##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006.

or



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

For the transition period from ____________ to ____________.

Commission File Number:
000-20931

Ventana Medical Systems, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2976937                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                               | 
|1910 E. Innovation Park Drive Tucson, AZ                       |  | 85755                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

Not Applicable

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. (See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer  x            Accelerated Filer ̈Non-Accelerated Filer ̈

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

The number of shares outstanding of the registrants common stock, $0.001 par value was 36,950,568 as of July 24, 2006.



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##### Table of Contents

Ventana Medical Systems, Inc.

INDEX



|         |  |                                                                                                   |  |     
|-------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                   |  | PAGE
|PART I.  |  | FINANCIAL INFORMATION                                                                             |  |     
|         |  |                                                                                                  
|Item 1.  |  | Financial Statements (Unaudited)                                                                  |  |     
|         |  |                                                                                                  
|         |  | Condensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005                         |  | 3   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2006 and 2005 |  | 4   
|         |  |                                                                                                  
|         |  | Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005           |  | 5   
|         |  |                                                                                                  
|         |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6   
|         |  |                                                                                                  
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 15  
|         |  |                                                                                                  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                        |  | 19  
|         |  |                                                                                                  
|Item 4.  |  | Controls and Procedures                                                                           |  | 20  
|         |  |                                                                                                  
|PART II. |  | OTHER INFORMATION                                                                                 |  |     
|         |  |                                                                                                  
|Item 1.  |  | Legal Proceedings                                                                                 |  | 21  
|         |  |                                                                                                  
|Item 2.  |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                  |  | 30  
|         |  |                                                                                                  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                               |  | 32  
|         |  |                                                                                                  
|Item 6.  |  | Exhibits                                                                                          |  | 33  
|         |  |                                                                                                  
|         |  | Signature                                                                                         |  | 34  
|         |  |                                                                                                  
|         |  | Exhibits                                                                                          |  | 35  



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##### Table of Contents

VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)



|Item 1. | Financial Statements
|------- | --------------------



|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                             |  | June 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                                             |  | (Unaudited)   |         |   |                   |  
|ASSETS                                                                                                                                                       |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                              |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                    |  | $             | 17,596  |   |                   | $ | 17,519  |  
|Short-term investments                                                                                                                                       |  |               | 35,115  |   |                   |   | 27,892  |  
|Trade accounts receivable, net of allowance for doubtful accounts of $1,919 and $1,536, respectively                                                         |  |               | 43,563  |   |                   |   | 38,170  |  
|Inventories, net                                                                                                                                             |  |               | 14,701  |   |                   |   | 12,888  |  
|Deferred tax assets                                                                                                                                          |  |               | 7,806   |   |                   |   | 7,969   |  
|Prepaids and other current assets                                                                                                                            |  |               | 3,138   |   |                   |   | 2,412   |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                         |  |               | 121,919 |   |                   |   | 106,850 |  
|Property and equipment, net                                                                                                                                  |  |               | 58,396  |   |                   |   | 54,195  |  
|Deferred tax assets, net of current portion                                                                                                                  |  |               | 18,673  |   |                   |   | 13,056  |  
|Long-term investments                                                                                                                                        |  |               | 4,923   |   |                   |   | 6,209   |  
|Goodwill                                                                                                                                                     |  |               | 2,804   |   |                   |   | 2,804   |  
|Intangible assets, net                                                                                                                                       |  |               | 7,317   |   |                   |   | 8,779   |  
|Capitalized software development costs, net                                                                                                                  |  |               | 3,043   |   |                   |   | 2,741   |  
|Other assets                                                                                                                                                 |  |               | 1,833   |   |                   |   | 1,898   |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                 |  | $             | 218,908 |   |                   | $ | 196,532 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                         |  |               |         |   |                   |   |         |  
|Accounts payable                                                                                                                                             |  | $             | 14,747  |   |                   | $ | 10,660  |  
|Other current liabilities                                                                                                                                    |  |               | 30,627  |   |                   |   | 30,954  |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                    |  |               | 45,374  |   |                   |   | 41,614  |  
|Long-term debt                                                                                                                                               |  |               | 1,961   |   |                   |   | 1,996   |  
|Other long-term liabilities                                                                                                                                  |  |               | 672     |   |                   |   | 618     |  
|                                                                                                                                                             |  |              
|Commitments and Contingencies                                                                                                                                |  |               |         |   |                   |   |         |  
|                                                                                                                                                             |  |              
|Stockholders equity                                                                                                                                         |  |               |         |   |                   |   |         |  
|Common stock$.001 par value; 100,000 shares authorized, 36,923 and 36,226 shares issued and outstanding at June 30, 2006 and
December 31, 2005 respectively |  |               | 36      |   |                   |   | 36      |  
|Additional paid-in-capital                                                                                                                                   |  |               | 219,329 |   |                   |   | 199,580 |  
|Deferred share-based compensation                                                                                                                            |  |               |        |   |                   |   | (382    | )
|Accumulated income                                                                                                                                           |  |               | 23,873  |   |                   |   | 11,628  |  
|Accumulated other comprehensive loss                                                                                                                         |  |               | (702    | ) |                   |   | (783    | )
|Treasury stock2,516 and 2,140 shares, at cost, at June 30, 2006 and December 31, 2005, respectively                                                         |  |               | (71,635 | ) |                   |   | (57,775 | )
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                   |  |               | 170,901 |   |                   |   | 152,304 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $             | 218,908 |   |                   | $ | 196,532 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

Ventana Medical Systems, Inc.

Condensed Consolidated Statements of Operations

(in thousands except per share data)

(Unaudited)



