cases in which the disease is present. Tests based on our
Hybrid Capture technology are highly reproducible and minimally
susceptible to clinical variability.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Single-Sample, Multi-Test Efficiency.We are the first to develop
FDA-approved or cleared tests that detect human papillomavirus,
chlamydia and gonorrhea from a single patient sample. The ability to
perform multiple tests from a single patient sample provides greater
convenience for patients and physicians, may reduce healthcare costs
associated with frequent patient visits and testing and improves
efficiency.                                                                                                                                                                                                                                                                                                                
|
| |  |  | Patient Care.Our tests help diagnose the presence or extent of
disease at an early stage and clarify uncertain test results obtained
under other diagnostic methods. For example, our HPV Test enables
patients who are at risk of high-grade cervical disease to receive
treatment early on, reducing patient anxiety associated with
uncertainty and significantly reduces unnecessary invasive procedures.
In addition, our tests can monitor the progression of a disease, detect
an individuals risk of developing a disease or, in the case of our
blood virus tests, determine a patients response to a specific
treatment.                                                                                                        
|
| |  |  | Cost Effectiveness.The higher accuracy and sensitivity of our
tests may reduce the overall patient management costs and eliminate
costs associated with late diagnosis of disease, equivocal test results
and false negative diagnoses. This potential for cost reduction arises
because the higher accuracy reduces the need for follow-up exams,
allows healthcare resources to be focused on patients who have, or are
at a higher risk of developing, disease and avoids the expenditure of
resources on those patients at least risk. In addition, the simple
form and automation capabilities of our tests allow ease of laboratory
use, reducing overall processing costs.                                                           
|
| |  |  | Scalable.Our hc2 platform offers potential automation with the
Rapid Capture System, which serves as the automation platform we
developed for large-scale diagnostic testing. The Rapid Capture System
is a robotic pipetting and microplate handling instrument that allows a
single lab technician to run up to 4 microplates, or more than 350
specimens, in a single 8 hour lab shift, meeting the demands of high
volume testing.                                                                                                                                                                                                                                                                                                      

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Facilities and Manufacturing

We lease approximately 90,000 square feet of office and manufacturing
space in Gaithersburg, Maryland. Our lease expires December 31, 2009 and we
have the ability to extend the lease for two five-year terms. We also lease
office and sales operations facilities in the United Kingdom, Germany,
Switzerland, France, Italy and Spain, which run in length from month-to-month
to five years. We also utilize third-party warehouse facilities in Germany and
the United Kingdom to support our European operations.

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

We have established a quality control program, including a set of standard
manufacturing and documentation procedures, intended to ensure that our
products are manufactured and tested in accordance with the FDAs Quality
System Regulation, or QSR, which imposes current Good Manufacturing Practice
requirements. We received ISO 9001 certification in June 1999 and ISO 13485
certification in July 2003.

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

Intellectual Property

Patents and other proprietary rights are essential to our business. In
May 2001, we received a United States patent for the Hybrid Capture assay from
the United States Patent and Trademark Office. Foreign counterparts of this
patent application have been granted in Europe, Japan and Australia. We have
also filed United States patent applications relating to other aspects of our
Hybrid Capture technology. We have an exclusive license with the University of
Hawaii for two patents covering monoclonal antibodies for the detection of
RNA:DNA hybrid complexes. We also have United States patents and pending
patent applications, and corresponding foreign patents and patent applications,
in the areas of direct DNA probe labeling, signal amplification and
biotin-avidin probe chemistry and our continuous amplification method. The
inventions claimed by these patents and applications may be used in our DNA
probes and any patents that issue from such applications may provide some
ancillary protection for specific aspects of our products. Under current law,
patent applications filed in the United States after November 29, 2000 are
published eighteen months after filing (unless no foreign counterparts are
filed). Patent applications filed before November 29, 2000 are maintained in
secrecy until

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patents are issued. Patent applications in some foreign countries are
maintained in secrecy for a period of time after filing. Any additional United
States patents or foreign patents relating to our Hybrid Capture technology or
our products may not be issued to us on a timely basis, or at all.

We hold issued United States patents relating to human papillomavirus
types 35, 43, 44 and 56. The patents relating to types 35, 44 and 56 expire in
2007, and the patent on type 43 expires in 2006. We also hold issued European
patents in countries such as Germany, France, Italy and the United Kingdom and
have pending foreign patent applications in Europe and Japan. We have licensed
the patents relating to human papillomavirus types 35, 43 and 56 to Institut
Pasteur (see cross license discussion below). In addition, we are the
exclusive, worldwide licensee of a United States patent application and
corresponding foreign patents and patent applications relating to human
papillomavirus type 52 and a United States patent and corresponding foreign
patents relating to the use of the L1 gene sequence to detect specific human
papillomavirus types (see Georgetown license discussion below) as well as trade
secrets relating to human papillomavirus type 58 (see Kanebo license discussion
below).

Through a cross license with Institut Pasteur, we have obtained a
worldwide license to United States patents and patent applications and
corresponding foreign patents and patent applications relating to human
papillomavirus types 33, 39 and 42. The United States patents relating to
human papillomavirus type 33 begin to expire in 2007, and the United States
patents relating to human papillomavirus types 39 and 42 begin to expire in
2012. The European patents relating to human papillomavirus types 33, 39 and
42 begin to expire in 2007. In return, we have granted to Institut Pasteur a
worldwide license to our three United States patents and corresponding foreign
patents and applications relating to human papillomavirus types 35, 43 and 56.
We have granted Institut Pasteur the right to extend the scope of the cross
license to include the United States patent and corresponding patent
applications relating to human papillomavirus type 44 at such time as Institut
Pasteur shall have discovered and developed an additional human papillomavirus
type which is equivalent in value to human papillomavirus type 44. In return
for such an extension, we will receive a license to the new human
papillomavirus type discovered and developed by Institut Pasteur. The cross
license is non-exclusive. Under the cross license, Institut Pasteur has the
right to grant a sublicense of its rights under the cross license, without the
right to grant further sublicenses, to Beckman Instruments (now known as
Beckman Coulter, Inc.) and to affiliates of Institut Pasteur. Under the
agreement, both parties are restricted from granting additional licenses to the
intellectual property subject to the cross licenses. We believe that the cross
license terminates on the last to expire of the underlying patent rights. Any
prior termination of the cross license could have a material adverse effect on
our business, financial condition and results of operations. In June 2002, we
were notified by Institut Pasteur that it had transferred to F. Hoffman-La
Roche Ltd. the human papillomavirus intellectual property estate of Institut
Pasteur, which included an assignment of the cross license to Roche. On
September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it
had acquired Beckman Coulter, Inc.s human papillomavirus business and
corresponding assets, including the assignment of the human papillomavirus
intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut
Pasteur through a 1991 sublicense agreement.

On April 5, 2000, we entered into an exclusive worldwide license with
Institut Pasteur relating to the genetic sequence of human papillomavirus types
68 and 70 (including the use of the United States patent relating thereto
issued November 9, 1999 and expiring in 2017) and the

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detection of human papillomavirus types 68 and 70 using DNA testing
methods. Under the license we can use our rights to develop and sell products
using the licensed technology and pay royalties on such products. The term of
the license expires upon expiration of the licensed patent, except that it
continues for the commercial life of the products in countries where there is
no licensed patent.

Through a license with Georgetown University, we have obtained exclusive,
worldwide rights to a United States patent application and corresponding
foreign patents and patent applications relating to human papillomavirus type
52 and to a United States patent and corresponding foreign patents relating to
the use of the L1 gene sequence to detect specific human papillomavirus types.
Unless terminated earlier, the Georgetown license will terminate upon the last
to expire of the licensed patent rights. The issued patents relating to human
papillomavirus type 52 will expire in 2014 in the United States and in 2009 in
Europe. A corresponding foreign patent relating to human papillomavirus type
52 was issued in Japan in 2000. The L1-related patent will expire in 2008 in
the United States and in 2006 in Europe. We are obligated to make royalty
payments to Georgetown University based on the percentage of net sales of
products incorporating the licensed technologies.

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

Government Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Competition

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

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

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

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

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

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Employees

At June 30, 2003, we had 297 employees, including 53 in research and
development, 91 in manufacturing, including quality assurance, 78 in sales and
marketing and 75 in accounting, finance, administration and regulatory affairs.
We are not a party to any collective bargaining agreements, and we believe our
relationships with our employees are good.

Principal Executive Offices

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

Available Information

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

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ADDITIONAL CONSIDERATIONS

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

We have had substantial operating losses since incorporation in 1987. We
turned profitable during the fourth quarter of fiscal 2003, but prior to that
we never earned a profit. At June 30, 2003, our accumulated deficit was
approximately $71,365,000. Previous losses have resulted principally from:



| |  |  | expenses associated with our research and
development programs;                 
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | our sales and marketing activities in the United
States and internationally; and
|
| |  |  | other expenses, including administrative and
facilities costs.                  

Historically, our net losses were $6,480,997 in fiscal 2001 and $9,396,616 in
fiscal 2002, and $4,323,511 in fiscal 2003. We expect to remain profitable
through fiscal 2004, but we may be unable to generate sufficient revenues to
remain profitable.

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

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

Furthermore, technological advancements designed to improve quality
control over sample collection and preservation and to reduce the Pap tests
susceptibility to human error may increase physician reliance on the Pap test
and solidify its market position as the most widely used screen for cervical
cancer. In particular, in marketing our HPV Test along with the Pap test for
primary screening in the United States, our HPV Test may be seen as adding
unnecessary expense to the generally accepted cervical cancer screening
methodology.

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

A significant portion of the sales of our products in the United States
and other markets depend, in large part, on the availability of adequate
reimbursement to users of our tests from government insurance plans, including
Medicare and Medicaid in the United States, managed care organizations and
private insurance plans. All of our FDA-approved products have some level of
reimbursement coverage. Third-party payors are often reluctant to reimburse
healthcare providers for the use of medical tests incorporating new technology.
In addition, third-party

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payors are increasingly limiting reimbursement coverage for medical
diagnostic products and, in many instances, are exerting pressure on medical
suppliers to reduce their prices. Thus, third-party reimbursement may not be
consistently available or financially adequate to cover the cost of our
products. This could limit our ability to sell our products, cause us to
reduce the prices of our products or otherwise adversely affect our operating
results.

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

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

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

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

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

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

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



| |  |  | fines, injunctions and civil penalties;
| | - |  | ---------------------------------------
|
| |  |  | recall or seizure of our products;     

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

Any enforcement action by the FDA may also affect our ability to
commercially distribute our products in the United States.

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

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

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

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

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

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

We may be exposed to liability claims arising from the use of our products
and the commercial sale of our products, as well as from the use of our
products or product candidates in

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

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

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

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

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

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

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

There have been substantial litigation and other proceedings regarding
patent and other intellectual property rights in the pharmaceutical and
biotechnology industries because of the uncertainties and complex legal,
scientific and factual questions related to the protection of intellectual
property. We have received inquiries regarding possible patent infringements
relating to, among other things, aspects of our Hybrid Capture technology. We
believe that the patents of others to which these inquiries relate are either
not infringed by our Hybrid Capture technology or are invalid. However, we may
be subject to further claims that our technology, including our Hybrid Capture
technology, or our products infringe the patents or proprietary rights of third
parties. In addition, we have licenses to various patents covering
intellectual property that we use in conjunction with applications of our
Hybrid Capture technology. Third

30



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parties may have claims to these patents. An adverse outcome to such
claims could subject us to significant liabilities to third parties or require
us to obtain royalty-bearing licenses from third parties, cease sales of
related products or revise the applications or products which employ the
patented technology. Any licenses required for any such third party patents or
proprietary rights may not be made available to us on commercially reasonable
terms, if at all. Furthermore, we may be unable to make the necessary
revisions to our applications or products. We may also be forced to initiate
legal proceedings to protect our patent position or other proprietary rights.
These proceedings are often expensive and time-consuming, even if we were to
prevail.

In June 1999, Enzo Biochem, Inc. filed an action in the United States
District Court for the Southern District of New York against the following
defendants, Chugai Pharmaceutical Co., Ltd. and its subsidiaries, Chugai Pharma
U.S.A., Inc. and Gen-Probe Incorporated, bioMerieux, Inc. and Becton Dickinson
and Company for infringement of Enzos United States patent no. 4,900,659. In
January 2001, the court granted a summary judgment motion in favor of each of
the defendants. In July 2002, a panel of the Federal Circuit, after having
previously affirmed the district courts decision, granted Enzos petition for
rehearing, reversed the district courts order granting summary judgment and
remanded the case to the district court for further proceedings and factual
findings. In October 1999, Enzo contacted us to determine whether our hc2
Gonorrhea Test might infringe such patent. We have evaluated this matter and
its potential impact on our Gonorrhea Test. After consultation with our patent
counsel, we believe that the Enzo United States patent is invalid and not
infringed. We have also consulted with German counsel regarding Enzos
European counterpart to this patent and believe that, like the U.S. patent, the
European counterpart patent is also invalid and not infringed. It is possible
that we could become involved in litigation with Enzo and/or have to seek a
license from Enzo.

In July 2001, Institut Pasteur notified us that Institut Pasteur was
granted a new U.S. patent concerning the HBV genome and requested information
from Digene regarding products that may use the technology described in this
recently issued patent. It is possible that we may have to seek a license from
Institut Pasteur.

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

On November 19, 2001, we filed an action for patent infringement against
Ventana Medical Systems, Inc. The action was filed in the United States
District Court for the District of Delaware. In the action, we allege that
Ventana Medical Systems, Inc. has made, used, sold and/or offered for sale
products embodying our patented inventions thereby infringing our United States
Patent No. 4,849,332 entitled Human Papilloma Virus 35 Nucleic Acid
Hybridization Probes and Methods for Employing the Same and our United States
Patent No. 4,849,331 entitled Human Papilloma Virus 44 Nucleic Acid
Hybridization Probes and Methods for Employing the Same. We are seeking a
permanent injunction and monetary damages for past infringement. On September
25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired
Beckman Coulter, Inc.s human papillomavirus business and corresponding assets,
including the assignment of the human papillomavirus intellectual property
portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a
1991 sublicense agreement. On October 18, 2002, we filed a motion to amend our
complaint to add Beckman Coulter, Inc. as

31



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

On March 15, 2002, we filed an action for declaratory judgment against
Enzo Biochem, Inc. The action was filed in the United States District Court
for the District of Delaware. We filed this action after having received
direct threats from Enzo Biochem of infringement of U.S. Patent No. 6,221,581
entitled Processes for Detecting Polynucleotides, Determining Genetic
Mutations or Defects in Genetic Material, Separating or Isolating Nucleic Acid
of Interest from Samples, and Useful Compositions of Matter and Multihybrid
Complex Compositions. We are seeking a judgment that the patent is invalid
and has not been infringed by us. On March 20, 2002, in response to our
complaint, Enzo Biochem filed a motion to dismiss our complaint for lack of
subject matter jurisdiction, based on assertions that Enzo Diagnostics, Inc. (a
wholly owned subsidiary of Enzo Biochem), not Enzo Biochem, was the holder of
the patent in question. On the same day, Enzo Diagnostics, Inc. also filed a
complaint for patent infringement against us in the Delaware District Court.
Enzo Diagnostics, Inc. asserts in its complaint that we have infringed U.S.
Patent No. 6,221,581 through the manufacture, sale and offer for sale of our
Hybrid Capture products. The two cases have now been consolidated and
discovery has commenced. We have filed counterclaims against Enzo Biochem for
various business-related tortious conduct. The Court has denied Enzo Biochems
motion to dismiss our counterclaims and has granted Digenes motion to amend
our counterclaims to include inequitable conduct claims. We do not believe we
are infringing such patent and will go forward with the action for declaratory
judgment and continue vigorously defending against Enzos claim of patent
infringement. The Court has indicated that a trial in this matter will be held
on March 22, 2004.

