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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                          to                         

Commission file number: 000-20931

VENTANA MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (520) 887-2155

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock with a par value of $0.001

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    x

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the Nasdaq National Market on June 28, 2002, which is the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $357,410,972. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2003 there were 16,398,790 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates information by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002.

TABLE OF CONTENTS

PART I

This Form 10-K contains forward-looking statements that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-K. Please see the beginning of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a description of these forward-looking statements and cautionary language, and please see the section of this Form 10-K entitled “Risk Factors” for a description of the risks that may cause our actual results to vary from the forward-looking statements.

Item 1.    Business

Summary of Our Business

Ventana Medical Systems, Inc. was incorporated in California in 1985, and reincorporated in Delaware in 1993. We launched our first instrument-reagent system in 1991, and have since launched numerous new products using internally developed and acquired technologies. Unless the context requires otherwise, all references to “we”, “our” “us”, “Ventana”, “registrant” or “Company” refer to Ventana Medical Systems, Inc., and its six subsidiaries: Ventana Medical Systems, GmbH, Ventana Medical Systems, Japan K.K, Ventana Medical Systems, Pty. Ltd., Ventana Medical Systems, S.A., BioTek Solutions, Inc., and BioTechnology Tools, Inc.

We develop, manufacture and market instruments and consumables that automate tissue preparation and slide staining in anatomical pathology and drug discovery laboratories. Our products are designed to provide users with automated high-quality and consistent results with high throughput and significant labor savings. Our clinical systems are important tools used in anatomical pathology labs to analyze human tissue to assist in the diagnosis and treatment of cancer and infectious diseases. Our drug discovery systems are used by large pharmaceutical and biotechnology companies to accelerate the discovery of new drug targets and to evaluate the safety of new drug compounds. The consumable products we market include reagents and other accessories required to operate our instruments. Our instruments have been placed in the majority of the top fifty U.S. cancer centers, including recognized leaders in cancer research and treatment such as Johns Hopkins Hospital, the Mayo Clinic, Memorial Sloan-Kettering Cancer Center, and M.D. Anderson Medical Center.

For the purposes of financial reporting, we have two reportable segments: North America (primarily the United States) and International (primarily France, Germany, Japan and Australia). Please see Note 12 in the Notes to Consolidated Financial Statements for additional information concerning our North American and International business segments.

Market Overview

We target our instrument-reagent systems at two markets: (1) anatomical pathology labs (Histology and Cytology) and (2) drug discovery labs. We currently derive the majority of our revenues and profits from ongoing sales of consumables and instruments to anatomical pathology labs, although we expect sales to drug discovery labs to grow over time.

According to the National Cancer Institute, cancer is the second leading cause of death in the United States. Mortality rates are improved by early detection and the selection of appropriate therapies. Pathologists and oncologists use Histology and Cytology tests to assist in the diagnosis of cancer and infectious diseases and to select an appropriate therapy. Based upon our modeling of the market, we estimate that anatomical pathology labs worldwide currently purchase approximately $1.0 billion in instruments and consumables on an annual basis. Most anatomical pathology labs are hospital-based, although some independent reference labs offer these services. Pharmaceutical and biotechnology companies involved in analyzing the human genome and proteome to accelerate new drug discovery also benefit from automating the analysis of human and animal tissue and cells.

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Histology

Histology is the study of the microscopic structure of tissues. In a Histology lab, an anatomical pathologist attempts to identify the causes and consequences of disease in a specific part of the body by examining tissue samples obtained during surgery. Structural and other changes in cells, tissues, and organs are determined by using tools ranging from powerful microscopes to molecular analysis of cell proteins and genes. Anatomical pathology examinations are among the most reliable ways to establish: (1) a diagnosis of the type of disease suffered by the patient, (2) a prognosis on the likely progression of the disease and (3) a determination as to which therapies are most likely to be effective in treating the patient.

All patient tissue samples entering the Histology lab move through seven sample preparation and work cells:

Additional tests, which may be requested by the pathologist, include immunohistochemistry, Special Stains or in situ hybridization tests. These tests are significantly more complex than the H&E stains and require special reagents.

We currently offer products that are used in tissue processing, IHC staining, Special Stains staining and ISH staining.