|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|----------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|                                                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                      |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|Sales:                                                |  |                            |        |                          |   |        |  |      |         |  |   |       
|Reagents and other                                    |  | $                          | 51,815 |                          | $ | 42,797 |  | $    | 98,989  |  | $ | 81,706
|Instruments                                           |  |                            | 7,241  |                          |   | 6,322  |  |      | 14,154  |  |   | 12,435
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Total net sales                                       |  |                            | 59,056 |                          |   | 49,119 |  |      | 113,143 |  |   | 94,141
|Cost of goods sold (1)                                |  |                            | 13,864 |                          |   | 11,987 |  |      | 27,168  |  |   | 23,587
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Gross margin                                          |  |                            | 45,192 |                          |   | 37,132 |  |      | 85,975  |  |   | 70,554
|                                                      |  |                            |        |                         
|Operating expenses:                                   |  |                            |        |                          |   |        |  |      |         |  |   |       
|Research and development (2)                          |  |                            | 8,463  |                          |   | 6,690  |  |      | 15,822  |  |   | 12,825
|Selling, general and administrative (3)               |  |                            | 25,960 |                          |   | 19,893 |  |      | 50,942  |  |   | 39,693
|Amortization of intangible assets                     |  |                            | 611    |                          |   | 479    |  |      | 1,242   |  |   | 955   
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Income from operations                                |  |                            | 10,158 |                          |   | 10,070 |  |      | 17,969  |  |   | 17,081
|Interest and other income                             |  |                            | 1,131  |                          |   | 296    |  |      | 1,557   |  |   | 397   
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Income before taxes                                   |  |                            | 11,289 |                          |   | 10,366 |  |      | 19,526  |  |   | 17,478
|Provision for income taxes                            |  |                            | 4,067  |                          |   | 3,628  |  |      | 7,281   |  |   | 6,124 
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Net income                                            |  | $                          | 7,222  |                          | $ | 6,738  |  | $    | 12,245  |  | $ | 11,354
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Net income per common share:                          |  |                            |        |                          |   |        |  |      |         |  |   |       
|Basic                                                |  | $                          | 0.21   |                          | $ | 0.19   |  | $    | 0.36    |  | $ | 0.33  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Diluted                                              |  | $                          | 0.20   |                          | $ | 0.18   |  | $    | 0.34    |  | $ | 0.31  
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Shares used in computing net income per common share: |  |                            |        |                          |   |        |  |      |         |  |   |       
|Basic                                                |  |                            | 34,209 |                          |   | 34,689 |  |      | 34,091  |  |   | 34,429
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|Diluted                                              |  |                            | 36,184 |                          |   | 37,153 |  |      | 36,026  |  |   | 36,896
|                                                      |  |                            |        |                          |   |        |  |      |         |  |   |       
|(1) amounts include share-based compensation expense  |  | $                          | 48     |                          | $ |       |  | $    | 83      |  | $ |      
|                                                      |  |                            |        |                         
|(2) amounts include share-based compensation expense  |  | $                          | 259    |                          | $ | 34     |  | $    | 541     |  | $ | 48    
|                                                      |  |                            |        |                         
|(3) amounts include share-based compensation expense  |  | $                          | 886    |                          | $ |       |  | $    | 1,933   |  | $ |      

See Notes to Consolidated Financial Statements.



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##### Table of Contents

Ventana Medical Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                                                |  |                           |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                |  | Six Months Ended June 30, |        
|                                                                                                |  | 2006                      |         |   | 2005 |  
|Net income                                                                                      |  | $                         | 12,245  |   |      | $ | 11,354  |  
|Adjustments to reconcile net income to cash provided by operating activities:                   |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                                   |  |                           | 8,112   |   |      |   | 4,652   |  
|Share-based compensation expense related to employee stock options and employee stock purchases |  |                           | 2,557   |   |      |   |        |  
|Deferred income taxes                                                                           |  |                           | (5,454  | ) |      |   |        |  
|Tax benefit from employee stock option plans                                                    |  |                           | 7,545   |   |      |   | 4,381   |  
|Excess tax benefits from share-based compensation                                               |  |                           | (7,002  | ) |      |   |        |  
|Change in operating assets and liabilities:                                                     |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                             |  |                           | (5,393  | ) |      |   | (179    | )
|Inventory                                                                                       |  |                           | (1,813  | ) |      |   | (1,379  | )
|Other assets                                                                                    |  |                           | (80     | ) |      |   | (548    | )
|Accounts payable                                                                                |  |                           | 4,085   |   |      |   | 1,156   |  
|Other liabilities                                                                               |  |                           | (230    | ) |      |   | 152     |  
|                                                                                                |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                       |  |                           | 14,572  |   |      |   | 19,589  |  
|                                                                                                |  |                          
|Cash flows from investing activities:                                                           |  |                           |         |   |      |   |         |  
|Purchase of property and equipment                                                              |  |                           | (11,072 | ) |      |   | (7,394  | )
|Purchase of intangible assets                                                                   |  |                           | (659    | ) |      |   | (1,813  | )
|Purchases of short-term investments                                                             |  |                           | (82,840 | ) |      |   | (33,930 | )
|Proceeds from sale of short-term investments                                                    |  |                           | 76,903  |   |      |   | 8,930   |  
|                                                                                                |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                           |  |                           | (17,668 | ) |      |   | (34,207 | )
|Cash flows from financing activities:                                                           |  |                           |         |   |      |   |         |  
|Issuance of common stock                                                                        |  |                           | 9,518   |   |      |   | 10,294  |  
|Purchases of common stock for treasury                                                          |  |                           | (13,394 | ) |      |   | (4,709  | )
|Excess tax benefits from share-based compensation                                               |  |                           | 7,002   |   |      |   |        |  
|Repayments of debt                                                                              |  |                           | (232    | ) |      |   | (110    | )
|                                                                                                |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                                       |  |                           | 2,894   |   |      |   | 5,475   |  
|Effect of exchange rate change on cash and cash equivalents                                     |  |                           | 279     |   |      |   | (1,620  | )
|                                                                                                |  |                           |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                            |  |                           | 77      |   |      |   | (10,763 | )
|Cash and cash equivalents, beginning of period                                                  |  |                           | 17,519  |   |      |   | 33,354  |  
|                                                                                                |  |                           |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                        |  | $                         | 17,596  |   |      | $ | 22,591  |  
|                                                                                                |  |                           |         |   |      |   |         |  
|                                                                                                |  |                          
|Supplemental cash flow information:                                                             |  |                           |         |   |      |   |         |  
|Income taxes paid                                                                               |  | $                         | 5,699   |   |      | $ | 250     |  
|Interest paid                                                                                   |  | $                         | 52      |   |      | $ | 35      |  
|Non-cash investing and financing activities:                                                    |  |                           |         |   |      |   |         |  
|Tendered common stock for stock option exercises                                                |  | $                         | 466     |   |      | $ | 338     |  
|Unpaid common stock repurchases for treasury                                                    |  | $                         |        |   |      | $ | 4,719   |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

(Unaudited)

1. Nature of Business

Ventana Medical Systems, Inc. (Ventana or the Company) develops, manufactures and markets proprietary instruments and reagents that automate diagnostic procedures used for molecular analysis of
cells. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ventana Medical Systems, S.A., Ventana Medical Systems, GmbH, Ventana Medical Systems, Ltd., Ventana Medical Systems, Japan K.K., and
Ventana Medical Systems Pty. Ltd. All significant inter-company balances and transactions have been eliminated. We do not have any subsidiaries in which we do not own 100% of the outstanding stock.

