##### 



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

FORM 10-Q

(Mark One)

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|   
|    |  | For the quarterly period ended December 31, 2001                                        
|   
|    |  | OR                                                                                      
|   
|[ ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|   
|    |  | For the transition period from  to                                                      

Commission file number 0-28194

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

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

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

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

(Former name, former address and former fiscal year, if changed since last report)

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 the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

|                                       |  |                                           
|-------------------------------------- |  | ------------------------------------------
|Class                                  |  | Shares outstanding as of
February 12, 2002
|                                       |  |                                           
|Common Stock, par value $.01 per share |  | 17,881,594                                



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##### 



DIGENE CORPORATION

INDEX TO FORM 10-Q

|                                            |                                                                         |                                                       |    |    |      |  | 
|------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------- | -- | -- | ---- |  | 
|                                            |                                                                         |                                                       |    |    | Page
|Part I. Consolidated Financial Information: |                                                                         |                                                       |    |   
|                                           
|                                            | Item 1. Consolidated Financial Statements -                             |                                                       |    |    |     
|                                           
|                                            |                                                                         | Consolidated Balance Sheets                          |    |    |      | 
|                                            |                                                                         | December 31, 2001 and June 30, 2001                   |    |    | 1    | 
|                                           
|                                            |                                                                         | Consolidated Statements of Operations                |    |    |      | 
|                                            |                                                                         | Three and six months ended December 31, 2001 and 2000 |    |    | 2    | 
|                                           
|                                            |                                                                         | Consolidated Statements of Cash Flows                |    |    |      | 
|                                            |                                                                         | Six months ended December 31, 2001 and 2000           |    |    | 3    | 
|                                           
|                                            |                                                                         | Notes to Consolidated Financial Statements            |    |    | 4    | 
|                                           
|                                            | Item 2. Managements Discussion and Analysis of Financial Condition and |                                                       |    |    |     
|                                            |                                                                         | Results of Operations                                 |    |    | 6    | 
|                                           
|                                            | Item 3. Quantitative and Qualitative Disclosures about Market Risk      |                                                       |    | 11 |     
|                                           
|Part II. Other Information:                 |                                                                         |                                                       |    |   
|                                           
|                                            | Item 1. Legal Proceedings                                               |                                                       |    | 12 |     
|                                           
|                                            | Item 5. Other Information                                               |                                                       |    | 12 |     
|                                           
|                                            | Item 6. Exhibits and Reports on Form 8-K                                |                                                       |    | 13 |     
|                                           
|Signatures                                  |                                                                         |                                                       | 14 |   
|                                           
|Exhibit Index                               |                                                                         |                                                       | 15 |   





