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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

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 30, 2003, which is the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $444,218,700. 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 March 4, 2004 there were 17,052,938 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, 2003.

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TABLE OF CONTENTS

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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. 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 both 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 five subsidiaries: Ventana Medical Systems, GmbH, Ventana Medical Systems, Japan K.K., Ventana Medical Systems, Pty. Ltd., Ventana Medical Systems, S.A. and BioTechnology Tools, Inc. BioTechnology Tools, Inc. was dissolved on April 2, 2003.

We develop, manufacture and market instrument-reagent systems that automate slide staining in anatomical pathology and drug discovery laboratories worldwide. 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 America and International business segments.

Market Overview

Ventana targets instrument-reagent systems at two markets: (1) anatomical pathology laboratories which comprise both Histology and Cytology laboratories and (2) drug discovery laboratories. We currently obtain the majority of our revenues and profits from ongoing sales of consumables and instruments to anatomical pathology labs worldwide.

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 $1.1 billion in instruments and consumables annually. Most anatomical pathology labs are hospital-based, although some independent reference labs offer these services.

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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.

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, in situ hybridization or Special Stains tests. These tests are significantly more complex than the H&E stains and require special reagents.

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

IHC Staining.    The majority of IHC slides are stained in hospital-based Histology 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 general population ages, thereby increasing Histology producing surgical cases, and (2) the emergence of new stains that may influence therapy choices.

IHC instruments require reagents and accessories to operate. We supply a full line of these consumables for use with our instruments.

ISH Staining.    The clinical market for ISH staining is currently 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.

Special Stains Staining.    We estimate that the Special Stains slide market is smaller than the worldwide IHC market and is growing. 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 five to ten years.

Cytology

Cytology involves the collection and microscopic analysis of cell samples from various parts of the body for the purpose of identifying significant abnormal cell changes. The information obtained by cytologic analysis allows the physician to detect, diagnose and monitor cancerous and pre-cancerous disease. Cell samples are gathered by the clinician using scraping, brushing, lavaging or aspiration. The cells are examined fresh or fixed and stained by a cytotechnologist who searches for morphologic abnormalities that characterize disease. The cytopathologist takes this information, along with the patient’s medical history and clinical condition, and classifies the findings according to accepted categories. The cytologic diagnosis enables the clinician to identify patients who may be at risk for the subsequent development of cancer, detect those who already have cancer, and to monitor the response of cancer to treatment. Cytology is utilized in the detection and management of cervical cancer, bladder cancer and lung cancer, among others.

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

Worldwide, the greatest application of Cytology is in cervical cancer screening. Cervical cancer is the second most common cancer in women and is the principal cancer of women in developing countries where 80% of cases occur. Globally, more than 400,000 cases of cervical cancer are diagnosed annually. In the United States, according to historical incidence data from the National Cancer Institute, there are approximately 15,000 new cases of cervical cancer diagnosed each year. Because cervical cancer can be a highly treatable disease, there is an emphasis on screening and early detection through the use of cervical cytology. According to Women’s Health in Primary Care, Vol. 5, No 6/June 2002, of the 50-60 American million women who undergo cervical cytology (Pap) testing each year, approximately 3.5 million will have a cytologic abnormality that requires further evaluation.

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Human Papillomavirus (HPV) infection has been closely linked to the genesis of invasive cervical cancer. Presence and persistence of infection with high-risk HPV subtypes are considered among the most important risk factors for the disease. In recent years, HPV testing has become a critical component of cervical cancer screening. Ventana’s INFORM^® HPV ISH 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.

Drug Discovery

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.

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. Researchers then use gene expression and ISH experiments to identify targets and study localized gene expression. Our Discovery^® systems are used by large pharmaceutical and biotechnology companies to hybridize gene expression arrays and to run ISH experiments.

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 expected to be significantly more challenging to map than the genome. In drug discovery laboratories, measuring protein expression is a critical step in target validation and determining mechanism of action for drug candidates. Our Discovery^® systems are used by large pharmaceutical and biotechnology companies to run IHC and ISH experiments in their target validation, biomarker discovery and toxicology laboratories.

Strategy

Our objective is to build substantial shareholder value through: (1) expanding our competitive position in Histology lab automation and (2) leveraging the core technologies we have developed for Histology labs into drug discovery labs. Key elements of our strategy include the following:

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Our Products

Our product offerings are summarized as follows:

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/ISH Staining.    Our first product, the ES^® 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. The 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 hospital clinical and reference labs. Though no longer available for sale, there are Techmate^® instruments still in operation today.

