UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 2006

For the transition period from                     to                     

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 þ No o

     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. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of December 31, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $584,088,850. 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, 2005.

     As of September 7, 2006, 23,591,984 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).

 

ITEM 1. BUSINESS

Overview

     We develop, manufacture and market our proprietary gene-based diagnostic tests 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 (HPV), which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. Our HPV testing products, which are the only Food and Drug Administration (FDA)-approved tests for the detection of HPV, are each a reproducible, objective test for the primary cause of cervical cancer. We have created, and are continuing to expand, the worldwide market for HPV testing.

     Our patented Hybrid Capture platform has been optimized for high-throughput, cost-effective cervical cancer screening and other gynecologic applications. Hybrid Capture is a signal amplification technology that combines the convenience of a direct probe test with the sensitivity of an amplification test, requires minimal sample preparation and provides objective test results.

     In creating the worldwide market for HPV testing we have focused our activities on four aspects of the market: seeking FDA approval for our products, supporting the clinical validation of HPV testing, including pursuit of clinical practice guidelines from recognized professional associations, educating healthcare professionals and womens’ health leaders as to the benefits of HPV testing, and seeking reimbursement approval for the use of our tests, both in the United States and internationally. We continue to focus our activities on increasing access to and use of our HPV test products in the United States and internationally.

     In fiscal 2006, revenue from our HPV testing products was approximately $134,361,000.

     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 both our position as a pioneer in the HPV testing market, and our Hybrid Capture technology to develop additional tests for the early detection of disease. We have established relationships with clinical laboratories, physicians and other healthcare professionals, developed primarily through our HPV test product marketing efforts, which will help us sell our products.

     For the future, we intend to focus our activities in the following four areas:

     In addition to our HPV test products, our diagnostic test product portfolio includes gene-based tests for the detection of chlamydia (CT), gonorrhea (GC), cytomegalovirus (CMV) and hepatitis B virus (HBV). We also develop and sell to clinical laboratories the equipment, instrumentation and accessories

used to perform clinical specimen testing with our diagnostic tests, including the Rapid CaptureÒ System, an automated specimen processing system. During fiscal 2006 we also acquired the exclusive rights to market and distribute the Signature^® cystic fibrosis (CF) screening products being developed by Asuragen, Inc.

     In June 2006, we announced that Evan Jones, our Chairman and Chief Executive Officer, will be retiring from Digene during fiscal 2007 after selection of a new Chief Executive Officer. Mr. Jones will remain as a member of our Board of Directors through 2008. In August 2006, we announced that Charles Fleischman, our President, Chief Operating Officer, Chief Financial Officer and a director has resigned from such offices, with the effective date of his resignation as Chief Financial Officer on October 1, 2006, and his resignation from the other offices and as a director on October 31, 2006. On October 1, 2006, Joseph P. Slattery will become Chief Financial Officer. He is currently our Senior Vice President, Finance and Information Services.

     The Nominating and Corporate Governance Committee of our Board of Directors is serving as a search committee for candidates for our Chief Executive Officer position. The committee has retained SpencerStuart, an executive search firm, to assist in the identification of candidates for such position.

     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 that may bear little relationship to the underlying mechanism or cause of the disease.

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

     We expect gene-based diagnostic tests to create a fundamental shift in both the practice of medicine and the economics of the diagnostics industry. Gene-based diagnostic tests are expected to create an increased emphasis on preventative and predictive 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 side effects. In addition, the relatively straight-forward format and significant automation capabilities of our tests allow ease of laboratory use, reducing overall processing costs.

     The following tables describe the diagnostic test kit products and principal instrumentation we market and sell, and our products in development.

     Our HPV Tests. There are more than 70 distinct HPV types, approximately 23 of which are specific to the female genital tract. HPV types that infect the genital tract can be divided into two categories, high-risk and low-risk, which indicate the relative chances of developing cervical cancer. Cancer-causing HPV types have been found in more than 99% of cervical cancers.

     Our hc₂ HPV Test contains individual RNA probes that are mixed into cocktails of the thirteen most significant cancer-causing, high-risk papillomavirus types (types 16, 18, 31, 33, 35, 39, 45, 51, 52, 56, 58, 59 and 68), and low-risk HPV types which are not linked to the development of cervical cancer (types 6, 11, 42, 43 and 44). The Digene HPV Test contains individual RNA probes of the thirteen most significant cancer-causing, high-risk HPV types. Each of our HPV test products use a signal amplification process to detect small amounts of the HPV DNA collected from the cells of the cervix. Each test kit consists of RNA probes to specific HPV types, antibodies, detection reagents and a 96-well microplate coated with antibodies.

     Each of our HPV test products is prescribed by a gynecologist or other healthcare professional. The healthcare professional collects the specimen by inserting a collection brush into the cervix, rotating the brush to collect cells, removing it and placing it into a transport tube device. The device is then sent to the laboratory, where it is processed and tested with our test kits by a lab technician and specialized software programs provided with our Hybrid Capture 2 systems to generate qualitative patient test results indicating presence or absence of HPV DNA in the cervical specimen. The laboratory subsequently reports these test results to the physician using standard reporting procedures and the physician advises the woman of the test results and the appropriate follow-up action or treatment, if any. 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 HPV testing without the need for additional specimen collection.

     Since infection with HPV is necessary for the development of essentially all cervical cancer, testing with our HPV test products identifies women at high risk for the development of cervical disease and cervical cancer. This predictive nature of HPV testing permits healthcare professionals to classify women who test negative for HPV as being unlikely to develop cervical disease in the foreseeable future. Such classification 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 the higher clinical sensitivity and negative predictive value (the measure of how often a negative test result correctly identifies the absence of disease) of our HPV 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 focus on patients who have, or are at an increased risk of developing disease and minimizes the expenditure of resources on those patients at least risk.

     Our Chlamydia and Gonorrhea Tests. Chlamydia is the most common bacterial 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 tests. We have the only test cleared by the FDA (our hc₂ CT/GC Test) for the simultaneous detection of chlamydia and gonorrhea infections from a single patient sample from which HPV may also be detected using our HPV tests. 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. Clinical studies on women have indicated that our hc₂ CT Test is capable of detecting chlamydia in up to 98% of the cases in which the bacterium is present and our hc₂ GC Test is capable of detecting gonorrhea in up to 92% of the cases in which the bacterium is present. We also offer our hc₂ CT/GC Test which can be used to test for both infections from the same sample, needing only to confirm the presence of chlamydia and/or gonorrhea by follow-up testing of CT/GC positive specimens with our hc₂ CT Test and hc₂ GC Test.

     Our Blood Virus Tests. Blood viruses, such as hepatitis B virus and cytomegalovirus, are leading causes of morbidity and death. Antiviral therapies have been developed to treat the diseases caused by these viruses. 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 measuring viral load and identifying patients who are not responding to therapy early in their treatment, physicians can tailor antiviral therapies through monitoring of individual responses, recognize when a patient develops drug resistance and project how quickly the infection will progress to chronic disease. Rapid, accurate and ongoing detection of blood viruses and monitoring of viral load are essential for effective patient management.

     We have developed unique testing products using our Hybrid Capture technology to detect the presence of cytomegalovirus and hepatitis B virus. Our hc₁ CMV Test is the only DNA test cleared for the detection of cytomegalovirus by the FDA. Our hc₂ HBV Test is currently available primarily in Asia.

     Our Instrumentation and Accessory Products. We manufacture, or have manufactured for us, instrumentation and accessories for performing our tests in clinical laboratories. For our hc₁ and hc₂ tests, we offer a manual Hybrid Capture system that includes a DML 2000 luminometer, plate washers, microplate heaters and additional accessories. We also offer our Rapid Capture System, which is an automated pipetting and microplate handling platform developed for high volume diagnostic testing using our Hybrid Capture technology. In 2001 we received FDA clearance for use of the Rapid Capture System with our diagnostic tests for chlamydia and gonorrhea and in May 2004 we received FDA approval for use of the Rapid Capture System for HPV testing. Using our Rapid Capture System, a single laboratory technician can perform over 350 tests in a single laboratory shift. Our HPV test products are approved, and our chlamydia and gonorrhea tests products are 510(k)-cleared, by the FDA for use with the Rapid Capture System.

     Our Products in Development. Please see below under the headings “Research and Development of Next Generation Products” and “In-Licensing and Acquisitions” for a description of our products in development.

     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 cervical cancer cases are preventable. In the United States, there are approximately 10,000 newly diagnosed cases of cervical cancer per year. The United States has a relatively low incidence of cervical cancer due to widespread use of cervical cancer screening methods and significant expenditures on screening infrastructure, which includes sophisticated laboratory facilities, highly trained cytotechnologists and extensive regulatory oversight. Nonetheless, approximately 3,700 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 method for cervical cancer screening since the 1940s. Between 50 and 55 million Pap tests are performed annually in the United States, and we believe that an additional 60 to 100 million are performed annually in the rest of the world. Pap test results fall into three broad categories: normal, abnormal and equivocal, or ASC-US (Atypical Squamous Cells of Undetermined Significance). An equivocal 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.

     Women with normal Pap test results typically do not undergo follow-up treatment beyond routine Pap testing, unless there are other indicators of increased risk for disease such as being HPV-positive, which could necessitate more frequent follow-up testing for women over 30. A diagnostic follow-up alternative for women with abnormal Pap tests is a colposcopic examination (visual examination of the cervix with the aid of a colposcope). Many women also undergo biopsy at the time of colposcopy, and may go on to have any suspected lesions ablated (physically removed with a scalpel or cauterizing instrument). Women with equivocal Pap test results may undergo HPV testing and/or repeat Pap testing; thereafter, an abnormal or positive result from either would necessitate a follow-up colposcopy.

     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 results leading to 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. Consequently, Pap testing does not allow the clinician to identify women with no overt signs of cervical disease but who are at increased risk for developing cervical disease or cervical cancer in the future.

     HPV Testing in Cervical Cancer Screening. In 1999, the Journal of Pathology reported that HPV, a sexually transmitted virus, is the primary cause of cervical cancer and that 99.7% of cervical cancers contain cancer-causing HPV. Persistent infection with cancer-causing HPV types is a necessary precursor to virtually all cervical cancer. A positive HPV test result is more meaningful with increasing age because HPV 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 HPV have high-grade

cervical disease. Additionally, women age 30 and older with persistent HPV infection and who do not have cervical disease are at significant risk of developing cervical disease in the future.

     In 2002, the Journal of the American Medical Association, (JAMA), published Consensus Guidelines recommending testing for HPV in the management of women with ASC-US Pap test results. These “2001 Consensus Guidelines” were sponsored by the American Society for Colposcopy and Cervical Pathology (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. Since the publication of these guidelines in 2002, we believe that the use of HPV testing as a follow-up to an ASC-US Pap test result has become the standard of care and that HPV testing is used in approximately 75% of such cases in the United States.

     In July 2003, the American College of Obstetricians and Gynecologists (ACOG) published recommendations for cervical cancer screening that include the use of an FDA-approved high-risk HPV DNA test for women age 30 and older. The Digene HPV Test is the only FDA-approved high-risk HPV DNA test. In April 2005, ACOG issued a “Level A” designation – ACOG’s highest level of recognition – that HPV testing together with a Pap test is more sensitive than a Pap test alone.

     We believe The Digene HPV 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 women independent of age, enhances cervical cancer screening by overcoming the shortcomings of the Pap test alone. The Digene HPV Test:

     Over the last several years, many general population screening studies using our HPV test products have been conducted by prominent medical professionals and academic and government institutions throughout the world, including the National Cancer Institute, Columbia University, Kaiser Permanente Medical Group and the Cleveland Clinic Foundation. Many of these studies assessed the usefulness of our HPV test products in comparison to the Pap test for women age 30 and older. These studies demonstrate the superior performance of our HPV test products 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. A meta-analysis of multiple studies published in the August 2003 Archives of Pathology and Laboratory Medicine shows that women age 30 and older who test negative for HPV and have normal Pap test results are not likely to have cervical disease currently and are at very

low risk of developing cervical disease in the future. Women age 30 and older who test positive for high-risk HPV are at significant risk of developing cervical disease or cancer. A second, independently conducted meta-analysis published in the April 2006 International Journal of Cancer, comprising eleven European and North American studies involving more than 60,000 women, shows that testing for high-risk types of HPV is a consistently more sensitive tool for cervical cancer screening as compared to the Pap test alone. Other examples of published clinical validation studies have been described in our prior Form 10-K filings, which are available on the SEC’s website at www.sec.gov.

     The FDA has approved two separate uses for our HPV testing products:

     Over the last several years, and particularly in fiscal 2006, the majority of our sales and marketing investments have been directed to the launch of The Digene HPV Test in the United States for both FDA-approved indications.

     Increasing awareness of the benefits of HPV testing, including the ability to use our HPV testing products as part of an accurate assessment of the risk of developing cervical disease or cancer, is the key step in our demand-creation marketing campaign for our HPV test products. Our strategy has involved:

     The following table provides information regarding our revenues and assets. For further information regarding our product sales, including revenues from our principal products, our HPV test products, as well as profits and losses from operations for the last three fiscal years, see our consolidated financial statements in Item 8 of this Form 10-K.

     Our commercialization plan for the United States consists of five key activities, all of which progressed significantly in fiscal 2006.