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Tissue Processing.    In developed nations, all Histology labs have at least one automated tissue processor instrument and most labs have two or more. In less developed countries, tissue processing is still performed manually in most labs. Tissue processors consume a substantial quantity of reagents (fixatives, alcohol, xylene, paraffin). We do not, however, participate in this reagent market.

IHC Staining.    We estimate that there are in excess of 30 million slides stained with IHC annually on a worldwide basis. The majority of these slides are stained in the approximately 6,000 hospital-based anatomical pathology labs. However, in North America and Japan some hospitals send their IHC slides to regional reference labs for staining, rather than performing the work themselves. We estimate that the number of IHC slides processed across all labs in the U.S. is growing about 6% to 8% annually due to: (1) the increasing incidence of cancer as the population ages increases Histology producing surgical cases, and (2) the emergence of new stains that may influence therapy choices.

We estimate that approximately 55% of the IHC slides processed in North America and Europe are stained on automated instruments. The rest of the world primarily uses manual staining, which we believe creates a substantial growth opportunity as these users convert to automated systems.

IHC instruments require reagents and accessories to operate. We supply a full line of these consumables for use with our instruments. Our experience in the industry suggests that we are the worldwide market leader in supplying automated IHC staining systems.

Special Stains Staining.    We estimate that the Special Stains market is slightly smaller than the worldwide IHC market and is growing rapidly. There is an opportunity to place instruments with virtually every hospital-based Histology lab as Special Stains slides are rarely sent to reference labs. Currently, nearly all Special Stains slides are processed manually; we believe that a major segment of the market will switch to automated slide processing over the next 5 to 10 years.

ISH Staining.    The clinical market for ISH staining is currently very small due to the difficulty of performing ISH stains manually and the small number of assays accepted for clinical use. We expect automation to grow the clinical ISH Staining market significantly. Currently, the principal clinical tests are used to detect cancer and infectious diseases, primarily viruses, in tissue. We believe ISH tests for genetic mutations will become important clinical tests.

Cytology

Cytology is the microscopic study of cell samples from various human body sites for the detection, diagnosis, and management of human disease. Cytopathologists seek to identify cells, which are either living (phase microscopy) or dead (fixed). The cytotechnologist microscopically examines the morphologic features of the cells, which are gathered by brush, lavage, scraping or aspirate, relates these findings to the patient’s clinical history, and then renders a cytological diagnosis. The cytopathologist then reviews all the findings and reports out gynecologic abnormal cases and all non-gynecologic cases. The cytopathologist’s finding is used to aid the clinician with patient diagnosis, to assist with patient management and to provide a means to follow the progress or regression of a particular disease.

In those cases where abnormalities are found to exist, tests including Special Stains, immunohistochemistry or in situ hybridization can be done to further assist the cytopathologist in assessing patient samples.

According to Women’s Health in Primary Care, Vol. 5, No 6/June 2002, of the 50-60 million women who undergo Papanicolaou (Pap) testing each year, approximately 3.5 million will have a cervical cytologic abnormality that requires further evaluation. In 2001, there were 12,900 newly diagnosed cases of invasive carcinoma and 4,400 deaths due to this malignancy. In the United States, there is a progressive increase in the incidence of invasive carcinoma up to the age of 64. It is believed that infection with Human Papillomavirus

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(HPV) is a significant cause of invasive carcinoma. Our INFORM^® HPV in situ assays for liquid-based cytological specimens and tissue specimens are used to determine if a patient is HPV positive and if the infection is a high or low risk viral type. These tests are fully automated on the BENCHMARK^® slide staining system.

Drug Research

The research market for new drugs comprises over 500,000 researchers worldwide located in labs operated by traditional pharmaceutical companies, biopharmaceutical companies, governments, and medical research centers. Research is conducted in these labs to determine the causes of disease and identify the specific drugs to treat disease. Both genomics, the study of genes and their function, and proteomics, the study of proteins and their function, seek to accelerate the drug discovery process by understanding the molecular mechanisms of disease. The genomic and proteomic revolutions are providing researchers with a dramatic increase in the number of potential drug targets. For example, researchers are now able to conduct screens against compound collections and compound libraries for activity against specific proteins.