Today we market 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 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. The NexES^® IHC is used in many small to mid-sized accounts.

Our groundbreaking BenchMark^® and Discovery^® IHC/ISH systems were launched in late 2000 and 1999 respectively and subsequently replaced by the BenchMark^® XT, BenchMark^® LT and Discovery^® XT systems. The BenchMark^® series of instruments are the only slide preparation systems to offer fully automated Baking Through Staining (BTS^™) technology and the flexibility of multiple technologies (IHC and ISH), providing superior,

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standardized stain quality, increased testing efficiency and maximum laboratory productivity. BTS^™ technology describes the automation of the staining process that eliminates 58 manual steps. This automation saves up to 90 minutes of manual work by performing the baking, deparafinization, cell conditioning or antigen unmasking and staining all on-line thereby providing full walk-away convenience. The BenchMark^® and Discovery^® systems use a barcode that is affixed to each slide to identify the sample and the testing procedures to be performed. The BenchMark^®/Discovery^® then scans the barcode, dispenses the reagents and processes each slide in accordance with instructions per the bar code label on each slide. The dispensing, incubation (i.e. temperature and time control) and washing is performed using proprietary chemical and mechanical methods critical to obtaining precise, sensitive and rapid test results. All aspects of the testing procedure are controlled by software. This makes the system reliable and easy to use.

Our next generation BenchMark^® XT and BenchMark^® LT systems, introduced in late 2003 and early 2004 respectively, represent the latest and most advanced instrumentation developed to date by Ventana. The XT and LT provide additional flexibility by providing more protocol options, including the ability to optimize temperature, incubation and pretreatment steps, in addition to allowing simultaneous processing of IHC and ISH samples. The XT also adds more capacity by increasing throughput by 50%. The next generation Discovery^® XT, introduced in early 2004, shares all of the improvements of the new BenchMark^® XT, with the added advantage of microarray capability and research level flexibility for protocol development.

We manufacture and market an extensive line of primary antibodies, probes and detection chemistries for use on our systems. In combination, these reagents detect antigens of interest in tissue samples by generating visual signal in an IHC/ISH reaction at the site where a primary antibody or probe is bound to a specific antigen or molecule in the cell or tissue. 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 automated IHC/ISH test. Customers with our BenchMark^® and Discovery^® system series must use our detection chemistries on all tests, but they have the option of purchasing primary antibodies from other sources. The detection chemistries, primary antibodies, probes and other reagents have been developed using proprietary formulations that, when combined, optimize the results of the tests performed. As we place additional BenchMark^® XT/LT systems, the reagents used to prepare tissue prior to the application of a primary antibody or probe will become an important source of our revenue.

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.

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/ISH 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.

Contracts

Instruments are placed through direct sales, instrument rentals and our Performance Evaluation Period (PEP) program. The PEP program is a formal agreement whereby a staining system is installed on the premises of a pre-qualified customer for the purpose of allowing the customer to evaluate the system’s functionality over an extended trial period. The customer agrees to purchase a reagent starter kit at the time of installation and to purchase a minimum volume of reagents over the life of the trial period. Minimum purchase requirements vary by customer. Upon completion of the trial period, the customer purchases the staining system or returns it to the Company.

Research and Development

Our research and development group is divided into two development teams: (1) instrumentation and (2) staining protocols and reagents. Our efforts are focused on innovative combined instrument-reagent systems,

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as well as enhancements to existing instruments. In addition, we are developing reagents for current and future customer applications.

Our 82 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 $19.6 million, $16.4 million, and $14.9 million in 2003, 2002, and 2001, 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, the BenchMark^® system, and most recently the BenchMark^® XT/LT and Discovery^® XT systems. 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 four 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.

Customers

Our customers consist of hospital-based anatomical pathology labs, independent reference labs, the drug discovery labs of large pharmaceutical companies, biotechnology companies, government labs, medical research centers and resellers serving such entities. None of our customers accounted for more than 5% of our consolidated revenues in 2003, 2002 or 2001.