     First, we continue to pursue and receive support of governmental agencies, medical societies and physician groups regarding the efficacy of HPV testing using The Digene HPV Test (DNAwithPap). Second, we have established formalized programs to co-market The Digene HPV Test with our laboratory partners to physicians and payors. Third, we have implemented physician education programs, which are driven by our physician detailing organization and third-party organizations, working independently, to educate physicians and women about the proper use of the combined tests. Fourth, we have established, and continue to work to establish, comprehensive health insurance reimbursement for our products. And fifth, we partner with women’s advocacy groups, and have continued our own direct-to-consumer awareness campaigns to educate the public about the benefits of HPV testing. These five key elements of our Digene HPV Test commercialization plan are coordinated and balanced with our overall demand creation marketing plan.

     Acceptance of our HPV and other testing products by clinical reference laboratories, hospitals and integrated health networks is key to helping to increase clinician use of our testing products. We have developed strong relationships with these important customers through a direct laboratory-focused sales force supported by internal and field-based technical and customer service representatives. At the end of fiscal 2006, we had existing contracts with the majority of the major U.S. national and regional reference laboratory providers, and estimate that more than 300 clinical laboratories in the United States provided testing using our HPV, chlamydia, gonorrhea and cytomegalovirus testing products. The largest laboratory providers in the United States, such as Quest Diagnostics and Laboratory Corporation of America (LabCorp), all have active programs for automatic (or “reflex”) HPV testing for women with equivocal results from specimens collected using Cytyc Corporation’s ThinPrep Pap^® Test. In addition, several national and regional reference and hospital clinical laboratories are actively working to build awareness of the clinical value of primary HPV testing with a Pap test in women age 30 and over.

     To enhance the knowledge base of clinicians and to provide for physician-directed marketing of our products, in May 2003 we entered into an agreement with PDI, Inc. (“PDI”), under which PDI established a Digene sales organization dedicated to educating U.S. physicians, nurses and other healthcare professionals about the benefits of The Digene HPV Test. Under the PDI agreement, our sales

force grew from 32 sales professionals in fiscal 2003 to 64 sales professionals and seven field-based managers in 2005. Beginning in fiscal 2005 we assumed responsibility for the direct management of this sales team, by hiring the managers and all of the representatives, a process we completed during fiscal 2006. Our sales force, as of June 30, 2006, consisted of 63 sales professionals and seven field-based managers. The efforts of our sales force are supplemented by a diverse educational-outreach program. In fiscal 2006, approximately 8,000 practicing clinicians participated in one or more Digene-sponsored CME and/or grand round programs. In fiscal 2007, we plan to continue these activities.

     Our ability to secure adequate reimbursement from government and third-party payors is an important element of our sales and marketing plan. In the United States, all of our FDA-approved products have some level of reimbursement coverage for their FDA-approved indications. This has been supported by the American Medical Association, which assigned specific Current Procedural Terminology (CPT) codes – necessary for reimbursement – for HPV testing. The Centers for Medicare and Medicaid Services also has established Medicaid and Medicare reimbursement for our HPV test products. In terms of indication, coverage for HPV testing as a follow-up test for equivocal Pap results is estimated at 80% penetration. Coverage for HPV primary screening testing in women age 30 and older, in conjunction with a Pap test is available from payors that provide health insurance to an estimated 225 million “covered lives” in the United States. Our effort to extend access to HPV testing has been helped by Women in Government, a bipartisan, non-profit organization representing the nation’s more than 1,600 elected state-level women legislators, which in 2004 launched a 10-year campaign to eliminate cervical cancer. Women in Government is supporting initiatives by state legislators to introduce and pass bills and resolutions calling for greater education and access to new technologies such as HPV testing. By the end of fiscal 2006, 39 of these laws and resolutions had passed, including five that call for mandated coverage of primary HPV testing.

     In March 2005, we launched a direct-to-consumer (DTC) advertising campaign designed to educate women about the link between HPV and cervical cancer and the availability of The Digene HPV Test. To date, the DTC campaign has included advertisements placed in nine national magazines and a 30-second television ad aired in ten major metropolitan markets — Atlanta, Baltimore, Philadelphia, Boston, Chicago, Houston, Dallas, New York City, San Francisco and Washington, D.C. We believe, based on our product ordering patterns, that our DTC campaign has been successful in increasing awareness among women in the targeted markets about the benefits of HPV testing and has had a direct impact on the increase of orders by clinical laboratories. We plan to continue the DTC campaign during fiscal 2007 — the extent of the campaign will be determined on a quarter-by-quarter basis.

     We are also analyzing and planning for the impact HPV vaccines will have on the HPV testing market. In June 2006, Merck & Co., Inc. received FDA approval for its HPV vaccine product, and is now in the process of launching its marketing campaign in the U.S. to clinicians and consumers. GlaxoSmithKline has an HPV vaccine product candidate in the FDA approval process. We expect that there will be an increased awareness of the causal link between HPV infection and the risk of developing cervical cancer as a result of these marketing campaigns. Even with the availability of HPV vaccines, we believe the need for HPV testing and screening will remain for the foreseeable future because the vaccines do not cover all cancer-causing HPV types, and the vaccines are approved for women younger than the approved population for adjunctive screening. There may also be a use for pre- or post-vaccination HPV testing; such use will need to be determined through additional clinical research. We believe our HPV technologies, including our HPV genotyping products in development, position us to be a leader in such HPV testing.

     Internationally, we continue to make progress in increasing the market penetration of our HPV testing products in cervical cancer screening programs throughout Europe, Latin America, and the Asia/Pacific region. In such markets we sell The Digene HPV Test under the DNAPap test trademark. We have direct, company-controlled sales operations in Europe and Brazil, and also make extensive use of independent distributors in other international markets. In fiscal 2006, we increased overall international revenue from our HPV test products by approximately 12% over the prior year.

     We have established reimbursement for HPV (triage) testing in major European countries and continue to work towards our goal of establishing available reimbursement for HPV primary stand-alone screening. We have also established reimbursement for our marketed products in major European countries, Mexico, Brazil, Australia and major Asian countries. We also work with our distribution networks in smaller markets to establish reimbursement from third-party payors in their respective territories, and with government and ministry officials to establish appropriate reimbursement coverage for our marketed products.

     As we continue to grow the international sales of our products, we anticipate that changes in the rate of exchange for foreign currencies into U.S. dollars may have an adverse impact on our revenues.

     Europe. We believe that approximately 45 to 55 million Pap tests are performed annually in Europe, and that cervical cancer screening using stand-alone HPV testing has potential for more widespread acceptance. In fiscal 2002 we made the decision to establish our own sales, marketing, distribution, warehousing and customer support infrastructure in Europe for the sale of our HPV test products. Since that time, we have established Digene subsidiaries in Germany, France, Italy, Spain, the United Kingdom and Switzerland, which currently sell our products into 13 European countries. We also have established an extensive, third-party distributor network that markets our products in 25 additional countries in Europe, the Middle East and Africa.

     In the European market we face a number of challenges including: the lack of clinical guidelines and/or government public funding for HPV primary screening; strong resistance from some current participants in the pathology, cytology and gynecology infrastructure to HPV testing; limited reimbursement in certain countries; and competition from emerging, non-validated technologies. Although we sustained losses from our European operations as a whole in fiscal 2006, we believe the transition from a distributor sales model to a combination of Digene-managed direct sales and a third-party distributor network under company control will be a key to accelerating our market penetration in the future. This approach should allow for better control of our marketing programs, higher test kit margins and improved customer support. In addition, we believe that progress in Europe will be driven by our coordinated sales and marketing programs, which include comprehensive physician and laboratory marketing and education, continued support of primary screening trials, public awareness campaigns and lobbying public health and government contacts for acceptance and funding of HPV primary screening.

     As part of an ongoing effort, we are involved in several clinical studies throughout Europe designed to demonstrate the clinical utility of HPV testing for primary screening. In June 2006, a large randomized study of more than 33,000 women was published in the Journal of the National Cancer Institute by Ronco et al. The study, which was funded in part by the European Union and The Italian Ministry of Health, demonstrated that The Digene HPV Test was approximately 40% more sensitive than conventional cytology, and approximately 30% more sensitive than liquid cytology, for the detection of high grade cervical disease and cancer. We are aware that a similar study (called ARTISTIC) of 24,500 women is underway in the United Kingdom. Initial data have been published showing that The Digene HPV Test detected 96% of high-grade cervical disease and cancers. The authors concluded that HPV

testing is practicable as a primary routine screening test. Another example of our progress in Europe is the January 2006 announcement by Deutsche BKK, a major public-health insurance provider in central Germany, of the decision to implement the first cervical cancer screening program in the Wolfsburg region. The protocol being used for this screening requires the use of The Digene HPV Test as an adjunct to cytology for all women 30 years of age and older.

     Latin America. In Brazil, we market our products directly through our majority-owned subsidiary, Digene do Brasil LTDA. The products we market include our gene-based diagnostic test products and our proprietary Universal Collection Medium (UCM™), which enables both cytology and HPV DNA testing to be done from one patient sample. This product was launched in 2002. In other countries in Latin America we contract with specific distributors to sell our products. We first began to market our products in these regions during 2003. Our primary markets are Mexico, Colombia and Costa Rica and secondary markets include Peru, Argentina, Chile, Ecuador, and Venezuela.

     We believe we have potential for growth in Latin America, due to the high cervical cancer rates in the population, the key relationships we are building with governments in various countries, a growing government awareness that current methods of detection are not successful in the population, and the lack of alternative HPV testing products. The challenges we face include the lack of direct control that results from reliance on distributor relationships, the cost of our test compared to conventional cytology and colposcopy, the lack of general consumer awareness about HPV, a lack of screening infrastructure, and the reluctance of distributors and laboratories to invest in instrumentation.

     Asia/Pacific. The Asia/Pacific market encompasses approximately 770 million women age 30 to 60. We are concentrating our efforts in Korea, Japan, China, Australia, Taiwan and Hong Kong, and work in these countries through established distributor arrangements. Some OB/GYN societies within the region have recognized the potential role of HPV testing in cervical cancer screening, but no organizations have published guidelines as of yet. Reimbursement is highly varied in the Asia/Pacific region. In Japan, there is regulatory approval for marketing our hc₂ HPV, chlamydia and gonorrhea tests. Our hc₂ HPV Test also is registered with the People’s Republic of China State Food and Drug Administration, and HPV testing reimbursement has been established in Beijing, Shanghai and Guangzhou. In Australia, there are currently recommendations for post-disease treatment management using our HPV test products.

     Historically, the Asia/Pacific region suffers from a lack of screening infrastructure and cytology expertise. The female population is becoming increasingly aware of the benefits of cervical cancer screening. Alternatives, including liquid cytology and polymerase chain reaction (PCR) HPV testing, are becoming available in the Asia/Pacific region. We have implemented a series of programs and activities focused on key markets in this region and intend to coordinate speaker programs to help increase awareness of HPV testing and its advantages, to conduct focused lobbying activities along with direct government contact, and may explore direct-to-consumer activities and educational events. There also are opportunities in the region for sales of our tests for chlamydia and gonorrhea.

     One of our key goals is to continually expand 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 core research efforts for next generation technologies include research programs for improved molecular diagnostic assay systems for detection of HPV and other targets in the area of women’s cancers and infectious diseases, and research on our next generation nucleic acid detection technology. During fiscal 2006, our research and development activities were concentrated on platform technology, including adaptations of such technology, and improvements to our diagnostic test and equipment products. We focused on four areas: (1) core research efforts for next generation technologies; (2) new product development activities; (3) support and improvement of existing product lines and equipment offerings; and (4) support of regulatory submissions seeking approval to market our existing products with procedural improvements and/or for additional uses and indications in the U.S. and abroad. 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.

     We are developing HPV genotyping products, the first of which was introduced in 2006, and others of which are planned for commercialization over the next few years. We believe HPV genotyping products provide healthcare professionals with additional diagnostic assistance for women with HPV positive, Pap test negative results. HPV genotyping products allow the clinician to determine the presence of the specific HPV type, which allows for more specific assessment of the risk of developing cervical disease.

     In 2003, we entered into a collaborative product development and commercialization agreement with PATH (Program for Appropriate Technology in Health) to develop a rapid-batch HPV test product for resource-constrained countries and that program is ongoing. In conjunction with PATH, we jointly fund the efforts subject to certain maximum funding obligations and we perform the product development and commercialization activities. We expect to have a prototype for initial clinical evaluation during calendar 2006.

     Product development activities are currently focused on simplifying and improving the efficiency of cervical specimen processing procedures and thereby increasing Hybrid Capture 2 assay throughput; these development efforts include a new batch preparation method for processing liquid-based cytology specimens for Hybrid Capture testing. In support of this new method, we collected data supporting a pre-market approval supplement (PMAS) for hc₂ HR HPV testing of ThinPrep^® PreservCyt^TM Solution (Cytyc Corporation) specimens processed with this new method; the PMAS was submitted to the FDA on June 30, 2006. Work is also progressing on a specimen preparation system which automates the front-end processing of relevant types of cervical specimens. This specimen preparation system is being developed to provide clinical laboratories with a streamlined means to prepare samples for transfer to our Rapid Capture System and is expected to be commercialized in calendar 2007.