The accompanying interim condensed consolidated financial statements of Ventana Medical Systems, Inc have been prepared in conformity with U.S. generally
accepted accounting principles, consistent in all material respects with those applied in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, except for the adoption of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment (SFAS No. 123R)  See Note 2. The financial information is unaudited, but reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of the
Companys management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2005.

2. Share-Based Compensation

At June 30, 2006, the Company had six active share-based employee compensation plans. Stock option awards granted from these plans are granted at
the fair market value on the date of grant. The option awards vest over a period determined at the time the options are granted, ranging from zero to five years, and generally have a maximum term of ten years. Certain options provide for accelerated
vesting if there is a change in control (as defined in the plans). When options are exercised, new shares of the Companys common stock are issued. Prior to January 1, 2006, the Company accounted for share-based employee compensation,
including stock options, using the method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations (APB Opinion No. 25).



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective method. Other than restricted stock, no share-based employee compensation cost has been reflected in net income prior to the adoption of SFAS No. 123R. Results for prior periods have not been restated.

The adoption of SFAS No. 123R reduced net income for the six months ended June 30, 2006 by approximately $1,700. As a result, basic and
diluted earnings per share were reduced by $0.05 each.

The total value of the stock option awards is expensed ratably over the service
period of the employees receiving the awards. As of June 30, 2006, total unrecognized compensation cost related to stock option awards was approximately $8,500 and the related weighted-average period over which it is expected to be
recognized is approximately 1.8 years.

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows in the condensed consolidated statements of cash flows. SFAS No. 123R requires the cash flows resulting from the tax benefits arising from tax deductions in
excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $7,002 excess tax benefit classified as a financing cash inflow in the Companys accompanying condensed
consolidated statements of cash flows for the six months ending June 30, 2006 would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123R.

A summary of stock option activity within the Companys stock-based compensation plans and changes for the six months ended June 30, 2006 is as
follows:



|                             |  |                 |   |  |                               |       |                                                 |     |                         |   |        
|---------------------------- |  | --------------- | - |  | ----------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -------
|                             |  | Number ofShares |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsicValue
|Balance at December 31, 2005 |  | 6,688           |   |  | $                             | 19.21 |                                                 |     |                         |   |        
|Granted                      |  | 2               |   |  |                               | 35.95 |                                                 |     |                         |   |        
|Exercised                    |  | (668            | ) |  |                               | 13.49 |                                                 |     |                         |   |        
|Terminated/expired           |  | (123            | ) |  |                               | 23.30 |                                                 |     |                         |   |        
|                             |  |                 |   |  |                               |       |                                                 |     |                         |   |        
|Balance at June 30, 2006     |  | 5,899           |   |  | $                             | 19.78 |                                                 | 6.0 |                         | $ | 161,658
|                             |  |                 |   |  |                               |       |                                                 |     |                         |   |        

The intrinsic value of options exercised during the six months ended June 30, 2006 was
$20,877.



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##### Table of Contents

Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



A summary of fully-vested stock options and stock options expected to vest, as of June 30, 2006,
is as follows:



|            |  |                 |  |                               |       |                                         |     |                         |   |        
|----------- |  | --------------- |  | ----------------------------- | ----- | --------------------------------------- | --- | ----------------------- | - | -------
|            |  | Number ofShares |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm |     | AggregateIntrinsicValue
|Outstanding |  | 5,897           |  | $                             | 19.78 |                                         | 6.0 |                         | $ | 161,596
|Exercisable |  | 5,120           |  | $                             | 19.96 |                                         | 5.8 |                         | $ | 139,381

The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model. The following are the weighted average assumptions used for the periods noted:



|                                         |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                         |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                         |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Weighted average risk-free interest rate |  | 4.4                        | % |  | 3.9                      | % |  | 4.4  | % |  | 3.9  | %
|Expected life of options (years)         |  | 9.0                        |   |  | 6.5                      |   |  | 9.0  |   |  | 6.5  |  
|Expected stock volatility                |  | 55.0                       |   |  | 70.1                     | % |  | 55.0 |   |  | 70.1 | %
|Expected dividend yield                  |  | 0                          | % |  | 0                        | % |  | 0    | % |  | 0    | %

The risk-free interest rate is based on the U.S. treasury security rate in effect as of the
date of grant. The expected lives of options are based on historical data of the Company. In 2006, the Company determined that a blend of implied and historical volatility is more reflective of market conditions and a better indicator of expected
volatility versus using historical volatility alone. The expected dividend yield is based on expected annual dividend to be paid by the Company as a percentage of the market value of the Companys stock as of the date of grant.

The weighted average fair value of options granted during the first six months of 2006 and 2005 was $19.73 and $22.80, respectively. The Company did not
grant any stock options during the three months ended June 30, 2006 and 2005.



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



The following table illustrates the effect on net income and net income per common share for the
three and six months ended June 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 (amounts in thousands, except per share amounts):



|                                                                                                                                            |  |             |        |   |           |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | - | --------- | - | ------ | -
|                                                                                                                                            |  | ThreeMonths |        |   | SixMonths |  
|Net income, as reported                                                                                                                     |  | $           | 6,738  |   |           | $ | 11,354 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |             | (1,022 | ) |           |   | (2,208 | )
|                                                                                                                                            |  |             |        |   |           |   |        |  
|Pro-forma net income                                                                                                                        |  | $           | 5,716  |   |           | $ | 9,146  |  
|                                                                                                                                            |  |             |        |   |           |   |        |  
|Net income per common share                                                                                                                 |  |             |        |   |           |   |        |  
|Basic, as reported                                                                                                                          |  | $           | 0.19   |   |           | $ | 0.33   |  
|Basic, pro-forma                                                                                                                            |  | $           | 0.16   |   |           | $ | 0.27   |  
|Diluted, as reported                                                                                                                        |  | $           | 0.18   |   |           | $ | 0.31   |  
|Diluted, pro-forma                                                                                                                          |  | $           | 0.15   |   |           | $ | 0.25   |  

The Company also grants restricted stock awards to certain employees. Restricted stock awards are
valued at the closing market value of the Companys common stock on the date of grant, and the total value of the award is expensed ratably over the service period of the employees receiving the grants. During the three and six months ended
June 30, 2006, 1.3 and 4.5 shares of restricted stock, respectively, were granted to certain employees. Share-based compensation expense related to all restricted stock awards outstanding during the three and six months ended June 30, 2006
and 2005 was approximately $23 and $49 and $25 and $39, respectively. As of June 30, 2006, the total amount of unrecognized compensation cost related to nonvested restricted stock awards was approximately $485, which is expected to be
recognized over a weighted-average period of approximately 4.0 years.