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

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

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

On September 25, 2002, Ventana Medical Systems, Inc. publicly announced
that it had acquired Beckman Coulter, Inc.s human papillomavirus business and
corresponding assets, including the assignment of the human papillomavirus
intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut
Pasteur through a 1991 sublicense agreement. On October 18, 2002, we filed a
motion to amend our complaint to add Beckman Coulter, Inc. as a co-

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

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

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

Several key components of our products come from, or are manufactured for
us by, a single supplier or limited number of suppliers. This applies in
particular to three components: first, Tropix, a subsidiary of Applied
Biosystems Group, supplies us with chemiluminescent substrates (used to create
a chemical reaction that causes light in connection with our Hybrid Capture
signal amplified molecular technology), second, Qiagen Instruments supplies us
with the Rapid Capture System that serves as the automation platform developed
for large-scale diagnostic testing using the Hybrid Capture technology and,
third, Corning supplies us with the 96-well microplate. Tropix has been one of
our suppliers since 1996. We entered into an agreement with Qiagen Instruments
in January 2001 pursuant to which they supply us with the Rapid Capture System.
Corning has been one of our suppliers since 1996. In some cases, the supplier
is not required to supply us with specified quantities over longer periods of
time or set-aside part of its inventory for our forecasted requirements. We
have not arranged for alternative supply sources for some of these components
and it may be difficult to find alternative suppliers, especially to replace
Tropix, Qiagen Instruments and Corning. If our product sales increase beyond
the forecast levels, or if our suppliers are unable or unwilling to supply us
on commercially acceptable terms, we may not have access to sufficient
quantities of key components on a timely basis and may be unable to satisfy
product demand.

In addition, if any of the components of our products are no longer
available in the marketplace, we may be forced to further develop our products
or technology to incorporate alternate components. The incorporation of new
components into our products may require us to seek approvals from the FDA or
foreign regulatory agencies prior to commercialization.

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

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

We have a single manufacturing facility located in Gaithersburg, Maryland.
This facility is subject, on an ongoing basis, to a variety of quality systems
regulations, international quality standards and other regulatory requirements,
including the QSR and good manufacturing practices requirements. We may
encounter difficulties expanding our manufacturing operations

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in accordance with these regulations and standards, which could result in
a delay or termination of manufacturing or an inability to meet product demand.

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

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

For fiscal 2003, we derived approximately 19% of our consolidated revenues
from the international sales of our products and services in foreign currencies
and we expect that international sales will continue to account for a large
portion of our sales. Changes in the rate of exchange of foreign currencies
into United States dollars have and may hurt our revenues and results of
operations.

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

The extent and complexity of medical products regulation are increasing
worldwide, particularly in Europe, with regulation in some countries nearly as
extensive as in the United States. Further, we must comply with import and
export regulations when distributing our products to foreign nations. Each
foreign countrys regulatory requirements for product approval and distribution
are unique and may require the expenditure of substantial time, money and
effort. As a result, we may not be able to successfully commercialize our
products in foreign markets at or beyond the level of commercialization we have
already achieved.

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

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



| |  |  | the timing of our expenditures, such as research and development and marketing;
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | variations in our distribution channels or purchasing patterns;                
|
| |  |  | the degree of market acceptance of our products;                               

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| |  |  | currency exchange rates;                                              
| | - |  | ----------------------------------------------------------------------
|
| |  |  | the timing of regulatory approvals and other regulatory decisions;    
|
| |  |  | the timing of new product introductions by us and our competitors; and
|
| |  |  | product obsolescence resulting from new product introductions.        

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

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

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

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



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

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

We turned profitable during the fourth quarter of fiscal 2003 and we
believe that our existing capital resources will be sufficient to meet the
anticipated cash needs of our current business at least through calendar year
2004. Net cash used in our operating activities was approximately $1,834,000
for the fiscal year ended June 30, 2003. However, if we incur operating losses
during or after fiscal 2004 or if one or more of the events described in these
Additional Considerations actually occurs, we may have to obtain additional
funds through

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equity or debt financing, strategic alliances with corporate partners and
others or through alternative sources. Any equity financing would dilute our
then current stockholders. We do not have any committed sources of additional
financing. Additional funding, if necessary, may not be available on
acceptable terms, if at all. If adequate funds are not available, we may have
to delay, scale-back or eliminate aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others. This
may result in the relinquishment of our rights to some of our technologies,
product candidates, products or potential markets.

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

As of September 9, 2003, our Chairman and Chief Executive Officer and our
President, Chief Operating Officer and Chief Financial Officer beneficially
owned an aggregate of approximately 22.5% of our outstanding shares of common
stock. As a result, these officers, acting together, effectively control the
election of directors and matters requiring approval by our stockholders.

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

Our board of directors has the authority, without further action by the
stockholders, to issue, from time to time, up to 1,000,000 shares of preferred
stock in one or more classes or series and to fix the rights and preferences of
such preferred stock. Our certificate of incorporation also provides for
staggered terms for members of the board of directors. Additionally, our
bylaws establish an advance-notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of our
certificate of incorporation and bylaws may prevent or frustrate any attempt to
replace or remove our current management by stockholders, which may have the
effect of delaying, deterring or preventing a change in our control.

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

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ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

On November 19, 2001, we filed an action for patent infringement against
Ventana Medical Systems, Inc. The action was filed in the United States
District Court for the District of Delaware. In the action, we allege that
Ventana Medical Systems, Inc. has made, used, sold and/or offered for sale
products embodying our patented inventions thereby infringing our United States
Patent No. 4,849,332 entitled Human Papilloma Virus 35 Nucleic Acid
Hybridization Probes and Methods for Employing the Same and our United States
Patent No. 4,849,331 entitled Human Papilloma Virus 44 Nucleic Acid
Hybridization Probes and Methods for Employing the Same. We are seeking a
permanent injunction and monetary damages for past infringement. On September
25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired
Beckman Coulter, Inc.s human papillomavirus business and corresponding assets,
including the assignment of the human papillomavirus intellectual property
portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a
1991 sublicense agreement. On October 18, 2002, we filed a motion to amend our
complaint to add Beckman Coulter, Inc. as a co-defendant, as well as additional
claims against Ventana. On March 5, 2003, the Court granted our motion to
amend. No trial date has been set.

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

37



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and has granted Digenes motion to amend our counterclaims to include
inequitable conduct claims. We do not believe we are infringing such patent
and will go forward with the action for declaratory judgment and continue
vigorously defending against Enzos claim of patent infringement. The Court
has indicated that a trial in this matter will be held on March 22, 2004.

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

Not applicable.

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EXECUTIVE OFFICERS OF DIGENE

|                            |  |     |    |                            |  |                                                               
|--------------------------- |  | --- | -- | -------------------------- |  | --------------------------------------------------------------
|Name                        |  | Age |    | Positions with the Company
|                            |  |     |    |                           
|Evan Jones(1)               |  |     | 46 |                            |  | Chief Executive Officer and Chairman of the Board             
|                            |  |     |    |                            |  |                                                               
|Charles M. Fleischman(2)    |  |     | 45 |                            |  | President, Chief Operating Officer and Chief
Financial Officer
|                            |  |     |    |                            |  |                                                               
|Robert McG. Lilley(3)       |  |     | 58 |                            |  | Senior Vice President, Global Sales and Marketing             
|                            |  |     |    |                            |  |                                                               
|Attila T. Lorincz, Ph.D.(4) |  |     | 48 |                            |  | Senior Vice President and Chief Scientific Officer            
|                            |  |     |    |                            |  |                                                               
|Belinda O. Patrick(5)       |  |     | 47 |                            |  | Senior Vice President, Manufacturing Operations               
|                            |  |     |    |                            |  |                                                               
|Joseph P. Slattery(6)       |  |     | 38 |                            |  | Senior Vice President, Finance and Information
Systems        
|                            |  |     |    |                            |  |                                                               
|Donna Marie Seyfried(7)     |  |     | 45 |                            |  | Vice President, Business Development                          



---

|(1) |  | Mr. Jones joined Digene in July 1990 as Chief Executive Officer. He was
elected to serve on the Board of Directors in July 1990 and became
Chairman of the Board in September 1995. He served as our President from
July 1990 to June 1999. From 1988 to September 1990, Mr. Jones was
President of Neomorphics, Inc. Between 1987 and 1990, he was first an
associate and then a partner with the CW Group, a health care venture
capital firm. From 1983 to 1987, Mr. Jones was employed by The
Perkin-Elmer Corporation. Mr. Jones is a member of the Board of Directors
of the Childrens Research Institute at the Childrens National Medical
Center and the Board of Visitors of the University of Maryland College of
Life Sciences. Mr. Jones received a B.A. in Biochemistry from the
University of Colorado and an M.B.A. from The Wharton School at the
University of Pennsylvania. Mr. Jones is a stepbrother of Mr. Whitehead,
a member of Digenes Board of Directors.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Fleischman has served as our President since June 1999, as Chief
Financial Officer since March 1996 and as Chief Operating Officer since
September 1995. He also served as our Executive Vice President from July
1990 to June 1999. From 1987 to 1990, he was a Vice President and then
Associate Director in the Investment Banking Group of Furman Selz (now ING
Group), New York, New York. From 1986 to 1987, Mr. Fleischman was a
founder and Managing Director of Intercapital Brokers, Ltd., London,
England. Mr. Fleischman 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.                                                                                                                                                                                                 
|   
|(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. Slattery has served as our Senior Vice President, Finance and
Information Systems since September 2002. Previously, he served as our
Vice President, Finance from July 1999 to September 2002 and as Controller
from February 1996 to July 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(7) |  | Ms. Seyfried has served as our Vice President, Business Development since
October 1996. Ms. Seyfried served as Senior Director, Business
Development of The Perkin-Elmer Corporation from March 1993 to September
1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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PART II

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

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

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|Fiscal
2003    |  |      |       |     |  |   |       | 
|Fourth quarter |  | $    | 29.05 |     |  | $ | 18.21 | 
|Third quarter  |  |      | 18.00 |     |  |   | 10.02 | 
|Second quarter |  |      | 11.46 |     |  |   | 7.03  | 
|First quarter  |  |      | 11.78 |     |  |   | 6.22  | 
|Fiscal 2002    |  |      |       |     |  |   |       | 
|Fourth quarter |  | $    | 36.57 |     |  | $ | 8.85  | 
|Third quarter  |  |      | 37.32 |     |  |   | 21.45 | 
|Second quarter |  |      | 39.00 |     |  |   | 24.76 | 
|First quarter  |  |      | 39.50 |     |  |   | 22.00 | 

On September 9, 2003, the closing sale price for our common stock, as
reported by the NASDAQ National Market, was $38.60. As of September 9, 2003,
our common stock was held by 150 holders of record.

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

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to
Digenes Consolidated Statements of Operations for the fiscal years ended June
30, 2001, 2002 and 2003 and with respect to Digenes Consolidated Balance
Sheets at June 30, 2002 and 2003 are derived from the audited Consolidated
Financial Statements of Digene, which are included elsewhere in this Form 10-K.
Consolidated Statements of Operations data for the fiscal years ended June 30,
1999 and 2000 and Consolidated Balance Sheet data at June 30, 1999, 2000 and
2001 are derived from Consolidated Financial Statements of Digene not included
herein. The selected consolidated financial data set forth below is qualified
in its entirety by, and should be read in conjunction with, the Consolidated
Financial Statements, the related Notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Form 10-K.

|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |        |        | 
|------------------------------------------ | --------------------------------- | ------------------------ | ------ | -------------------------- | ------ | ---- | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                           |                                   |                          |        | Fiscal Year Ended June 30,
|                                           |                                   |                          |        | 1999                       |        | 2000 |        | 2001                                  |        | 2002 |        | 2003  
|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |       
|                                           |                                   |                          |        |                            |        |      |        | (in thousands, except per share loss) |        |      |        |       
|Consolidated Statement of Operations
Data: |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Revenues:                                  |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                           | Product sales (1)                 |                          | $      | 17,014                     |        |      | $      | 22,287                                |        |      | $      | 32,706 |        |   | $      | 45,750 |        |   | $      | 62,440 |       
|                                           | Distribution contract (1)         |                          |        |                           |        |      |        |                                      |        |      |        | 838    |        |   |        | 2,357  |        |   |        |       |       
|                                           | Other revenues                    |                          |        | 453                        |        |      |        | 757                                   |        |      |        | 653    |        |   |        | 741    |        |   |        | 662    |       
|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                           |                                   | Total revenues           |        |                            | 17,467 |      |        |                                       | 23,044 |      |        |        | 34,197 |   |        |        | 48,848 |   |        |        | 63,102 | 
|Costs and expenses:                        |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                           | Cost of product sales (1)         |                          |        | 6,389                      |        |      |        | 7,919                                 |        |      |        | 12,553 |        |   |        | 12,938 |        |   |        | 13,383 |       
|                                           | Research and development          |                          |        | 4,643                      |        |      |        | 6,123                                 |        |      |        | 8,120  |        |   |        | 9,265  |        |   |        | 10,262 |       
|                                           | Selling and marketing (1)         |                          |        | 10,254                     |        |      |        | 10,652                                |        |      |        | 12,548 |        |   |        | 19,835 |        |   |        | 27,913 |       
|                                           | General and administrative        |                          |        | 5,957                      |        |      |        | 6,346                                 |        |      |        | 8,336  |        |   |        | 14,024 |        |   |        | 16,642 |       
|                                           | Abbott termination fee            |                          |        |                           |        |      |        |                                      |        |      |        |       |        |   |        | 2,500  |        |   |        |       |       
|                                           | Amortization of intangible assets |                          |        | 150                        |        |      |        | 150                                   |        |      |        | 150    |        |   |        | 150    |        |   |        |       |       
|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|                                           |                                   | Total costs and expenses |        |                            | 27,393 |      |        |                                       | 31,190 |      |        |        | 41,707 |   |        |        | 58,712 |   |        |        | 68,200 | 
|Loss from operations                       |                                   |                          | (9,926 | )                          |        |      | (8,146 | )                                     |        |      | (7,510 | )      |        |   | (9,864 | )      |        |   | (5,098 | )     
|Interest income                            |                                   |                          | 985    |                            |        |      | 1,050  |                                       |        |      | 1,194  |        |        |   | 729    |        |        |   | 593    |       
|Interest expense                           |                                   |                          | (30    | )                          |        |      |       |                                       |        |      | (11    | )      |        |   | (32    | )      |        |   | (273   | )     
|Other income (expense)                     |                                   |                          | (184   | )                          |        |      | 513    |                                       |        |      | (37    | )      |        |   | (20    | )      |        |   | 678    |       
|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Loss from operations before income taxes   |                                   |                          | (9,155 | )                          |        |      | (6,583 | )                                     |        |      | (6,364 | )      |        |   | (9,187 | )      |        |   | (4,100 | )     
|Provision for income taxes                 |                                   |                          | 149    |                            |        |      | 184    |                                       |        |      | 117    |        |        |   | 210    |        |        |   | 224    |       
|                                           |                                   |                          |        |                            |        |      |        |                                       |        |      |        |        |        |   |        |        |        |   |        |       
|Net loss                                   |                                   | $                        | (9,304 | )                          |        | $    | (6,767 | )                                     |        | $    | (6,481 | )      |        | $ | (9,397 | )      |        | $ | (4,324 | )     
|Basic and diluted net loss per share (2)   |                                   | $                        | (0.65  | )                          |        | $    | (0.44  | )                                     |        | $    | (0.39  | )      |        | $ | (0.54  | )      |        | $ | (0.24  | )     
|Weighted average shares outstanding (2)    |                                   |                          | 14,354 |                            |        |      | 15,296 |                                       |        |      | 16,557 |        |        |   | 17,361 |        |        |   | 18,136 |       

|                                        |  |          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------- |  | -------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                        |  | June 30,
|                                        |  | 1999     |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                        |  |          |         |      |  |      |         |      |  |     
|Consolidated Balance Sheet Data:        |  |          |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Working capital                         |  | $        | 20,499  |      |  | $    | 24,268  |      |  | $    | 26,905  |   |  | $ | 39,828  |   |  | $ | 36,119  |  
|Total assets                            |  |          | 28,108  |      |  |      | 35,785  |      |  |      | 48,195  |   |  |   | 67,241  |   |  |   | 63,375  |  
|Long-term debt, less current maturities |  |          |        |      |  |      |        |      |  |      | 1,000   |   |  |   | 3,690   |   |  |   | 2,154   |  
|Accumulated deficit                     |  |          | (48,720 | )    |  |      | (55,487 | )    |  |      | (61,968 | ) |  |   | (71,365 | ) |  |   | (75,688 | )
|Total stockholders equity              |  |          | 23,687  |      |  |      | 29,425  |      |  |      | 26,334  |   |  |   | 39,639  |   |  |   | 43,006  |  



|(1) |  | Certain amounts have been reclassified to conform to current year
presentation.         
|--- |  | ----------------------------------------------------------------------------------------
|   
|(2) |  | Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.