     We remain active in our efforts to expand HPV testing capabilities for additional liquid-based cytology media, including the SurePath^TM collection and preservative medium (TriPath Imaging). The FDA review process is ongoing with regard to TriPath Imaging’s PMAS supporting the use of SurePath specimens with the hc2 HR HPV Test that was submitted to the FDA in December 2005, and TriPath Imaging is responding to the FDA’s request for information. Other activities relevant to this program continue as part of the collaboration between Digene and TriPath Imaging.

     We spent approximately $10,744,000, or 12% of total revenues, $12,964,000, or 11% of total revenues, and $17,922,000, or 12% of total revenues, on research and development in fiscal 2004, 2005 and 2006 respectively.

     In-Licensing and Acquisitions

     We continually explore opportunities to acquire related businesses or in-license products or technologies. Our activities in this area are primarily focused on women’s health and molecular diagnostics companies, products and technologies that can leverage our global distribution infrastructure, expand the product offerings for our laboratory and physician sales force in the United States, or provide additional targets for our next-generation nucleic acid detection technology platform.

     In May 2005, we signed a license agreement with Luminex Corporation under which we acquired non-exclusive worldwide rights to commercialize certain in vitro clinical diagnostic tests using Luminex’s xMAP^® multiplex liquid bead-based array technology, which enables testing for multiple markers or diseases at a single time. We believe this license agreement marks an important milestone in the development of our hc4 platform. For example, one of our HPV genotyping products in development is a Luminex-based multiplex genotyping test for up to 19 HPV types employing a modified configuration of our GP5+/6+ primers, and we intend to use the xMAP technology with respect to the Asuragen Signature Cystic Fibrosis products described below.

     To continue expanding our product portfolio offerings, in March 2006 we entered into an exclusive, worldwide agreement with Asuragen, Inc. to market and distribute Asuragen’s Signature Cystic Fibrosis (CF) screening products. Under the agreement, we have the exclusive rights to market and distribute Asuragen’s Signature CF products worldwide. In addition, Asuragen will develop, for our exclusive distribution, the next generation CF test, Signature CF Expand, which expands the mutation panel to include ethnic-specific mutations that can be adapted for use in carrier screening and may find additional utility for neonatal and newborn testing. We will have the right of first refusal on future genetic test products developed by Asuragen. The Signature products utilize the Luminex xMAP technology.

     Cystic fibrosis is the most common autosomal recessive disease in the Caucasian population with a prevalence estimate of 1 in every 2,500 to 3,300 live births. In April 2001, the American College of Medical Genetics and ACOG issued statements and developed guidelines for population CF carrier screening. Those guidelines include recommendations for genetic screening for CF mutations should be offered to identify carriers among adults with a positive family history of CF, partners of individuals with CF, women planning a pregnancy and women seeking prenatal care.

     We believe that the Signature CF screening products represent an important and useful addition to our portfolio offerings to the OB/GYN healthcare professionals targeted by our sales force professionals and to our laboratory partners. In fiscal 2007, we anticipate that Asuragen will conduct the clinical trials necessary to support the submission of a 510(k) pre-market notification to the FDA.

     On June 30, 2006, we entered into a non-exclusive sublicense agreement with Abbott Laboratories pursuant to which we obtained sublicense rights in the field of human in vitro diagnostics under U.S. Patent No. 5,582,989 and foreign counterparts that generally disclose and claim certain inventions characterized as “Multiplex Genomic DNA Amplification for Deletion Detection.” We anticipate this technology may be important in future multiplex applications.

     Our ability to continue to grow may depend upon identifying and successfully acquiring attractive acquisition opportunities, effectively integrating such opportunities, achieving cost efficiencies and managing these acquisitions as part of our business. In November 2005 we completed a capital raising transaction in an underwritten public offering of our common stock. Part of the proceeds of that offering may be used for such potential acquisition and in-licensing opportunities.

     Globally, The Digene HPV Test holds a strong competitive position due to our clinically validated and patent-protected Hybrid Capture platform and high-volume automation instrumentation, the breadth of our intellectual property rights to high-risk HPV types, our ability to test for HPV, chlamydia and gonorrhea from the same sample, our strong regulatory position, our success in obtaining reimbursement for our products, and our marketing focus that includes programs designed to educate healthcare professionals and consumers about the benefits of HPV testing. Digene is currently the only market participant with FDA-approved HPV DNA test products. For detection of HPV, we sell our products in the United States for the two FDA-approved indications: adjunctive primary screening with a Pap test for women age 30 and older, and follow-up testing of equivocal Pap test results in women of any age. In Europe and the rest of the world, HPV testing is in varying stages of research and adoption, with most use limited to follow-up for equivocal Pap tests. We are aware of an increasing number of clinical trials being conducted to explore use of HPV testing for primary screening, both with a Pap test or as a stand-alone initial test, as well as for proof of clearance or cure after treatment for diagnosed cervical disease or cancer.

     We believe we have a competitive advantage because our HPV test products are FDA-approved for two indications and because, as clinical studies have shown, our HPV test products, used in conjunction with the Pap test, enable excellent diagnostic capabilities due to high clinical sensitivity and high negative predictive value. None of our competitors methodologies have demonstrated similar clinical sensitivity. Some of our competitors stress the analytical sensitivity of their product offerings, but we believe it is important to distinguish between clinical sensitivity and analytical sensitivity. Clinical sensitivity is a measure of a test’s ability to accurately detect the presence of disease. Analytical sensitivity is simply the lower limit of a test’s ability to detect a given analyte, in this case HPV DNA. Although clinical sensitivity is a function of analytical sensitivity, analytical sensitivity alone is not a sufficient measure of a test’s clinical value. Cervical cancer is generally not present unless HPV DNA has reached a critical limit of viral load in tissues, thus the cutoff value of a test is a very important attribute relating to clinical sensitivity and specificity. Due to the high prevalence of HPV infection in specific populations and the transient nature of this infection in those populations, most of which does not lead to disease, HPV tests should not have excessive analytical sensitivity as this has the potential to increase the number of clinical false positive results. A large volume of clinical validation data exists which has shown that obtaining a positive result with our HPV test reflects the presence of clinically relevant HPV infection, which is a very strong indicator of the risk of developing cervical disease or cancer. Conversely, but equally as important, the high negative predictive value of our HPV test demonstrates that a negative HPV test result is a strong indicator that neither cervical cancer nor its cause is present, offering greater reassurance to women and their physicians, alleviating patient anxiety, and reducing healthcare costs.

     We compete with well established diagnostic technologies such as cytology and, particularly in Europe, from emerging alternative HPV testing approaches such as research-based PCR, other indicators of disease and other “home brew” testing methods developed by laboratories. With the increasing acceptance of the importance of HPV testing, we expect such competition will intensify. In the United States, which is our largest market, our competitors include molecular diagnostic companies such as Roche Diagnostics, Third Wave Technologies, Inc. and Ventana Medical Systems, Inc., which are developing or marketing HPV products that have not been approved by the FDA, and manufacturers of liquid-based Pap tests, such as Cytyc Corporation and TriPath Imaging. The Pap test, and related follow-up diagnostic procedures, such as colposcopy and biopsy, have a long history of use, are widely accepted, inexpensive (in the case of the Pap test) and, with regular use, may be adequate screening tests for cervical cancer. When The Digene HPV Test is marketed as an adjunct to the Pap test for primary screening, it is sometimes perceived as adding unnecessary expense and counseling time to such accepted

cervical cancer screening methodology. In addition, technological advancements designed to improve the quality of sample collection and preservation, as well as to reduce Pap testing’s susceptibility to human error, may increase physician reliance on the Pap test and solidify its market position. These factors may inhibit significant market acceptance of The Digene HPV testing products for primary cervical cancer screening, and many of our sales and marketing programs are focused on educating healthcare professionals and consumers about the advantages of HPV testing.

     Approximately 55 million Pap tests are performed annually in the United States. We believe the potential U.S. HPV testing market is approximately 35 million tests conducted annually, either adjunctively with a Pap test, as follow-up testing for women with abnormal or equivocal Pap test results, or as “proof of cure.” We assume some extension of screening intervals as part of this market estimation, but believe the size of the overall market potential may grow in the future if we pursue approval for use of our HPV test product for stand-alone primary cervical cancer screening. At the end of fiscal 2006, we estimated our penetration of this potential HPV testing market to be approximately 18% in the United States.

     We estimate that an additional 60 to 100 million Pap tests are performed annually in the rest of the world, in those countries where a cytology infrastructure exists. We believe the current HPV testing market is limited to follow-up testing for women with equivocal or abnormal Pap test results. However, in the future, we expect such global HPV testing market to expand as primary cervical cancer screening, either with a Pap test or as a stand-alone, gains acceptance on a country-by-country basis, particularly in countries without existing cytology infrastructure.

     In June 2002, Institut Pasteur announced that it had transferred its HPV intellectual property estate to F. Hoffman-La Roche Ltd. (Roche), including assignment of a cross-license agreement between Digene and Institut Pasteur. Based on Roche’s description of the virus types it has acquired or otherwise has access to, and despite our continuing exclusive access to several high-risk HPV types, we believe Roche has the ability to develop an HPV test that could be competitive with Digene products in the future. Roche currently is marketing a PCR-based HPV testing product in Europe, as well as technology for HPV genotyping. Roche is substantially larger and better capitalized than Digene, can offer an HPV test as part of a broader menu, and has existing customer relationships in the gene-based probe diagnostics business. If Roche receives FDA approval for an HPV test, we may not be able to compete in a way that will allow us to substantially increase our share of the HPV testing market. However, we believe there are a number of technical hurdles that Roche must overcome before its HPV testing products can become truly competitive and that we retain advantages in the clinical validation of our products and our success in obtaining product-specific reimbursement approvals. In February 2005, Roche entered into an agreement with Gen-Probe Incorporated (Gen-Probe), under which Roche will manufacture and supply DNA probes for use in Gen-Probe HPV test kits. According to publicly available filings with the Securities and Exchange Commission, the agreement calls for Gen-Probe to pay Roche up to $30 million for access to Roche proprietary HPV types, including those transferred from Institut Pasteur. Such agreement may also lead to increased competition in our market.

     With respect to our other diagnostic test products, the medical diagnostics and biotechnology industries are subject to intense competition. Some of our products, such as our tests for chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus, compete against existing screening, monitoring and diagnostic technologies, including tissue culture and antigen-based diagnostic methodologies. 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. Other companies, including large, well-capitalized pharmaceutical and biotechnology companies, may enter the market in the future. We believe the primary competitive factors in the market for gene-based probe diagnostics and other screening devices are clinical validation, performance and reliability; ease of use; standardization; cost;

proprietary position; the competitor’s share of the existing market; access to distribution channels; regulatory approvals; and availability of reimbursement. For the CT/GC market specifically, the key challenge for Digene is our current lack of a urine-based indication for our test, which we intend to address as part of our next generation platform offering.

     Our existing and potential competitors may be in the process of seeking FDA or foreign regulatory approvals for their respective products and/or may 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 existing products. We may not be able to continue to compete effectively against existing or future competitors, which may have a material adverse effect on our business, financial condition and results of operations.

     Patents and other proprietary rights are essential to our business. We own or have license rights to over 150 patents and patent applications. Our most significant patent rights relate to our Hybrid Capture technology and HPV types.

     Hybrid Capture Technology

     Our Hybrid Capture technology combines two of the most significant technologies in the life sciences industry, DNA/RNA probes and monoclonal/polyclonal antibodies, to allow rapid, standardized gene-based testing in virtually any laboratory setting. In May 2001, we received a United States patent for our Hybrid Capture assay from the United States Patent and Trademark Office. Foreign counterparts of this patent application have been granted to us in Europe, Japan and Australia. We have also filed United States patent applications relating to other aspects of our Hybrid Capture technology. The earliest of these Hybrid Capture assay patents will expire in the United States in 2018 and in Europe in 2012. In addition, in connection with our settlement of litigation with Enzo Biochem, Inc. and Enzo Life Sciences, Inc. in October 2004, we obtained an irrevocable non-exclusive license to use certain technologies in connection with our Hybrid Capture products. We had an exclusive license with the University of Hawaii for two patents covering monoclonal antibodies for the detection of RNA:DNA hybrid complexes, which patents expired in March 2005. We have non-exclusive reseller rights to the chemiluminescent substrates (used to create a chemical reaction that produces light in connection with our Hybrid Capture signal amplified molecular technology) included in our Hybrid Capture test products under our long-term supply agreement with Applied Biosystems. Such agreement includes certain license rights to manufacture the product in the event the manufacturer is not able to do so.

     We believe our Hybrid Capture patent estate provides us with exclusivity, and that expiration of individual patents, including the expiration of the University of Hawaii patents, will not have a material adverse impact on our business. We have not out-licensed our Hybrid Capture technology to any third party and believe our know-how and the complexity of our technology make it difficult for others to replicate our Hybrid Capture technology.

     Rights to HPV Types

     There are more than 70 distinct HPV types, approximately 23 of which are specific to the female genital tract. HPV types that infect the genital tract can be divided into two categories, high-risk (potentially cancer-causing) and low-risk. Of the 23 HPV types specific to the female genital tract, 13 are commonly recognized as high-risk. High-risk HPV types have been found in more than 99% of cervical cancers.

     The following table provides information regarding the HPV types included in our HPV test products.