Genomics has created opportunities to fundamentally alter the field of human medicine through the discovery of new biological targets for drugs and an improved ability to diagnose and manage disease. Interest in understanding the relationships between genes and disease has generated a worldwide effort to identify and sequence the genes of many organisms, including the approximately three billion nucleotide pairs and the estimated 30,000 genes within the human genome. Once researchers identify the genes and their nucleotide sequences, we anticipate that many years of additional research will be required to gain an understanding of the specific function of each of these genes and their role in disease.

Proteomics is the analysis of proteins encoded by active genes–the direct cause of disease in the body. It is believed that there are many more proteins in the human body than genes. The human proteome is years away from being decoded, but this task will be simplified, as the functions of the estimated 30,000 human genes are uncovered. We believe proteomics will likely increase in importance in worldwide drug discovery labs. Our Discovery^® systems are used by large pharmaceutical and biotechnology companies to accelerate the testing process required to progress in these areas.

Strategy

Our objectives are to: (1) expand our worldwide leadership position in automating anatomical pathology labs, (2) leverage the core technologies we have developed for the anatomical pathology labs into drug discovery labs and (3) build substantial shareholder value. Key elements of our strategy include the following:

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Our Products

Our product offerings are summarized as follows:

Tissue Processors

Our RENAISSANCE^™ tissue processor is a batch instrument that processes up to 350 specimens in a single run. This enclosed system has features that dramatically improve the quality of prepared tissue compared to manual methods.

Staining Systems and Associated Reagents

The principal benefits of automated cellular and tissue analyses using our integrated systems, compared with manual methods, are as follows:

In addition to the critical clinical and operational advantages, our automated approach has shown significant cost savings over manual methods.

IHC Staining.    Our first product, launched in 1991, was an instrument-reagent system to automate IHC staining. Prior to the introduction of this system, all IHC staining was performed manually or with low-levels of automation. In early 1996, we acquired BioTek Solutions, Inc. and the TECHMATE^® automated stainer.

We market three IHC instrument systems with a full line of complementary reagents and accessories. Our line of IHC products includes batch-processing and patient-priority systems targeted to hospital clinical and reference labs.

Our TECHMATE^® 500 batch-processing instrument has a 120-slide capacity and is designed for large volume, single application testing, applicable to large and moderate-size reference and research labs. We manufacture and market reagents for use with our TECHMATE^® systems.

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Our NEXES^® IHC staining system was the world’s first truly automated IHC slide staining system which introduced a new level of staining quality while combining system modularity and ease of operation for improved laboratory productivity. NEXES^® is used in many small to mid-sized volume IHC customer accounts.

Our premier IHC system, the BENCHMARK^®, launched in late 2000, is the only slide staining system to offer fully automated Baked Through Staining (BTS^™) technology and the flexibility of multiple technologies, providing superior, standardized stain quality, increased testing efficiency and maximum laboratory productivity. (BTS^™) technology describes the automation of the staining process which eliminated approximately 60 manual steps. This automation saves up to 90 minutes of manual work otherwise required prior to an IHC run, while allowing walk-away convenience. Additionally, this system performs both IHC and more complex ISH stains. The BENCHMARK^® uses a barcode system and is designed to run multiple tests on a single biopsy with rapid turnaround time without manual intervention. The barcode affixed to each slide identifies the slide and testing procedures to be performed. The BENCHMARK^® scans the slide, dispenses the reagents and processes each slide. The dispensing, incubating (i.e. temperature and time control) and washing performed using proprietary chemical/mechanical methods are critical to obtaining precise, sensitive and rapid test results. Our software controls all aspects of the test procedures. This makes the system reliable and easy to use, reducing slide processing time to less than two hours.

We manufacture and market an extensive line of primary antibodies and detection chemistries for use on our IHC systems. In combination, these reagents detect antigens of interest in tissue samples. We produce reagents, used to condition tissue and cells prior to staining, primary antibodies and detection chemistries. Each of these reagent products is required for an IHC test. Customers with patient-priority systems must use our detection chemistries on all tests, but they have the option of purchasing primary antibodies from other sources. Customers with our batch-processing systems can purchase both primary antibodies and detection chemistries from other sources, however the majority purchase Ventana-produced reagents.