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

The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and the related Notes to such Consolidated Financial Statements also
included in this Form 10-K. Some of the information that follows are not
statements of historical fact but merely reflect our intent, belief or
expectations regarding the anticipated effect of events, circumstances and
trends. Such statements should be considered as forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. We
believe that our expectations are based on reasonable assumptions within the
bounds of our knowledge of our business and operations. Factors that might
cause or contribute to differences between our expectations and actual results
include: uncertainty of market acceptance of our products by the worldwide
medical community; dependence on third-party reimbursement from government
entities, managed care organizations, and private insurance plans; our ability
to scale up our manufacturing to the extent product sales increase; our limited
sales and marketing experience; the extent of future expenditures for sales and
marketing programs; uncertainty of clinical trial results for our products in
development; risk that other companies may develop and market HPV tests
competitive with our own; uncertainty regarding patents and propriety rights in
connection with our products and products in development; delay in or failure
to obtain regulatory approvals for our products in development; uncertainty of
future profitability and cash generation from operations; our ability, if
necessary, to obtain requisite additional financing to fund our operations
beyond calendar year 2004; risks inherent in international transactions,
including those relating to our expansion in Europe and elsewhere; and other
factors as set forth under the caption Additional Considerations beginning on
page 27.

Overview

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

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

Research and development expenses increased 11% to approximately
$10,262,000 in fiscal 2003 from approximately $9,265,000 in fiscal 2002. The
increase in expenses was due primarily to a 305% increase in professional
services and clinical trial expenses, to approximately $2,593,000, partially
offset by a decrease in personnel costs, which decreased 11% to approximately
$4,364,000, and laboratory supplies, which decreased 29% to approximately
$815,000. The increase in professional services is due largely to costs
incurred in preparation for compliance with the European Union In Vitro
Diagnostic Directive (IVDD) regulations. We expect that compliance with the
European Union IVDD regulations will continue to require investment during
fiscal 2004. Our research and development activities focus on our platform
technology, including different or modified uses of such technology, and
improvements to our diagnostic test and equipment products. Because our
research and development expenditures tend to benefit multiple product
offerings, we do not track and maintain research and development expenses on a
per-product or per-disease target basis.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During fiscal 2002, we recognized revenue of approximately $2,357,000
related to minimum purchase guarantees under the Roche Distribution Contract as
compared to approximately $838,000 in fiscal 2001. Please see Liquidity and
Capital Resources below for a description of the Roche Distribution Contract.

Other revenues included research and development contract revenues,
equipment rental revenues and licensing revenues. Other revenues increased to
approximately $740,000 in fiscal 2002 from approximately $653,000 in fiscal
2001. The increase was due primarily to the recognition of equipment sales in
Europe which were initially deferred in the fourth quarter of fiscal 2002, and
additional research and development revenue under an existing contract,
partially offset by a reduction in licensing revenue under an exclusive
contract, which was converted to non-exclusive during fiscal 2001.

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Cost of product sales marginally increased to approximately $12,938,000 in
fiscal 2002 from approximately $12,553,000 in fiscal 2001. Gross margins on
product sales increased to 72% in fiscal 2002 from 62% in fiscal 2001. The
increase in gross margin percentage primarily related to increased sales of our
HPV Test products, principally in the United States where we sold such products
directly in fiscal 2002, and decreased sales of lower margin equipment
products, as well as the elimination, by the first quarter of fiscal 2002, of
certain expenses associated with the relocation to our new manufacturing
facility in April 2000 (which negatively impacted our gross margins during
fiscal 2001), improved inventory management and the recognition of minimum
purchase guarantees by Roche, partially offset by European value added taxes on
inventory purchases.

Research and development expenses increased to approximately $9,265,000 in
fiscal 2002 from approximately $8,120,000 in fiscal 2001. The increase in
expenses was due primarily to personnel costs, which increased 23%,
professional services and clinical trial expenses, which increased 18% and
laboratory supplies, which increased 8%.

During fiscal 2002, we focused our research and development activities
principally on: the development of our Rapid Capture System for automated
processing of our Hybrid Capture tests, initially related to HPV and CT/GC;
activities related to the preparation of a PMA supplement that we submitted to
the U.S. Food and Drug Administration (FDA) in October 2001 to obtain market
approval for the DNAwithPap Test which involves the use of our hc2 HPV Test as
a primary cervical cancer screening test to be performed in conjunction with
the Pap test for women age 30 and older, which was subsequently approved on
March 31, 2003; the development of our universal collection medium (UCM) that
is expected to allow the simultaneous testing for HPV, chlamydia and gonorrhea
and of other genetic and cellular material from a single patient sample;
clinical trials related to CT/GC testing from Cytycs PreservCyt specimens and
HPV testing from the TriPath Imagings SurePath specimens; and the creation of
our next generation of Hybrid Capture technology.

Selling and marketing expenses increased to approximately $19,835,000 in
fiscal 2002 from approximately $12,548,000 in fiscal 2001. The increase was
due primarily to various marketing programs and associated professional
expenses, which increased 110%, royalty costs, which increased 63%, and
personnel costs, which increased 26%. In fiscal 2002, we retained the services
of an advertising agency. All of the costs associated with this agency were
treated as advertising costs.

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

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

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

Liquidity and Capital Resources

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

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

On April 29, 2001, we entered into a letter agreement with Roche Molecular
Systems (the Roche Distribution Contract), which established Roche Molecular
Systems (Roche) as the co-exclusive distributor of our human papillomavirus
(HPV) products in Europe, Africa and the Middle East from May 1, 2001 through
June 30, 2002. In June 2002, we adopted as our sole strategy for the
distribution of our HPV products in Europe, Africa and the Middle East, a
combination of direct distribution through its European infrastructure and the
use of local distributors and agents.

On June 30, 2002, the term of the Roche Distribution Contract expired,
subject to a non-exclusive wind-down period. Under the Roche Distribution
Contract, we had the option,

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exercisable within 30 days after December 31, 2002, to buy back from Roche
equipment purchased from us by Roche and in use for HPV testing in customers
laboratories on June 30, 2002. In June 2002, as part of our strategic
decision, we decided that we would exercise the option to repurchase the
equipment.

In recognition of the decision to repurchase the equipment, commencing in
the fourth quarter of 2002, we deferred recognition of equipment sold to Roche.
Equipment sold during this time period had a sales price of $2.3 million and a
cost of $1.4 million, which amounts were recorded as deferred revenue and
deferred costs, respectively. The deferred revenue and deferred costs were
being amortized over a four-year period to other revenue (as equipment rental)
and selling and marketing expenses, respectively. For fiscal 2002, we recorded
Other revenue and Selling and marketing expenses of $109,000 and $67,000,
respectively related to the amortization of these balances. For fiscal 2003,
we recorded other revenue and selling and marketing expenses of $288,000 and
$177,000, respectively, related to the amortization of these balances prior to
the commencement of the repurchase. At December 31, 2002, when amortization
ceased, the remaining deferred revenue and deferred cost balances were
$1,904,000 and $1,169,000, respectively, for a remaining net credit as of
December 31, 2002 of $734,000.

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

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

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

We anticipate that working capital requirements will increase moderately
for the foreseeable future due to the investment necessary to support our
European direct distribution operations, including the January 2003 buy back
from Roche of equipment in Europe, as well as increasing accounts receivable as
a result of expected revenue growth. We have incurred negative cash flows from
operations since our inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our planned product
development efforts, expand our sales and marketing activities and expand our
manufacturing capabilities. We expect that our existing capital resources will
be adequate to fund our operations through

49



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##### 



fiscal 2004. Our future capital requirements and the adequacy of
available funds may change, however, based on numerous factors, including our
degree of success in commercializing our products, progress in our product
development efforts and the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, progress in our regulatory affairs
activities, the cost and timing of expansion of our manufacturing capabilities,
the development and maintenance of effective sales and marketing activities,
the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights, competing technological and market
developments, and the development and maturation of strategic alliances for the
marketing of our products. To the extent that our existing capital resources
and funds generated from operations are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. We do not have any committed sources of
additional financing, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, we may be required to delay, scale back or eliminate certain
aspects of our operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets.
Under such conditions, our business, financial condition and results of
operations will be materially adversely affected.

We have summarized below our material contractual obligations as of June
30, 2003:

(in thousands)

|                                   |  |       |            |               |  |                    |           |                    |  |                     |            |                  |  |   |           |  |  |   |           | 
|---------------------------------- |  | ----- | ---------- | ------------- |  | ------------------ | --------- | ------------------ |  | ------------------- | ---------- | ---------------- |  | - | --------- |  |  | - | --------- | 
|                                   |  |       |            |               |  | Less than One      |           | One to Three       |  | Four to Five        |            |                  |  |  
|Contractual                        |  |       |            |               |  | Year               |           | Years              |  | Years               |            | After Five Years
|Obligations                        |  | Total |            | (Fiscal 2004) |  | (Fiscal 2005-2007) |           | (Fiscal 2008-2009) |  | (After Fiscal 2009)
|                                   |  |       |            |               |  |                    |           |                    |  |                    
|Long-term debt                     |  | $     | 4,794,607  |               |  | $                  | 2,640,363 |                    |  | $                   | 1,653,779  |                  |  | $ | 180,334   |  |  | $ | 320,131   | 
|Operating leases                   |  |       | 18,781,119 |               |  |                    | 2,941,613 |                    |  |                     | 8,583,901  |                  |  |   | 5,637,336 |  |  |   | 1,618,269 | 
|                                   |  |       |            |               |  |                    |           |                    |  |                     |            |                  |  |   |           |  |  |   |           | 
|Total contractual
cash obligations |  | $     | 23,575,726 |               |  | $                  | 5,581,976 |                    |  | $                   | 10,237,680 |                  |  | $ | 5,817,670 |  |  | $ | 1,938,400 | 
|                                   |  |       |            |               |  |                    |           |                    |  |                     |            |                  |  |   |           |  |  |   |           | 

50



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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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



| |  |  | Inventory management.Our inventories are stated at the lower of
cost or market. Cost is determined using a weighted-average approach,
which approximates the first-in first-out method of inventory
management. We also record provisions for inventories which may not be
salable due to anticipated trends in sales volume and/or pricing and
our estimates of net realizable value. These provisions are determined
based on significant estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Revenue recognition.We recognize revenue from product sales when
there is persuasive evidence that an arrangement exists, delivery has
occurred, the price is fixed and determinable, and collectibility is
reasonably assured. We establish allowances for estimated
uncollectible amounts, product returns and discounts based on
historical default rates and specifically identified problem accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Accounting for employee stock options. We account for our employee
stock-based compensation in accordance with the provisions of APB No.
25, and related interpretations, which allow us to recognize
compensation costs for the excess of the estimated fair value of the
stock option at the grant date over the exercise price, if any. An
alternative method of accounting would apply the principles of SFAS No.
123 which require the fair value of the stock option to be recognized
at the date of grant and amortized to compensation expense over the
stock options vesting period. Had we applied the principles of SFAS
No. 123 for our employee options, our net loss would have been
approximately $17,241,000, $24,451,000 and $17,381,000 during our
fiscal years ended June 30, 2001, 2002 and 2003 instead of our reported
net loss which approximated $6,481,000, $9,397,000 and $4,324,000,
respectively.

51



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Our exchange rate risk comes from our
operations in Europe and South America. The net impact of foreign exchange
activities on earnings was not material for the years ended June 30, 2001, 2002
and 2003. Interest rate exposure is primarily limited to the $34.3 million of
cash, cash equivalents and short- and long-term investments owned by us. Such
securities are debt instruments that generate interest income for us on cash
balances. We do not actively manage the risk of interest rate fluctuations;
however, such risk is mitigated by the relatively short term nature, less than
twelve months, of certain investments. We do not consider the present rate of
inflation to have a significant impact on our business.

52



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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DIGENE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                  |  |  |    | 
|------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent Auditors |  |  | 54 | 
|Consolidated Balance Sheets                       |  |  | 55 | 
|Consolidated Statements of Operations             |  |  | 56 | 
|Consolidated Statements of Stockholders Equity   |  |  | 57 | 
|Consolidated Statements of Cash Flows             |  |  | 58 | 
|Notes to Consolidated Financial Statements        |  |  | 59 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digene Corporation

We have audited the accompanying consolidated balance sheets of Digene
Corporation as of June 30, 2002 and 2003, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended June 30, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digene
Corporation at June 30, 2002 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2003, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

McLean, Virginia
August 15, 2003

54



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DIGENE CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |   |  | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | ---------- | ----------- | -------- | - | ---------- | ----------- | - |  | 
|                                           |                                                                                                                                                              |                                      |            |             | June 30,
|                                           |                                                                                                                                                              |                                      |            |             |         
|                                           |                                                                                                                                                              |                                      |            |             | 2002     |   | 2003      
|                                           |                                                                                                                                                              |                                      |            |             |          |   |           
|                                           |                                                                                                                                                              |                                      | ASSETS     |             |          |   |            |             |   |  | 
|Current assets:                            |                                                                                                                                                              |                                      |            |             |          |   |            |            
|                                           | Cash and cash equivalents                                                                                                                                    |                                      | $          | 9,453,125   |          |   | $          | 7,883,129   |  
|                                           | Short-term investments                                                                                                                                       |                                      |            | 30,140,114  |          |   |            | 26,408,994  |  
|                                           | Accounts receivable, less allowance of approximately $684,000
and $432,000 at June 30, 2002 and 2003, respectively                                           |                                      |            | 9,001,584   |          |   |            | 10,344,597  |  
|                                           | Inventories                                                                                                                                                  |                                      |            | 5,980,386   |          |   |            | 7,073,920   |  
|                                           | Prepaid expenses and other current assets                                                                                                                    |                                      |            | 2,195,264   |          |   |            | 2,189,225   |  
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|Total current assets                       |                                                                                                                                                              |                                      | 56,770,473 |             |          |   | 53,899,865 |            
|Property and equipment, net                |                                                                                                                                                              |                                      | 7,398,637  |             |          |   | 7,515,104  |            
|Deferred costs, net                        |                                                                                                                                                              |                                      | 1,345,763  |             |          |   |           |            
|Intangible assets, net                     |                                                                                                                                                              |                                      | 900,515    |             |          |   | 900,515    |            
|Deposits and other assets                  |                                                                                                                                                              |                                      | 825,941    |             |          |   | 1,059,666  |            
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|Total assets                               |                                                                                                                                                              | $                                    | 67,241,329 |             |          | $ | 63,375,150 |            
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|                                           |                                                                                                                                                              | LIABILITIES AND STOCKHOLDERS EQUITY |            |             |          |   |            |             |   | 
|Current liabilities:                       |                                                                                                                                                              |                                      |            |             |          |   |            |            
|                                           | Accounts payable                                                                                                                                             |                                      | $          | 6,496,406   |          |   | $          | 7,489,700   |  
|                                           | Accrued expenses                                                                                                                                             |                                      |            | 5,628,706   |          |   |            | 3,467,629   |  
|                                           | Accrued payroll                                                                                                                                              |                                      |            | 2,864,436   |          |   |            | 4,182,327   |  
|                                           | Current portion of long-term debt                                                                                                                            |                                      |            | 1,377,856   |          |   |            | 2,640,363   |  
|                                           | Deferred revenues                                                                                                                                            |                                      |            | 575,091     |          |   |            |            |  
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|Total current liabilities                  |                                                                                                                                                              |                                      | 16,942,495 |             |          |   | 17,780,019 |            
|Deferred rent                              |                                                                                                                                                              |                                      | 353,076    |             |          |   | 434,908    |            
|Deferred revenue, less current portion     |                                                                                                                                                              |                                      | 1,616,478  |             |          |   |           |            
|Long-term debt, less current portion       |                                                                                                                                                              |                                      | 3,690,496  |             |          |   | 2,154,244  |            
|Deferred liability                         |                                                                                                                                                              |                                      | 5,000,000  |             |          |   |           |            
|Stockholders equity:                      |                                                                                                                                                              |                                      |            |             |          |   |            |            
|                                           | Preferred Stock, $0.10 par value, 1,000,000 shares authorized,
no shares issued and outstanding                                                              |                                      |            |            |          |   |            |            |  
|                                           | Common Stock, $0.01 par value, 50,000,000 shares authorized, 17,972,728
and 18,325,208 shares issued and outstanding at June 30, 2002 and
2003, respectively |                                      |            | 179,727     |          |   |            | 183,252     |  
|                                           | Additional paid-in capital                                                                                                                                   |                                      |            | 110,856,010 |          |   |            | 118,535,272 |  
|                                           | Deferred stock compensation                                                                                                                                  |                                      |            | (32,137     | )        |   |            | (380,633    | )
|                                           | Accumulated other comprehensive income                                                                                                                       |                                      |            |            |          |   |            | 356,415     |  
|                                           | Accumulated deficit                                                                                                                                          |                                      |            | (71,364,816 | )        |   |            | (75,688,327 | )
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|Total stockholders equity                 |                                                                                                                                                              |                                      | 39,638,784 |             |          |   | 43,005,979 |            
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  
|Total liabilities and stockholders equity |                                                                                                                                                              | $                                    | 67,241,329 |             |          | $ | 63,375,150 |            
|                                           |                                                                                                                                                              |                                      |            |             |          |   |            |             |  

See accompanying notes.