     Through our owned patents, license agreements described further below and access to other HPV types, we have rights to or access to the 13 commonly recognized high–risk HPV types. We believe we have access to more high–risk HPV types than other companies currently offering or developing HPV tests. Some of these HPV types are the subject of multiple patents. As our issued patents and exclusive license rights expire, or are terminated, other companies will gain access to such high–risk HPV types, but we do not believe the expiration of the earliest to expire patents will have a material impact on us.

     We are party to a cross license agreement with Institut Pasteur, under which we obtained a worldwide non-exclusive license to United States patents and patent applications and corresponding

foreign patents and patent applications, relating to HPV types 33, 39 and 42. In return, we granted to Institut Pasteur a worldwide non-exclusive license to our three owned United States patents and corresponding foreign patents and applications relating to HPV types 35, 43 and 56. We granted Institut Pasteur the right to extend the scope of its non-exclusive license to include the United States patent and corresponding patent applications relating to HPV type 44 at such time as Institut Pasteur discovers and develops an additional HPV type which is equivalent in value to HPV type 44. If such extension is granted, we will receive a license to the new HPV type discovered and developed by Institut Pasteur. Under the cross license agreement, Institut Pasteur has the right to grant a sublicense of its rights under the cross license agreement, without the right to grant further sublicenses, to Beckman Instruments (now known as Beckman Coulter, Inc.) and to affiliates of Institut Pasteur. Under the cross license agreement, both parties are restricted from granting any additional licenses to the HPV types subject to the cross licenses but are entitled to assign their rights, subject to all restrictions. We believe that the cross license agreement 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. (Roche) the HPV intellectual property estate of Institut Pasteur, which included an assignment of the cross license agreement to Roche. On September 25, 2002, Ventana Medical Systems, Inc. publicly announced that it had acquired Beckman Coulter, Inc.’s HPV business and corresponding assets, including the assignment of the HPV intellectual property portfolio acquired by Beckman Coulter, Inc. from Institut Pasteur through a 1991 sublicense agreement. We are currently party to a patent infringement action with Ventana Medical Systems and Beckman Coulter related to these matters. Please see Item 3. “Legal Proceedings,” for a description of such litigation.

     On April 5, 2000, we entered into an exclusive worldwide license with Institut Pasteur relating to the genetic sequence of HPV types 68 and 70 (including the use of the United States patent relating thereto issued November 9, 1999 and expiring in 2017) and the detection of HPV 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 Settlement and License Agreement with Georgetown University, which replaces a previous license between us and Georgetown University, we obtained exclusive, irrevocable, worldwide rights to a U.S. patent and corresponding foreign patents and patent applications relating to HPV type 52 and to a U.S. patent and corresponding foreign patents relating to the use of the L1 gene sequence to detect specific HPV types. The licenses granted under the Settlement and License Agreement with Georgetown will terminate upon the last to expire of the licensed patent rights. The L1 gene sequence-related patent will expire in 2008 in the United States and expired in March 2006 in Europe. We are obligated to make royalty payments to Georgetown University based on the percentage of net sales (as defined in the Settlement and License Agreement) of products incorporating the licensed technologies. The Settlement and License Agreement was entered into in connection with the settlement of litigation between us and Georgetown University in July 2005. Please see Item 3. “Legal Proceedings,” for a description of such settlement.

     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 HPV type 58 provided by Kanebo to develop, manufacture, use, distribute and sell products. Unless terminated earlier, the Kanebo license agreement will expire on January 1, 2010.

     Other Intellectual Property

     In May 2005, through an agreement with Luminex Corporation, we acquired non-exclusive worldwide rights to commercialize certain in vitro clinical tests for use in women’s health diagnostics using Luminex’s xMAP multiplex liquid bead-based array technology, which enables testing for multiple markers or diseases at a single time. As described above, under “Research and Development of Next Generation Products,” we are using the xMAP technology in our next generation of Hybrid Capture products. This license agreement represents an important element in our hc4 platform development efforts. The term of the license expires upon expiration of the last of the licensed patents under the agreement.

     The use of trademarks is important to help promote name recognition for us and our product offerings. We have developed a portfolio of trademarks for which we are pursuing or have received registrations, in the U.S. and elsewhere. We have programs in place to monitor any unauthorized use of our trademarks, or the use of marks confusingly similar to our marks. To date we have not experienced any significant issues related to our trademark estate.

     Our principal trademarks include:

     We lease a facility in Gaithersburg, Maryland, comprising a total of 111,000 square feet for our corporate headquarters and manufacturing operations pursuant to a Lease Agreement dated March 2, 1998, as amended, between Digene and ARE-Metropolitan Grove I, LLC, as Landlord. Approximately 45% of such space is dedicated to our manufacturing, quality control and shipping activities. We currently run one manufacturing and product shipment shift per workday and have the capacity to add additional shifts as required.

     On November 15, 2005, we and the Landlord executed the Fourth Amendment to the Lease. The Amendment provides for us to expand the rented premises to 143,585 rentable square feet. The additional space will be used for manufacturing and research and development space. Under the Amendment, we and the Landlord are contributing financing to fund the expansion construction and outfitting, for which construction is expected to be substantially completed by September 20, 2006. In addition, the initial term of the Lease has been extended until ten years after the earlier of substantial completion of the expansion work or September 20, 2006, and we have the ability to extend the lease for two additional five-year terms. We believe that we have sufficient manufacturing capacity to satisfy demand through the

completion of this expansion and, post expansion, we expect to be able to expand our production capability to satisfy demand for the foreseeable future.

     We lease office and sales operations facilities in the United Kingdom, Germany, Switzerland, France, Brazil and Italy, which leases run in length from one year to ten years, and Spain which runs month-to-month. We also utilize a third-party warehouse facility in Germany to support our European operations.

     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 Regulations, which imposes current Good Manufacturing Practice requirements. We received ISO 9001 certification in 1999, transitioned to ISO 13485 certification in 2003 and obtained ISO 13485:2003 certification in November 2005. As part of our quality assessment procedures, we periodically evaluate the performance of our raw material suppliers, potential new alternative sources of such materials, and the risks and benefits of reliance on our existing suppliers.

     We combine more than 200 biological reagents, inorganic and organic reagents and kit components to manufacture our finished diagnostic 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 or by third-party vendors. We purchase many of these components and reagents, which are readily available from a variety of manufacturers and outside suppliers.

     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 the following items: chemiluminescent substrates included in our diagnostic test kits (used to create a chemical reaction that causes light in connection with our Hybrid Capture signal amplified molecular technology), our Rapid Capture System that serves as the automation platform developed for large-scale diagnostic testing using our Hybrid Capture technology, the 96-well microplate used by laboratories to run our diagnostic test products, the Digene Microplate Luminometer that provides the results of all of our microplate-based diagnostic tests, and the collection tubes, plus cervical sampler brushes we provide as part of cervical sampler kits that we sell with our HPV testing products. We have been able, to date, to enter into long-term contracts with these single source or key suppliers. In some cases, however, the supplier of a key component 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 these components and it may be difficult to find alternative suppliers, if at all. If our product sales increase beyond the forecast levels, or if our suppliers are unable or unwilling to supply us key components on a timely basis, we 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.

     Receipt and maintenance of regulatory authorization to market and sell our products is vital to our success. The following table summarizes the regulatory approvals and clearances we have received to date for our principal products.

     In addition to seeking regulatory authorizations for our own products, we work with other companies to seek regulatory approval for use of their specimen collection products to provide the specimens necessary to perform our diagnostic tests. For example, during fiscal 2003 and 2004 we worked with TriPath Imaging to complete the necessary clinical studies to support a pre-market approval supplement (PMAS) seeking FDA approval of the use of our hc₂ HPV Test with TriPath Imaging’s

SurePath Test Pack sample collection system. In February 2005, TriPath Imaging withdrew the PMAS after TriPath Imaging and the FDA agreed that additional clinical information and analysis would be required. This additional information was collected and submitted to the FDA in December 2005. We continue to work with TriPath Imaging as they respond to the FDA’s request for information as part of the most recent FDA review.

     The medical devices marketed and manufactured by us are subject to extensive regulation by the FDA and, in most instances, by foreign regulatory authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the related regulations, the FDA regulates product development, product testing, product labeling, product storage, pre-market 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 pre-market clearance or pre-market 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.

     Before a new device can be introduced into the market, the manufacturer generally must obtain pre-market approval through the filing of a pre-market approval application (PMA) or, if pre-market approval through the pre-market approval requirements is not necessary, pre-marketing clearance through the filing of a 510(k) notification is usually required.

     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), and class II devices are subject to general and special controls (for example, performance standards, post-market surveillance, patient registries and FDA guidance). Generally, class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices). Our HPV test products are subject to pre-market approval requirements and our diagnostic tests for chlamydia, gonorrhea and cytomegalovirus are subject to the 510(k) marketing clearance requirements. The regulatory requirements for our instrumentation, including our manual Hybrid Capture system and Rapid Capture System, are predicated upon the diagnostic test products with which they are used.

     Generally, a PMA must be filed for a proposed new device unless the applicant can show, under FDA regulations, that the proposed device is “substantially equivalent” to a legally marketed class I or class II device. A PMA must be supported by valid scientific evidence, including preclinical and clinical trial data, to demonstrate the safety and effectiveness of the device. The PMA must also contain the results of relevant bench tests, laboratory and animal studies, if applicable, a complete description of the device and its components, and 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 is accepted for filing, the FDA begins an in-depth review of the submission. FDA review of a PMA generally takes one to two years from the date the PMA is accepted for filing, but may take significantly longer. The pre-market approval review process includes a pre-approval inspection of the manufacturer’s facilities to ensure that the facilities are in compliance with the applicable quality and safety 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 pre-market approval 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 PMA applications. 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.

     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 compliance with pre-market approval requirements. It generally takes from three to six months from the date of submission to obtain a 510(k) clearance, but can take twelve months or longer depending on any additional information requested by the FDA. 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 supplement.

     Clinical investigations of in vitro diagnostic tests are exempt from the FDA’s investigational device exemption requirements if the investigations meet certain exemption criteria. As an in vitro diagnostic test manufacturer, we must establish distribution controls to assure that in vitro diagnostic tests distributed for the purpose of conducting clinical investigations are used only for that purpose and are not improperly commercialized.

     We are exporting our hc₂ 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 hc₂ HBV Test for clinical use abroad, primarily in the Asia/Pacific region. Exportation of our hc₂ HPV Test as a primary cervical cancer screening test and export of our hc₂ HBV Test can be undertaken without prior FDA approval of a PMA provided, among other things, that:

     We also must provide the FDA with simple notification indicating the products exported and the countries to which they are 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 record keeping 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 Federal Food, Drug, and Cosmetic Act requires devices to be manufactured in accordance with the applicable quality and safety requirements, which impose certain procedural and documentation requirements on us with respect to our manufacturing and quality assurance activities. Noncompliance with the applicable quality and safety 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 pre-market clearance or pre-market approval for devices, withdrawal of marketing approvals and criminal prosecution.

     The FDA actively enforces regulations prohibiting the promotion of devices for unapproved (or “off label”) uses and the promotion of devices for which pre-market clearance or approval has not been obtained. Any failure by us to comply with these requirements can result in regulatory enforcement action by the FDA and possible limitations on the promotion and/or sale of our products.

     Both Digene and the products we produce and market are subject to a variety of state laws and regulations. Applicable state or local regulations may hinder our ability to market our products in those states or localities. As a manufacturer, we are also subject to numerous federal and Maryland 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 incur significant costs to comply with such laws and regulations in the future, particularly if substantial changes are made to such laws or regulations.

     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 or defined economic region, such as the European Union. 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 or economic region has its own tariff regulations, duties and tax requirements.

     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 pre-market clearance or approval of devices and criminal prosecution.

     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.

     At June 30, 2006, we had 490 employees, including 65 in research and development, 109 in manufacturing, including quality assurance, 206 in sales and marketing and 110 in accounting, finance, administration and regulatory affairs. At June 30, 2006, 56 and 31 of such employees were employed by our European and Brazil subsidiaries, respectively. We are not a party to any collective bargaining agreements, and we believe our relationships with our employees are good.

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

     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.

     Investing in our securities involves a material degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth below.

We will not be able to achieve significant increases in our revenues if HPV screening is not increasingly accepted by physicians and laboratories.

     Our growth and success depend upon continued increasing acceptance by physicians and laboratories of HPV screening as a necessary part of the standard of care for cervical cancer screening and, more specifically, of our HPV test products as a primary cervical cancer screening method, in conjunction with Pap tests, independent of Pap tests, and in conjunction with the implementation of HPV vaccinations. Pap tests have been the principal means of cervical cancer screening since the 1940s. Technological advances 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. Currently, 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.

     HPV testing applies a new gene-based technology and testing approach that is different from the cytology (reviewing cells under a microscope) approach of the Pap test. We have expended, and need to continue to spend, significant resources to educate physicians and laboratories about the patient benefits that can result from using our HPV test products in addition to the Pap test, and to assist laboratory customers in learning how to perform our HPV test products. Using our HPV test products along with the Pap test for primary screening in the United States may be seen by some of these customers as adding unnecessary expense to the generally accepted cervical cancer screening methodology and we frequently need to provide information to counteract this impression on a case-by-case basis. To date, we have been able to grow our U.S. revenues from sales of our HPV test products from approximately $24,354,000 in fiscal 2002 to approximately $111,746,000 in fiscal 2006. We believe that with these efforts we have captured approximately 18% of the HPV testing market. If we are not successful in executing our marketing strategies, we may not be able to significantly grow our market share for HPV testing, and we will not be able to continue to grow our revenues.