Patents and Proprietary Rights

We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights, trademarks, and trade secret laws. We file applications for and obtain patents, copyrights, and trademarks in the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets and confidential information by non-disclosure policies and through the use of appropriate confidentiality agreements. We have obtained a substantial number of patents and trademarks in the United States and in other countries. There can be no assurance, however, that these patents are valid or can be enforced against competitive products in every jurisdiction. Although we believe the protection afforded by our patents, patent applications, copyrights, trademarks and trade secrets has value, the rapidly changing technology in the in vitro diagnostic industry and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise, and management abilities of our employees rather than on the protection afforded by patent, copyright, trademark, and trade secret laws.

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Many of our products include intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe, based upon past experience and standard industry practice that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition.

The industry in which we compete is characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding patent and other intellectual property rights. For example, in the CytoLogix litigation, described in further detail under Item 3. Legal Proceedings, we have received an adverse judgment and were determined to infringe CytoLogix patents for “Moving Platform Slide Stainer With Heating Elements” (U.S. 6,180,061), and “Random Access Slide Stainer with Independent Slide Heating Regulation” (U.S. 6,183,693). Currently, we are facing an imminent injunction on the manufacture and sale of our first generation Discovery^® and BenchMark^® instruments and may have to pay damages including royalties if our appeal is unsuccessful.

There can be no assurance that our patents and other proprietary rights will not be challenged, invalidated or circumvented, that others will not assert intellectual property rights to technologies that are relevant to us, or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. The risks associated with patents and intellectual property are more fully discussed in the section of this report entitled “Risk Factors”.

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 Histology 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^® XT systems and related consumables.

A complementary 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, and product line breadth and after-sales service.

Histology

We are a leader in automated IHC and ISH staining. Nevertheless, we face strong competition from the manual method of performing IHC and ISH tests and from competitors marketing instrument-reagent IHC and ISH staining systems. A number of anatomical pathology labs in the U.S. and the majority outside the U.S.

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continue to manually perform IHC and ISH slide staining. Significant barriers exist to automation in countries where insurance or governmental healthcare reimbursement for IHC testing is low. Additionally, labs in which pathologists prefer manually stained slides remain reluctant to automate their processes.

Currently, direct competition comes from five competitors selling instrument-reagent IHC staining systems. These competitors are DAKO Cytomation A/S (DAKO), a privately held Danish company which holds a significant share of the market for manual IHC reagents; BioGenex Laboratories, Inc., a privately held U.S. company marketing instruments with a reagent annuity; Lab Vision Corporation, a subsidiary of the publicly traded company, Apogent Technologies, Inc., a public company that supplies DAKO with instruments, and markets its instruments through distributors and a direct sales force; Diagnostics Products Corp., a public company who markets high-volume IHC staining systems in Europe; and Vision Bio Systems Ltd. (Vision), an Australian biomedical company. Vision plans to launch an automated IHC/ISH staining system in the U.S. during 2004. Two automated Special Stains systems compete with our Special Stains module: one system offered by DAKO, and another offered by BioGenex. 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

Our focus is on the study of the hybridization of nucleic acid micro arrays and messenger RNA expression. Our competitors in nucleic acid micro array hybridization include Tecan Group Ltd., Affymetrix, Inc., and Amersham Biosciences UK Limited. Currently, we do not face competition providing automated systems for messenger RNA expression studies. In drug discovery IHC staining, competition includes clinical IHC competitors, DAKO and BioGenex.

Manufacturing

All of our instrument and reagent manufacturing operations are housed in a single facility located in Tucson, Arizona. Medical device manufacturing operations are conducted under the FDA Quality System Regulations. These regulations subject our facilities to inspections to verify compliance and require us to maintain documentation and controls for our manufacturing and quality activities. ISO 13485 is the international quality standard for medical device manufacturers, based upon the ISO 9001 quality standard with additional specific industry requirements consistent with the FDA Quality System Regulation. We received ISO 13485 certification in February 2003.

Employees

As of December 31, 2003, we had 618 full-time employees, including our 8 officers.

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.

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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 or inability 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.

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

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takes significant time, is 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, which may not be available to us. Even if a license is available, it may require us to pay substantial royalties.

For example, 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 receive an adverse determination, we might be enjoined or otherwise restricted from selling our INFORM^® HPV probes, which could reduce our sales revenue.

If we are unsuccessful in appealing the adverse judgment we received in connection with the Cytologix litigation, we may be forced to pay damages to Cytologix.

As discussed in more detail under Item 3. Legal Proceedings, we have been involved in litigation with Cytologix, Inc., pursuant to which a jury determined that we infringed certain Cytologix patents. We are currently facing an imminent injunction from further manufacture and sale of our first generation BenchMark^® and Discovery^® instruments. This action does not apply to the BenchMark^® XT/LT and Discovery^® XT instruments.