As we place additional BENCHMARK^® systems, the reagents used to prepare tissue prior to the application of a primary antibody will become an important source of our revenue. The detection chemistries, primary antibodies and other reagents have been developed using proprietary formulations that, when combined, optimize the results of tests performed. These kits generate the visual signal in an IHC reaction at the site where a primary antibody is bound to a specific antigen or molecule in the cell or tissue.

Additionally, we offer a line of consumable ancillary products necessary for processing slides used with both patient-priority and batch-processing instruments. These include buffers for optimizing the IHC reaction, and counterstains for staining cell nuclei.

Special Stains.     In late 1998, we offered anatomical pathology labs the first automated system for Special Stains testing with the launch of our second instrument-reagent system. We believe our NEXES^® Special Stains system is the market leader in this product segment.

The Special Stains module can be operated with the same control computer that operates our NEXES^® IHC and BENCHMARK^® modules, with up to eight complete modules operated on a system. This flexibility enables customers to design a combination Special Stains/IHC system that meets their specific needs and provides flexibility for future lab growth. Presently, our 14 Special Stains kits potentially serve 90% of all Special Stains testing performed in anatomical pathology labs. All of our kits are developed using proprietary protocols.

ISH Staining.     The launch of our GENII^™ system in 1995 was our entry into the ISH staining market. The instrument was sold primarily into the drug discovery market, although some were placed into anatomical pathology labs. Our BENCHMARK^® IHC system also has ISH capability, and we plan to leverage this capability with an expanded menu of clinical ISH tests.

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In December 1999, we launched the DISCOVERY^® system for ISH and IHC staining in drug discovery labs. This system can function as a high throughput processor of DNA micro arrays, RNA micro arrays and tissue arrays used to validate drug leads. This system is sold primarily to drug research companies.

Like the BENCHMARK^® system, the DISCOVERY^® system incorporates a number of important technological advances over our earlier NEXES^® IHC and Special Stains systems. In contrast to the NEXES^® IHC and Special Stains modules that heat the entire reaction chamber to a pre-set temperature and maintain that temperature during the entire processing cycle, the DISCOVERY^® system can accurately control the reaction temperature for each slide. Individual slide heaters permit an optimal protocol for each test and allow for the denaturing of DNA, a critical step for detecting genetic abnormalities.

Contracts

Instruments are placed through direct sales, non-recourse leases, instrument rentals and our Performance Evaluation Period (PEP) program. The PEP program allows customers to evaluate an instrument for up to six months, provided that the customer enters an agreement to purchase Ventana-produced consumables to operate the instrument. At the end of the evaluation period, the customer must purchase, rent or return the system.

Research and Development

Our research and development group is divided into two teams: (1) instrumentation development and (2) staining protocols and reagents. Our efforts are focused on innovative combined instrument-reagent systems, as well as enhancements to existing instruments. In addition, we are developing reagents for current and future customer applications.

Our approximately 80 research and development employees perform the majority of our research and development activities. Their efforts are supplemented by consulting services and assistance from scientific advisors. We incurred research and development expenses of $16.4 million, $14.9 million, and $11.1 million in 2002, 2001, and 2000, respectively.

Instrumentation Development Projects

Our instrumentation development is focused on product improvement and new product development. The modular platform used by our NEXES^® IHC system enabled us to rapidly develop new products, such as the NEXES^® Special Stains system, the DISCOVERY^® system and the BENCHMARK^® system. This modular development strategy will continue as we explore new opportunities in instrument systems, and automating manual lab processes.

Reagent Development Projects

Our reagent development is divided into five principal areas:

We continue to monitor third-party development of new primary antibodies used to identify abnormal levels of patient expression and to assist pathologists in recommending treatment. We will license or purchase these antibodies as appropriate. New detection chemistries with improved sensitivity and specificity continue to be developed through our research efforts, and reagent development for our systems is on going.

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Customers

Our customers consist of hospital-based anatomical pathology labs, independent reference labs, and drug discovery labs of large pharmaceutical companies, biotechnology companies, government labs and medical research centers. None of our customers accounted for more than 5% of our consolidated revenues in 2002, 2001 or 2000.