     During fiscal 2006 we expanded our direct-to-consumer awareness marketing programs because we believe a well educated female population will work with their health care providers to increase the use of The Digene HPV Test. The campaign to date involved national print advertisement and focused television advertising in ten locations, Atlanta, Baltimore, Philadelphia, Boston, Chicago, Houston, Dallas, New York City, San Francisco and Washington, D.C. We plan to continue our direct-to-consumer awareness campaign in fiscal 2007, and to move into other markets in fiscal 2007. If we are not successful in executing this marketing program, we may not be able to significantly increase the sales of our HPV tests to the extent we desire.

     In June 2006 Merck & Co., Inc. received FDA approval for a vaccine against HPV types 16 and 18, the high-risk HPV types associated with approximately 70% of cervical cancer cases. We anticipate that GlaxoSmithKline will receive FDA approval for an HPV vaccine product during our fiscal 2007. We are working with our physician and laboratory customers and with others to develop and establish the role HPV screening will play in the standard of care for HPV vaccination. If we are not successful in this endeavor, we may not be able to significantly grow the market for HPV screening or increase our HPV test revenues.

     Our products for the diagnosis of the presence of chlamydia and gonorrhea compete with other FDA-cleared products that detect the presence of such infectious diseases. Our marketing activities focus on providing information regarding the accuracy and objective nature of these diagnostic tests, but such activities are time-consuming and expensive. We believe the best way to increase our revenues from these products is to educate laboratories and physicians about the ability to run such tests from the same patient sample collected for HPV testing. If we are not successful in executing our marketing strategy we do not expect to significantly grow our revenues from these products.

We have the only fully commercialized and FDA-approved test for the detection of HPV, which provides us with a competitive advantage that may be adversely impacted if other companies develop and commercialize alternative HPV tests.

     Although we have the only fully commercialized and FDA-approved test for the detection of HPV, a significant portion of our HPV-related intellectual property is in the public domain, subject to patents that will begin to expire in the next few years or not licensed to us on a sole and exclusive basis. As a result, we believe other companies are developing or will develop HPV detection tests in the next few years.

     For example, F. Hoffman-La Roche Ltd. (Roche) has publicly announced its ongoing development of a test for the detection of HPV and in April 2004 announced that it launched such test in Europe. In February 2005, Roche announced an agreement with Gen-Probe Incorporated to supply HPV DNA probes to Gen-Probe for its HPV test kits. In June 2002, Institut Pasteur announced that it had transferred its HPV intellectual property estate to Roche, which included an assignment of the cross license between Digene and Institut Pasteur. Based upon the HPV types to which Roche has announced that it acquired access as a result of the transfer by Institut Pasteur, the HPV types covered by Roche’s own patents and the HPV types that are publicly available, and despite our continuing exclusive right to certain high risk HPV types, we believe Roche may have the ability to develop a HPV test that would be competitive with our HPV test products in our principal markets. Roche has substantially greater resources than we do. We may not be able to compete successfully against Roche if it markets a HPV test competitive with our HPV test.

     Ventana Medical Systems, Inc. is selling an in situ diagnostic test for the detection of HPV. We believe Ventana’s activities infringe our intellectual property and we have initiated patent infringement litigation against Ventana. If we are not successful in such litigation, and if Ventana obtains FDA approval for a test competitive with our HPV test products, we may lose significant HPV testing revenue to Ventana.

     We are also aware that a significant number of laboratory organizations and other companies are developing and using internally developed, or “home-brew,” HPV tests. These tests, although not approved by the FDA or similar non-U.S. regulatory authorities, do offer an alternative to our HPV test products that could limit the laboratory customer base for our product. We are monitoring these activities.

We are dependent on a relatively small number of national laboratories for a significant portion of our sales to laboratory customers.

     We supply our HPV test products to national laboratories, such as Quest Diagnostics and LabCorp pursuant to standard, non-exclusive fixed term contracts. A significant customer could decide to

terminate or not renew its existing contract with us. The loss of one or more significant customers could have a material adverse effect on our business.

Changes in our senior management team could impact our ability to successfully operate and grow our business.

     During fiscal 2007 both our current Chief Executive Officer, and our current President, Chief Operating Officer and Chief Financial Officer will leave Digene. The Nominating and Corporate Governance Committee of our Board of Directors is currently conducting a search for a new Chief Executive Officer. Such changes in our senior management team, and the activities associated with identifying and selecting a new Chief Executive Officer could divert management attention from our core business, and could have a negative impact on our ability to implement our strategic objectives and grow our business. We are highly dependent on the remaining principal members of our management staff. Loss of additional key personnel would likely impede achievement of our research and development, operational, or strategic objectives. To be successful, we must attract qualified replacements for our departing executives, retain key employees and attract additional qualified employees.

We may encounter difficulties expanding our manufacturing operations as demand for our products increases, which would negatively impact our revenues. We depend on a single facility for the manufacture of all of our diagnostic test kits and any temporary stoppage at that site would have a material adverse effect on our business.

     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 current good manufacturing practices requirements of the FDA. We may encounter difficulties maintaining or expanding our manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand.

     We face risks inherent in operating as a single facility for the manufacture of our products. We do not have alternative production plans in place or alternative facilities available if we experience prolonged facility failure at our Gaithersburg, Maryland manufacturing facility. These risks include unforeseen manufacturing delays or stoppage due to equipment, raw material supply disruption, regulatory, environmental or other factors, and the resulting inability to meet customer orders on a timely basis.

We may not be able to successfully integrate future acquisitions.

     We continually explore opportunities to acquire related businesses, some of which could be material to us. Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating such companies, achieving cost efficiencies and managing these businesses as part of our company. We may not be able to effectively integrate acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our effort to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition, the loss of customers resulting from the acquisitions and the assumption of unknown liabilities. In addition, the process of integrating these businesses could cause an

interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact our business if any of the above adverse effects were to occur. Further, the benefits that we anticipate from any future acquisitions may not develop.

Future acquisitions may harm our operating results, dilute our stockholders’ equity and create other financial difficulties for us.

     We may in the future pursue acquisitions that we believe could provide us with new technologies, products or service offerings, or enable us to obtain other competitive advantages.

     Acquisitions by us may involve some or all of the following financial risks:

     We may not be successful in overcoming the risks described above or any other problems associated with future acquisitions. Any of these risks and problems could materially harm our business, prospects and financial condition. Additionally, we cannot guarantee that any companies we may acquire will achieve anticipated revenues or operating results.

If more third-party health insurance payors do not adequately reimburse for our HPV test products, the use of our HPV test products may not increase, thus negatively affecting our ability to grow our revenues.

     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. We believe we have nearly universal coverage from U.S. government payors, third-party payors and managed care entities for our hc₂ HPV Test as a follow-up test to categorize equivocal Pap test results. In addition, government payors, third—party payors and managed care entities that provide health insurance coverage to over 225 million people in the United States currently authorize reimbursement for the use of our Digene HPV Test to adjunctively screen women age 30 and older to assess the presence or absence of significant, cancer-causing HPV types. We also seek reimbursement coverage in other countries where we market our products, particularly in Europe, and receipt of the necessary approvals is time-consuming and expensive. Reimbursement coverage for the Pap test is universal in the United States and in other markets where we sell our HPV test products.

     We have encountered delays in receipt of some European reimbursement approvals and public health funding, which has impacted our ability to grow revenues in these markets.

     Despite our success to date, third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests such as our HPV test products that involve new technology. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic

products and, in many instances, are exerting pressure on diagnostic product 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 need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some, if not all, of our intellectual property rights, and thereby impair our ability to compete.

     We rely on patents to protect a large part of our intellectual property. To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would also put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. We may also provoke these third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We cannot provide assurance that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these potential suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Any public announcements related to these suits could cause our stock price to decline.

We may inadvertently infringe upon the intellectual property rights of third parties, which could expose us to expensive intellectual property litigation, impose a significant strain on our resources and prevent us from developing or marketing our products.

     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 ownership and 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. 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.

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

     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 the following components, chemiluminescent substrates (used to create a chemical reaction that causes light in connection with our Hybrid Capture signal amplified molecular technology), our Rapid Capture System that serves as the

automation platform developed for large-scale diagnostic testing using the Hybrid Capture technology, the 96-well microplate used by laboratories to run our diagnostic test products, the Digene Microplate Luminometer that provides the results of all of our microplate-based diagnostic tests, and the collection tubes, plus the cervical sampler brushes we provide as part of cervical sampler kits that we sell with our HPV testing products. We have been able, to date, to enter into long-term contracts with these single source suppliers. In some cases, however, the supplier of a key component 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 these components and it may be difficult to find alternative suppliers, if at all. If our products sales increase beyond the forecast levels, or if our suppliers are unable or unwilling to supply us components on a timely basis, we 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 are required to obtain and maintain royalty-bearing licenses to third party patents or patent applications, and loss of such licenses, or the need to obtain additional licenses, could materially adversely affect our ability to commercialize our products.

     We have in-licensed patents to a number of cancer-causing HPV types, which, together with the patents to cancer-causing HPV 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.

     Our products and manufacturing processes require access to biological materials and other intellectual property that may be subject to patents and patent applications held by third parties. In addition, we have licenses to various patents covering intellectual property that we use in conjunction with applications of our Hybrid Capture technology. Third parties may have claims to these patents. An adverse outcome to such claims could subject us to significant liabilities to third parties or require us to obtain royalty-bearing licenses from third parties, cease sales of related products or revise the applications or products which employ the patented technology. Any licenses required for any such third party patents or proprietary rights may not be made available to us on commercially reasonable terms, if at all. Furthermore, we may be unable to make the necessary revisions to our applications or products.

     We may discover that we need to obtain rights to an additional patent in order to commercialize our products. We may be unable to obtain such rights on commercially reasonable terms or at all, which could adversely affect our ability to grow our business.

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

     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, 2006, our accumulated deficit was approximately $53,874,000. Previous losses have resulted principally from:

Our net losses were approximately $4,324,000 in fiscal 2003. We had net income of approximately $21,542,000, which included a deferred tax benefit of approximately $14,900,000, in fiscal 2004. In fiscal 2005, we had a net loss of approximately $8,167,000, primarily due to payments made to settle ongoing litigation matters. In fiscal 2006, we had net income of approximately $8,439,000. We believe that our existing capital resources, together with the proceeds of our 2005 financing, will be sufficient to meet the anticipated cash needs of our current business for the foreseeable future. However, if we incur significant operating losses or if one or more of the events described in these Risk Factors actually occurs, we may have to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through alternative sources. Any equity financing would dilute our then-current stockholders. We do not have any committed sources of additional financing. Additional funding, if necessary, may not be available on acceptable terms, if at all. If adequate funds are not available, we may have to delay, scale-back or eliminate aspects of our operations or attempt to obtain funds through arrangements with collaborative partners or others. This may result in the relinquishment of our rights to some of our technologies, product candidates, products or potential markets.

The growth of our European operations has been slower than expected, and we may not achieve the desired increase in our profitability from such market.

     In 2002 we made the decision to establish our own sales, marketing, distribution, warehousing and customer support infrastructure in Europe for the sale of our HPV test products and other products. Other companies selling medical diagnostic products in Europe are larger and significantly better capitalized than we are, and have had established European operations for a significantly longer period than we have. We had previously used third-party distributors to distribute and market our products in Europe, and our product inventory, distribution and customer support services are still in the development process. Approximately $11,992,000, or 19%, of our sales and marketing expenditures and approximately $5,779,000, or 22%, of our general and administrative expenditures for fiscal 2006 related to our activities in Europe. During the same period, approximately $16,394,000, or 12%, of our HPV testing revenues were from sales in Europe. We expect to continue to expend significant resources to grow and maintain our infrastructure as much as possible given the resources at our disposal, but such resources may not be sufficient to meaningfully increase our revenues in Europe. 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 products in Europe.

     The decision to establish our own infrastructure in Europe has required us to establish multiple subsidiary corporations in Europe. This subjects us to the laws of multiple jurisdictions, including tax and employment laws, and the laws governing the import, storage and distribution of our products. Any failure to comply with these laws could have a material adverse impact on our business and operations.

The time and expense needed to obtain regulatory approval and respond to changes in regulatory requirements could adversely affect our ability to commercially distribute our products and generate revenue therefrom.

     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 also have medical device approval regulations which are becoming more extensive. Such regulations govern the majority of the commercial activities we perform, including the indications for which our products can be used, product development, product testing, product labeling, product storage, use of our

products with other products and the manufacturing, advertising and promotion of our products for the approved indications. Compliance with these regulations is expensive and time-consuming. With respect to our HPV test products, we were the first company to obtain approval of regulatory applications for HPV testing in the United States and in many countries in Europe (our principal markets), which adds to our expense and increases the degree of regulatory review and oversight. The expense of submitting regulatory approval applications in multiple countries as compared to our available resources impacts the decisions we make about entering new markets.