We intend to appeal the decision. However, our success cannot be guaranteed, and, if we are ultimately unsuccessful in the litigation we may be forced to pay damages including royalties to Cytologix.

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, and if they are successful, 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 or license 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 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 results 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 in anatomical pathology 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 is not receptive to our products, our results would suffer.

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

Unless otherwise exempt, prior to marketing in the United States, medical devices require approval or clearance. The process of obtaining approvals and clearances necessary to market clinical products can be time-consuming, expensive and uncertain. 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. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new clinical products. In addition, we cannot assure 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.

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 Analyte Specific Reagents, we are required to adhere to Quality System regulations, which require that we manufacture our products and maintain records in a prescribed manner. We are subject to future FDA Quality System inspections and we cannot assure you that we will pass these inspections or maintain compliance.

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

Any of the customers using our products for clinical use in the United States may be regulated under the Clinical Laboratory Improvement Act (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, 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.

Sales of our products in the European Union (EU) are subject to strict regulatory requirements and approval is never certain. Effective December 7, 2003, all of our products had to be in compliance with the “In Vitro

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Diagnostics Directive” and bear the CE mark before being imported for sale in the EU. The CE mark is a symbol indicating that the device conforms to the essential requirements of the applicable directive, and can be commercially distributed throughout the EU. The In Vitro Diagnostic Directive also subjects our manufacturing facilities to compliance inspections, and requires design, manufacturing and quality process documentation and controls. Some of our products do not currently bear the CE mark. We cannot assure you that the CE mark will be granted for all our products, or that regulatory review will not involve delays that would harm our ability to market and sell our products in the EU.

If we make future acquisitions, such acquisitions may not be profitable.

We may make additional acquisitions of complementary businesses, products or technologies in the future. Acquisitions of companies, divisions of companies, or products entail numerous risks. We cannot assure that we will not incur problems in any future acquisitions, or that future acquisitions will increase our profitability. We also cannot assure that we will realize value from any acquisitions that would justify the consideration paid.

We depend on key personnel to grow and sustain our business.

We are dependent upon the retention of principal members of our management, Board of Directors, scientific, technical, marketing and sales staffs and the recruitment of additional personnel. Except as otherwise described in other sections, we do not have employment agreements with any of our executive officers and we do not maintain “key person” life insurance on any of our personnel. We compete with other companies, academic institutions, government entities and other organizations for qualified personnel. Our inability to hire or retain qualified personnel could cause our results of operations to suffer.

If we have problems with key suppliers, our product development and commercialization efforts could be delayed or stopped.

Our reagent products are formulated from chemical and biological materials using proprietary technology, and standard processing techniques. We purchase components and raw materials used to make our reagent products from single-source vendors. We cannot assure you that the materials or reagents will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a significant effect on our ability to manufacture our products. Developing alternative or additional suppliers could be time consuming and expensive.

A number of components used to manufacture instruments are made on a custom basis to our specifications and are available from a limited number of sources. If the supply of materials or components from any of these vendors were delayed or interrupted for any reason, or if the quality or reliability of the materials or components is not adequate for use in our instruments, our ability to make instruments in a timely fashion could be impaired and our results of operations would suffer.

We may be held liable for any inaccuracies associated with analysis tests performed using our products, which may require us to defend ourselves in costly litigation.

We may be subject to claims resulting from incorrect results of tests performed using our products. Litigation of these claims can be costly, and we may be forced to expend significant funds during any litigation proceeding brought against us. Further, if a court were to require us to pay damages to a plaintiff in excess of our insurance coverage, then our financial condition may be harmed.

We deal with hazardous materials and generate hazardous wastes and must comply with environmental laws and regulations, which can be expensive and restrict how we do business. We could also be liable for damages or penalties, if we are involved in a hazardous material or waste spill or other accident.

Our manufacturing processes, primarily those involved in producing some of our reagent products, require the use of potentially hazardous and carcinogenic chemicals. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste. In the event of a hazardous material or waste spill or other accident, we could also be liable for damages or penalties. In addition, we may be liable or potentially liable for injury or contamination that results from our own, or a third party’s, use of these materials, and our liability could exceed our total assets.

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We cannot assure that we will be able to fund our future capital requirements through internal sources, our existing line of credit or from other sources.