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##### 



PART I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |             |   |  | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------- | ------------ | - | ---------- | ----------- | - |  | 
|                                           |                                                                                                                                                                           |                                      |            |             | December 31, |   | June 30,  
|                                           |                                                                                                                                                                           |                                      |            |             | 2001         |   | 2001      
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |           
|                                           |                                                                                                                                                                           |                                      |            |             | (Unaudited)  |   |            |             |  
|                                           |                                                                                                                                                                           |                                      | ASSETS     |             |              |   |            |             |   |  | 
|Current assets:                            |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|                                           | Cash and cash equivalents                                                                                                                                                 |                                      | $          | 25,162,619  |              |   | $          | 20,626,252  |  
|                                           | Short-term investments                                                                                                                                                    |                                      |            | 10,588,353  |              |   |            | 8,977,412   |  
|                                           | Accounts receivable, less allowance of approximately $382,000 and
$281,000 at December 31, 2001 and June 30, 2001, respectively                                           |                                      |            | 7,266,457   |              |   |            | 5,694,648   |  
|                                           | Inventories                                                                                                                                                               |                                      |            | 5,388,455   |              |   |            | 5,548,415   |  
|                                           | Prepaid expenses and other current assets                                                                                                                                 |                                      |            | 1,466,150   |              |   |            | 1,685,767   |  
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|Total current assets                       |                                                                                                                                                                           |                                      | 49,872,034 |             |              |   | 42,532,494 |            
|Note receivable                            |                                                                                                                                                                           |                                      | 406,500    |             |              |   | 406,500    |            
|Property and equipment, net                |                                                                                                                                                                           |                                      | 3,883,164  |             |              |   | 3,490,490  |            
|Intangible assets, net                     |                                                                                                                                                                           |                                      | 975,558    |             |              |   | 1,050,601  |            
|Deposits                                   |                                                                                                                                                                           |                                      | 744,036    |             |              |   | 715,242    |            
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|Total assets                               |                                                                                                                                                                           | $                                    | 55,881,292 |             |              | $ | 48,195,327 |            
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|                                           |                                                                                                                                                                           | LIABILITIES AND STOCKHOLDERS EQUITY |            |             |              |   |            |             |   | 
|Current liabilities:                       |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|                                           | Accounts payable                                                                                                                                                          |                                      | $          | 5,247,675   |              |   | $          | 3,260,186   |  
|                                           | Accrued expenses                                                                                                                                                          |                                      |            | 5,257,231   |              |   |            | 2,709,490   |  
|                                           | Accrued payroll                                                                                                                                                           |                                      |            | 1,545,754   |              |   |            | 1,865,777   |  
|                                           | Deferred revenues                                                                                                                                                         |                                      |            | 8,609,000   |              |   |            | 7,792,000   |  
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|Total current liabilities                  |                                                                                                                                                                           |                                      | 20,659,660 |             |              |   | 15,627,453 |            
|Deferred rent                              |                                                                                                                                                                           |                                      | 302,862    |             |              |   | 233,584    |            
|Long-term debt                             |                                                                                                                                                                           |                                      | 1,000,000  |             |              |   | 1,000,000  |            
|Deferred liability                         |                                                                                                                                                                           |                                      | 5,000,000  |             |              |   | 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, 17,203,820
and 16,755,339 shares issued and outstanding at December 31, 2001
and June 30, 2001, respectively |                                      |            | 172,038     |              |   |            | 167,553     |  
|                                           | Additional paid-in capital                                                                                                                                                |                                      |            | 92,372,127  |              |   |            | 88,199,211  |  
|                                           | Deferred stock compensation                                                                                                                                               |                                      |            | (48,206     | )            |   |            | (64,274     | )
|                                           | Accumulated deficit                                                                                                                                                       |                                      |            | (63,577,189 | )            |   |            | (61,968,200 | )
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|Total stockholders equity                 |                                                                                                                                                                           |                                      | 28,918,770 |             |              |   | 26,334,290 |            
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            
|Total liabilities and stockholders equity |                                                                                                                                                                           | $                                    | 55,881,292 |             |              | $ | 48,195,327 |            
|                                           |                                                                                                                                                                           |                                      |            |             |              |   |            |            

See accompanying notes.