     Each medical device that we wish to distribute commercially in the United States will likely require either 510(k) clearance or pre-market approval from the FDA prior to marketing the device for in vitro-diagnostic use. Clinical trials related to our regulatory submissions take years to execute and are a significant expense for us. The 510(k) clearance pathway usually takes from three to twelve months, but can take longer. The pre-market approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three years, but can also take longer. It took us more than four years to receive pre-market approval to offer our current generation HPV test product to test for the presence of the HPV in women with equivocal Pap test results and pre-market approval to use our Digene HPV Test as a primary adjunctive cervical cancer screening test to be performed in conjunction with the Pap test for women age 30 and older. With respect to our ongoing efforts, in April 2002, we submitted a PMA supplement with the FDA seeking approval of the use of our hc₂ 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 worked with TriPath Imaging during fiscal 2004 to complete additional clinical studies and submitted the results of these studies to the FDA in August 2004 for pre-market approval. In February 2005, TriPath Imaging withdrew the PMA supplement after TriPath Imaging and the FDA agreed that additional clinical information and analysis would be required. In December 2005, TriPath Imaging resubmitted its PMAS supporting the use of SurePath specimens with the hc2 HR HPV Test. The FDA is currently reviewing such PMAS, and TriPath Imaging is responding to the FDA’s request for information. The regulatory time span increases our costs to develop new products and increases the risk that we will not succeed in introducing or selling new products in the United States.

     Our cleared or approved devices, including our diagnostic 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. If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as fines, injunctions and civil penalties, recall or seizure of our products, operating restrictions, partial suspension or total shutdown of production, denial of our requests for 510(k) clearance or pre-market approval of product candidates, withdrawal of 510(k) clearance or pre-market 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 may be sued for product liability claims or face product recalls for which our insurance may be inadequate.

     We may be found liable if any of our products causes injury or fails to accurately diagnose disease, i.e., provides a “false negative” or “false positive” test result. 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.

     Our products are a complex interaction of biochemical reagents, and it is not uncommon for us to face manufacturing, raw material or supply chain problems. We have initiated product recalls from time

to time in the past and additional product recalls may be necessary from time to time in the future, either voluntarily on our part or at the direction of the FDA or other government agencies. Although none of our past product recalls have had a material adverse impact on our business, we believe future product recalls could have a material adverse affect on our business, financial condition or reputation.

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

     For fiscal 2006, 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, 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.

Compliance with changing corporate governance and public disclosure regulations result in additional expenses.

     Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new U.S. Securities and Exchange Commission regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities.

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

     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. The board of directors could use this authority to issue preferred stock to discourage an unwanted bidder from making a proposal to acquire the company. Our certificate of incorporation also provides for staggered terms for members of the board of directors. This provision means it could take up to three years to replace our existing directors without the support 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 directors or management by stockholders, which may have the effect of delaying, deterring or preventing a change in control transaction.

     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 becomes an interested stockholder, unless the business combination is approved by our board of directors in a prescribed manner. Although we do not currently have a stockholder that meets the “interested stockholder” definition, these provisions of Delaware law may make business combinations more time consuming or expensive and have the impact of requiring our board of directors to agree with a proposal before it is accepted and presented to stockholders for consideration. These anti-takeover provisions might discourage bids for our common stock.

None.

     We have one manufacturing facility in Gaithersburg, Maryland. Our executive offices and research and development activities are located at the same location. The facility has a total of approximately 111,000 square feet, of which approximately 45% is dedicated to our manufacturing, quality control and shipping activities. Digene and ARE-Metropolitan Grove I, LLC, as landlord (the “Landlord”), entered a Lease Agreement dated March 2, 1998, as amended (the “Lease”). On November 15, 2005, we executed the Fourth Amendment to Lease (the “Amendment”). The Amendment provides for us to expand the rented premises to 143,585 rentable square feet. The additional space will be used for manufacturing and research and development space. Under the Amendment, we and the Landlord are contributing financing to fund the expansion construction and outfitting, which is expected to be substantially complete by late September 2006. In addition, the initial term of the Lease has been extended until ten years after the earlier of substantial completion of the expansion work or September 20, 2006 and we have the ability to extend the lease for two additional five-year terms. We believe that we have sufficient manufacturing capacity to satisfy demand through the completion of this expansion and, post expansion, we expect to be able to expand our production capability to satisfy demand for the foreseeable future.

     We also lease office and sales operations space in the United Kingdom, Germany, Switzerland, France, Brazil and Italy, pursuant to leases which run in length from one year to ten years. We lease an office and sales operations facility in Spain, which runs month-to-month. We currently have 87 employees in all such locations and believe the current office and sales locations are adequate to meet our needs. We believe we would be able to procure additional space, as needed, on commercially reasonable terms in Europe to support our European operations. We also utilize a third-party warehouse facility in Germany, pursuant to a contract supplying us with dedicated space, to hold product and equipment inventory necessary to support our European operations. We believe this facility is adequate to satisfy demand for the foreseeable future.

Pending Legal Proceedings:

Digene Corporation v. Ventana Medical Systems, Inc. and Beckman Coulter, Inc.

     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. 4,849,331 entitled “Human Papilloma Virus 44 Nucleic Acid Hybridization Probes and methods for Employing the Same” and United States Patent No. 4,849,332 entitled “Human Papilloma Virus 35 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 December 10, 2002, the Court granted our motion to amend. On January 28, 2003, we filed a motion to file a second amended complaint. On March 9, 2003 the Court granted our motion to amend.

     In the course of this litigation, Ventana and Beckman Coulter filed motions seeking to compel arbitration of our claims against them. After a bench trial, the Court issued an order that Beckman Coulter has a right to arbitrate our claims against it, but that Ventana does not. The Court, as a matter of judicial economy, has stayed the proceedings against Ventana pending the outcome of the arbitration between us and Beckman Coulter. On December 23, 2004, we submitted a demand for arbitration against Beckman with the American Arbitration Association (“AAA”). The arbitration hearing occurred on March 13-16, 2006.

     On July 27, 2006, the AAA arbitration panel ruled in our favor by concluding, among other things, that Beckman Coulter’s purported sale of its HPV intellectual property portfolio, acquired by Beckman Coulter from Institut Pasteur through a 1991 sublicense agreement, to Ventana violated the terms of the 1990 Cross-License Agreement between Institut Pasteur and our predecessor, Life Technologies, Inc. In addition, the panel found that the Cross-License Agreement prohibits Beckman Coulter from supplying cell paste within the scope of our patent rights covered by the Cross-License Agreement to third parties.

     On August 10, 2006, we filed a motion with the United States District Court for the District of Delaware to lift the stay of the proceedings against Ventana. By order dated August 15, 2006, the District Court granted our motion to lift the stay and re-open the case. During the week of August 28, 2006, the parties to the case made a number of filings with the Court including a motion for a preliminary injunction filed by Digene against Ventana, an answer to the amended complaint filed by Ventana and motions to dismiss some or all of the pending claims filed by Ventana and Beckman on procedural grounds.

     Not applicable.

     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.

     On September 7, 2006, the closing sale price for our common stock, as reported by the NASDAQ National Market, was $40.81. As of September 7, 2006, our common stock was held by 113 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.

     The selected consolidated financial data set forth below with respect to Digene’s Consolidated Statements of Operations for the fiscal years ended June 30, 2004, 2005 and 2006 and with respect to Digene’s Consolidated Balance Sheets at June 30, 2005 and 2006 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, 2002 and 2003 and Consolidated Balance Sheets data at June 30, 2002, 2003 and 2004 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.

     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; our need to obtain third-party reimbursement approval from additional government entities, private insurance plans, and managed care organizations, particularly outside the United States; risk that other companies may develop and market human papillomavirus (HPV) tests competitive with our own; our ability to scale up our manufacturing to the extent demand for our products increases; uncertainty regarding patents and proprietary rights in connection with our products and products in development; uncertainty to the outcome of patent litigation which may arise in the future; the extent of future expenditures for sales and marketing programs; delay in or failure to obtain regulatory approvals and uncertainty of clinical trial results for our products in development; uncertainty of clinical trial results for our products in development; ability to develop new products; uncertainty of future profitability and cash generation from operations; ability to execute and integrate strategic transactions; risks inherent in international transactions, including those relating to our expansion in Europe and elsewhere; and other factors as set forth under Item 1A — “Risk Factors” beginning on page 27.

     Since our incorporation in 1987, we have devoted substantially all of our resources to developing, manufacturing and marketing our proprietary gene-based testing systems for the screening, monitoring and diagnosis of human diseases. Until the end of fiscal 2003, we 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 diagnostic tests for the presence of HPV. HPV test revenues accounted for 88% of total revenues in fiscal 2006. We expect that the growing acceptance of HPV testing in cervical cancer screening programs, especially in the United States, will continue to drive the growth in revenues from our HPV test products.

     In fiscal 2006, our gross margin on product sales increased to 85% as compared to 82% in fiscal 2005. In fiscal 2007, we expect a gross margin of approximately 84%; however, there can be no assurance that we will meet this goal. We calculate gross margin as the difference between product sales and the cost of product sales, which excludes royalty and technology expense, as a percentage of product sales for the period.

     We have in-licensed patents to a number of cancer-causing human papillomavirus types, biological materials, and other intellectual property on which we pay royalties, patent maintenance and other technology access costs. In fiscal 2006, our total royalty and technology expense was 5% of product sales. In fiscal 2007, we expect total royalty and technology expense to be approximately 5% to 6% of product sales.

     Our sales and marketing expenditures have been, and will continue to be, focused on accelerating the adoption of HPV testing worldwide and particularly in the United States. We have expanded our sales organization in the United States and increased our investment in physician education and direct-to-consumer awareness campaign activities. In fiscal 2006, we increased our sales and marketing expenditures to capitalize on the growing acceptance of our HPV test products by physicians, laboratories and health insurance providers, and we expect to continue to invest heavily in such sales and marketing programs over the next several quarters.

     We expect to increase the size of our investment in research and development activities during fiscal 2007 with particular investment in the development of our next generation platforms and other research and development programs primarily related to HPV testing.

     We expect our general and administrative expenses will increase to support the overall growth of our business.

     On October 13, 2004, we executed a Settlement and License Agreement to settle the then-pending patent litigation with Enzo Biochem, Inc. and its subsidiary Enzo Life Sciences, Inc. (formerly known as Enzo Diagnostics, Inc.) (collectively, Enzo). As a result, we recorded a pre-tax charge of $14 million in patent litigation settlement expense in the quarter ended September 30, 2004. Additionally, we will pay Enzo royalties on future net sales of products covered by the license grant. Please see “Liquidity and Capital Resources” below for a description of the Enzo settlement.

     On July 12, 2005, we entered into a Settlement and License Agreement with Georgetown University (Georgetown) to settle the then-pending litigation. As a result, we recorded a pre-tax charge of $7.5 million in the quarter ended June 30, 2005. We will also pay Georgetown royalties on future net sales of products covered by the license grant. Please see “Liquidity and Capital Resources” below for a description of the Georgetown settlement.

     Although we anticipate increasing our expenditures as described above, we anticipate that factors such as increased revenue will offset the impact such increased expenditures would have on our operating profits. We expect to generate operating profits in fiscal 2007; however, there can be no assurance that we will meet this goal.

     Product sales in fiscal 2006 increased 33% to approximately $152,888,000 as compared to approximately $115,142,000 in fiscal 2005. The increase was due primarily to a 38% growth in sales of our HPV test products to approximately $134,361,000. The majority of the growth in our HPV test product revenue was in the United States, which increased 45% to approximately $111,746,000, and in Europe, which increased 5%, to approximately $16,394,000. In the combined Latin America and Asia Pacific region, HPV test product revenue increased 38%, to approximately $6,220,000; the net impact of foreign exchange rate fluctuations on product sales was immaterial for the fiscal years ended June 30, 2006 and 2005. In the United States, growth in our HPV test product sales resulted from increased acceptance of our Digene HPV Test for adjunctive cervical cancer screening with a Pap test for women age 30 and older (also marketed as the DNAwithPapÔ Test). We believe the growth was due in part to our physician and patient education activities and our direct-to-consumer marketing campaign.

     Other revenues primarily include research and development contract revenues, equipment rental, extended warranty and training services revenues. Other revenues increased 7% in fiscal 2006 to approximately $2,060,000 from approximately $1,923,000 in fiscal 2005. The increase in other revenues in fiscal 2006 is largely due to an 84% increase in miscellaneous revenues to approximately $577,000, which consists primarily of extended warranty revenue.

     Cost of product sales in fiscal 2006 increased 9% to approximately $21,888,000 as compared to approximately $20,128,000 in fiscal 2005 primarily due to increased product sales volume. For fiscal 2006, cost of product sales included approximately $620,000 of stock compensation expense. Gross margin on product sales increased to 85% in fiscal 2006 from 82% in fiscal 2005. The increase in gross margin percentage in fiscal 2006 was the result of a shift in product mix from lower margin products to higher margin HPV test products, as well as decreased manufacturing overhead costs as a percentage of product sales and improved operational efficiencies.

     Royalty and technology expense increased 40% to approximately $7,572,000 in fiscal 2006 from approximately $5,394,000 in fiscal 2005. The increase in fiscal 2006 related primarily to increased

product sales and to a lesser extent by increased royalties under new license agreements. This increase was partially offset by the expiration of an exclusively licensed patent.