Patents and Proprietary Rights

Our strategy is to patent key technologies in the automation of and chemistry of analyzing cells and tissues on microscope slides. Presently, we hold 38 active U.S. patents and numerous corresponding foreign patents, and have filed patent applications in the U.S. and abroad to cover our existing and future products. Eight U.S. patents were issued in 2002. These eight new patents complement our access to key technology through exclusive and nonexclusive licenses, manufacturing supply contracts, and research support agreements. The expiration dates of our issued U.S. patents range from September 2005 to 2019.

In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. We require our employees, directors, consultants and advisors, outside scientific collaborators and sponsored researchers, other advisors and other individuals and entities to execute confidentiality agreements upon the start of employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some other parties, the agreements provide that all inventions conceived by the individual will be our exclusive property. These agreements may not provide meaningful protection for or adequate remedies to protect our technology in the event of unauthorized use or disclosure of information. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors.

Sales and Marketing

Our sales and marketing strategy is to provide superior levels of customer service. In our major markets, including North America, Europe and Japan, we seek to achieve this goal by selling our products directly to our customers. Our direct sales force, which we believe to be the world’s largest covering anatomical pathology labs, is organized by region in North America, with the exception of national and key accounts, and by country internationally. In smaller markets, we rely on strategic distributors to sell and service our products.

To augment our clinical anatomical pathology tactical marketing and sales organizations, we have established similar operations to cover our drug discovery line of business. These sales forces in North America, Europe and Japan primarily promote our DISCOVERY^® systems and related consumables.

Our worldwide marketing team is responsible for identifying new product opportunities, working with our research and development group on product development and driving worldwide revenues through marketing support.

Competition

We face an array of competitors in the anatomical pathology lab and drug discovery lab markets. In many market segments our competitors have greater experience and name recognition. Competition is intense, and is based on product performance, product price, product line breadth and after-sales service.

Tissue Processor

In the tissue processing market, our principal competitor is Sakura Fine Technical Co., Ltd., a privately held Japanese company with extensive brand recognition. Other competitors in the industry include Leica Microsystems Group, a German-based competitor, Vision BioSystems Ltd., and Thermo BioAnalysis Group, a publicly traded U.S. company which owns Shandon Lipshaw, a competitor in lab equipment.

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Histology

As the market share leader in automated IHC staining, we have historically placed more new instruments annually than all our competitors combined. Nevertheless, we face strong competition from the manual method of performing IHC tests and from competitors marketing instrument-reagent IHC staining systems. A number of anatomical pathology labs in the U.S. and the majority outside the U.S. continue to manually perform IHC slide staining. Significant barriers exist to automation in countries where insurance or governmental healthcare reimbursement for IHC tests is low. Additionally, labs in which pathologists prefer manually stained slides remain reluctant to automate their processes.

Currently, direct competition comes from four competitors selling instrument-reagent IHC staining systems. These competitors are DAKO Cytomation A/S (DAKO), a privately held Danish company that dominates the market for manual IHC reagents; BioGenex Laboratories, Inc., a privately held U.S. company marketing instruments with a reagent stream; Lab Vision Corporation, a subsidiary of the publicly traded company, Apogent Technologies, Inc., that supplies DAKO with instruments, and markets its instruments through distributors and direct sales force; and Diagnostics Products Corp. who markets high-volume IHC staining systems in Europe. A future competitor is Vision BioSystems Ltd., an Australian biomedical company. Vision plans to launch an automated IHC/ISH staining system in the U.S. during 2003. Two automated Special Stains systems, offered by CytoLogix Corp., now owned by DAKO, and BioGenex, compete with our Special Stains module. We believe that our initial success in the Special Stains market will attract additional competitors.

Cytology

The current HPV testing market is dominated by Digene Corporation with their U.S. Food and Drug Administration (FDA) approved, HYBRID CAPTURE II^® liquid based prep assay holding more than 95% of the HPV testing market.

Drug Discovery

In drug discovery applications, we are focused on the study of the hybridization of nucleic acid micro arrays and messenger RNA expression. Our competitors in nucleic acid micro array hybridization include Genomic Solutions, Inc. and Molecular Dynamics, a subsidiary of the publicly traded company, Amersham Pharmacia Biotech. Currently, we do not face competition providing automated systems for messenger RNA expression studies. In drug discovery IHC staining, competition includes our clinical IHC competitors, DAKO and BioGenex.