1



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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |            |  
|----------------------------------------- | ---------------------------------- | - | ------------------ | ---------- | ---------------- | - | ---------- | --------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                          |                                    |   | Three Months Ended |            | Six Months Ended
|                                          |                                    |   | December 31,       |            | December 31,    
|                                          |                                    |   |                    |            |                 
|                                          |                                    |   | 2001               |            | 2000             |   | 2001       |           | 2000
|                                          |                                    |   |                    |            |                  |   |            |           |     
|                                          |                                    |   | (Unaudited)        |            | (Unaudited)     
|Revenues:                                 |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|                                          | Product sales                      |   | $                  | 11,391,892 |                  |   | $          | 7,724,166 |      |   | $          | 21,690,875 |   |   | $          | 14,392,035 |  
|                                          | Research and development contracts |   |                    | 191,718    |                  |   |            | 31,090    |      |   |            | 274,975    |   |   |            | 535,237    |  
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|Total revenues                            |                                    |   | 11,583,610         |            |                  |   | 7,755,256  |           |      |   | 21,965,850 |            |   |   | 14,927,272 |           
|                                         
|Costs and expenses:                       |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|                                          | Cost of product sales              |   |                    | 2,818,630  |                  |   |            | 3,112,809 |      |   |            | 5,727,628  |   |   |            | 6,024,672  |  
|                                          | Research and development           |   |                    | 2,342,252  |                  |   |            | 1,841,600 |      |   |            | 4,416,036  |   |   |            | 3,947,251  |  
|                                          | Selling and marketing              |   |                    | 4,752,875  |                  |   |            | 2,840,879 |      |   |            | 8,677,174  |   |   |            | 5,282,915  |  
|                                          | General and administrative         |   |                    | 2,826,276  |                  |   |            | 1,827,927 |      |   |            | 4,888,877  |   |   |            | 3,607,746  |  
|                                          | Amortization of intangible assets  |   |                    | 37,521     |                  |   |            | 37,522    |      |   |            | 75,042     |   |   |            | 75,043     |  
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|Loss from operations                      |                                    |   | (1,193,944         | )          |                  |   | (1,905,481 | )         |      |   | (1,818,907 | )          |   |   | (4,010,355 | )         
|                                         
|Other income (expense):                   |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|                                          | Other income (expense)             |   |                    | 78,878     |                  |   |            | 29,135    |      |   |            | 12,604     |   |   |            | (2,941     | )
|                                          | Interest income                    |   |                    | 185,232    |                  |   |            | 266,014   |      |   |            | 391,902    |   |   |            | 578,693    |  
|                                          | Interest expense                   |   |                    | (2,530     | )                |   |            | (63       | )    |   |            | (5,085     | ) |   |            | (903       | )
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|Loss from operations before income taxes  |                                    |   | (932,364           | )          |                  |   | (1,610,395 | )         |      |   | (1,419,486 | )          |   |   | (3,435,506 | )         
|                                         
|Provision for (benefit from) income taxes |                                    |   | 141,620            |            |                  |   | (32,584    | )         |      |   | 189,503    |            |   |   | 57,817     |           
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |           
|Net loss                                  |                                    | $ | (1,073,984         | )          |                  | $ | (1,577,811 | )         |      | $ | (1,608,989 | )          |   | $ | (3,493,323 | )         
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |            |  
|Basic and diluted net loss per share      |                                    | $ | (0.06              | )          |                  | $ | (0.10      | )         |      | $ | (0.10      | )          |   | $ | (0.21      | )         
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |            |  
|Weighted average shares outstanding       |                                    |   | 17,021,779         |            |                  |   | 16,556,713 |           |      |   | 16,906,678 |            |   |   | 16,404,165 |           
|                                          |                                    |   |                    |            |                  |   |            |           |      |   |            |            |   |   |            |            |  

See accompanying notes.