55



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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|---------------------------------------- | --------------------------------- | - | ------------------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                         |                                   |   | Year Ended June 30,
|                                         |                                   |   |                    
|                                         |                                   |   | 2001                |            | 2002 |   | 2003      
|                                         |                                   |   |                     |            |      |   |           
|Revenues:                                |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Product sales                     |   | $                   | 32,706,349 |      |   | $          | 45,750,124 |   |   | $          | 62,440,415 |  
|                                         | Distribution contract             |   |                     | 837,577    |      |   |            | 2,357,239  |   |   |            |           |  
|                                         | Other                             |   |                     | 652,960    |      |   |            | 740,414    |   |   |            | 661,481    |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Total revenues                           |                                   |   | 34,196,886          |            |      |   | 48,847,777 |            |   |   | 63,101,896 |           
|Costs and expenses:                      |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Cost of product sales             |   |                     | 12,552,640 |      |   |            | 12,937,556 |   |   |            | 13,383,086 |  
|                                         | Research and development          |   |                     | 8,120,114  |      |   |            | 9,264,548  |   |   |            | 10,262,138 |  
|                                         | Selling and marketing             |   |                     | 12,548,476 |      |   |            | 19,835,304 |   |   |            | 27,912,724 |  
|                                         | General and administrative        |   |                     | 8,335,562  |      |   |            | 14,024,276 |   |   |            | 16,642,100 |  
|                                         | Abbott termination fee            |   |                     |           |      |   |            | 2,500,000  |   |   |            |           |  
|                                         | Amortization of intangible assets |   |                     | 150,086    |      |   |            | 150,086    |   |   |            |           |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Total costs and expenses                 |                                   |   | 41,706,878          |            |      |   | 58,711,770 |            |   |   | 68,200,048 |           
|Loss from operations                     |                                   |   | (7,509,992          | )          |      |   | (9,863,993 | )          |   |   | (5,098,152 | )         
|Other income (expense):                  |                                   |   |                     |            |      |   |            |            |   |   |            |           
|                                         | Interest income                   |   |                     | 1,193,941  |      |   |            | 729,681    |   |   |            | 593,331    |  
|                                         | Interest expense                  |   |                     | (10,297    | )    |   |            | (32,217    | ) |   |            | (272,810   | )
|                                         | Other income (expense)            |   |                     | (37,432    | )    |   |            | (19,981    | ) |   |            | 677,585    |  
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Loss from operations before income taxes |                                   |   | (6,363,780          | )          |      |   | (9,186,510 | )          |   |   | (4,100,046 | )         
|Provision for income taxes               |                                   |   | 117,217             |            |      |   | 210,106    |            |   |   | 223,465    |           
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Net loss                                 |                                   | $ | (6,480,997          | )          |      | $ | (9,396,616 | )          |   | $ | (4,323,511 | )         
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Basic and diluted net loss per share     |                                   | $ | (0.39               | )          |      | $ | (0.54      | )          |   | $ | (0.24      | )         
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  
|Weighted average shares outstanding      |                                   |   | 16,556,863          |            |      |   | 17,360,725 |            |   |   | 18,135,689 |           
|                                         |                                   |   |                     |            |      |   |            |            |   |   |            |            |  

See accompanying notes.

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DIGENE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |            |  
|----------------------------------------------------------------------- | ---------------------------- |  | ------------ | - | ---------- | - | -------------- | - | ------------- | - | ----------- | - | ------------- | - | -------- | - | ----- | - | ----------- | ------- |  | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   | Accumulated |         |  |   |             |            |   |   |           
|                                                                        |                              |  | Common Stock |   | Additional |   |                |   |               |   | Other       |   |               |   |          |   | Total
|                                                                        |                              |  |              |   | Paid-In    |   | Deferred Stock |   | Comprehensive |   | Accumulated |   | Stockholders
|                                                                        |                              |  | Shares       |   | Amount     |   | Capital        |   | Compensation  |   | Income      |   | Deficit       |   | Equity  
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |         
|Balance at June 30, 2000                                                |                              |  | l6,173,538   |   |            | $ | 161,735        |   |               | $ | 84,846,747  |   |               | $ | (96,411  | ) |       | $ |            |         |  | $ | (55,487,203 | )          |   | $ | 29,424,868 |           
|Exercise of Common Stock
options                                        |                              |  | 581,801      |   |            |   | 5,818          |   |               |   | 3,352,464   |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 3,358,282  |           
|Compensatory stock options
earned by non-employees                      |                              |  |             |   |            |   |               |   |               |   |            |   |               |   | 32,137   |   |       |   |            |         |  |   |            |            |   |   | 32,137     |           
|Net loss                                                                |                              |  |             |   |            |   |               |   |               |   |            |   |               |   |         |   |       |   |            |         |  |   | (6,480,997  | )          |   |   | (6,480,997 | )         
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |           
|Balance at June 30, 2001                                                |                              |  | 16,755,339   |   |            |   | 167,553        |   |               |   | 88,199,211  |   |               |   | (64,274  | ) |       |   |            |         |  |   | (61,968,200 | )          |   |   | 26,334,290 |           
|Exercise of Common Stock
options                                        |                              |  | 541,281      |   |            |   | 5,413          |   |               |   | 5,244,020   |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 5,249,433  |           
|Issuance of Common Stock in
connection with private
placement financing |                              |  | 588,235      |   |            |   | 5,882          |   |               |   | 14,913,658  |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 14,919,540 |           
|Issuance of Common Stock in
connection with Abbott
agreement            |                              |  | 87,873       |   |            |   | 879            |   |               |   | 2,499,121   |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 2,500,000  |           
|Compensatory stock options
earned by non-employees                      |                              |  |             |   |            |   |               |   |               |   |            |   |               |   | 32,137   |   |       |   |             |         |  |   |            |            |   |   | 32,137     |           
|Net loss                                                                |                              |  |             |   |            |   |               |   |               |   |            |   |               |   |         |   |       |   |             |         |  |   | (9,396,616  | )          |   |   | (9,396,616 | )         
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |           
|Balance at June 30, 2002                                                |                              |  | 17,972,728   |   |            |   | 179,727        |   |               |   | 110,856,010 |   |               |   | (32,137  | ) |       |   |            |         |  |   | (71,364,816 | )          |   |   | 39,638,784 |           
|Comprehensive loss:                                                     |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |            |         |  |   |            |            |   |   |            |           
|                                                                        | Foreign currency translation |  |              |  |            |   |                |  |               |   |             |  |               |   |          |  |       |   |             | 356,415 |  |   |             |           |   |   |            | 356,415    |  
|                                                                        | Net loss                     |  |              |  |            |   |                |  |               |   |             |  |               |   |          |  |       |   |             |        |  |   |             | (4,323,511 | ) |   |            | (4,323,511 | )
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |           
|                                                                        | Comprehensive loss           |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            | (3,967,096 | )
|Exercise of Common Stock
options                                        |                              |  | 209,623      |   |            |   | 2,096          |   |               |   | 2,079,691   |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 2,081,787  |           
|Issuance of Common Stock to
Roche                                       |                              |  | 142,857      |   |            |   | 1,429          |   |               |   | 4,998,571   |   |               |   |         |   |       |   |            |         |  |   |            |            |   |   | 5,000,000  |           
|Issuance of Common Stock
options to non-employees                       |                              |  |             |   |            |   |               |   |               |   | 601,000     |   |               |   | (601,000 | ) |       |   |            |         |  |   |            |            |   |   |           |           
|Compensatory stock options
earned by non-employees                      |                              |  |             |   |            |   |               |   |               |   |            |   |               |   | 252,504  |   |       |   |            |         |  |   |            |            |   |   | 252,504    |           
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |           
|Balance at June 30, 2003                                                |                              |  | 18,325,208   |   |            | $ | 183,252        |   |               | $ | 118,535,272 |   |               | $ | (380,633 | ) |       | $ | 356,415     |         |  | $ | (75,688,327 | )          |   | $ | 43,005,979 |           
|                                                                        |                              |  |              |   |            |   |                |   |               |   |             |   |               |   |          |   |       |   |             |         |  |   |             |            |   |   |            |           

See accompanying notes.

57



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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |         |           |            |  
|----------------------------------------------------------------------------------------- | ----------------- | ------------------------------------------------------- | ----------------------------------------- | ------ | ------------------- | ---------- | ----------- | ------ | --------- | ---------- | ----------- | ------- | --------- | ---------- | -
|                                                                                          |                   |                                                         |                                           |        | Year Ended June 30,
|                                                                                          |                   |                                                         |                                           |        |                    
|                                                                                          |                   |                                                         |                                           |        | 2001                |            | 2002        |        | 2003     
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |          
|Operating activities                                                                      |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Net loss                                                                                  |                   | $                                                       | (6,480,997                                | )      |                     | $          | (9,396,616  | )      |           | $          | (4,323,511  | )      
|Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|                                                                                          |                   | Abbott termination fee                                  |                                           |        |                    |            |             |        | 2,500,000 |            |             |         |          |           
|                                                                                          |                   | Write-off note receivable                               |                                           |        |                    |            |             |        | 406,500   |            |             |         |          |           
|                                                                                          |                   | Depreciation and amortization of property and
equipment |                                           |        | 1,360,729           |            |             |        | 1,769,567 |            |             |         | 3,293,454 |           
|                                                                                          |                   | Amortization of intangible assets                       |                                           |        | 150,086             |            |             |        | 150,086   |            |             |         |          |           
|                                                                                          |                   | Loan on disposal of fixed assets                        |                                           |        |                    |            |             |        |          |            |             |         | 22,925    |           
|                                                                                          |                   | Compensation expense related to stock options           |                                           |        | 32,137              |            |             |        | 32,137    |            |             |         | 252,504   |           
|                                                                                          |                   | Changes in operating assets and liabilities:            |                                           |        |                     |            |             |        |           |            |             |         |           |           
|                                                                                          |                   |                                                         | Accounts receivable                       |        |                     | (913,870   | )           |        |           | (3,306,936 | )           |         |           | (1,343,013 | )
|                                                                                          |                   |                                                         | Inventories                               |        |                     | (1,148,118 | )           |        |           | (431,971   | )           |         |           | 259,177    |  
|                                                                                          |                   |                                                         | Prepaid expenses and other current assets |        |                     | (777,890   | )           |        |           | (509,497   | )           |         |           | 6,039      |  
|                                                                                          |                   |                                                         | Deferred costs                            |        |                     |           |             |        |           | (1,412,524 | )           |         |           |           |  
|                                                                                          |                   |                                                         | Deposits and other assets                 |        |                     | 127,680    |             |        |           | (110,699   | )           |         |           | (233,725   | )
|                                                                                          |                   |                                                         | Accounts payable                          |        |                     | (567,952   | )           |        |           | 3,236,220  |             |         |           | 993,294    |  
|                                                                                          |                   |                                                         | Accrued expenses                          |        |                     | 1,682,890  |             |        |           | 2,919,216  |             |         |           | (2,161,077 | )
|                                                                                          |                   |                                                         | Accrued payroll                           |        |                     | 439,173    |             |        |           | 998,659    |             |         |           | 1,317,891  |  
|                                                                                          |                   |                                                         | Deferred revenues                         |        |                     | 7,792,000  |             |        |           | (5,600,431 | )           |         |           |           |  
|                                                                                          |                   |                                                         | Deferred rent                             |        |                     | 154,828    |             |        |           | 119,492    |             |         |           | 81,832     |  
|                                                                                          |                   |                                                         | Deferred liability                        |        |                     | 5,000,000  |             |        |           |           |             |         |           |           |  
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Net cash provided by (used in) operating activities                                       |                   |                                                         | 6,850,696                                 |        |                     |            | (8,636,797  | )      |           |            | (1,834,210  | )      
|Investing activities                                                                      |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Purchases of short-term investments                                                       |                   |                                                         | (14,719,120                               | )      |                     |            | (35,755,094 | )      |           |            | (29,940,689 | )      
|Sales of short-term investments                                                           |                   |                                                         | 18,420,527                                |        |                     |            | 14,592,392  |        |           |            | 33,671,809  |        
|Capital expenditures                                                                      |                   |                                                         | (1,819,131                                | )      |                     |            | (1,542,601  | )      |           |            | (3,763,786  | )      
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Net cash provided by (used in) investing activities                                       |                   |                                                         | 1,882,276                                 |        |                     |            | (22,705,303 | )      |           |            | (32,666     | )      
|Financing activities                                                                      |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Net proceeds from issuance of Common Stock                                                |                   |                                                         |                                          |        |                     |            | 14,919,540  |        |           |            |            |        
|Exercise of Common Stock options                                                          |                   |                                                         | 3,358,282                                 |        |                     |            | 5,249,433   |        |           |            | 2,081,787   |        
|Proceeds from long-term debt                                                              |                   |                                                         | 1,000,000                                 |        |                     |            |            |        |           |            |            |        
|Principal payments of long-term debt                                                      |                   |                                                         |                                          |        |                     |            |            |        |           |            | (1,428,492  | )      
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Net cash provided by financing activities                                                 |                   |                                                         | 4,358,282                                 |        |                     |            | 20,168,973  |        |           |            | 653,295     |        
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Effect of currency translations                                                           |                   |                                                         |                                          |        |                     |            |            |        |           |            | (356,415    | )      
|Net increase (decrease) in cash and cash equivalents                                      |                   |                                                         | 13,091,254                                |        |                     |            | (11,173,127 | )      |           |            | (1,569,996  | )      
|Cash and cash equivalents at beginning of year                                            |                   |                                                         | 7,534,998                                 |        |                     |            | 20,626,252  |        |           |            | 9,453,125   |        
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Cash and cash equivalents at end of year                                                  |                   | $                                                       | 20,626,252                                |        |                     | $          | 9,453,125   |        |           | $          | 7,883,129   |        
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|Supplemental cash flow information                                                        |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|                                                                                          | Interest paid     |                                                         | $                                         | 4,000  |                     |            | $           | 13,000 |           |            | $           | 374,000 |          
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        
|                                                                                          | Income taxes paid |                                                         | $                                         | 38,000 |                     |            | $           | 72,000 |           |            | $           | 149,000 |          
|                                                                                          |                   |                                                         |                                           |        |                     |            |             |        |           |            |             |        

See accompanying notes.

58



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

On June 28, 1996, the Company entered into a joint venture agreement with a
Brazilian national to establish Digene do Brasil LTDA, a majority-owned
subsidiary of the Company.