A summary of restricted stock activity within the
Companys share-based compensation plans and changes for the six months ended June 30, 2006 is as follows (share amounts in thousands):



|                               |  |        |   |  |                                     |      
|------------------------------ |  | ------ | - |  | ----------------------------------- | -----
|                               |  | Shares |   |  | WeightedAverageGrant DateFair Value
|Nonvested at December 31, 2005 |  | 11.0   |   |  | $                                   | 40.13
|Granted                        |  | 4.5    |   |  |                                     | 43.37
|Vested                         |  | (1.2   | ) |  |                                     | 35.95
|Forefeited                     |  |       |   |  |                                     |     
|                               |  |        |   |  |                                     |      
|Nonvested at June 30, 2006     |  | 14.3   |   |  | $                                   | 41.51
|                               |  |        |   |  |                                     |      

The total fair value of restricted shares vested during the three and six months ended
June 30, 2006 was $44; and $839 for the same periods ended June 30, 2005.



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



3. Comprehensive Income

The components of comprehensive income, net of tax, for the three and six months ending June 30, 2006 and 2005 are as follows:



|                                                       |  |                            |       |      |                          |       |      |  |      |        |  |   |        |  
|------------------------------------------------------ |  | -------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | ---- | ------ |  | - | ------ | -
|                                                       |  | Three Months EndedJune 30, |       |      | Six Months EndedJune 30, |      
|                                                       |  | 2006                       |       | 2005 |                          |       | 2006 |  | 2005 |       
|Net income                                             |  | $                          | 7,222 |      | $                        | 6,738 |      |  | $    | 12,245 |  | $ | 11,354 |  
|Net unrealized losses on available for sale securities |  |                            | 6     |      |                          | 24    |      |  |      |       |  |   | (14    | )
|Net change in cumulative translation adjustment        |  |                            | 90    |      |                          | (825  | )    |  |      | 81     |  |   | (1,407 | )
|                                                       |  |                            |       |      |                          |       |      |  |      |        |  |   |        |  
|                                                       |  | $                          | 7,318 |      | $                        | 5,937 |      |  | $    | 12,326 |  | $ | 9,933  |  
|                                                       |  |                            |       |      |                          |       |      |  |      |        |  |   |        |  

The components of accumulated other comprehensive loss, net of tax, for the six months ending
June 30, 2006 and 2005 are as follows:



|                                                       |  |                          |      |   |      |   |        |  
|------------------------------------------------------ |  | ------------------------ | ---- | - | ---- | - | ------ | -
|                                                       |  | Six Months EndedJune 30, |     
|                                                       |  | 2006                     |      |   | 2005 |  
|Net unrealized losses on available for sale securities |  | $                        | (88  | ) |      | $ | (78    | )
|Cumulative translation adjustment                      |  |                          | (614 | ) |      |   | (1,303 | )
|                                                       |  |                          |      |   |      |   |        |  
|                                                       |  | $                        | (702 | ) |      | $ | (1,381 | )
|                                                       |  |                          |      |   |      |   |        |  

4. Provision for Income Taxes

The Company accounts for income taxes during interim periods in accordance with SFAS No. 109, Accounting for Income Taxes, Accounting Principles Board, (APB) No. 28, Interim
Financial Reporting, and FIN 18, Accounting for Income Taxes in Interim Periods, an interpretation of APB Opinion No. 28. For interim reporting purposes, these rules require that a company determine the best estimate of its
annual effective tax rate and then apply that rate in providing for income taxes on a year-to-date basis.

On December 31, 2005, the
United States research tax credit expired. As a result, the Company is not permitted to claim a benefit for twelve months of its research and development credit in its full-year estimated tax rate for purposes of calculating its second quarter tax
provision. Consequently, the Companys effective tax rate is approximately 37% for the six months ended June 30, 2006 versus 35% for the six months ended June 30, 2005. Under paragraph 20 of APB 28, any immediate impact as a result of
a change in tax law  in this case, reinstatement of the credit  should be recognized in the interim period in which the law change is enacted. Therefore, if the credit is reinstated after June 30, 2006, any catch-up
adjustment will be recognized when the annual estimated tax rate is remeasured during the applicable reporting period.

The Company took
advantage of additional tax deductions available relating to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Accordingly, the Company recorded a $7,545 increase to equity with a
corresponding increase to deferred tax asset for the six months ended June 30, 2006. Quarterly adjustments for the exercise of non-qualified stock options and disqualified dispositions of incentive stock options may vary as they relate to the
actions of the option holder or shareholder. The Company also evaluated the recoverability of its net deferred tax assets and determined that the balances existing at June 30, 2006, represented the amount that is more likely than not of being
recovered in the foreseeable future.



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



5. Stock Repurchase

On September 8, 1998, the Companys Board of Directors authorized the Company to repurchase up to 1,500 shares of its common stock in the open market or in privately negotiated transactions. In May 2004, the
Board of Directors approved the repurchase of an additional 2,000 shares and in May 2006, the Board of Directors approved the repurchase of another 2,000 shares. During the six months ended June 30, 2006 and 2005, the Company re-purchased 366
and 252 shares of its common stock for $13,394 and $9,766, respectively. The repurchased shares were returned to the status of authorized, but un-issued shares. The timing and amount of any future repurchases will depend on market conditions and
corporate considerations.

6. Operating Segment and Enterprise Data

The Company has two reportable segments: North America (primarily the United States and Canada) and International (primarily France, Germany, United Kingdom, Japan and Australia). Segment information for the three and
six months ended June 30, 2006 and 2005 are as follows:



|                                      |  |                                  |         |               |   |              |  |   |         |   |  |   |        
|------------------------------------- |  | -------------------------------- | ------- | ------------- | - | ------------ |  | - | ------- | - |  | - | -------
|                                      |  | Three months ended June 30, 2006
|                                      |  | NorthAmerica                     |         | International |   | Eliminations |  |   | Totals 
|Sales to external customers           |  | $                                | 42,238  |               | $ | 16,818       |  | $ |        |   |  | $ | 59,056 
|Depreciation and amortization expense |  |                                  | 3,488   |               |   | 821          |  |   |        |   |  |   | 4,309  
|Segment profit                        |  |                                  | 5,064   |               |   | 2,158        |  |   |        |   |  |   | 7,222  
|                                      | 
|                                      |  | Three months ended June 30, 2005
|                                      |  | NorthAmerica                     |         | International |   | Eliminations |  |   | Totals 
|Sales to external customers           |  | $                                | 34,690  |               | $ | 14,429       |  | $ |        |   |  | $ | 49,119 
|Depreciation and amortization expense |  |                                  | 1,977   |               |   | 441          |  |   |        |   |  |   | 2,418  
|Segment profit                        |  |                                  | 4,884   |               |   | 1,854        |  |   |        |   |  |   | 6,738  
|                                      | 
|                                      |  | Six months ended June 30, 2006  
|                                      |  | NorthAmerica                     |         | International |   | Eliminations |  |   | Totals 
|Sales to external customers           |  | $                                | 81,239  |               | $ | 31,904       |  | $ |        |   |  | $ | 113,143
|Depreciation and amortization expense |  |                                  | 6,816   |               |   | 1,296        |  |   |        |   |  |   | 8,112  
|Segment profit                        |  |                                  | 6,336   |               |   | 5,909        |  |   |        |   |  |   | 12,245 
|Property and equipment, net           |  |                                  | 51,438  |               |   | 6,958        |  |   |        |   |  |   | 58,396 
|Segment assets                        |  |                                  | 204,885 |               |   | 34,203       |  |   | (20,180 | ) |  |   | 218,908
|Expenditures for long-lived assets    |  |                                  | 10,997  |               |   | 734          |  |   |        |   |  |   | 11,731 