2



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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |            |         |          |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ---------- | ---------------- | ---------- | ---------- | ---------- | ------- | -------- | -
|                                                     |                                                                                           |                                                         |                                           |            | Six Months Ended
|                                                     |                                                                                           |                                                         |                                           |            | December 31,    
|                                                     |                                                                                           |                                                         |                                           |            |                 
|                                                     |                                                                                           |                                                         |                                           |            | 2001             |            | 2000      
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |           
|                                                     |                                                                                           |                                                         |                                           |            | (Unaudited)     
|Operating activities                                 |                                                                                           |                                                         |                                           |            |                  |            |            |           
|                                                     | Net loss                                                                                  |                                                         | $                                         | (1,608,989 | )                |            | $          | (3,493,323 | )      
|                                                     | Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                                         |                                           |            |                  |            |            |            |        
|                                                     |                                                                                           | Depreciation and amortization of property and equipment |                                           |            | 812,853          |            |            |            | 692,948 |         
|                                                     |                                                                                           | Amortization of intangible assets                       |                                           |            | 75,043           |            |            |            | 75,043  |         
|                                                     |                                                                                           | Compensation expense related to stock options           |                                           |            | 16,068           |            |            |            | 16,068  |         
|                                                     |                                                                                           | Changes in operating assets and liabilities:            |                                           |            |                  |            |            |            |         |         
|                                                     |                                                                                           |                                                         | Accounts receivable                       |            |                  | (1,571,809 | )          |            |         | 560,813  |  
|                                                     |                                                                                           |                                                         | Inventories                               |            |                  | 159,960    |            |            |         | (938,275 | )
|                                                     |                                                                                           |                                                         | Prepaid expenses and other current assets |            |                  | 219,617    |            |            |         | (97,225  | )
|                                                     |                                                                                           |                                                         | Deposits                                  |            |                  | (28,794    | )          |            |         | (8,489   | )
|                                                     |                                                                                           |                                                         | Accounts payable                          |            |                  | 1,987,489  |            |            |         | (872,613 | )
|                                                     |                                                                                           |                                                         | Accrued expenses                          |            |                  | 2,547,741  |            |            |         | (17,688  | )
|                                                     |                                                                                           |                                                         | Accrued payroll                           |            |                  | (320,023   | )          |            |         | (425,428 | )
|                                                     |                                                                                           |                                                         | Deferred revenues                         |            |                  | 817,000    |            |            |         |         |  
|                                                     |                                                                                           |                                                         | Deferred rent                             |            |                  | 69,278     |            |            |         | 86,480   |  
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |           
|Net cash provided by (used in) operating activities  |                                                                                           |                                                         | 3,175,434                                 |            |                  |            | (4,421,689 | )         
|                                                    
|Investing activities                                 |                                                                                           |                                                         |                                           |            |                  |            |            |           
|                                                     | Purchases of short-term investments                                                       |                                                         |                                           | (8,880,174 | )                |            |            | (6,154,876 | )      
|                                                     | Maturities of short-term investments                                                      |                                                         |                                           | 7,269,233  |                  |            |            | 7,338,884  |        
|                                                     | Capital expenditures                                                                      |                                                         |                                           | (1,205,527 | )                |            |            | (1,060,404 | )      
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |           
|Net cash (used in) provided by investing activities  |                                                                                           |                                                         | (2,816,468                                | )          |                  |            | 123,604    |           
|                                                    
|Financing activities                                 |                                                                                           |                                                         |                                           |            |                  |            |            |           
|                                                     | Exercise of common stock options                                                          |                                                         |                                           | 4,177,401  |                  |            |            | 2,363,640  |        
|                                                     | Proceeds from note receivable                                                             |                                                         |                                           |           |                  |            |            | 40,000     |        
|                                                     | Proceeds from note payable                                                                |                                                         |                                           |           |                  |            |            | 1,000,000  |        
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |           
|Net cash provided by financing activities            |                                                                                           |                                                         | 4,177,401                                 |            |                  |            | 3,403,640  |           
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                                           |                                                         | 4,536,367                                 |            |                  |            | (894,445   | )         
|Cash and cash equivalents at beginning of period     |                                                                                           |                                                         | 20,626,252                                |            |                  |            | 7,534,998  |           
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |           
|Cash and cash equivalents at end of period           |                                                                                           | $                                                       | 25,162,619                                |            |                  | $          | 6,640,553  |           
|                                                     |                                                                                           |                                                         |                                           |            |                  |            |            |            |        

See accompanying notes.

3



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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

The consolidated financial statements of Digene Corporation (Digene) for the
three- and six-month periods ended December 31, 2001 and 2000 are unaudited and
include all adjustments which, in the opinion of management, are necessary to
present fairly the results of operations for the periods then ended. All such
adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended June 30, 2001 filed with the Securities and Exchange Commission.

The results of operations for any interim period are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal
year.

2.     Inventories

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

Inventories consist of the following:

|                     |  |              |            |          |  |   |            |  
|-------------------- |  | ------------ | ---------- | -------- |  | - | ---------- | -
|                     |  | December 31, |            | June 30,
|                     |  | 2001         |            | 2001    
|                     |  |              |            |         
|                     |  | (Unaudited)  |            |          |  |  
|Finished goods       |  | $            | 3,147,878  |          |  | $ | 3,087,651  |  
|Work in process      |  |              | 2,874,273  |          |  |   | 3,369,419  |  
|Raw materials        |  |              | 1,040,827  |          |  |   | 1,256,358  |  
|                     |  |              |            |          |  |   |            |  
|                     |  |              | 7,062,978  |          |  |   | 7,713,428  |  
|Obsolescence reserve |  |              | (1,674,523 | )        |  |   | (2,165,013 | )
|                     |  |              |            |          |  |   |            |  
|                     |  | $            | 5,388,455  |          |  | $ | 5,548,415  |  
|                     |  |              |            |          |  |   |            |  

3.     Marketing and Distribution Agreements

On April 30, 2001, Digene terminated the Marketing and Distribution Agreement
between Digene and Abbott Laboratories (the Abbott Agreement) as it applies
to the distribution of Digenes human papillomavirus DNA products, and
converted the distribution rights under the Abbott Agreement for Digenes
Hepatitis B DNA products to non-exclusive for the remainder of the term of the
Abbott Agreement. Prior to such action, Abbott was the exclusive distributor
of Digenes human papillomavirus (HPV) and Hepatitis B DNA products in Europe,
Africa and the Middle East. The Abbott Agreement provides for a non-exclusive,
twelve-month wind-down distribution period for the HPV products.