     Research and development expenses increased 38% in fiscal 2006 to approximately $17,922,000 or 12% of total revenues from approximately $12,964,000 or 11% of total revenues in fiscal 2005. The increase in expenditures was due primarily to an increase in personnel costs of 19% to approximately $7,028,000; a 100% increase in professional services to approximately $5,366,000; payment relating to a marketing and distribution agreement for new products; and a license fee for intellectual property, of $500,000. The increase in personnel costs included approximately $435,000 of stock compensation expense. The increase in professional services was due largely to increased efforts in conjunction with our products under development including our specimen preparation system and our next generation automation technology.

     Our core research efforts for next-generation technologies include programs for improved molecular diagnostic assay systems for detection of HPV and other targets in the area of women’s cancers and infectious diseases and research on our next generation nucleic acid detection technology. In fiscal 2006, research and development activities were concentrated on platform technology, including adaptations of such technology, and improvements to our diagnostic test and equipment products. We focused on four areas: (1) core research efforts for next generation technologies; (2) new product development activities; (3) support and improvement of existing product lines and equipment offerings; and (4) support of regulatory submissions seeking approval to market our existing products with procedural improvements and/or for additional uses and indications in the U.S. and abroad. 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.

     We continue to develop products that will enable HPV genotyping. We signed an agreement for preliminary development of a high risk HPV genotyping assay for the European market. In addition, our collaborative product development and commercialization agreement with PATH (Program for Appropriate Technology in Health) continues. Under that collaboration, we are preparing for clinical trials of a rapid batch HPV test for resource-constrained countries. We expect to have a prototype for initial clinical evaluation during calendar 2006.

     Product development activities are currently focused on simplifying and improving the efficiency of cervical specimen processing procedures, and thereby increasing test throughput. These development efforts include a new batch preparation method for processing liquid-based cytology specimens for HPV testing. In support of this new method, we collected data to support a pre-market approval supplement (PMAS) for hc₂ high-risk HPV testing of specimens collected with the ThinPrep^® test (in PreservCyt^® solution) (Cytyc Corporation) submitted to the FDA in June 2006. Work is also progressing on a specimen preparation system to automate processing of cervical specimens. This specimen preparation system is being developed to provide clinical laboratories with a streamlined means to prepare samples for transfer to our Rapid Capture^® System and is expected to be commercialized in calendar year 2007.

     We remain active in our efforts to expand HPV testing capabilities for additional liquid-based cytology media, including the SurePath^® test’s collection and preservative medium (TriPath Imaging). The FDA is currently reviewing TriPath’s PMAS supporting the use of SurePath specimens with the hc₂ High Risk HPV DNA Test^® that was submitted to the FDA in December 2005. Other activity relevant to this program remains ongoing as part of the continued collaboration between TriPath Imaging and us.

     In April 2006, we entered into an exclusive worldwide marketing and distribution agreement with Asuragen, Inc. for the marketing and distribution of Asuragen’s Signature^® cystic fibrosis screening products. The Asuragen products utilize the Luminex^® xMAP^® technology.

     On June 30, 2006 we entered into a non-exclusive sublicense agreement with Abbott Laboratories pursuant to which we obtained sublicense rights under a U.S. patent and foreign counterparts that generally disclose and claim certain inventions characterized as “Multiplex Genomic DNA Amplification for Deletion Detection.” We anticipate this technology may be important in future multiplex applications.

     Selling and marketing expenses increased 37% in fiscal 2006 to approximately $62,815,000 or 41% of total revenues from approximately $45,933,000 or 40% of total revenues in fiscal 2005. For fiscal 2006, selling and marketing expenses included approximately $1,470,000 of stock compensation expense. The increase in fiscal 2006 was due primarily to personnel costs, which increased 40% to approximately $26,888,000; marketing program expenses, which increased 44% to approximately $16,548,000; and facility, overhead and travel expenses, which increased 51% to approximately $11,888,000. The increase in personnel costs and facility, overhead and travel expenses is due largely to increasing the size of our physician sales force, a program we began during fiscal 2005. The increase in marketing program expenses is the result of a direct-to-consumer awareness campaign implemented during fiscal 2005 and continued throughout fiscal 2006. Costs associated with the direct-to-consumer awareness campaign were approximately $7,000,000 for fiscal 2006 and approximately $4,000,000 for fiscal 2005.

     Virtually all of the increase in our selling and marketing expenses for fiscal 2006 was incurred in the United States, which increased 58% to approximately $48,641,000, over the corresponding period in fiscal 2005, as we expanded our direct sales and marketing activities, including our physician and patient education activities directed toward increasing sales of our HPV test products.

     General and administrative expenses increased 30% in fiscal 2006 to approximately $26,294,000 or 17% of total revenues from approximately $20,265,000 or 18% of total revenues in fiscal 2005. For fiscal 2006, general and administrative expenses included approximately $3,156,000 of stock compensation expense; an increase in personnel costs of 21% to approximately $10,281,000; and an increase in professional services of 7% to approximately $7,135,000. The increase in professional services is due to increased patent and other legal expenses incurred in fiscal 2006, partially offset by a decrease in litigation expenses associated with the Georgetown and Enzo patent litigation settlements in fiscal 2005 and early fiscal 2006.

     The majority of the increase in general and administrative expenses for fiscal 2006 was incurred in the United States, which increased 44%, to approximately $18,827,000.

     Patent litigation settlements relate to the settlement with Enzo, for which $14,000,000 was recorded in fiscal 2005, and with Georgetown, for which a charge of $7,500,000 was recorded in fiscal 2005, each based on a Settlement and License Agreement. Please see “Liquidity and Capital Resources” below for descriptions of the Enzo and Georgetown settlements.

     Interest income increased 372% to approximately $3,808,000 in fiscal 2006 from approximately $808,000 in fiscal 2005. The increase was due to higher cash, cash equivalents and short-term investment balances, primarily generated from our common stock offering in November 2005, as well as higher interest rates in fiscal 2006 compared to fiscal 2005.

     Interest expense increased to approximately $803,000 in fiscal 2006 compared to approximately $37,000 in fiscal 2005. The increase was due to the Gaithersburg facility lease obligation, which is more fully described below.

     Other income was approximately $48,000 in fiscal 2006 compared to approximately $116,000 in fiscal 2005. The balances in both periods are primarily based on foreign exchange rate fluctuations causing transaction gains and losses.

     Minority interest decreased 60% to approximately $142,000 in fiscal 2006 compared to approximately $353,000 in fiscal 2005. Minority interest represents the Digene do Brasil LTDA minority partner’s share of the gains and losses of the subsidiary.

     We recognized an income tax provision of approximately $10,773,000 in fiscal 2006 and an income tax benefit of approximately $2,573,000 in fiscal 2005. In fiscal 2006 and 2005 we recognized approximately $6,074,000 and $4,283,000, respectively, of foreign operating losses before income tax from certain European operations that did not generate an income tax benefit due to a full valuation allowance recorded against foreign deferred tax assets, including additional deferred tax assets created by current year foreign tax losses. We had total U.S. net operating loss carryforwards of approximately $105,900,000 and $113,394,000, respectively, as of June 30, 2006 and June 30, 2005. We also had foreign net operating loss carryforwards of approximately $24,898,000 and $22,181,000 as of June 30, 2006 and June 30, 2005, respectively. Based upon both recent historical financial results and projected future operating performance, we believe that we will be able to utilize our U.S. net operating loss carryforwards arising from the exercise of stock options against future taxable income. As a result, for fiscal 2006, we released approximately $40,715,000 of our valuation allowance. Pursuant to recently adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment” (Statement 123(R)), the benefits were reflected as a direct increase to stockholders’ equity, but only to the extent that the deductions reduce taxes payable. The approximately $34,081,000 unrecognized balance as of June 30, 2006, is reflected as an offsetting reduction of both deferred tax assets and valuation allowance on the Consolidated Balance Sheets; this unrecognized balance is available for utilization in future years, subject to expiration. Further, we have retained a full valuation allowance related to foreign net operating losses and certain U.S. tax credits. Should realization of these benefits become more likely than not, a significant portion of the benefit will be reflected as an increase to Consolidated Statements of Operations.

     At June 30, 2006, we had two stock-based employee compensation plans, one stock-based non-employee compensation plan, and one stock-based director compensation plan, which are described more fully in Note 7 of the Notes to our Consolidated Financial Statements included in this Form 10-K Report. As of March 2006, we only have the ability to issue stock-based compensation to employees under one of the employee compensation plans, as the other expired on March 26, 2006. Prior to July 1, 2005, we accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (Opinion 25), and related Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation” (Statement 123). We account for equity instruments issued to non-employees in accordance with Emerging Issues Task Force (EITF) 96-18, “Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services.” Effective July 1, 2005, we adopted the fair value recognition provisions of Statement 123(R), using the modified-prospective-transition method.

     Under the modified-prospective-transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated. As a result of adopting Statement 123(R) on July 1, 2005, our income before income taxes and net income for fiscal 2006, are approximately $5,681,000 and $2,495,000 lower, respectively, than if we had continued to account for shares-based compensation under Opinion 25. Basic and diluted earnings per share for fiscal 2006 are each $0.11 lower, than if we had continued to account for share-based compensation under Opinion 25. Total compensation cost related to

nonvested awards not yet recognized as of June 30, 2006 is approximately $7,042,000 and is expected to be recognized over a weighted-average life of approximately two years.

     On March 7, 2005, the Compensation Committee of our Board of Directors approved the acceleration of vesting of “underwater” unvested stock options held by certain current employees, including executive officers. Stock options held by non-employee directors were not included in such acceleration. A stock option was considered “underwater” if the option exercise price was greater than or equal to $32.35 per share. As such, we fully vested options to purchase 622,202 shares of our common stock. We took this action primarily to avoid recognizing compensation cost in future financial statements when Statement 123(R) became effective.

     Product sales in fiscal 2005 increased 28% as compared to fiscal 2004. The increase was due primarily to a 31% growth in sales of our HPV test products to approximately $97,437,000. An increase of 21% in equipment sales, to approximately $6,565,000, also contributed to the increase in product sales. The majority of the growth in our HPV test product revenue was in the United States, which increased 34% to approximately $77,301,000, and in Europe, which increased 21%, to approximately $15,613,000. In the United States, most of the growth in our HPV test product sales was from increased acceptance of our Digene HPV Test (also marketed as the DNAwithPap Test in the United States) for adjunctive cervical cancer screening with a Pap test for women age 30 and older, an indication approved by the U.S. Food and Drug Administration (FDA) in March 2003. We believe the continued growth was also due in part to our direct-to-consumer marketing campaign which began in fiscal 2005. The increase in revenues from equipment sales primarily related to sales of our Rapid Capture System following the May 2004 FDA approval of the use of such automated system to perform our diagnostic tests. The growth in product sales in Europe related to the success of our subsidiary operating companies and distributor operations benefiting from our coordinated sales and marketing programs, public awareness campaigns and government education efforts. The net impact of foreign exchange rate fluctuations on product sales was immaterial for the fiscal years ended June 30, 2005 and 2004, respectively.

     Other revenues primarily included research and development contract revenues, equipment rental revenues and licensing revenues. Other revenues increased 43% in fiscal 2005 to approximately $1,923,000 from approximately $1,346,000 in fiscal 2004. The increase in other revenues in fiscal 2005 was largely due to a 29% increase in research and development contract revenues to approximately $731,000, and a 149% increase in miscellaneous revenue to $313,000, which consists primarily of extended warranty revenue.

     Cost of product sales in fiscal 2005 increased 20% as compared to fiscal 2004 primarily due to increased product sales volume. Gross margins on product sales increased to 82% in fiscal 2005 from 81% in fiscal 2004. The increase in gross margin percentage in fiscal 2005 was the result of a shift in product mix from lower margin products to higher margin HPV test products. This increase in gross margin percentage due to product mix changes was partially offset by increased manufacturing overhead costs.

     Royalty and technology expense increased 216% to approximately $5,394,000 in fiscal 2005 from approximately $1,705,000 in fiscal 2004. The increase in fiscal 2005 was primarily due to increased royalty expenses, on net sales of our products based on a Settlement and License Agreement with Enzo effective October 1, 2004, under which we pay Enzo royalties on net sales of products covered by the license grant. The increase was also due to a charge of $750,000 accrued during the quarter ended September 30, 2004 relating to a non-exclusive license to Institut Pasteur’s intellectual property concerning the Hepatitis B virus genome and the reversal of approximately $535,000 of accrual during

fiscal 2004 based on the expectation that a specific royalty accrual would not materialize. Please see “Liquidity and Capital Resources” below for a description of the Enzo settlement.

     Research and development expenses increased 21% in fiscal 2005 to approximately $12,964,000 or 11% of total revenues from approximately $10,744,000 or 12% of total revenues in fiscal 2004. The increase in expenditures was due primarily to a 17% increase in personnel costs to approximately $5,919,000, an increase in professional services of 36% to approximately $2,608,000, and an increase in license fees to $402,000. The increase in professional services was due largely to costs paid to a vendor for development of the sample preparation workstation, clinical evaluations for processing liquid-based cytology, and costs incurred for the preparation of compliance with the European Union In Vitro Diagnostic Directive regulations for our Rapid Capture System and related accessories, for which compliance was obtained in the last quarter of fiscal 2005. The majority of the license fees relate to a supply and license agreement we entered into in fiscal 2005 to develop certain next-generation products.