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



|                                      |  |                                |         |               |   |              |  |   |         |   |  |   |        
|------------------------------------- |  | ------------------------------ | ------- | ------------- | - | ------------ |  | - | ------- | - |  | - | -------
|                                      |  | Six months ended June 30, 2005
|                                      |  | North America                  |         | International |   | Eliminations |  |   | Totals 
|Sales to external customers           |  | $                              | 65,605  |               | $ | 28,536       |  | $ |        |   |  | $ | 94,141 
|Depreciation and amortization expense |  |                                | 3,820   |               |   | 832          |  |   |        |   |  |   | 4,652  
|Segment profit                        |  |                                | 8,512   |               |   | 2,842        |  |   |        |   |  |   | 11,354 
|Property and equipment, net           |  |                                | 45,842  |               |   | 5,534        |  |   |        |   |  |   | 51,376 
|Segment assets                        |  |                                | 186,826 |               |   | 34,651       |  |   | (20,445 | ) |  |   | 201,032
|Expenditures for long-lived assets    |  |                                | 8,213   |               |   | 994          |  |   |        |   |  |   | 9,207  

7. Short-Term and Long-Term Investments

The Companys short-term investments and long-term investments are intended to establish a high-quality portfolio that preserves principal, meets
liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Companys investment guidelines and market conditions. At June 30, 2006, the Company has recorded the estimated fair value in
available-for-sale securities for short-term investments and long-term investments of $35,115 and $4,923, respectively. The following is a summary of available-for-sale securities as of June 30, 2006:



|                                     |  |              |        |                      |   |                     |  |   |                     |   |  |   |       
|------------------------------------ |  | ------------ | ------ | -------------------- | - | ------------------- |  | - | ------------------- | - |  | - | ------
|                                     |  | AdjustedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLoss |  |   | EstimatedFair Value
|Federal agency                       |  | $            | 8,287  |                      | $ |                    |  | $ | (61                 | ) |  | $ | 8,226 
|Municipal bonds                      |  |              | 3,400  |                      |   |                    |  |   |                    |   |  |   | 3,400 
|Corporate commercial paper and bonds |  |              | 28,034 |                      |   | 5                   |  |   | (80                 | ) |  |   | 27,959
|Money market                         |  |              | 453    |                      |   |                    |  |   |                    |   |  |   | 453   
|                                     |  |              |        |                      |   |                     |  |   |                     |   |  |   |       
|                                     |  | $            | 40,174 |                      | $ | 5                   |  | $ | (141                | ) |  | $ | 40,038
|                                     |  |              |        |                      |   |                     |  |   |                     |   |  |   |       



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



During the three and six months ended June 30, 2006, the Company did not have any gross realized
gains or losses on sales of available-for-sale securities. The following table shows the amortized cost and estimated fair value of the available-for-sale securities at June 30, 2006, by maturity. Expected maturities can differ from contractual
maturities, because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations. Contractual maturities of
available-for-sale debt securities were as follows:



|                                          |  |               |        |                     |   |       
|----------------------------------------- |  | ------------- | ------ | ------------------- | - | ------
|                                          |  | June 30, 2006
|                                          |  | Cost          |        | EstimatedFair Value
|Due in one year or less                   |  | $             | 30,250 |                     | $ | 30,215
|Due after one year and through five years |  |               | 4,608  |                     |   | 4,512 
|Due after five years                      |  |               | 5,316  |                     |   | 5,311 
|                                          |  |               |        |                     |   |       
|                                          |  | $             | 40,174 |                     | $ | 40,038
|                                          |  |               |        |                     |   |       

At June 30, 2006, $4,900 of the $9,823 in estimated fair value expected to mature greater
than one year has been classified as short-term investments since these investments are in an unrealized gain position and the Company views its available-for-sale securities as available for current operations.

The following table shows the gross unrealized losses and fair value of the Companys investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2006:



|                                     |           |                     |                     |                        |           |    |                     |   |       |  |   |    
|------------------------------------ | --------- | ------------------- | ------------------- | ---------------------- | --------- | -- | ------------------- | - | ----- |  | - | ---
|                                     |           | Less Than 12 Months |                     | Greater than 12 Months
|                                     | FairValue |                     | GrossUnrealizedLoss |                        | FairValue |    | GrossUnrealizedLoss
|Federal agency                       |           | $                   | 2,493               |                        | $         | 6  |                     | $ | 4,933 |  | $ | 55 
|Corporate commercial paper and bonds |           |                     | 496                 |                        |           | 4  |                     |   | 3,671 |  |   | 76 
|                                     |           |                     |                     |                        |           |    |                     |   |       |  |   |    
|                                     |           | $                   | 2,989               |                        | $         | 10 |                     | $ | 8,604 |  | $ | 131
|                                     |           |                     |                     |                        |           |    |                     |   |       |  |   |    

The unrealized losses on the Companys investment in federal agency securities were caused by
interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the
Companys investment.

The unrealized losses on the Companys investment in corporate commercial paper and bonds were caused
primarily by interest rate increases. Generally, the investments are in corporations with a credit rating of AA or higher and consequently the Company believes it is probable that all amounts due will be collectible according to the contractual
terms of the investments.

Because the Company has the ability and intent to hold these investments until a recovery of fair value, which
may be maturity, it does not consider the investments with unrealized losses to be other-than-temporarily impaired at June 30, 2006.