On January 28, 2002, in accordance with an Amendment to the Abbott Agreement,
Digene re-acquired from Abbott Laboratories the exclusive rights to market,
sell and distribute Digenes

4



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##### 



chlamydia and gonorrhea (CT/GC) products worldwide, subject to a non-exclusive
wind-down period for Abbott Laboratories activities with respect to such
products in Europe, Africa and the Middle East until April 30, 2002.
In connection with this Amendment, Digene issued 87,873 shares of common stock
to Abbott Laboratories in a private placement transaction. Digene will recognize a one-time incremental
expense of approximately $2,500,000 in the third quarter of fiscal year 2002 related to this
transaction.

On April 29, 2001, Digene entered into an agreement (the Roche Letter
Agreement) with Roche Molecular Systems, Inc. (Roche). Under the Roche
Letter Agreement, Roche will act as a co-exclusive distributor for Digenes HPV
products in Europe, the Middle East and Africa from May 1, 2001 through June
30, 2002. Roche has guaranteed minimum purchases over the term of the Roche
Letter Agreement. During the six-month period ended December 31, 2001, Digene
received prepayments of approximately $7.3 million for certain of these minimum
purchases. Roche did not meet its minimum quarterly purchase obligations for the
six-month period ended December 31, 2001, and, accordingly, Digene recognized
approximately $603,000 of the prepayments as product sales for such period. As
of December 31, 2001, Digene is obligated to return approximately $2.6 million
of the prepayments to Roche due to offsetting revenue received by Digene from
Abbott under the Abbott Agreement. This obligation is recorded in accrued
expenses on the Consolidated Balance Sheet as of December 31, 2001.

Under the Roche Letter Agreement, Roche made a non-refundable payment of $5.0
million to Digene, which is recorded as a deferred liability on the
Consolidated Balance Sheet as of December 31, 2001. Under certain
circumstances, this payment will be converted into shares of Digenes common
stock at a conversion price of $35 per share.

4.     Subsequent Events

On January 30, 2002, Digene completed a private offering of 588,235 shares of
common stock, the net proceeds of which, after expenses, were approximately
$14,950,000.

5



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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations

Forward-Looking Statements

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 thereto included elsewhere in this report and in our Annual
Report on Form 10-K for the year ended June 30, 2001. 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; our limited sales and
marketing experience, including our limited experience in selling our products
directly, particularly our chlamydia and gonorrhea products in the United
States; uncertainty of future profitability and cash generation from
operations; dependence on Roche Molecular Systems, Inc. and Abbott Laboratories
as our principal European distributors in fiscal 2002 and the potential
variability of our quarterly revenues due to the transition of our European
distribution structure; uncertainty regarding patents and proprietary rights in
connection with our products and products in development; risks inherent in
international transactions, including those relating to our sales and marketing
efforts in Europe; 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; the extent
of future expenditures for sales and marketing programs; uncertainty of
clinical trial results for our products in development; delay in or failure to
obtain regulatory approvals for our products in development; our ability to
obtain requisite additional financing to fund our operations beyond calendar
2003; and other factors as set forth under the caption Additional
Considerations in our Annual Report on Form 10-K for the year ended June 30,
2001.

Overview

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

Our revenues to a significant extent have been derived from the sales of our
HPV tests, which, for fiscal year 2001, accounted for 57% of total revenues
and, for the six months ended December 31, 2001, accounted for 75% 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 and testing services in the future.

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Results of Operations

Product sales increased to approximately $11,392,000 for the three-month period
ended December 31, 2001 from approximately $7,724,000 for the corresponding
period in 2000. The increase was due primarily to a 110% growth in sales of
our HPV tests and testing services over such sales in the corresponding period
in 2000, partially offset by decreases in sales of equipment and non-core
products. The majority of the growth in HPV products sales was due to
increased sales in the United States (128% over such sales in the corresponding
period in 2000), as well as increased sales in Europe (144% over such sales in
the corresponding period in 2000).