In October 1997, the Company established Digene B.V., a Netherlands limited
liability company, to act as the Companys European distributor; in 1999 Digene
B.V. was made dormant. On March 3, 1998, the Company established a
wholly-owned Delaware subsidiary, Digene Europe, Inc., for the marketing of the
Companys products in Europe. In 2003 Digene Europe, Inc. became inactive as a
result of changes in the Companys distribution plans and assumption of the
marketing activities in Europe by the Companys newly-formed European entities.
On July 1, 1998, the Company acquired Viropath B.V., a company with limited
liability, registered in Amsterdam, The Netherlands.

On April 26, 2002, the Company established a wholly-owned subsidiary, Digene UK
(Holdings) Limited, to be a holding company for its European subsidiaries.
Digene UK (Holdings) Limited owns all the outstanding shares of Digene (UK)
Limited, Digene Deutschland GmbH, Digene (France) SAS and Digene Italia s.r.l.,
which were organized in April, May, August and October 2002, respectively, and
of Digene Diagnostics S.L. (Spain), which was organized in June of 2003. In
July 2002, the Company also organized Digene (Switzerland) Sarl, all of the
outstanding shares of which are owned by Digene. Through these newly formed
entities and the use of local distributors and agents, Digene will market and
distribute the Companys products throughout Europe.



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

Management Estimates

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

Principles of Consolidation

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

Cash and Cash Equivalents

Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less. Substantially
all cash equivalents are held in short-term money market accounts with large
high-quality institutions.

59



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Short-Term Investments

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

Trade Receivables

Trade receivables that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported in the consolidated
balance sheets at outstanding principal less any charge offs and the allowance
for doubtful accounts. The Company charges off uncollectible receivables
against the allowance for doubtful accounts when the likelihood of collection
is remote. Generally, the Company considers receivables past due 30 days
subsequent to the billing date; however, the Company may extend credit terms up
to 180 days. The Company performs ongoing credit evaluations of its customers
and generally extends credit without requiring collateral. The Company
maintains an allowance for doubtful accounts, which is determined based on
historical experience, existing economic conditions and managements
expectations of future losses. Losses have historically been within
managements expectations. As of June 20, 2002 and 2003, the Company had an
allowance for doubtful accounts of approximately $684,000 and $432,000,
respectively.

Intangible Assets

Intangible assets arose from the Companys acquisition of Viropath B.V. in
1998. The excess of the purchase price over the identifiable tangible net
assets acquired of approximately $1.5 million was being amortized on a
straight-line basis over ten years. In July 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, which requires companies to stop amortizing goodwill and
certain intangible assets deemed to have an indefinite useful life. Instead,
SFAS No. 142 requires that goodwill and intangible assets deemed to have an
indefinite useful life be reviewed for impairment upon the adoption of SFAS 142
and annually thereafter. The Company has ceased the amortization of the
intangible assets effective July 1, 2002, and instead reviews intangible assets
in the fourth quarter of each fiscal year for evidence of impairment, and will
adjust the recorded value, if necessary. The Company reviewed the value of the
intangible assets in the fourth quarter of fiscal year 2003 and did not note
any circumstances which would warrant an adjustment to the recorded value.
Accumulated amortization expense approximated $600,000 as of June 30, 2003.

If goodwill and other intangible assets had been accounted for in accordance
with this guidance from the date of acquisition, net income and EPS would be as
follows:

|                               |  |                     |            |      |  |      |            |   |  |   |            |  
|------------------------------ |  | ------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                               |  | Year Ended June 30,
|                               |  |                    
|                               |  | 2001                |            | 2002 |  | 2003
|                               |  |                     |            |      |  |     
|Net loss, as reported          |  | $                   | (6,480,997 | )    |  | $    | (9,396,616 | ) |  | $ | (4,323,511 | )
|Amortization expense           |  |                     | 150,086    |      |  |      | 150,086    |   |  |   |           |  
|                               |  |                     |            |      |  |      |            |   |  |   |            |  
|Pro forma net loss             |  | $                   | (6,330,911 | )    |  | $    | (9,246,530 | ) |  | $ | (4,323,511 | )
|                               |  |                     |            |      |  |      |            |   |  |   |            |  
|Net loss per share             | 
|Basic and diluted, as reported |  | $                   | (0.39      | )    |  | $    | (0.54      | ) |  | $ | (0.24      | )
|Basic and diluted, pro forma   |  | $                   | (0.38      | )    |  | $    | (0.53      | ) |  | $ | (0.24      | )

60



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Impairment of Long-Lived Assets and Recoverability of Intangibles

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

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
whereby revenue is not recognized until it is realized or realizable and
earned. Revenue is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the price to the buyer is fixed and determinable and
collectibility is reasonably assured. Revenues from product sales are
recognized upon shipment. Allowances are established for estimated
uncollectible amounts, product returns and discounts. In addition, the Company
defers approximately two percent of its product sales as a reserve for future
warranty costs and recognizes this deferred revenue over one year, which is the
standard warranty period for a majority of its systems components. At June 30,
2003, the warranty reserve was approximately $633,000 and, historically, the
warranty losses have been within management estimates.

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

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

Concentration of Credit Risk and Financial Instruments

The Company performs ongoing credit evaluations on its customers financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have historically been within
managements expectations.

For the year ended June 30, 2001, the Company generated 28% of total revenues
from a single customer. For the year ended June 30, 2002, two customers
comprised 26% of total revenues. For the year ended June 30, 2003, two
customers generated 28% of total revenue. As of June 30, 2002 and 2003, the
Company recorded receivable balances of $1,686,000 and $2,175,000,
respectively, from these customers.

61



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Concentration of Credit Risk and Financial Instruments (continued)

The fair value of the Companys cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximate their carrying amount due to the relatively short maturity of these
items. The fair value of debt approximates its carrying amount as of June 30,
2002 and 2003 based on rates currently available to the Company for debt with
similar terms and maturities.

Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income, requires the presentation of
comprehensive income or loss and its components as part of the consolidated
financial statements. The Companys comprehensive loss includes net loss as
well as additional other comprehensive net income. For the years ended June
30, 2001 and 2002, the Companys net loss approximates its comprehensive loss;
accordingly, no separate disclosure of comprehensive loss is required. For the
year ended June 30, 2003, other comprehensive income included gains and losses
on long-term intercompany transactions and translation gains and losses
incurred when converting its subsidiaries financial statements from their
functional currency to U.S. dollars.

Foreign Currency Valuation

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

Research and Development

The Company expenses its research and development costs as incurred. Research
and development costs include salaries and related benefits, outside services,
material and supplies and allocations of facility and support costs.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs amounted
to approximately $19,000, $963,000 and $855,000 during fiscal 2001, 2002 and
2003, respectively.

Shipping Costs

The Companys shipping and handling costs are included in cost of product sales
for all periods presented.

Income Taxes

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

Net Loss Per Share

The Company follows the provisions of SFAS No. 128, Earnings Per Share, which
require the Company to present basic and fully diluted loss per share. The
Companys basic and diluted loss per share is calculated by dividing the net
loss by the weighted average number of shares of Common Stock outstanding
during all periods presented. The Companys diluted net loss per share is the
same as basic net loss per share as the shares issuable upon the exercise of
stock options have been excluded from the computation because the effect of
their inclusion would be anti-dilutive.

62



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation
cost is recognized for the excess of the estimated fair value of the stock at
the grant date over the exercise price, if any. The Company accounts for equity
instruments issued to non-employees in accordance with EITF 96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods, or Services. Accordingly, the estimated
fair value of the equity instrument is recorded on the earlier of the
performance commitment date or the date the services required are completed.

In accordance with SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS No. 148) the effect on net loss and net loss
per share if the company had applied the fair value recognition provisions of
SFAS No. 123 Accounting for Stock-Based Compensation(SFAS No. 123) to
stock-based employee compensation is as follows:

|                                                                                                 |  |                     |             |      |  |      |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------ |  | ------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                 |  | Year ended June 30,
|                                                                                                 |  |                    
|                                                                                                 |  | 2001                |             | 2002 |  | 2003
|                                                                                                 |  |                     |             |      |  |     
|Net loss, as reported                                                                            |  | $                   | (6,480,997  | )    |  | $    | (9,396,616  | ) |  | $ | (4,323,511  | )
|Add: Stock-based non-employee
compensation included in
reported net loss                         |  |                     | 32,137      |      |  |      | 32,137      |   |  |   | 252,504     |  
|Deduct: Stock-based employee
compensation expense if SFAS
No. 123 had been applied to
all grants |  |                     | (10,792,003 | )    |  |      | (15,086,236 | ) |  |   | (13,310,256 | )
|                                                                                                 |  |                     |             |      |  |      |             |   |  |   |             |  
|Pro forma net loss                                                                               |  | $                   | (17,240,863 | )    |  | $    | (24,450,715 | ) |  | $ | (17,381,263 | )
|                                                                                                 |  |                     |             |      |  |      |             |   |  |   |             |  
|Net loss per share                                                                               |  |                     |             |      |  |      |             |   |  |   |             |  
|Basic and diluted  as reported                                                                  |  | $                   | (0.39       | )    |  | $    | (0.54       | ) |  | $ | (0.24       | )
|Basic and diluted  pro forma                                                                    |  | $                   | (1.04       | )    |  | $    | (1.41       | ) |  | $ | (0.96       | )

The effect of applying SFAS No. 123 on a pro forma net loss as stated above is
not necessarily representative of the effect on reported net loss for future
years due to, among other things, the vesting period of the stock options and
the fair value of additional options to be granted in future years.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN
45). FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 31, 2002. The adoption of FIN 45 did not
have an effect on the Companys financial condition, results of operations or
liquidity.

In November 2002, the Emerging Issues Task Force reached consensus on EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 provides a model for how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. The model requires that revenue
arrangements with multiple deliverables should be divided into separate units
of accounting if the deliverables in the arrangements meet certain criteria.
EITF 00-21 is effective for

63



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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Recent Accounting Pronouncements (continued)

fiscal periods beginning after June 15, 2003. The Company does not expect
adoption of EITF 00-21 to have a material effect on its financial condition,
results of operations or liquidity.

In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46, which
applies to certain off-balance sheet assets, liabilities and obligations,
clarifies the application of Accounting Research Bulletin
No. 51, Consolidated
Financial Statements, to certain entities, called variable interest entities,
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Variable interest entities are frequently used in connection
with collateralized debt obligations, receivable securitizations and synthetic
leases. The FIN 46 guidelines will usually require the party that bears the
majority of the risk of, or controls the actions of, the variable interest
entity to consolidate the assets and liabilities of the associated variable
interest entity. FIN 46 was applicable upon issuance to variable interest
entities created after January 31, 2003 and for periods beginning after June
15, 2003 for all other variable interest entities. The Company has adopted FIN
46 effective July 1, 2003, however it does not currently have an effect on the
Companys financial condition, results of operations or liquidity.

Reclassifications

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



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

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

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

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

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

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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

minimum purchases of equipment and HPV products over the term of the Roche
Distribution Contract. The minimum purchase guarantee was funded and accounted
for as follows:

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

Under the terms of the Roche Distribution Contract, Digene was required to
remit to Roche the total amount the Company received from sales made to Abbott,
subject to certain limitations. Accordingly, the Consolidated Balance Sheet as
of June 30, 2002 includes an amount payable to Roche of approximately $1.9
million, representing the balance of product sales revenue from Abbott which
was owed to Roche.

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

In June 2002, the Company adopted as its sole strategy for the distribution of
its products in Europe, Africa and the Middle East, a combination of direct
distribution through its European infrastructure and the use of local
distributors and agents. On June 30, 2002, the term of the Roche Distribution
Contract expired, subject to a non-exclusive wind-down period. Under the Roche
Distribution Contract, the Company had the option, exercisable within 30 days
after December 31, 2002, to buy back from Roche equipment purchased from the
Company by Roche and in use for HPV testing in customers laboratories on June
30, 2002. In June 2002, as part of its strategic decision, the Company decided
that it would exercise the option to repurchase the equipment.

In recognition of the decision to repurchase the equipment, commencing in the
fourth quarter of 2002, the Company deferred recognition of revenue from
equipment sold to Roche. Equipment sold during this time period had a sales
price of $2.3 million and a cost of $1.4 million, which amounts were recorded
as deferred revenue and deferred costs, respectively. The deferred revenue and
deferred costs were being amortized over a four-year period to other revenue
(as equipment rental) and selling and marketing expenses, respectively. For
the year ended June 30, 2002, the Company recorded other revenue and selling
and marketing expenses of $109,000 and $67,000, respectively related to the
amortization of these balances. For the year ended June 30, 2003, the Company
recorded other revenue and selling and marketing expenses of $288,000 and
$177,000, respectively, related to the amortization of these balances prior to
the commencement of the repurchase. At December 31, 2002, when amortization
ceased, the remaining deferred revenue and deferred cost balances were
$1,904,000 and $1,169,000, respectively, for a remaining net credit as of
December 31, 2002 of $734,000.

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

65



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

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



|4. |  | Tender Offer and Co-Promotion Agreement
|-- |  | ---------------------------------------

On February 19, 2002, the Company, Cytyc Corporation (Cytyc) and Cruiser,
Inc., a wholly-owned subsidiary of Cytyc, entered into an Agreement and Plan of
Merger (the Merger Agreement), which provided for, among other things: (i)
the commencement by Cytyc of a stock and cash tender offer for all of the
outstanding shares of Digene (the Offer); and (ii) following consummation of
the Offer, the merger of Cruiser, Inc. with and into Digene. The closing of the
transaction was subject to the receipt of all necessary regulatory approvals
and other customary closing conditions. The transaction was reviewed by the
U.S. Federal Trade Commission (FTC) under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.

On June 30, 2002, Digene delivered to Cytyc a formal notice of Digenes
termination of the Merger Agreement following receipt of a notice from the FTC
informing Digene and Cytyc that, if the parties sought to close the
transactions contemplated by the Merger Agreement, the FTC would seek an
injunction to block the closing. Under the terms of the Merger Agreement,
either of Cytyc or Digene had the right to terminate the Merger Agreement. For
the year ended June 30, 2002, the Company incurred incremental costs of
approximately $3.0 million for merger related expenditures such as legal
services, accounting fees and consultancy. These costs were charged to
operations as incurred.

In January 2001, the Company entered into an exclusive co-promotion agreement
with Cytyc for the promotion of the Companys HC2 HPV Test for use with Cytycs
ThinPrep® Pap Test in the United States and Puerto Rico. The companies jointly
promoted the benefits of testing for HPV with the Digene HC2 HPV Test directly
from Cytycs ThinPrep Pap Test sample collection vial. Subject to FDA
approval, the companies intended to co-promote the combined products as the
most effective primary screening method for cervical cancer. The original term
of the agreement expired June 30, 2002 and was allowed to automatically renew
until June 30, 2003. This agreement was not renewed at June 30, 2003. In
accordance with the co-promotion agreement, Digene paid Cytyc for its
co-promotion activities based on a product sales-derived formula. For the
years ended June 30, 2001, 2002 and 2003, the Company recorded expenses of
approximately $36,000, $1.8 million and $2.3 million, respectively, related to
payments due to Cytyc for these co-promotion activities.



|5. |  | Sale of a Product Line
|-- |  | ----------------------

On March 24, 2000, the Company completed the sale of its Molecular Biology
Reagents (MBR) product line and related assets to KD Medical, Inc. This
transaction involved the sale of the Companys MBR product line and the
associated manufacturing equipment, as well as the raw material and finished
goods inventory for the product line. As consideration for this sale, the
Company received $200,000 in cash and a promissory note in the amount of
$400,000 payable in monthly installments of $20,000 plus 8% accrued interest
from July 1, 2000 through February 1, 2002. A gain of approximately $515,000
was recorded on the sale of this product line and was included in the other
income (expense) line of the Consolidated Statements of Operations for the year
ended June 30, 2000. In June 2002, the Company determined the balance
outstanding on the promissory note was uncollectible and took a charge against
operations for the unpaid principal and accrued interest of $406,500.