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Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except
per share data)

(Unaudited)



8. Inventories

Inventories consist of the following:



|                                 |  |              |        |                  |   |       
|-------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                 |  | June 30,2006 |        | December 31,2005
|Raw material and work-in-process |  | $            | 8,364  |                  | $ | 6,441 
|Finished goods                   |  |              | 6,337  |                  |   | 6,447 
|                                 |  |              |        |                  |   |       
|                                 |  | $            | 14,701 |                  | $ | 12,888
|                                 |  |              |        |                  |   |       

9. Commitments and Contingencies

In the ordinary course of business, we are involved in legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or
more of them. Although the outcome of these actions is not presently determinable, it is the opinion of the Companys management, based upon the information available at this time, that the expected outcome of these matters, individually or in
the aggregate, will not have a material adverse effect on the results of operations or financial condition of the Company.

10. Recently Issued
Accounting Pronouncement

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on
a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN 48
these will be accounted for as an adjustment to retained earnings. The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of operations.



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Ventana Medical Systems, Inc.

Managements Discussion and Analysis of Financial Condition and Analysis

(Unaudited)



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

We develop, manufacture and market proprietary instruments and reagents that automate diagnostic procedures used for molecular analysis of cells 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 for anatomical pathology labs in analyzing human tissue to assist in the diagnosis and treatment of cancer and infectious diseases. Our drug discovery systems are used by pharmaceutical and biotechnology companies to accelerate the discovery
of new drug targets and to evaluate the safety of new drug compounds. In addition to instruments, we market consumable products, including reagents and other accessories, required to operate our instruments.

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial
Statements and related Notes thereto included elsewhere in this Form 10-Q. This Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, by their very nature, contain risks and uncertainties. Accordingly, actual events or results may differ materially from those anticipated by such forward-looking statements. A wide variety
of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. Such factors, many of which are beyond our control, include the following: market acceptance of new automated
histology products, continued success in asset management, continued improvements in our manufacturing efficiencies, on-schedule launches of our new products, currency exchange rate variability, adverse determinations in various outstanding
litigations, competition and competitive pressures on pricing and general economic conditions in the United States and in the regions we serve.

Results
of Operations

Total Net Sales

Net
sales for the three and six months ended June 30, 2006 increased 20% compared to the same periods in 2005 to $59.1 million and $113.1 million from $49.1 million and $94.1 million, respectively. These increases were primarily due to a 21%
increase in reagents and other sales. Reagent and other sales growth was due to an 11% increase in our installed base from approximately 5,400 in 2005 to approximately 6,000 in 2006 and an 8% year-over-year improvement in the average reagent annuity
stream per installed instrument to $28,300 from $26,300 in 2005.

By geographic segment, total sales increased in the three and six month
periods of 2006 compared to 2005 across both geographic segments: 22% and 24% in North America ($42.3 million and $81.2 million compared to $34.7 million and $65.6 million, respectively) and 17% and 12% internationally ($16.8 million and $31.9
million compared to $14.4 million and $28.5 million, respectively) due to the reasons mentioned above.

Gross Margin

Gross margin for the three and six months ended June 30, 2006 increased to $45.2 million and $86.0 million, respectively, from $37.1 million and
$70.6 million for the same periods in 2005. The Companys gross margin for the three and six months ended June 30, 2006 was 76.5%



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Ventana Medical Systems, Inc.

Managements Discussion and Analysis of Financial Condition and Analysis

(Unaudited)



and 76.0% compared to 75.6% and 75.0% for the same periods in 2005. The increase in gross margin is due to the continued longer term trend of a shift in
sales mix to higher margin reagent and other sales from instrument sales, which have a lower margin.

Research and Development

Research and development spending for the three and six months ended June 30, 2006 increased to $8.5 million and $15.8 million, respectively, from
$6.7 million and $12.8 million for the same periods in 2005. Excluding approximately $0.3 million and $0.5 million of share-based compensation expense recognized upon our adoption of SFAS No. 123R for the three and six months ended
June 20, 2006, respectively, the additional increase is primarily attributable to our continued new platform development programs and our reagent chemistry application initiatives focused primarily on the histology market.

Selling, General and Administrative (SG&A)

SG&A expense for the three and six months ended June 30, 2006 increased to $26.0 million and $51.0 million, respectively, from $19.9 million and $39.7 million. Approximately, $0.9 million and $1.9 million of the increase are due to
the recognition of share-based compensation expense for the three and six months ended June 30, 2006, respectively. The additional increase is primarily attributable to increased investments in our sales force and associated infrastructure and
continued development of our marketing organization. We also continued to invest in further establishing our intellectual property position and defending ourselves in litigation matters. SG&A expense as a percentage of sales increased to 44% and
45% for the three and six months ended June 30, 2006, respectively, compared to 40% and 42% in 2005. Excluding share-based compensation expense, SG&A expense as a percentage of sales decreased to 42% and 43% for the three and six months
ended June 30, 2006, respectively.

Amortization of Intangible Assets

Amortization expense of intangible assets for the three and six months ended June 30, 2006 increased to $0.6 million and $1.2 million, respectively,
from $0.5 million and $1.0 million for the same periods in 2005. The increase is due to incremental amortization associated with a higher carrying base in intangible assets during the three and six months ended June 30, 2006. Estimated
amortization expense for intangible assets as of June 30, 2006 for each of the five succeeding fiscal years is as follows (all amounts are in thousands): 2006: $2,400, 2007: $2,100, 2008: $1,800, 2009: $1,700, 2010: $400.

Interest and Other Income

Interest and other income
for the three and six months ending June 30, 2006 increased to $1.1 million and $1.6 million, respectively, from $0.3 million and $0.4 million for the same periods in 2005. The increase is due to increased investment balances and interest rates
as well as the Company received proceeds related to a settlement of a legal matter.

Provision for Income Taxes

Income tax expense increased to $4.1 million, or 36% of pretax income, for the three months ended June 30, 2006, from $3.6 million, or 35%
of pretax income, in the same period of the prior year. For the six months ended June 30, 2006, income tax expense increased to $7.3 million, or



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Ventana Medical Systems, Inc.

Managements Discussion and Analysis of Financial Condition and Analysis

(Unaudited)



37% of pretax income, from $6.1 million, or 35% of pretax income, in the same period of the prior year. The increased effective tax rate in 2006 is primarily
attributable to the expiration of the United States research tax credit. If the United States research tax credit would not have expired, the Companys effective tax rate for the six months ended June 30, 2006 would have been approximately
33%. Under paragraph 20 of APB 28, any immediate impact as a result of a change in tax law  in this case, reinstatement of the credit  should be recognized in the interim period in which the law change is enacted. Therefore, if the
credit is reinstated after June 30, 2006, any catch-up adjustment will be recognized when the annual estimated tax rate is remeasured during the applicable reporting period.