Product sales increased to approximately $21,691,000 for the six-month period
ended December 31, 2001 from approximately $14,392,000 for the corresponding
period in 2000. The increase was due primarily to a 109% growth in sales of
our HPV tests and testing services over such sales in the corresponding period
in 2000, partially offset by decreases in sales of equipment and non-core
products. The majority of the growth in HPV products sales was due to
increased sales in the United States (131% over such sales in the corresponding
period in 2000), as well as increased sales in Europe (138% over such sales in
the corresponding period in 2000).

Research and development contract revenues increased to approximately $192,000
for the three-month period ended December 31, 2001 from approximately $31,000
for the corresponding period in 2000 and decreased to approximately $275,000
for the six-month period ended December 31, 2001 from approximately $535,000
for the corresponding period in 2000. The increase in the three-month period
was due primarily to an increase in research and development revenue under an
existing contract. The decrease in the six-month period was due primarily to a
reduction in revenue under an exclusive contract, which was converted to
non-exclusive during fiscal 2001.

Cost of product sales decreased to approximately $2,819,000 for the three-month
period ended December 31, 2001 from approximately $3,113,000 for the
corresponding period in 2000 and decreased to approximately $5,728,000 for the
six-month period ended December 31, 2001 from approximately $6,025,000 for the
corresponding period in 2000. Gross margin on product sales increased to 75%
for the three-month period ended December 31, 2001 from 60% for the
corresponding period in 2000 and increased to 74% for the six-month period
ended December 31, 2001 from 58% for the corresponding period in 2000. The
increase in gross margin percentage in both periods was due primarily to
increased sales of our test products, particularly HPV tests, principally in
the United States where we sell such products directly and decreased sales of
lower margin equipment products, as well as the elimination by the first
quarter of fiscal year 2002 of certain operating expenses associated with the
relocation to our new manufacturing facility in April 2000, which negatively
impacted our gross margins during fiscal year 2001, and improved inventory
management.

During the six-month period ended December 31, 2001, we focused our research
and development activities principally on: the development of our Rapid
Capture System for automated processing of our Hybrid Capture tests, initially
related to HPV and CT/GC; activities related to the preparation

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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 use of our Hybrid
Capture 2 HPV Test as a primary cervical cancer screening test to be performed
in conjunction with the Pap smear for women age 30 and older; the development
of our universal collection medium (UCMTM) that is expected to allow the
simultaneous testing of HPV, chlamydia, gonorrhea and other genetic and
cellular material from a single patient sample; clinical trials related to
CT/GC testing for ThinPrep specimens and HPV testing from the TriPath Prep
system; activities utilizing our Hybrid Capture technology for microarray-based
genomics analysis in the areas of gene expression profiling, genotyping and
molecular disease management; and the creation of our next generation of Hybrid
Capture technology. Research and development expenses increased to
approximately $2,342,000 for the three-month period ended December 31, 2001
from approximately $1,842,000 for the corresponding period in 2000 and
increased to approximately $4,416,000 for the six-month period ended December
31, 2001 from approximately $3,947,000 for the corresponding period in 2000.
The increase for the three-month period was due primarily to outside
professional services and clinical trial expenses, which increased 105%,
personnel costs, which increased 35% and laboratory supplies, which increased
32%. The increase for the six-month period was due primarily to personnel
costs, which increased 25% and laboratory supplies, which increased 11%,
partially offset by outside professional services and clinical trial expenses,
which decreased 12%.

Selling and marketing expenses increased to approximately $4,753,000 for the
three-month period ended December 31, 2001, from approximately $2,841,000 for
the corresponding period in 2000 and increased to approximately $8,677,000 for
the six-month period ended December 31, 2001 from approximately $5,283,000 for
the corresponding period in 2000. The increase was due primarily to various
marketing programs and associated professional expenses, which increased 164%
and 160% for the three- and six-month periods, respectively, royalty costs,
which increased 121% and 114% for the three- and six-month periods,
respectively and personnel costs, which increased 31% and 22% for the three-
and six-month periods, respectively. We expect our selling and marketing
expenses to increase during the remainder of fiscal 2002 as we begin to sell
our CT/GC products directly, initially in the United States, and as we prepare
for the expiration, on April 30, 2002, of Abbotts non-exclusive distribution
wind-down period for our HPV and CT/GC products in Europe, the Middle East and
Africa.