66



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|6. |  | Inventories
|-- |  | -----------

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

Inventories consist of the following:

|                |  |          |            |      |  |   |            |  
|--------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                |  | June 30,
|                |  | 2002     |            | 2003
|                |  |          |            |     
|Finished goods  |  | $        | 2,388,153  |      |  | $ | 5,132,328  |  
|Work in process |  |          | 3,460,359  |      |  |   | 2,897,539  |  
|Raw materials   |  |          | 1,339,470  |      |  |   | 1,461,347  |  
|                |  |          |            |      |  |   |            |  
|                |  |          | 7,187,982  |      |  |   | 9,491,214  |  
|Reserve         |  |          | (1,207,596 | )    |  |   | (2,417,294 | )
|                |  |          |            |      |  |   |            |  
|                |  | $        | 5,980,386  |      |  | $ | 7,073,920  |  
|                |  |          |            |      |  |   |            |  



|7. |  | Property and Equipment
|-- |  | ----------------------

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

Property and equipment consist of the following:

|                                          |  |          |            |      |  |   |            |  
|----------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                          |  | June 30,
|                                          |  | 2002     |            | 2003
|                                          |  |          |            |     
|Furniture, fixtures and office equipment  |  | $        | 2,357,887  |      |  | $ | 2,321,487  |  
|Machinery and equipment                   |  |          | 11,786,019 |      |  |   | 12,464,146 |  
|Leasehold improvements                    |  |          | 223,200    |      |  |   | 201,079    |  
|                                          |  |          |            |      |  |   |            |  
|                                          |  |          | 14,367,106 |      |  |   | 14,986,712 |  
|Accumulated depreciation and amortization |  |          | (6,968,469 | )    |  |   | (7,471,608 | )
|                                          |  |          |            |      |  |   |            |  
|                                          |  | $        | 7,398,637  |      |  | $ | 7,515,104  |  
|                                          |  |          |            |      |  |   |            |  



|8. |  | Long-term Debt
|-- |  | --------------

In February 2000, the Company received an equipment loan facility of $1,000,000
from the State of Maryland to finance a portion of the costs of equipment
installed at the Companys facility in Gaithersburg, Maryland. Approximately
$503,000 of fixed asset additions, previously financed with cash, was converted
to this facility during July 2000. The remaining $497,000 of the facility was
drawn down in the year ended June 30, 2001 for additional capital expenditures.
The repayment of this loan is secured by a lien on property and equipment
purchased using the proceeds from the loan facility. The loan bears interest
at 1% per annum and the Company began making quarterly principal payments in
October 2002, with all unpaid principal and interest due by December 31, 2009.

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

67



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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Long-term Debt (continued)
|-- |  | --------------------------

In January 2003, as part of the repurchase of certain equipment from Roche
under the Roche Distribution Contract as discussed in Note 3, the Company
issued a promissory note to Roche with a principal amount of $1,225,663 which
is to be paid in its entirety on January 6, 2004. There is no stated interest
rate for this note and, accordingly, the Company has imputed interest at its
current borrowing rate and has recorded a discount on this note payable, which
is being amortized to interest expense over the term of the note.

At June 30, 2003, future minimum principal payment on all long-term debt
obligations is as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 2,640,363 | 
|2005       |  |   | 1,447,683 | 
|2006       |  |   | 103,048   | 
|2007       |  |   | 103,048   | 
|2008       |  |   | 103,048   | 
|Thereafter |  |   | 397,417   | 
|           |  |   |           | 
|           |  | $ | 4,794,607 | 
|           |  |   |           | 



|9. |  | Warranties
|-- |  | ----------

In fiscal 2003 the Company began to offer its customers extended warranties on
its equipment. The revenue from these extended warranties are deferred and are
recognized evenly over the life of the extended warranty. Changes in the
Companys deferred extended warranty revenue during the period are as follows:

|                                                                                          |  |   |        |  
|----------------------------------------------------------------------------------------- |  | - | ------ | -
|Balance, June 30, 2002                                                                    |  | $ |       |  
|Warranties issued during the period                                                       |  |   | 65,429 |  
|Settlements made during the period                                                        |  |   |       |  
|Changes in liability for pre-existing warranties during the
period, including expirations |  |   | (7,409 | )
|                                                                                          |  |   |        |  
|Balance, June 30, 2003                                                                    |  | $ | 58,020 |  



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

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

|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|-------------------------------- | ------- | - | ------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                 |         |   | Year Ended June 30,
|                                 |         |   | 2001                |         | 2002 |   | 2003   
|                                 |         |   |                     |         |      |   |        
|Current:                         |         |   |                     |         |      |   |         |         |  |   |         |        
|                                 | Federal |   | $                   |        |      |   | $       |        |  |   | $       |        | 
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | Foreign |   |                     | 117,217 |      |   |         | 210,106 |  |   |         | 223,465 | 
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total current                    |         |   | 117,217             |         |      |   | 210,106 |         |  |   | 223,465 |        
|Deferred:                        |         |   |                     |         |      |   |         |         |  |   |         |        
|                                 | Federal |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | State   |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 | Foreign |   |                     |        |      |   |         |        |  |   |         |        | 
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total deferred                   |         |   |                    |         |      |   |        |         |  |   |        |        
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 
|Total provision for income taxes |         | $ | 117,217             |         |      | $ | 210,106 |         |  | $ | 223,465 |        
|                                 |         |   |                     |         |      |   |         |         |  |   |         |         | 

68



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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

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

|              |  |                     |            |      |  |      |            |   |  |   |            |  
|------------- |  | ------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|              |  | Year Ended June 30,
|              |  | 2001                |            | 2002 |  | 2003
|              |  |                     |            |      |  |     
|United States |  | $                   | (6,336,249 | )    |  | $    | (9,249,838 | ) |  | $ | 5,635,918  |  
|Foreign       |  |                     | (27,531    | )    |  |      | 63,328     |   |  |   | (9,735,964 | )
|              |  |                     |            |      |  |      |            |   |  |   |            |  
|              |  | $                   | (6,363,780 | )    |  | $    | (9,186,510 | ) |  | $ | (4,100,046 | )
|              |  |                     |            |      |  |      |            |   |  |   |            |  

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

|                                         |                       |   |                     |            |      |   |            |            |   |   |            |           |  
|---------------------------------------- | --------------------- | - | ------------------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | --------- | -
|                                         |                       |   | Year Ended June 30,
|                                         |                       |   | 2001                |            | 2002 |   | 2003      
|                                         |                       |   |                     |            |      |   |           
|Tax (benefit) expense at statutory rates |                       | $ | (2,164,000          | )          |      | $ | (3,123,000 | )          |   | $ | (1,394,000 | )        
|Effect of:                               |                       |   |                     |            |      |   |            |            |   |   |            |          
|                                         | State income tax, net |   |                     | (383,000   | )    |   |            | (335,000   | ) |   |            | 129,000   |  
|                                         | Foreign tax           |   |                     | 117,217    |      |   |            | 210,106    |   |   |            | 233,465   |  
|                                         | Stock options         |   |                     | (7,067,000 | )    |   |            | (1,604,000 | ) |   |            | (708,000  | )
|                                         | Foreign income (loss) |   |                     | 9,000      |      |   |            | (22,000    | ) |   |            | 3,310,000 |  
|                                         | Other                 |   |                     | (161,000   | )    |   |            | 1,503,000  |   |   |            | (466,000  | )
|                                         | Valuation allowance   |   |                     | 9,766,000  |      |   |            | 3,581,000  |   |   |            | (871,000  | )
|                                         |                       |   |                     |            |      |   |            |            |   |   |            |          
|Provision for income taxes               |                       | $ | 117,217             |            |      | $ | 210,106    |            |   | $ | 233,465    |          
|                                         |                       |   |                     |            |      |   |            |            |   |   |            |          

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

|                                       |  |          |             |      |  |   |             |  
|-------------------------------------- |  | -------- | ----------- | ---- |  | - | ----------- | -
|                                       |  | June 30,
|                                       |  | 2002     |             | 2003
|                                       |  |          |             |     
|Net operating loss carryforwards       |  | $        | 37,021,092  |      |  | $ | 37,013,163  |  
|Research and development credits       |  |          | 2,232,967   |      |  |   | 2,746,073   |  
|Patent costs, net                      |  |          | 262,283     |      |  |   | 220,933     |  
|Research and development deferral, net |  |          | 479,320     |      |  |   | 269,304     |  
|Murex customer lists                   |  |          | 614,621     |      |  |   | 550,486     |  
|Reserves                               |  |          | 1,257,702   |      |  |   | 2,045,398   |  
|Other                                  |  |          | 2,031,015   |      |  |   | 2,472,941   |  
|                                       |  |          |             |      |  |   |             |  
|Deferred tax assets                    |  |          | 43,899,000  |      |  |   | 45,318,298  |  
|Valuation allowance                    |  |          | (43,899,000 | )    |  |   | (45,318,298 | )
|                                       |  |          |             |      |  |   |             |  
|Net deferred tax assets                |  | $        |            |      |  | $ |            |  
|                                       |  |          |             |      |  |   |             |  

The Company recognized a tax provision of $210,106 and $233,465 for the years
ended June 30, 2002 and 2003, respectively, which related to the Companys
foreign operations. At June 30, 2003, the Company had tax net operating loss
carryforwards for income tax purposes of approximately $97.5 million.
Approximately $65.7 million of the net operating loss carryforwards is
attributable to exercised stock options, the benefit of which, when realized,
will directly increase additional paid-in capital.

69



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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.     Income Taxes (continued)

At June 30, 2003, the Company also had research and development credit
carryforwards of approximately $2.7 million. In 1990, the Company experienced
a change in ownership pursuant to Section 382 of the Internal Revenue Code,
which will cause the utilization of pre-change losses and credits to be
limited. Subject to this limitation, the Companys net operating loss
carryforwards and tax credits expire, if unused, at various dates from 2004
through 2022. Realization of total deferred tax assets is contingent upon the
generation of future taxable income. Due to the uncertainty of realization of
these tax benefits, the Company has provided a valuation allowance for the full
amount of its deferred tax assets.

11.     Lease and Other Commitments

The Company leases a facility in Gaithersburg, Maryland, comprising a total of
approximately 90,000 square feet for its corporate headquarters and
manufacturing operations. The lease for the Gaithersburg facility has a
ten-year term and the Company has two consecutive rights to extend the term of
the lease for five years each. The Company also leases office and sales
operations facilities in the United Kingdom, Germany, Switzerland, France,
Italy and Spain, which leases run in length from month-to-month to five years.
The Company also utilizes dedicated space in third-party warehouse facilities
in Germany and the United Kingdom to support its European operations. Future
minimum rental commitments under these and other operating lease agreements,
including the agreements mentioned above, are as follows as of June 30, 2003:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 2,941,613  | 
|2005       |  |   | 2,894,923  | 
|2006       |  |   | 2,863,696  | 
|2007       |  |   | 2,825,282  | 
|2008       |  |   | 2,817,616  | 
|Thereafter |  |   | 4,437,989  | 
|           |  |   |            | 
|           |  | $ | 18,781,119 | 
|           |  |   |            | 

Rent expense under these leases was $3,287,422, $2,926,098, and $3,174,602 for
the years ended June 30, 2001, 2002 and 2003, respectively.

The Companys access to various probes, diagnostic techniques and a key product
component were acquired under agreements requiring the Company to pay future
royalties on future net sales on certain products. For the years ending June
30, 2001, 2002 and 2003, total royalties amounted to $1,283,021, $2,093,434,
and $2,813,556, respectively.

12.     Common Stock

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

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

70



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.     Common Stock (continued)

Under the Roche Distribution Contract, Roche made a non-refundable payment of
$5.0 million to the Company in fiscal 2001, which was recorded as a deferred
liability on the Consolidated Balance Sheet as of June 30, 2002. On July 1,
2002, consistent with the provisions of the Roche Distribution Contract, this
payment was converted into 142,857 shares of Digene common stock at a
conversion price of $35 per share.

13.     Common Stock Options

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

In October 1996, the Company adopted the Digene Corporation Directors Stock
Option Plan (the Directors Plan). Pursuant to the Directors Plan,
directors of the Company may receive options to purchase Common Stock.
Additionally, immediately following the Companys Annual Meeting of
Stockholders, each non-employee director of the Company automatically is
granted an option to purchase 10,000 shares of Common Stock under the
Directors Plan. The Directors Plan is administered by the Board of
Directors. A maximum of 500,000 shares have been authorized to cover grants
and awards under the Directors Plan.

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

In October 1999, the Company adopted the Digene 1999 Incentive Plan (the 1999
Plan). Pursuant to the 1999 Plan, employees of the Company and its
subsidiaries may receive options to purchase Common Stock and other Common
Stock awards. The 1999 Plan is administered by the Compensation Committee. A
maximum of 4,000,000 shares have been authorized to cover grants and awards
under the 1999 Plan.

As of June 30, 2003, 1,777,145 shares were available for grant or award under
the Omnibus Plan, the Directors Plan, the 1997 Stock Option Plan and the 1999
Plan. Of these, 1,343,645 shares are available for grant or award to officers
and employees under the Omnibus Plan and the 1999 Plan.

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

71



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     Common Stock Options (continued)

Common Stock options activity is as follows:

|                                 |  |                     |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|-------------------------------- |  | ------------------- | --------- | ----- |  | --------- | ----- | ----- |  | ------ | --------- | --------- |  | - | ----- |  |  | --------- | --------- | - |  | - | ----- | 
|                                 |  | Year Ended June 30,
|                                 |  |                    
|                                 |  | 2001                |           | 2002  |  | 2003     
|                                 |  |                     |           |       |  |          
|                                 |  |                     |           |       |  | Weighted- |       |       |  |        |           | Weighted- |  |   |       |  |  | Weighted-
|                                 |  |                     |           |       |  | Average   |       |       |  |        |           | Average   |  |   |       |  |  | Average  
|                                 |  |                     |           |       |  | Exercise  |       |       |  |        |           | Exercise  |  |   |       |  |  | Exercise 
|                                 |  | Shares              |           | Price |  | Shares    |       | Price |  | Shares |           | Price    
|                                 |  |                     |           |       |  |           |       |       |  |        |           |          
|Outstanding at beginning of
year |  |                     | 2,995,087 |       |  | $         | 10.06 |       |  |        | 3,129,275 |           |  | $ | 16.32 |  |  |           | 3,265,862 |   |  | $ | 20.62 | 
|Options granted                  |  |                     | 792,500   |       |  |           | 32.53 |       |  |        | 770,500   |           |  |   | 31.39 |  |  |           | 1,096,000 |   |  |   | 8.88  | 
|Options exercised                |  |                     | (581,801  | )     |  |           | 5.77  |       |  |        | (541,281  | )         |  |   | 9.70  |  |  |           | (209,623  | ) |  |   | 9.93  | 
|Options canceled or expired      |  |                     | (76,511   | )     |  |           | 19.81 |       |  |        | (92,632   | )         |  |   | 29.03 |  |  |           | (101,226  | ) |  |   | 22.64 | 
|                                 |  |                     |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|Outstanding at end of year       |  |                     | 3,129,275 |       |  |           | 16.32 |       |  |        | 3,265,862 |           |  |   | 20.62 |  |  |           | 4,051,013 |   |  |   | 17.95 | 
|                                 |  |                     |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|Options exercisable at year-end  |  |                     | 1,477,776 |       |  |           | 10.06 |       |  |        | 1,647,089 |           |  |   | 13.16 |  |  |           | 2,119,687 |   |  |   | 16.90 | 
|                                 |  |                     |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 

The following table summarizes information about fixed-price stock options
outstanding at June 30, 2003:

|                  |  |                |                     |             |                     |          |         |                |           |          |         |  |  |  |           |  |  |   |       |  | 
|----------------- |  | -------------- | ------------------- | ----------- | ------------------- | -------- | ------- | -------------- | --------- | -------- | ------- |  |  |  | --------- |  |  | - | ----- |  | 
|                  |  |                | Options Outstanding |             | Options Exercisable
|                  |  |                |                     |             |                    
|                  |  |                |                     |             |                     |          | Average |                | Weighted- |          |         |  |  |  | Weighted-
|                  |  |                | Number              |             | Remaining           |          | Average |                | Number    |          | Average
|Range of Exercise |  | Outstanding at |                     | Contractual |                     | Exercise |         | Exercisable at |           | Exercise
|Prices            |  | June 30, 2003  |                     | Life        |                     | Price    |         | June 30, 2003  |           | Price   
|                  |  |                |                     |             |                     |          |         |                |           |         
|$ 0.00  - $ 10.00 |  |                | 1,863,082           |             |                     |          | 6.2     |                |           | $        | 8.23    |  |  |  | 1,053,732 |  |  | $ | 9.14  | 
|$10.01 - $ 20.00  |  |                | 730,930             |             |                     |          | 7.1     |                |           |          | 14.12   |  |  |  | 447,030   |  |  |   | 13.00 | 
|$20.01 - $ 30.00  |  |                | 204,500             |             |                     |          | 8.0     |                |           |          | 26.31   |  |  |  | 32,634    |  |  |   | 25.19 | 
|$30.01 - $ 40.00  |  |                | 1,242,501           |             |                     |          | 7.8     |                |           |          | 33.19   |  |  |  | 586,291   |  |  |   | 33.36 | 
|$40.01 - $ 44.25  |  |                | 10,000              |             |                     |          | 7.1     |                |           |          | 44.25   |  |  |  |          |  |  |   | 0.00  | 
|                  |  |                |                     |             |                     |          |         |                |           |          |         |  |  |  |           |  |  |   |       | 
|                  |  |                | 4,051,013           |             |                     |          | 6.9     |                |           |          | 17.95   |  |  |  | 2,119,687 |  |  |   | 16.90 | 
|                  |  |                |                     |             |                     |          |         |                |           |          |         |  |  |  |           |  |  |   |       | 

Pro forma information regarding net income and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing fair value model with the following weighted-average assumptions
used for grants:

|                                            |  |                     |      |      |  |      |      |   |  |  |      |  
|------------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                            |  | Year Ended June 30,
|                                            |  |                    
|                                            |  | 2001                |      | 2002 |  | 2003
|                                            |  |                     |      |      |  |     
|Dividend yield                              |  |                     | 0.00 | %    |  |      | 0.00 | % |  |  | 0.00 | %
|Expected volatility                         |  |                     | 78   | %    |  |      | 79   | % |  |  | 80   | %
|Risk-free interest rate                     |  |                     | 5.5  | %    |  |      | 5.4  | % |  |  | 2.8  | %
|Expected life of the option term (in years) |  |                     | 5.9  |      |  |      | 5.9  |   |  |  | 6.3  |  

72



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     Common Stock Options (continued)

The weighted-average fair values of the options granted during the years ended
June 30, 2001, 2002 and 2003 were $23.04, $22.36 and $6.50 respectively.