Critical Accounting Policies and Estimates

Our
discussion of financial condition and results of operations relies on our condensed consolidated financial statements which are prepared based on certain critical accounting policies and require management to make judgments and estimates that are
subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that
these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in
our annual report on Form 10-K as filed with the Securities and Exchange Commission on February 21, 2006 are those that depend most heavily on these judgments and estimates. As of July 28, 2006, we have added an additional critical
accounting policy on share-based compensation. There have been no other material changes to any of the critical accounting policies contained therein.

Share-Based Compensation

As part of our adoption of SFAS No. 123R as of January 1, 2006, we were required to
recognize the fair value of share-based compensation awards as an expense. We apply the Black-Scholes option-pricing model in order to determine the fair value of stock options on the date of grant, and we apply judgment in estimating key
assumptions that are important elements in the model, such as the expected stock-price volatility, expected stock option life and expected forfeiture rates. Our estimates of these important assumptions are based on historical data and judgment
regarding market trends and factors.

If actual results are not consistent with our assumptions and judgments used in estimating these
factors, we may be required to record additional share-based compensation expense or income tax expense, which could be material to our results of operations.

Liquidity and Capital Resources

Cash and cash equivalents was $17.6 million at June 30, 2006. We have funded our
capital requirements since inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities was $14.6 million and $19.6 million for the six months ended June 30, 2006 and
2005, respectively. Net cash provided by operating activities exceeded net income in 2006 primarily due to the effect of depreciation, share-based compensation and amortization expense and increases in operating liabilities.



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Managements Discussion and Analysis of Financial Condition and Analysis

(Unaudited)



We use cash in our investing activities primarily to fund investments in property and equipment and
to purchase investments. Net cash used in investing activities for the six months ended June 30, 2006 and 2005 was $17.7 million and $34.2 million, respectively. At June 30, 2006, we have $40.0 million in short-term and long-term
investments that primarily consist of corporate and various government agency debt securities. We classify these investments as available-for-sale.

Net cash provided by financing activities for the six months ended June 30, 2006 and 2005 was $2.9 million and $5.5 million, respectively. The $2.9 million consisted primarily of proceeds from the exercise of stock options and excess
tax benefits associated with these exercises, offset by $13.4 million in stock repurchases. Prior to the adoption of SFAS No. 123R, all tax benefits associated with the exercise of stock options were included within cash flows from operating
activities. For the six months ended June 30, 2005, the $5.5 million consisted of proceeds from the exercise of stock options and employee stock purchases, reduced by stock repurchases.

We believe that our cash flow from operations together with our current cash reserves will be sufficient to fund our projected capital requirements
through 2006. In the event that additional capital is required, we will first access our short-term investments. In the event that additional capital is required, we may seek to raise such capital through public or private equity or debt financings.
Future capital funding transactions may result in dilution to current shareholders.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

For quantitative and qualitative disclosures about market risk affecting Ventana, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2005.



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|Item 4. | Controls and Procedures
|------- | -----------------------



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) required by Exchange Act Rules
13a-15(b) or 15d-15(b), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required
to be disclosed by the company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls
and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.



|(b) | Changes in Internal Controls
|--- | ----------------------------

There were no changes
in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.



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PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

VENTANA v. DAKOCYTOMATION, Civil
Action No. 04-1522, was filed in December 2004, in the U.S. District Court, District of Delaware, alleging infringement of U.S. Patent No. 6,827,901 (Automated Biological Reaction Apparatus) by the making, using, and selling of
the ARTISAN staining system. The suit seeks
injunctive relief including a preliminary injunction against the continued making, using, and selling of the instrument and unspecified damages. DakoCytomation filed an Answer to the Complaint in January 2005. A claim construction hearing and
mediation were conducted in December 2005. In May 2006, the parties entered into a confidential settlement agreement and a Joint Stipulation of Dismissal, with Prejudice, was filed, terminating the litigation.

CYTOLOGIX v. VENTANA, was served in April 2004, in the U.S. District Court, District of Delaware alleging infringement of U.S. Patent No. 6,541,261
B1. In July 2004, the case was transferred to the Federal District Court in Boston, Civil Action No. 04-11783 (RWZ). CytoLogix alleges the manufacture, use, and sale of our BENCHMARK XT slide staining system infringes the 261 patent. We
dispute all of these contentions and we will defend ourselves vigorously. CytoLogix has asked for an injunction, unspecified damages, and enhanced damages for willful infringement. Discovery is currently ongoing. CytoLogix has filed a Motion for
Summary Judgment of Infringement. Our opposition to the motion was filed April 2006 and the hearing on the matter was conducted in May 2006. In June 2006, the Court issued a decision denying CytoLogix motion. In July 2006, Cytologix filed a
Motion for Reconsideration of the Courts June 2006 decision, which was denied.

CYTOLOGIX v. VENTANA, Civil Action No. 00-12231 REK,
was filed in October 2000 in the U.S. District Court, Eastern District of Massachusetts. The complaint alleges, under state-law based unfair competition law, Ventana misappropriated CytoLogixs trade secrets related to individual slide heating
and incorporated such secrets into our DISCOVERY and BENCHMARK instruments. CytoLogix seeks assignment of our patent applications relating to individual slide heating claiming the idea, multiple damages (unspecified amount), and an injunction
against our further sales of DISCOVERY and BENCHMARK instruments. In February 2002, CytoLogix amended their complaint to add the related claims of attempted monopolization and monopolization under the Sherman Act, and various Lanham Act violations.
This matter was consolidated with CYTOLOGIX v. VENTANA, Civil Action No. 01-10178 REK (see below) for purposes of discovery and trial.

CYTOLOGIX v. VENTANA, Civil Action No. 01-10178 REK, was filed in January 2001 in the U.S. District Court, Eastern District of Massachusetts. This complaint alleges we infringed on CytoLogixs patent No. 6,180,061, titled
Moving Platform Slide Stainer with Heating Elements, and the Complaint was later amended to add U.S. Patent No. 6,183,693, issued in February 2001, titled Random Access Slide Stainer with Independent Slide Heating
Regulation, both assigned to CytoLogix. CytoLogix seeks treble damages for willful infringement (unspecified amount), and an injunction against our further manufacture and sale of DISCOVERY and BENCHMARK instruments.