     Our research and development activities focused on our platform technology, including substantial modifications of the design or capabilities of our products and equipment offerings. 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.

     In fiscal 2005 our research and development activities focused on our platform technology, including adaptations of such technology, and improvements to our diagnostic test and equipment products. We focused our research and development activities in four areas: (1) core research efforts for next-generation technologies; (2) new product development activities; (3) support and improvement of existing product lines and equipment offerings; and (4) support of regulatory submissions to seek approvals to market our existing products for additional uses and indications in the U.S. and abroad.

     Selling and marketing expenses increased 32% in fiscal 2005 to approximately $45,933,000 or 40% of total revenues from approximately $34,918,000 or 39% of total revenues in fiscal 2004. The increase in fiscal 2005 was due primarily to personnel costs, which increased 45% to approximately $14,775,000; marketing program expenses, which increased 63% to approximately $11,531,000; and facility and overhead costs, including travel, which increased 29% to approximately $9,875,000. The increase in personnel costs was due largely to increasing the size of our physician detailing sales force for which we began hiring extensively in the middle of fiscal 2005. The increase in marketing program expenses was the result of a direct-to-consumer awareness campaign implemented during the quarter ended March 31, 2005. These increases were partially offset by a 12% decrease in agency fees to approximately $4,800,000, for our physician detailing arrangement with PDI, Inc. From fiscal 2003 until fiscal 2005, PDI recruited and administered a Digene-specific physician education sales organization dedicated to educating physicians about the benefits of The Digene HPV Test in the United States.

     Geographically, the majority of the increase in our selling and marketing expenses for fiscal 2005 was incurred in the United States, which increased 40% to approximately $30,859,000 as compared to approximately $22,051,000 in fiscal 2004, as we expanded our direct sales and marketing activities, including our direct-to-consumer awareness campaign, in the United States to increase sales of our HPV test products.

     General and administrative expenses increased 5% in fiscal 2005 to approximately $20,265,000 or 18% of total revenues from approximately $19,298,000 or 20% of total revenues in fiscal 2004. The increase was due primarily to personnel costs, which increased 20% to approximately $8,795,000 and an 18% increase in facility and overhead costs to approximately $3,198,000. These increases were partially offset by a 13% decrease in professional services, to approximately $6,632,000. The decrease in professional services was due largely to a decrease in legal fees, which decreased 28% to approximately $4,380,000, partially offset by an increase in accounting fees, which increased 56% to approximately $1,399,000.

     Geographically, the majority of the increase in general and administrative expenses for fiscal 2005 was incurred in the United States, which increased 6%, to approximately $13,109,000, over the corresponding period in fiscal 2004.

     Patent litigation settlements relate to the October 2004 settlement with Enzo, for which $14,000,000 was recorded in the first quarter of fiscal 2005, as well as a charge of $7,500,000 recorded in the last quarter of fiscal 2005 based on a Settlement and License Agreement entered into with Georgetown on July 12, 2005. Please see “Liquidity and Capital Resources” below for descriptions of the Enzo and Georgetown settlements.

     Interest income increased 76% to approximately $808,000 in fiscal 2005 from approximately $459,000 in fiscal 2004. The increase was due to higher interest rates in fiscal 2005 compared to the corresponding period in fiscal 2004, as well as higher average short-term investment balances in fiscal 2005 compared to fiscal 2004.

     Interest expense decreased to approximately $37,000 in fiscal 2005 compared to approximately $184,000 in fiscal 2004 primarily due to the reduction in our long-term debt due to Abbott Laboratories as quarterly principal payments were made on an outstanding promissory note. The promissory note was paid in full in September 2004.

     Other expense was approximately $116,000 in fiscal 2005 and other income was approximately $163,000 in fiscal 2004. The balances in both periods were primarily based on foreign exchange rate fluctuations causing transaction gains and losses.

     Minority interest was approximately $353,000 in fiscal 2005. Minority interest represents the Digene do Brasil LTDA minority partner’s share of the gains and losses of the subsidiary.

     The net income tax benefit of approximately $14,325,000 in fiscal 2004 was primarily related to the partial release of the valuation allowance previously established against our deferred tax assets. We released approximately $14,900,000 of valuation allowance in the fourth quarter of fiscal 2004 recorded against U.S deferred tax assets which was the estimated amount to be utilized in the foreseeable future. Based upon projected future operating performances, despite fiscal 2005 operating losses, we believed that we would be able to utilize a portion of our net operating loss carryforward against future taxable income. Accordingly, we recognized an income tax benefit of approximately $2,573,000 in fiscal 2005. However, we recognized approximately $4,283,000 of foreign operating losses before income tax from European operations during fiscal 2005 that did not generate an income tax benefit due to a full valuation allowance recorded against foreign deferred tax assets, including additional deferred tax assets created by current year foreign tax losses. As of June 30, 2005 and June 30, 2004, we had total U.S. net operating loss carryforwards of approximately $113,394,000 and $115,851,000, respectively. We also had foreign net operating loss carryforwards of approximately $22,181,000 and $18,543,000 as of June 30, 2005 and June 30, 2004, respectively. For fiscal 2005 and 2004, we maintained a valuation allowance against the potential tax benefits from the exercise of stock options as realization of these benefits were not more likely than not at such time and the amounts were expected to expire unused. Should realization of these benefits become more likely than not, the benefit will be reflected as a reclassification to stockholders’ equity. Further, we maintained a valuation allowance related to foreign net operating loss; should realization of these benefits become more likely than not, the benefit will be reflected as an increase to Consolidated Statement of Operations.

     Since inception, our expenses have significantly exceeded our revenues, resulting in an accumulated deficit of approximately $53,874,000 at June 30, 2006. 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, 2006, we had cash, cash equivalents and short-term investments aggregating approximately $139,257,000. We had positive cash flows from operations of approximately $26,028,000 for the year ended June 30, 2006, compared to positive cash flows from operations of approximately $2,564,000 for the year ended June 30, 2005. The increase in positive cash flows from operations was largely driven by the improvement from a net loss of approximately $8,167,000 in fiscal 2005 to net income of approximately $8,439,000 in fiscal 2006. The cash flows from operations for fiscal 2006 also included $7,500,000 in payments to Georgetown, further described below.

     Net cash used in investing activities for fiscal 2006 of approximately $112,938,000 included $112,285,000 of revolving maturities of short-term investments. Approximately $9,075,000 of capital expenditures was largely used for the Gaithersburg facility. Through fiscal 2007, we expect to spend up to $2,000,000 of working capital as we further expand our Gaithersburg facility.

     On November 15, 2005, we and Armonk Partners, a significant stockholder, entered into an Underwriting Agreement with J.P. Morgan Securities Inc., as representative of the underwriters identified therein (the “Underwriting Agreement”) with respect to the sale of up to 2,000,000 shares of Common Stock by us and up to 1,000,000 shares of Common Stock by Armonk Partners. The Underwriting Agreement granted an option to the underwriters to purchase up to an additional 450,000 shares of Common Stock (300,000 shares by us and 150,000 shares by Armonk Partners) to cover over-allotments, if any. The public offering, pursuant to our effective shelf registration statement, closed on November 18, 2005 with the sale of all initially offered shares of Common Stock. On December 14, 2005, the sale of the shares subject to the over-allotment option was closed following the exercise in full by the underwriters of the over-allotment option. Our net proceeds from the public offering were approximately $60,079,000 after expenses of approximately $457,000 and underwriters’ commissions.

     On October 13, 2004 we entered into a Settlement and License Agreement to settle our patent litigation with Enzo. Under the Agreement with Enzo, we received an irrevocable, non-exclusive, royalty-bearing worldwide license under identified Enzo patents. We made an initial payment to Enzo of $16,000,000, of which $2,000,000 was used to offset future royalty payments under the terms of the Agreement, resulting in a one-time pre-tax charge of $14,000,000 in patent settlement expense. We also agreed to pay Enzo royalties on future net sales of products covered by the license grant, which royalties were guaranteed at a minimum of $2,500,000 for the first annual period (October 1, 2004 to September 30, 2005) and will be guaranteed at minimums of at least $3,500,000 for each of the next four annual periods. We are obligated to make such guaranteed minimum payments in such first five annual periods under the Enzo Agreement. Our obligation to make royalty payments will end on April 24, 2018, unless earlier terminated in accordance with the terms of the Enzo Agreement.

     On July 12, 2005 we entered into a Settlement and License Agreement with Georgetown. Under the Agreement with Georgetown, we were granted irrevocable, worldwide, exclusive, royalty-bearing licenses with the right to grant sublicenses under two Georgetown patents, as well as corresponding foreign patents and patent applications. Under the Georgetown Agreement, we made an initial payment of $3,750,000 in July 2005, and we made a second payment of $3,750,000 to Georgetown in October 2005. We recorded a pre-tax charge for this $7,500,000 in settlement expense in our fiscal 2005 fourth quarter results. Digene also pays Georgetown royalties on future net sales of products covered by the license grants. Our obligation to make royalty payments on one of the Georgetown patents will end on

October 15, 2008 and for the other Georgetown patent on July 1, 2014, unless earlier terminated in accordance with the terms of the Georgetown Agreement.

     We lease a facility in Gaithersburg, Maryland, comprising a total of 111,000 square feet for our corporate headquarters and manufacturing operations pursuant to a Lease Agreement dated March 2, 1998 between Digene and ARE-Metropolitan Grove I, LLC, as landlord (the “Landlord”), as amended (the “Lease”). On November 15, 2005, we executed the Fourth Amendment to Lease (the “Amendment”). The Amendment provides for us to expand the rented premises to 143,585 rentable square feet. The additional space will be used for manufacturing and research and development space. Under the Amendment, the Landlord and we are contributing financing to fund the expansion construction and outfitting, for which construction is expected to be substantially completed by September 20, 2006. In addition, the initial term of the Lease has been extended until ten years after the earlier of substantial completion of the expansion work or September 20, 2006.

     Prior to the Amendment, we had historically accounted for the Lease as an operating lease. Under the Amendment we became responsible for a portion of the construction costs and were deemed to be the owner of the Gaithersburg facility for accounting purposes during the construction period under EITF 97-10, “The Effect of Lessee Involvement in Asset Construction.” During the quarter ended December 31, 2005, upon execution of the Amendment, we capitalized $21,400,000 to record the estimated fair value of the current building facility and recognized a related lease obligation of approximately $20,700,000. In accordance with accounting guidance, the portion of the Lease related to ground rent will continue to be treated as an operating lease. Amounts paid by us for the construction have been recorded as construction in progress. Upon completion of construction, the Lease will be accounted for as a financing in accordance with Statement of Financial Accounting Standards No. 98, “Accounting for Leases,” and we will, accordingly, continue to record the existing facility and expanded area as a capital asset. In addition, amounts paid for the expansion by the Landlord will increase the lease obligation as the project is funded. This change in accounting treatment has no impact on our cash flow or total expense over the Lease term; however, it results in the acceleration of expense from the later years of the Lease to the earlier years of the Lease. The impact of this acceleration on fiscal 2006 pre-tax earnings was approximately $700,000.

     We anticipate that working capital requirements will increase moderately for the foreseeable future due to the investment necessary to expand our Gaithersburg facility, as well as increasing accounts receivable as a result of expected revenue growth. We 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 our existing capital resources will be adequate to fund our operations for the foreseeable future. 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; the effectiveness of our sales and marketing activities; our progress in product development efforts and the magnitude and scope of such efforts; our success in increasing and maintaining customer relationships; our ability to receive additional regulatory approvals for our product offerings; the cost and timing of expansion of our manufacturing capabilities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competitive market developments; and execution and integration of strategic transactions. To the extent 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, which could include public offerings of our securities using our effective shelf registration statement, strategic alliances with corporate partners and others, or through other sources. Other than an equipment leasing facility with ePlus Group, Inc., for which we have used approximately $673,000 of a $1,000,000 total commitment, and the Gaithersburg facility Lease Amendment, 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 would be materially adversely affected.

     We have summarized below our material contractual obligations as of June 30, 2006 (in thousands):

     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:

     We are subject to market risk associated with changes in foreign currency exchange rates and interest rates. Our exchange rate risk comes from our operations in Europe and South America. The net impact of foreign exchange activities on earnings was immaterial for the years ended June 30, 2004, 2005 and 2006. Interest rate exposure is primarily limited to the $139,300,000 of cash, cash equivalents and short-term investments owned by us as of June 30, 2006. Such investments are money market debt securities 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 of our investments. We do not consider the present rate of inflation to have a significant impact on our business.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Stockholders
Digene Corporation

We have audited the accompanying consolidated balance sheets of Digene Corporation as of June 30, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles. 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.

As discussed in Note 2 to the financial statements, in 2006 the Company changed its method of accounting for share-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Digene Corporation’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 28, 2006 expressed an unqualified opinion thereon.

McLean, Virginia
August 28, 2006

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). There are inherent limitations in the effectiveness of any internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of June 30, 2006 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2006 has been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report which is included below.

The Board of Directors and Stockholders
Digene Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting that Digene Corporation maintained effective internal control over financial reporting as of June 30 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Digene Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Digene Corporation maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Digene Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Digene Corporation as of June 30, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006 of Digene Corporation and our report dated August 28, 2006 expressed an unqualified opinion thereon.

McLean, Virginia
August 28, 2006

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

See accompanying notes.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)

See accompanying notes.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

See accompanying notes.