General and administrative expenses increased to approximately $2,827,000 for
the three-month period ended December 31, 2001, from approximately $1,828,000
for the corresponding period in 2000 and increased to approximately $4,889,000
for the six-month period ended December 31, 2001 from $3,608,000 for the
corresponding period in 2000. The increase was due primarily to professional
fees, which increased 85% and 34% for the three- and six-month periods,
respectively, personnel costs, which increased 43% and 36% for the three- and
six-month periods, respectively and insurance expense, which increased 43% and
67% for the three- and six-month periods, respectively, principally related to
directors and officers insurance coverage.

Interest income decreased to approximately $185,000 for the three-month period
ended December 31, 2001, from approximately $266,000 for the corresponding
period in 2000 and decreased to approximately $392,000 for the six-month period
ended December 31, 2001 from approximately $579,000 for the corresponding
period in 2000. The decrease was primarily due to lower interest rates in the
first six months of fiscal year 2002 compared to the corresponding

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period in fiscal year 2001. The cash received from Roche Molecular Systems,
Inc. associated with advance minimum sales payments is held in an account which
does 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 $63,577,000 at December
31, 2001. We have funded our operations primarily through the sale of equity
securities and revenues from product sales and research and development
contracts. We had positive cash flows from operations of approximately
$3,175,000 for the six months ending December 31, 2001, primarily as a result
of advance minimum sales payments from Roche under the Roche Letter Agreement
compared to negative cash flows from operations of approximately $4,422,000 for
the six months ended December 31, 2000.

Capital expenditures increased to approximately $1,206,000 for the six months
ended December 31, 2001 from approximately $1,060,000 for the corresponding
period in 2000.

On January 28, 2002, we issued 87,873 shares of common stock to Abbott
Laboratories in a private placement transaction as consideration for the
termination of Abbotts exclusive rights to sell our chlamydia and gonorrhea
products worldwide. Digene will recognize a one-time incremental expense of
approximately $2,500,000 in the third quarter of fiscal year 2002 related to this
transaction.

On January 30, 2002, we completed a private offering of 588,235 shares of
common stock, the net proceeds of which, after expenses, were approximately
$14,950,000.

We anticipate that working capital requirements will increase moderately for
the foreseeable future due to increasing accounts receivable as a result of
expected revenue growth. Since our inception, exclusive of cash received from
Roche Molecular Systems, Inc. for advance minimum sales payments under the
Roche Letter Agreement, we have incurred negative cash flows from operations,
and have expended, and expect to continue to expend in the future, substantial
funds to complete our planned product development efforts, expand our sales and
marketing activities and expand our manufacturing capabilities. We expect that
our existing capital resources will be adequate to fund our operations through
calendar year 2003. Our future capital requirements and the adequacy of
available funds may change, however, based on numerous factors, including the
successful commercialization of our products, 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,
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, 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

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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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Our exchange rate risk comes from our
operations in Europe and South America. The net impact of foreign exchange
activities on earnings was immaterial for the three month periods ended
December 31, 2001 and 2000, respectively. Interest rate exposure is primarily
limited to the approximately $27,900,000 of cash, cash equivalents and
short-term investments owned by us. Such securities are debt and equity 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, less than twelve months, nature of certain investments.
We do not consider the present rate of inflation to have a significant impact
on our business.

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PART II. Other Information

Item 1. 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, Digene alleges
that Ventana Medical Systems, Inc. has made, used, sold and/or offered for sale
products embodying a patented invention of Digene thereby infringing Digenes
United States Patent No. 4,849,332 entitled Human Papilloma Virus 35 Nucleic
Acid Hybridization Probes and Methods for Employing the Same and Digenes
United States Patent No. 4,849,331 entitled Human Papilloma Virus 44 Nucleic
Acid Hybridization Probes and Methods for Employing the Same. Digene is
seeking a permanent injunction and monetary damages for past infringement.