The Company issued 25,000 options to a non-employee during the year ended June
30, 2003. These options have a vesting period of 30 months. The fair value of
these options has been recorded as deferred compensation and is being amortized
over the performance period. Under variable plan accounting, the value of the
unvested options will be re-measured and recognized in income at each reporting
date until fully vested.

14.     Retirement Plan

The Company sponsors a 401(k) Profit Sharing Plan (the Plan), which covers
all employees who have completed 90 days of service. The Plan stipulates that
employees may elect an amount up to 100% of their total compensation to
contribute to the Plan. Employee contributions are subject to Internal Revenue
Service limitations. It is recommended that elective deferral contributions
not exceed between 80% and 90% of eligible pay to allow for withholding of
Social Security, Federal and state taxes. This maximum deferral percentage
will also allow for employer contributions, if any. All employees who have
completed 1,000 hours of service during the plan year and are employed by the
Company on the last day of the plan year are eligible to share in discretionary
Company contributions. Employees vest in such discretionary employer
contributions over five years. No contributions were made by the Company
during the years ended June 30, 2001, 2002 and 2003.

15.     Segment Reporting

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

|              |  |        |            |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|------------- |  | ------ | ---------- | -------- |  | ------ | ---------- | -------- |  | ------ | ---------- | -------- |  | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|              |  | 2001   |            | 2002     |  | 2003  
|              |  |        |            |          |  |       
|              |  | Assets |            | Revenues |  | Assets |            | Revenues |  | Assets |            | Revenues
|              |  |        |            |          |  |        |            |          |  |        |            |         
|North America |  | $      | 46,890,764 |          |  | $      | 19,620,298 |          |  | $      | 61,961,002 |          |  | $ | 30,591,741 |  |  | $ | 50,845,853 |  |  | $ | 46,279,902 | 
|Europe        |  |        | 672,924    |          |  |        | 10,526,665 |          |  |        | 4,381,207  |          |  |   | 13,137,284 |  |  |   | 11,310,693 |  |  |   | 11,174,822 | 
|South America |  |        | 631,639    |          |  |        | 2,126,123  |          |  |        | 899,120    |          |  |   | 2,878,867  |  |  |   | 1,170,898  |  |  |   | 2,703,297  | 
|Pacific Rim   |  |        |           |          |  |        | 1,923,800  |          |  |        |           |          |  |   | 2,239,885  |  |  |   | 47,706     |  |  |   | 2,943,875  | 
|              |  |        |            |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 
|              |  | $      | 48,195,327 |          |  | $      | 34,196,886 |          |  | $      | 67,241,329 |          |  | $ | 48,847,777 |  |  | $ | 63,375,150 |  |  | $ | 63,101,896 | 
|              |  |        |            |          |  |        |            |          |  |        |            |          |  |   |            |  |  |   |            |  |  |   |            | 

73



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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.     Quarterly Results of Operations (Unaudited)

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

|                                    |                   |   |         |        |         |   |         |        |         |   |       |        |   |   |       |        |  
|----------------------------------- | ----------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ----- | ------ | - | - | ----- | ------ | -
|                                    |                   |   | First   |        | Second  |   | Third   |        | Fourth 
|                                    |                   |   | Quarter |        | Quarter |   | Quarter |        | Quarter
|                                    |                   |   |         |        |         |   |         |        |        
|2003                                |                   |   |         |        |         |   |         |        |         |   |       |        |   |   |       |       
|                                    | Revenues          |   | $       | 12,616 |         |   | $       | 14,450 |         |   | $     | 16,982 |   |   | $     | 19,054 |  
|                                    | Net income (loss) |   | $       | (2,624 | )       |   | $       | (1,340 | )       |   | $     | (619   | ) |   | $     | 260    |  
|Basic net income (loss) per share   |                   | $ | (0.14   | )      |         | $ | (0.07   | )      |         | $ | (0.03 | )      |   | $ | 0.01  |       
|Diluted net income (loss) per share |                   | $ | (0.14   | )      |         | $ | (0.07   | )      |         | $ | (0.03 | )      |   | $ | 0.01  |       
|2002                                |                   |   |         |        |         |   |         |        |         |   |       |        |   |   |       |       
|                                    | Revenues          |   | $       | 10,382 |         |   | $       | 11,584 |         |   | $     | 14,213 |   |   | $     | 12,669 |  
|                                    | Net income (loss) |   | $       | (535   | )       |   | $       | (1,074 | )       |   | $     | (3,319 | ) |   | $     | (4,468 | )
|Basic net income (loss) per share   |                   | $ | (0.03   | )      |         | $ | (0.06   | )      |         | $ | (0.19 | )      |   | $ | (0.25 | )     
|Diluted net income (loss) per share |                   | $ | (0.03   | )      |         | $ | (0.06   | )      |         | $ | (0.19 | )      |   | $ | (0.25 | )     

The sum of basic and diluted net loss per share for the four quarters in each
of 2003 and 2002 may not equal basic and diluted net loss per share for the
year due to the changes in the number of weighted-average shares outstanding
during the year.

74



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##### 



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

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

ITEM 9A. CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of the
principal executive officer and principal financial officer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of June 30, 2003, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries,
is made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission.

There were no changes that occurred during the fiscal quarter ended June
30, 2003 that have materially affected, or are reasonable likely to materially
affect, our internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



| |  |  | Directors. The information with respect to directors
required by this item is incorporated herein by reference to our
definitive Proxy Statement for our Annual Meeting of Stockholders,
scheduled to be held on October 30, 2003, which shall be filed with
the Securities and Exchange Commission within 120 days from the end
of the Digenes fiscal year (the 2003 Proxy Statement).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Executive Officers. The information with respect to
executive officers required by this item is set forth in Part I of
this Form 10-K.                                                                                                                                                                                                                                                    

ITEM 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by
reference to the 2003 Proxy Statement.

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

The information required under this item is incorporated herein by
reference to the 2003 Proxy Statement.

75



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##### 



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference
to the 2003 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference
to the 2003 Proxy Statement.

76



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##### 



PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|      |  |    |  |                                                                                                                                                                                                                      
|----- |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)   |  |   |  | Consolidated Financial Statements of Digene Corporation:                                                                                                                                                             
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Report of Independent Auditors                                                                                                                                                                                       
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Consolidated Balance Sheets as of June 30, 2002 and 2003                                                                                                                                                             
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Consolidated Statements of Operations for the fiscal years ended June 30, 2001, 2002 and 2003                                                                                                                        
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Consolidated Statements of Stockholders Equity for the fiscal years ended June 30, 2001, 2002 and 2003                                                                                                              
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2001, 2002 and 2003                                                                                                                        
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Notes to Consolidated Financial Statements                                                                                                                                                                           
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |   |  | Financial Statement Schedules:                                                                                                                                                                                       
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | Schedule II - Valuation and Qualifying Accounts and Reserves                                                                                                                                                         
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |    |  | All other schedules for which provision is made in the
applicable accounting regulation of the Commission are not
required under the related instructions or are inapplicable
and therefore have been omitted.       
|      |  |    |  |                                                                                                                                                                                                                      
|      |  |   |  | Exhibits:                                                                                                                                                                                                            
|      |  |    |  |                                                                                                                                                                                                                      
|3.1   |  | ** |  | Amended and Restated Certificate of Incorporation of Digene.                                                                                                                                                         
|      |  |    |  |                                                                                                                                                                                                                      
|3.2   |  |    |  | Amended and Restated Bylaws of Digene (Incorporated by
reference to Exhibit 3.2 of the Registrants Annual Report on Form
10-K for the fiscal year ended June 30, 1999 and filed with the SEC
on September 28, 1999).
|      |  |    |  |                                                                                                                                                                                                                      
|4.1   |  | ** |  | Specimen Common Stock Certificate.                                                                                                                                                                                   
|      |  |    |  |                                                                                                                                                                                                                      
|10.6  |  |    |  | Amended and Restated 1996 Omnibus Plan (Incorporated by
reference to Exhibit 10.3 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000).                                               
|      |  |    |  |                                                                                                                                                                                                                      
|10.14 |  | ** |  | License Agreement dated September 1, 1995 between Digene
and Institut Pasteur.                                                                                                                                       
|      |  |    |  |                                                                                                                                                                                                                      
|10.15 |  | ** |  | Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.                                                                                                                      
|      |  |    |  |                                                                                                                                                                                                                      
|10.16 |  | ** |  | License Agreement dated December 1, 1983 between Bethesda
Research Laboratories, a division of Life Technologies,
Inc. and Georgetown University.                                                                    
|      |  |    |  |                                                                                                                                                                                                                      
|10.18 |  | ** |  | License Agreement dated December 19, 1990 between Digene
and Life Technologies, Inc.                                                                                                                                 
|      |  |    |  |                                                                                                                                                                                                                      
|10.26 |  | ** |  | Registration Rights Agreement dated as of May 24, 1996
between Digene, Armonk Partners, Murex Diagnostics
Corporation and Certain Other Stockholders.                                                                
|      |  |    |  |                                                                                                                                                                                                                      
|10.28 |  | ** |  | License Agreement dated September 27, 1995 between Digene
and Kanebo, Ltd.                                                                                                                                           
|      |  |    |  |                                                                                                                                                                                                                      
|10.30 |  | *  |  | Amended and Restated Directors Stock Option Plan.                                                                                                                                                                   
|      |  |    |  |                                                                                                                                                                                                                      
|10.32 |  |    |  | Amended and Restated 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000).                                          

77



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##### 



|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|-------- |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.33    |  |       |  | Stock Purchase Agreement dated as of June 30, 1998 by and
among Digene and Stichting Researchfonds Pathologie, Ewald C.R.M.
Keijser, Christophorus J.L.M. Meijer and Jan M. M. Walboomers
(Incorporated by reference to Exhibit 10.37 of Digenes Annual
Report on Form 10-K for the fiscal year ended June 30, 1998).
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.34    |  |       |  | Lease dated as of March 2, 1998 by and between Digene and
ARE - Metropoliton Grove I, LLC (Incorporated by reference to
Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).                                                                                                 
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.37    |  | +     |  | Marketing and Distribution Agreement dated May 7, 1999
between Digene and Abbott Laboratories (Incorporated by reference to
Exhibit 10.41 of Digenes Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1999 and filed with the SEC on December
21, 1999).                                              
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.38    |  |       |  | Amended and Restated 1999 Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.1 of Digenes Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                  
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.39    |  | ++    |  | License Agreement dated April 5, 2000 between Digene and
Institut Pasteur (Incorporated by reference to Exhibit
10.39 of Digenes Annual Report on Form 10-K for the fiscal
year ended June 30, 2000).                                                                                                                
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.40    |  | +++   |  | Co-Promotion Agreement dated January 17, 2001 between
Digene and Cytyc Corporation (Incorporated by reference to
Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001).                                                                                                        
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.41    |  | +++   |  | Reseller Agreement dated July 22, 1996 between Digene and
Tropix, Inc. (Incorporated by reference to Exhibit 10.2 of
Digenes Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001).                                                                                                                    
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.41(a) |  | +++   |  | First Amendment to Reseller Agreement dated July 24, 1997
between Digene and Tropix, Inc. (Incorporated by reference to
Exhibit 10.2(a) of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001).                                                                                              
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.41(b) |  | +++   |  | Second Amendment to Reseller Agreement dated May 14, 1998
between Digene and Tropix, Inc. (Incorporated by reference to
Exhibit 10.2(b) of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001).                                                                                              
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.42    |  | ++++  |  | Letter Agreement dated April 29, 2001 between Digene and Roche
Molecular Systems, Inc., as amended by an Amendment dated September 7, 2001 (Incorporated by reference to
Exhibit 10.42 of Digenes Annual Report on Form 10-K for the fiscal year ended June 30, 2001).                                               
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.43    |  | ++++  |  | Original Equipment Manufacturer Supply Agreement dated January 23, 2001
between Digene and Qiagen Instruments AG (Incorporated by reference to Exhibit 10.43 of Digenes Annual Report
on Form 10-K for the fiscal year ended June 30, 2001).                                                                         
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.44    |  | +++++ |  | Amendment No. 2 to Letter Agreement between Digene and Roche Molecular Systems, Inc., dated October 24, 2001
(Incorporated by reference to Exhibit 10.1 to Digenes Quarterly on Form 10-Q for the quarter ended September
30, 2001).                                                                                 
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       
|10.45    |  |       |  | Amendment No. 1 to Marketing and Distribution Agreement
between Digene and Abbott Laboratories, dated January 28, 2002
(Incorporated by reference to Exhibit 10.1 of Digenes Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001).                                                                 
|         |  |       |  |                                                                                                                                                                                                                                                                                                                       

78



---



##### 



|         |  |   |  |                                                                                                                                                                                                                                                                                          
|-------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.50    |  | ! |  | Employment Agreement, dated February 19, 2002, between
Digene and Donna Marie Seyfried (Incorporated by reference to
Exhibit 99(e)(10) to Digenes Solicitation/Recommendation Statement on Schedule 14D-9, File No. 005-46641, dated March 1, 2002).                                    
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.51    |  | ! |  | Noncompetition, Nondisclosure and Developments Agreement, dated February 19, 2002, between Digene
and Donna Marie Seyfried (Incorporated by reference to Exhibit 99(e)(11) to Digenes
Solicitation/Recommendation Statement on Schedule 14D-9, File No. 005-46641, dated March 1,
2002).
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.54    |  |   |  | Amendment No. 3 to Letter Agreement, dated December 20,
2002, between Digene and Roche Molecular Systems, Inc. (Incorporated
by reference to Exhibit 10.1 of Digenes Quarterly Report on Form
10-Q for the quarter ended December 31, 2002).                                            
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.55    |  | ! |  | Form of Employment Agreement between Digene and each of Evan Jones and Charles M. Fleischman
(Incorporated by reference to Exhibit 10.2 of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).                                                                 
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.56    |  | ! |  | Form of Employment between each of Digene and each of the officers listed on Exhibit 10.56(a)
(Incorporated by reference to Exhibit 10.3 of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).                                                                
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.56(a) |  | ! |  | Schedule of officers of Digene entering into Employment Agreement (Incorporated by reference to
Exhibit 10.3(a) of Digenes Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).                                                                                         
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.57    |  | ! |  | Form of Change in Control Employment Agreement between Digene and each of Evan Jones and Charles
M. Fleischman (Incorporated by reference to Exhibit 10.4 of Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).                                               
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.58    |  | ! |  | Form of Change in Employment Agreement between Digene and each of the officers listed on Exhibit
10.58(a) (Incorporated by reference to Exhibit 10.5 of Digenes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003).                                                    
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|10.58(a) |  | ! |  | Schedule of officers of Digene entering into Change in Control Employment (Incorporated by
reference to Exhibit 10.5(a) of Digenes Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).                                                                                 
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|21       |  | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                          
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|23.1     |  | * |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                                      
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|31.1     |  | * |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                       
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|31.2     |  | * |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                       
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|32.1     |  | * |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) promulgated
under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.                                                                   
|         |  |   |  |                                                                                                                                                                                                                                                                                          
|32.2     |  | * |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) promulgated
under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.                                                                   



---



|*  |  | Filed herewith.                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Incorporated by reference to the like-numbered exhibits to Digenes
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.                                             
|  
|+  |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 21, 1999. Such
provisions have been filed separately with the Commission.
|  
|++ |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 13, 2000. Such
provisions have been filed separately with the Commission.