Manufacturing

Our instrument and reagent manufacturing are housed in a single facility located in Tucson, Arizona. We manufacture all of our instruments with the exception of the TECHMATE^® 500 system, which is produced by a third-party manufacturer and accounts for a small portion of our sales.

Medical device manufacturing operations are required to follow the FDA Quality Systems Regulations. These regulations subject our facilities to inspections to verify our compliance and require us to maintain documentation and controls for our manufacturing and quality measures. ISO 13485 is the international standard for medical device manufacturers, based upon the ISO 9001 quality standard with additional specific industry requirements consistent with the FDA’s current Good Manufacturing Practices and Quality System Regulations. In 2002, we implemented manufacturing policies and procedures, and we received ISO 13485 certification in February 2003.

Employees

As of December 31, 2002, we had 557 full-time employees, including our 12 officers.

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Available Information

We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains at http://www.sec.gov an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

You may also find on our website at http://www.ventanamed.com electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC.

Risk Factors

We may be required to bring litigation to enforce our intellectual property rights, which may result in substantial expense.

We rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. In particular, it is not certain that:

We may become involved in interference proceedings in the U.S. Patent and Trademark Office to determine the priority of our inventions. We could also become involved in opposition proceedings in foreign countries challenging the validity of our patents. In addition, costly litigation could be necessary to protect our patent position. 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 may not prevail in any lawsuit or, if we do prevail, we may not receive commercially valuable remedies. Failure to protect our patent rights or intellectual property could harm us.

We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect with confidentiality agreements with employees, consultants and others with whom we discuss our business. These individuals may breach our confidentiality agreements and our remedies may not be adequate to enforce these agreements. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of these agreements, and we may not be able to resolve these disputes in our favor. Furthermore, our competitors may independently develop trade secrets and proprietary technology similar to ours. We may not be able to maintain the confidentiality of information relating to our products.

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Our products could infringe the intellectual property rights of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.

Third parties may assert patent, trademark or copyright infringement or other intellectual property claims against us based on their patents or other intellectual property. We may be required to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s intellectual property rights. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from other business concerns. If we are not successful in a lawsuit, we may be unable to sell our products or continue to sell our products until we obtain a license from the owner of the relevant technology or other intellectual property rights. Even if a license is available, it may require us to pay substantial royalties.

In the CytoLogix litigation, described in Item 3. Legal Proceedings, although we feel that we have strong legal defenses, if we received an adverse judgement and are determined to infringe CytoLogix’s patents for “Moving Platform Slide Stainer With Heating Elements” (U.S. 6,180,061), or “Random Access Slide Stainer with Independent Slide Heating Regulation” (U.S. 6,183,693), we might be enjoined from manufacturing or selling our DISCOVERY^® and BENCHMARK^® instruments, two of our principal products, which could reduce our sales revenue.

In addition, in November 2001, a complaint was filed by Digene Corporation, Gaithersburg, MD, alleging that we infringe upon two patents with the sale of our INFORM^® HPV High-risk and Low-risk probe products. Although we feel that we have strong legal defenses to both infringement allegations, if we received an adverse determination, we might be enjoined or otherwise restricted from selling our INFORM^® HPV probes, which could reduce our sales revenue.

If our customers do not receive adequate third-party reimbursement, our products may not be accepted in the market.

In the United States, our products are primarily purchased by medical institutions and laboratories that bill third-party payers such as government health administration authorities, private health coverage insurers, managed care organizations and other similar organizations. Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be available to our customers from third-party payers. Third-party payers are increasingly attempting to limit both the coverage and the level of reimbursement of products to contain costs. If third-party payers are successful in such efforts, our ability to sustain revenue growth and profitably will be adversely effected.

If government funding is reduced, the ability of research centers to purchase our products may also be reduced.

Some of our products are sold to universities, research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. Research funding by the government could be significantly reduced and could materially affect the ability of many of our research customers to purchase our products.

If we fail to develop new products, we may not be profitable in the future.

A large part of our future growth and profitability will be dependent on our ability to develop, introduce and market new instruments and reagents used in disease diagnosis and treatment selection. We depend, in part, on the success of medical research done by others in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in our systems. We may need to license some of these technologies. We may not be able to enter into these licenses on terms that would allow us to economically develop and market new products. If this were to occur, our operating results would suffer.