Item 5. Other Information

On January 28, 2002, we entered into an Amendment to the Abbott Agreement
pursuant to which we re-acquired from Abbott Laboratories the exclusive rights
to distribute our chlamydia and gonorrhea (CT/GC) tests and accessories
worldwide. We plan to begin distributing the CT/GC tests in the United States
promptly. Pursuant to the Amendment, Abbott will continue to distribute the
CT/GC tests and accessories in Europe during a non-exclusive wind-down period
ending April 30, 2002. Under the terms of the Amendment and a related Stock
Purchase Agreement, we issued 87,873 shares of our common stock for the
re-acquisition of these exclusive rights, and agreed to repurchase Hybrid
Capture instrumentation used for HPV, chlamydia and gonorrhea testing
previously purchased by Abbott Laboratories under the Abbott Agreement. The
shares of common stock were issued in a private placement transaction in
reliance upon the exemption from the registration requirements of the
Securities Act of 1933 set forth in Section 4(2) of the Securities Act and Rule
506 promulgated by the SEC under the Securities Act. We have granted Abbott
Laboratories registration rights with respect to such shares.

On January 30, 2002, we completed a private placement of 588,235 shares of our
common stock to two accredited investors. The purchase price was $25.50 per
share, resulting in net proceeds to us of approximately $14,950,000. The
shares of common stock were issued in a private placement transaction in
reliance upon the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) of the Securities Act and Rule 506
promulgated by the SEC under the Securities Act. We have granted the
purchasers registration rights with respect to such shares.

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Item 6. Exhibits and Reports on Form 8-K

|             |  |                                                                                                                                                                            
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Exhibits |  |                                                                                                                                                                            
|            
|3.1          |  | Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to Digenes Registration Statement on Form S-1
(File No. 333-2968)).           
|            
|3.2          |  | Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Digenes Annual Report on Form 10-K for the year ended June 30, 1999).                            
|            
|4.1          |  | Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to
Digenes Registration Statement on Form S-1 (File No. 333-2968)).                            
|            
|4.2          |  | Stock Purchase Agreement between Digene and Abbott Laboratories, dated
January 28, 2002.                                                                                   
|            
|4.3          |  | Form of Purchase Agreement dated January 28, 2002, between Digene and
Acqua Wellington Private Placement Fund, Ltd. and Acqua Wellington
Opportunity I Limited.            
|            
|4.4          |  | Form of Registration Rights Agreement, dated January 28, 2002, between
Digene and Acqua Wellington Private Placement Fund, Ltd. and Acqua
Wellington Opportunity I Limited.
|            
|10.1         |  | Amendment No. 1 to Marketing and Distribution Agreement between Digene
and Abbott Laboratories, dated January 28, 2002.                                                    

(b)  Reports on Form 8-K

Digene did not file any reports on Form 8-K during the quarter ended December
31, 2001.

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SIGNATURES

Pursuant to the requirements of the Securities and 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                                                                                                                               
|                                
|Date:          February 14, 2002 |  | By:  /s/  Charles M. FleischmanCharles M. Fleischman
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
|                                
|Date:  February 14, 2002         |  | By:  /s/  Joseph P. Slattery                                                                                                                     
|                                
|                                 |  | Joseph P. Slattery
Vice President, Finance
(Principal Accounting Officer)                                                                        

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EXHIBIT INDEX

|           |  |                                                                                                                                                                           
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description                                                                                                                                                               
|          
|3.1        |  | Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to Digenes
Registration Statement on Form S-1 (File No. 333-2968)).          
|          
|3.2        |  | Amended and Restated Bylaws (Incorporated by reference
to Exhibit 3.2 to Digenes Annual Report on Form 10-K
for the year ended June 30, 1999).                           
|          
|4.1        |  | Form of Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to Digenes Registration Statement on
Form S-1 (File No. 333-2968).                            
|          
|4.2        |  | Stock Purchase Agreement between Digene and Abbott
Laboratories, dated January 28, 2002.                                                                                  
|          
|4.3        |  | Form of Purchase Agreement dated January 28, 2002, between
Digene and Acqua Wellington Private Placement Fund, Ltd. and Acqua
Wellington Opportunity I Limited.           
|          
|4.4        |  | Form of Registration Rights Agreement dated January 28, 2002,
between Digene and Acqua Wellington Private Placement Fund, Ltd. and
Acqua Wellington Opportunity I Limited.
|          
|10.1       |  | Amendment No. 1 to Marketing and Distribution Agreement between
Digene and Abbott Laboratories, dated January 28, 2002.                                                   

15