79



---



##### 



|+++   |  | Confidential treatment has been granted for certain portions thereof
by the Commission in a letter dated September 10, 2001. Such
provisions have been filed separately with the Commission.   
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|++++  |  | Confidential treatment has been granted for certain provisions
thereof pursuant to a Commission Order issued November 30, 2001.
Such provisions have been filed separately with the Commission.
|     
|+++++ |  | Confidential treatment has been granted for certain provisions
thereof by the Commission in a letter dated February 1, 2002. Such
provisions have been filed separately with the Commission.   
|     
|!     |  | Constitutes a management contract or compensatory plan required to
be filed as an exhibit to this Form 10-K.                                                                                   
|     
|      |  | (b)  Reports on Form 8-K.                                                                                                                                                                      

|         |  |             |  |                |  |                         |  |  |  |  |  | 
|-------- |  | ----------- |  | -------------- |  | ----------------------- |  |  |  |  |  | 
|Report   |  | Item(s) No. |  | Date of Report |  | Date Filed or Furnished
|         |  |             |  |                |  |                        
|Form 8-K |  | 5 and 7     |  | March 31, 2003 |  | Filed April 2, 2003    
|Form 8-K |  | 7 and 9     |  | May 6, 2003    |  | Furnished May 6, 2003  

80



---



##### 



SIGNATURES

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

|                   |  |                    |  |                                     
|------------------ |  | ------------------ |  | ------------------------------------
|                   |  | DIGENE CORPORATION
|                   |  |                    |  |                                     
|September 22, 2003 |  | By:                |  | /s/Evan Jones                       
|                   |  |                    |  |                                     
|                   |  |                    |  | Chairman and Chief Executive Officer

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

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

|                         |  |                                        |  |                   
|------------------------ |  | -------------------------------------- |  | ------------------
|Signature                |  | Title                                  |  | Date              
|                         |  |                                        |  |                   
|/s/Evan Jones            |  | Chairman and Chief Executive           |  | September 22, 2003
|                         |  | Officer (principal executive officer)  |  |                   
|Evan Jones               |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/Charles M. Fleischman |  | President, Chief Operating Officer,    |  | September 22, 2003
|                         |  | Chief Financial Officer and            |  |                   
|Charles M. Fleischman    |  | Director (principal financial officer) |  |                   
|                         |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/Joseph P. Slattery    |  | Senior Vice President, Finance and     |  | September 22, 2003
|                         |  | Information Systems                    |  |                   
|Joseph P. Slattery       |  | (principal accounting officer)         |  |                   
|                         |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/John H. Landon        |  | Director                               |  | September 22, 2003
|                         |  |                                        |  |                   
|John H. Landon           |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/Joseph M. Migliara    |  | Director                               |  | September 22, 2003
|                         |  |                                        |  |                   
|Joseph M. Migliara       |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/Cynthia L. Sullivan   |  | Director                               |  | September 22, 2003
|                         |  |                                        |  |                   
|Cynthia L. Sullivan      |  |                                        |  |                   
|                         |  |                                        |  |                   
|/s/John J. Whitehead     |  | Director                               |  | September 22, 2003
|                         |  |                                        |  |                   
|John J. Whitehead        |  |                                        |  |                   





---



##### 



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

|                                 |                          |        |              |           |  |            |   |               |  |  |   |        |            |  |   |       | 
|-------------------------------- | ------------------------ | ------ | ------------ | --------- |  | ---------- | - | ------------- |  |  | - | ------ | ---------- |  | - | ----- | 
|                                 |                          |        | Balance at   |           |  |            |   |               |  |  |   |        |            |  |  
|                                 |                          |        | Beginning of |           |  |            |   |               |  |  |   |        | Balance at
|Classification                   |                          | Period |              | Additions |  | Deductions |   | End of Period
|                                 |                          |        |              |           |  |            |   |              
|Allowance for doubtful accounts: |                          |        |              |           |  |            |   |               |  |  |   |        |            |  |   |      
|                                 | Year ended June 30, 2001 |        | $            | 263       |  |            | $ | 128           |  |  | $ | (110   | )(1)       |  | $ | 281   | 
|                                 | Year ended June 30, 2002 |        |              | 281       |  |            |   | 482           |  |  |   | (79    | )          |  |   | 684   | 
|                                 | Year ended June 30, 2003 |        |              | 684       |  |            |   | 144           |  |  |   | (396   | )(1)       |  |   | 432   | 
|Reserve for inventory:           |                          |        |              |           |  |            |   |               |  |  |   |        |            |  |   |      
|                                 | Year ended June 30, 2001 |        | $            | 1,255     |  |            | $ | 1,608         |  |  | $ | (698   | )          |  | $ | 2,165 | 
|                                 | Year ended June 30, 2002 |        |              | 2,165     |  |            |   | 384           |  |  |   | (1,341 | )          |  |   | 1,208 | 
|                                 | Year ended June 30, 2003 |        |              | 1,208     |  |            |   | 5,346         |  |  |   | (4,137 | )          |  |   | 2,417 | 



---

|   
|---
|(1)





---



##### 



EXHIBIT INDEX

|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|----------- |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |    |  | Description                                                                                                                                                                                                                                                                                                           
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|3.1         |  | ** |  | Amended and Restated Certificate of Incorporation of Digene.                                                                                                                                                                                                                                                          
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|3.2         |  |    |  | Amended and Restated Bylaws of Digene (Incorporated by
reference to Exhibit 3.2 of the Registrants Annual Report
on Form 10-K for the fiscal year ended June 30, 1999 and
filed with the SEC on September 28, 1999).                                                                                                 
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|4.1         |  | ** |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                    
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.6        |  |    |  | Amended and Restated 1996 Omnibus Plan (Incorporated by
reference to Exhibit 10.3 of Digenes Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                                
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.14       |  | ** |  | License Agreement dated September 1, 1995 between Digene
and Institut Pasteur.                                                                                                                                                                                                                                        
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.15       |  | ** |  | Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.                                                                                                                                                                                                                       
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.16       |  | ** |  | License Agreement dated December 1, 1983 between Bethesda
Research Laboratories, a division of Life Technologies,
Inc. and Georgetown University.                                                                                                                                                                     
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.18       |  | ** |  | License Agreement dated December 19, 1990 between Digene
and Life Technologies, Inc.                                                                                                                                                                                                                                  
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.26       |  | ** |  | Registration Rights Agreement dated as of May 24, 1996
between Digene, Armonk Partners, Murex Diagnostics
Corporation and Certain Other Stockholders.                                                                                                                                                                 
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.28       |  | ** |  | License Agreement dated September 27, 1995 between Digene
and Kanebo, Ltd.                                                                                                                                                                                                                                            
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.30       |  | *  |  | Amended and Restated Directors Stock Option Plan.                                                                                                                                                                                                                                                                    
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.32       |  |    |  | Amended and Restated 1997 Stock Option Plan (Incorporated
by reference to Exhibit 10.1 of Digenes Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000).                                                                                                                                           
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.33       |  |    |  | Stock Purchase Agreement dated as of June 30, 1998 by and
among Digene and Stichting Researchfonds Pathologie, Ewald
C.R.M. Keijser, Christophorus J.L.M. Meijer and Jan M. M.
Walboomers (Incorporated by reference to Exhibit 10.37 of
Digenes Annual Report on Form 10-K for the fiscal year
ended June 30, 1998).
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.34       |  |    |  | Lease dated as of March 2, 1998 by and between Digene and
ARE - Metropoliton Grove I, LLC (Incorporated by reference
to Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).                                                                                                 
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.37       |  | +  |  | Marketing and Distribution Agreement dated May 7, 1999
between Digene and Abbott Laboratories (Incorporated by
reference to Exhibit 10.41 of the Registrants Annual
Report on Form 10-K/A for the fiscal year ended June 30,
1999 and filed with the SEC on December 21, 1999).                                      
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.38       |  |    |  | Amended and Restated 1999 Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.1 of Digenes
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).                                                                                                                                  
|            |  |    |  |                                                                                                                                                                                                                                                                                                                       
|10.39       |  | ++ |  | License Agreement dated April 5, 2000 between Digene and
Institut Pasteur (Incorporated by reference to Exhibit
10.39 of Digenes Annual Report on Form 10-K for the fiscal
year ended June 30, 2000).                                                                                                                





---



##### 



|            |  |       |  |                                                                                                                                                                                                                                                                                          
|----------- |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |       |  | Description                                                                                                                                                                                                                                                                              
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.40       |  | +++   |  | Co-Promotion Agreement dated January 17, 2001 between
Digene and Cytyc Corporation (Incorporated by reference to
Exhibit 10.1 of Digenes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001).                                                                           
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.41       |  | +++   |  | Reseller Agreement dated July 22, 1996 between Digene and
Tropix, Inc. (Incorporated by reference to Exhibit 10.2 of
Digenes Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001).                                                                                       
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.41(a)    |  | +++   |  | First Amendment to Reseller Agreement dated July 24, 1997
between Digene and Tropix, Inc. (Incorporated by reference
to Exhibit 10.2(a) of Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2001).                                                                 
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.41(b)    |  | +++   |  | Second Amendment to Reseller Agreement dated May 14, 1998
between Digene and Tropix, Inc. (Incorporated by reference
to Exhibit 10.2(b) of Digenes Quarterly Report on Form
10-Q for the quarter ended March 31, 2001).                                                                 
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.42       |  | ++++  |  | Letter Agreement dated April 29, 2001 between Digene and
Roche Molecular Systems, Inc., as amended by an Amendment
dated September 7, 2001 (Incorporated by reference to
Exhibit 10.42 of Digenes Annual Report on Form 10-K for
the fiscal year ended June 30, 2001).                  
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.43       |  | ++++  |  | Original Equipment Manufacturer Supply Agreement dated
January 23, 2001 between Digene and Qiagen Instruments AG
(Incorporated by reference to Exhibit 10.43 of Digenes
Annual Report on Form 10-K for the fiscal year ended June
30, 2001).                                            
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.44       |  | +++++ |  | Amendment No. 2 to Letter Agreement between Digene and
Roche Molecular Systems, Inc., dated October 24, 2001
(Incorporated by reference to Exhibit 10.1 to Digenes
Quarterly on Form 10-Q for the quarter ended September 30,
2001).                                                    
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.45       |  |       |  | Amendment No. 1 to Marketing and Distribution Agreement
between Digene and Abbott Laboratories, dated January 28,
2002 (Incorporated by reference to Exhibit 10.1 of Digenes
Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001).                                    
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.50       |  | !     |  | Employment Agreement, dated February 19, 2002, between
Digene and Donna Marie Seyfried (Incorporated by reference
to Exhibit 99(e)(10) to Digenes
Solicitation/Recommendation Statement on Schedule 14D-9,
File No. 005-46641, dated March 1, 2002).                                    
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.51       |  | !     |  | Noncompetition, Nondisclosure and Developments Agreement,
dated February 19, 2002, between Digene and Donna Marie
Seyfried (Incorporated by reference to Exhibit 99(e)(11) to
Digenes Solicitation/Recommendation Statement on Schedule
14D-9, File No. 005-46641, dated March 1, 2002).
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.54       |  |       |  | Amendment No. 3 to Letter Agreement, dated December 20,
2002, between Digene and Roche Molecular Systems, Inc.
(Incorporated by reference to Exhibit 10.1 of Digenes
Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002).                                            
|            |  |       |  |                                                                                                                                                                                                                                                                                          
|10.55       |  | !     |  | Form of Employment Agreement between Digene and each of
Evan Jones and Charles M. Fleischman (Incorporated by
reference to Exhibit 10.2 of Digenes Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003).                                                                 





---



##### 



|            |  |   |  |                                                                                                                                                                                                                                           
|----------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                               
|            |  |   |  |                                                                                                                                                                                                                                           
|10.56       |  | ! |  | Form of Employment between each of Digene and each of the
officers listed on Exhibit 10.56(a) (Incorporated by
reference to Exhibit 10.3 of Digenes Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003).                 
|            |  |   |  |                                                                                                                                                                                                                                           
|10.56(a)    |  | ! |  | Schedule of officers of Digene entering into Employment
Agreement (Incorporated by reference to Exhibit 10.3(a) of
Digenes Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003).                                          
|            |  |   |  |                                                                                                                                                                                                                                           
|10.57       |  | ! |  | Form of Change in Control Employment Agreement between
Digene and each of Evan Jones and Charles M. Fleischman
(Incorporated by reference to Exhibit 10.4 of Digenes
Quarterly Report on Form 10-Q for the quarter ended March
31, 2003).
|            |  |   |  |                                                                                                                                                                                                                                           
|10.58       |  | ! |  | Form of Change in Employment Agreement between Digene and
each of the officers listed on Exhibit 10.58(a)
(Incorporated by reference to Exhibit 10.5 of Digenes
Quarterly Report on Form 10-Q for the quarter ended March
31, 2003).     
|            |  |   |  |                                                                                                                                                                                                                                           
|10.58(a)    |  | ! |  | Schedule of officers of Digene entering into Change in
Control Employment (Incorporated by reference to Exhibit
10.5(a) of Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).                                  
|            |  |   |  |                                                                                                                                                                                                                                           
|21          |  | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                           
|            |  |   |  |                                                                                                                                                                                                                                           
|23.1        |  | * |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                       
|            |  |   |  |                                                                                                                                                                                                                                           
|31.1        |  | * |  | Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                        
|            |  |   |  |                                                                                                                                                                                                                                           
|31.2        |  | * |  | Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                        
|            |  |   |  |                                                                                                                                                                                                                                           
|32.1        |  | * |  | Certification by Chief Executive Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) promulgated under the
Securities Exchange Act of 1934 and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                    
|            |  |   |  |                                                                                                                                                                                                                                           
|32.2        |  | * |  | Certification by Chief Financial Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) promulgated under the
Securities Exchange Act of 1934 and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.                    



---

|*     |  | Filed herewith.                                                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|**    |  | Incorporated by reference to the like-numbered exhibits to Digenes
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.                                               
|     
|+     |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 21, 1999. Such
provisions have been filed separately with the Commission.  
|     
|++    |  | Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order issued December 13, 2000. Such
provisions have been filed separately with the Commission.  
|     
|+++   |  | Confidential treatment has been granted for certain portions thereof
by the Commission in a letter dated September 10, 2001. Such
provisions have been filed separately with the Commission.   
|     
|++++  |  | Confidential treatment has been granted for certain provisions
thereof pursuant to a Commission Order issued November 30, 2001.
Such provisions have been filed separately with the Commission.
|     
|+++++ |  | Confidential treatment has been granted for certain provisions
thereof by the Commission in a letter dated February 1, 2002. Such
provisions have been filed separately with the Commission.   
|     
|!     |  | Constitutes a management contract or compensatory plan required to
be filed as an exhibit to this Form 10-K.