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We face intense competition and rapid technological change that could result in products that are superior to the products we are developing.

We have numerous competitors in the United States and abroad. These competitors include Sakura Fine Technical, DAKO Cytomation A/S, BioGenex Laboratories, Lab Vision Corporation, Digene Corporation, Genomic Solutions, Vision BioSystems Ltd., and Molecular Dynamics. These competitors may develop technologies and products that are more effective or less costly than our current or future products or that could render our technologies and products obsolete or noncompetitive. Many of these competitors have greater experience and name recognition. If we are not able to compete effectively, our result would suffer.

We need to convince the medical community of the superiority of our product to be successful.

The use of automated systems to perform diagnostic tests is relatively new. Historically, laboratory personnel have manually performed diagnostic tests that are now performed by our automated systems. Our ability to sell products is dependent on our ability to demonstrate to the medical community the benefits of automated diagnostic testing using our products. The quality and price of our products compared to manual testing and to our competitor’s products will affect acceptance and sales of our products. If the medical community were not receptive to our products, our results would suffer.

If we fail to obtain or maintain necessary FDA clearances or approvals for products, or if clearances or approvals are delayed, we will be unable to commercially distribute and market our products in the United States.

In the United States, the FDA regulates, as medical devices, instruments and diagnostic tests and reagents that are traditionally manufactured and commercially marketed as equipment or finished test kits. Some clinical laboratories, however, purchase clinical products, which are marketed as analytic specific reagents, or ASRs, and develop and prepare their own finished diagnostic tests called “home brews.” The FDA also considers ASRs to be medical devices. The FDA restricts the sale of ASRs to clinical laboratories certified under the Clinical Laboratory Improvement Amendments of 1988, known as CLIA, to perform high complexity testing. We currently market some diagnostic products as finished test kits and others as individual reagents. We intend to market more of each in the future. Current products are, and future products will be, regulated as medical devices.

Unless otherwise exempt, medical devices require approval or clearance prior to marketing in the United States. Although we believe that most of our currently marketed products, as well as those ASRs we market, are exempt from 510(k) premarket notification and premarket approval requirements, several products are subject to one or the other of these requirements. For these we have obtained the necessary clearance or approval. Clinical products that we may seek to introduce in the future may require FDA approvals or clearances prior to commercial sale in the United States. The process of obtaining approvals and clearances necessary to market clinical products can be time-consuming, expensive and uncertain. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new clinical products. In addition, we cannot assure you that regulatory approval or clearances of any clinical products for which we seek such approvals or clearances will be granted by the FDA or foreign regulatory authorities on a timely basis, if at all.

Any products that we manufacture or distribute pursuant to FDA clearance or approval are subject to pervasive and continuing regulation by the FDA and certain state agencies, including record keeping requirements and reporting of adverse experience with the use of the device. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement prohibits the promotion of approved medical devices for unapproved uses.

If we fail to comply with the FDA’s Quality System regulations, our manufacturing operations could be delayed, and our product sales and profitability could suffer.

When manufacturing our medical devices, including ASRs, we are required to adhere to Quality System regulations, which require that we manufacture our products and maintain records in a prescribed manner. We

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are subject to FDA Quality System inspections in the future, and we cannot assure you that we can pass future FDA audits or maintain compliance.

CLIA regulations could harm our business by limiting the potential market for our products.

Any of our customers using our products for clinical use in the United States may be regulated under CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of clinical tests, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using our products. Therefore, CLIA regulations and future administrative interpretations of CLIA could harm our business by limiting the potential market for our products.

Complying with international regulatory requirements is an expensive, time-consuming process and approval is never certain.

European sales of our products are subject to strict regulatory requirements. The review process varies from country to country, is typically lengthy and expensive, and approval is never certain. Effective December 7, 2003, all of our products must be in compliance with the “In Vitro Diagnostics Directive” and bear the CE mark before being marketed in the European Union. The CE mark is a symbol indicating that the device conforms with the essential requirements of an applicable directive, and can be commercially distributed throughout Europe. The In Vitro Diagnostic Directive also subjects our manufacturing facilities to compliance inspections, and req