At the December 2003, conclusion of the trial on the issues of patent infringement and trade secret misappropriation, the jury found Ventana liable for
infringement on the two patent cases (no willful infringement). On the trade secret issue, the jury determined we had not



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|Item 1. | Legal Proceedings  (continued)
|------- | -------------------------------



misappropriated any trade secrets. A permanent injunction was entered by the Court in April 2004, which prohibits us from making and selling the
DISCOVERY/BENCHMARK systems but does not prohibit their continued use by customers and will not prohibit us from servicing the instruments or supplying reagents to customers. In May 2004, we filed a Notice of Appeal to the Court of Appeals for the
Federal Circuit, on the patent infringement claims and CytoLogix, on the willfulness and misappropriation claims. The Appeals Court rendered its decision in September 2005 upholding the infringement finding on most of the claims of the 061 and
the 693 patents and remanded the case to District Court for further proceedings. On July 20, 2006, on a summary judgment motion brought by the Company, the Court dismissed the state unfair competition and Lanham Act claims but not the
Sherman Act claims of monopolization and attempted monopolization. As of this date, a trial has not been scheduled on the remaining issues of patent infringement damages and the Sherman Act claims. The Company has accrued a liability of $5 million
for potential patent infringement damages.

VISION BIOSYSTEMS, LTD v. VENTANA, Civil Action No. 03 CV 10391-GAO was filed in March
2003, in the U.S. District Court, Eastern District of Massachusetts. We were served with a Summons and Complaint by Vision BioSystems (Vision) for a Declaratory Judgment seeking a declaration of no infringement and invalidity of U.S. Patent
Nos. 5,355,439 and 6,352,861, both owned by us. In September 2004, the Judge denied Visions motion for Summary Judgment and ruled in favor of our cross-motion for Summary Judgment that Visions BOND system infringes claims 1 and 5 of
the 861 patent. The Court also dismissed the 439 patent from the case. Trial on the issues of patent invalidity and damages remain. This matter was consolidated with VENTANA v. VISION BIOSYSTEMS, LTD, Civil Action No. 05-10614 (see
below). Following the BioGenex claim construction ruling (see Ventana v. BioGenex, below) and entry of Judgment in that matter in October 2005, Vision filed a motion for Summary Judgment of Non-Infringement based upon collateral estoppel in
both cases. We have filed our opposition. The matter has been taken off the trial calendar and stayed pending further rulings by the Court.

VENTANA v. VISION BIOSYSTEMS, LTD., Civil Action No. 05-10614 GAO, was filed in March 2005, in the U.S. District Court, Eastern District of Massachusetts. This complaint alleges that Visions BOND OCR system infringes U.S. Patent No. 6,352,861. The suit seeks
injunctive relief including a preliminary injunction against the continued making, using and selling of the instrument and unspecified damages. This matter was consolidated with VISION BIOSYSTEMS, LTD v. VENTANA, Civil Action No. 03 CV
10391-GAO for trial (see above). The matter has been taken off the trial calendar and stayed pending the Courts rulings as described in the immediately preceding paragraph.

DIGENE CORPORATION v. VENTANA, Civil Action No. 01-752, was filed in November 2001, in the U.S. District Court, District of Delaware. This Complaint
alleges we infringe two U.S. patents held by Digene, U.S. 4,849,331 and 4,849,332, by activities relating to our INFORM® HPV Family 16 and Family 6 probe products. In November 2002, Digene filed a motion to amend its Complaint to add numerous causes of action related to
our September 2002 acquisition of Beckman Coulters (Beckman) HPV business and to add Beckman as a party. Digene seeks, among other remedies, an injunction against the sale of our INFORM HPV products, unspecified monetary damages,
cancellation of the Beckman HPV acquisition, and



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|Item 1. | Legal Proceedings  (continued)
|------- | -------------------------------



related claims. Several motions were filed by the parties, one of them being a motion to compel arbitration by Beckman and us. In May 2004, the Court ordered
arbitration to proceed as against Beckman, only, and stayed the proceedings pending in the District Court until the conclusion of the arbitration. The arbitration was conducted in March 2006 and post-hearing briefs were filed by the parties in April
2006. On July 27, 2006, the arbitration panel rendered its decision, which in our preliminary assessment is favorable to Beckman, and thus Ventana, on the central issue of arbitration.

VENTANA v. INSTITUT PASTEUR, ICC No. 12764/FM. In June 2003, Ventana and Beckman filed a request for arbitration with the International Chamber of
Commerce in Paris, France, to contest the purported termination by Institut Pasteur of the Sublicense Agreement acquired by us from Beckman in September 2002. The ICC hearing was conducted in September 2004. In a decision rendered in April 2005, the
ICC decided that Institut Pasteur did not have standing to terminate the Sublicense Agreement and that Ventana was a proper licensee and sub-licensee of the relevant HPV patents. The ICC tribunal further determined that Ventana was entitled to seek
damages in an amount to be quantified. The ICC tribunal resumed proceedings on this issue with the hearing on damages scheduled for July 2006. As of June 2006, the parties entered into a confidential Settlement Agreement which, inter alia, confirmed
the award of the ICC tribunal and provided for the recovery of a portion of Companys legal expenses. As a result, the parties have withdrawn all pending claims and terminated the ICC Arbitration and will terminate related French court
proceedings.

BIOGENEX LABORATORIES, INC. v. VENTANA, Case No. C05 00860 WDB, was filed in March 2005, in the U.S. District Court, Northern
District of California, San Jose Division. This Complaint alleges Ventana infringes U.S. Patent No. 6,632,598 held by BioGenex. BioGenex seeks, among other remedies, an injunction against our alleged infringement and unspecified monetary
damages. The matter has been joined with BIOGENEX LABORATORIES, INC. v. VENTANA, Case No. C03 03916 JF (see above). We filed a Motion to Dismiss the case with respect to the 452 patent. The motion was heard July 2005 and at the case management
conference held in August 2005, the Court dismissed the 452 claim. BioGenex infringement disclosures on the 598 were submitted in early September 2005 and we have filed a Summary Judgment of Non-infringement. The Summary Judgment motion
was heard in early 2006. No decision has been made by the Court on the Summary Judgment motion. Discovery is ongoing and no trial dates have been set.

For further discussion of legal proceedings affecting the Company, see Item 3, Legal Proceedings, of our Annual Report on Form 10-K for fiscal year ended December 31, 2005.

We record contingent liabilities resulting from claims against us when it is probable (as that word is defined in Statement of Financial Accounting
Standards No. 5) that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability.
Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. In all of
the cases noted where we are the defendant, we believe we have meritorious defenses to the claims in these actions and resolution of these matters will not have a material adverse effect on our business, financial condition, or results of operation;
however, the results of the proceedings are uncertain, and there can be no assurance to that effect.



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|Item 1A. | Risk Factors
|-------- | ------------

FACTORS THAT COULD AFFECT FUTURE RESULTS

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a
reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

We are engaged in
litigation, including patent litigation, and a court could determine that our products could infringe the intellectual property rights of others and require us to pay substantial damages or prohibit us from selling our products.

We are involved in numerous litigation proceedings with counterparties that allege we infringe certain patents held by them. For further discussion of
litigation matters, see Part II, Item 1, Legal Proceedings of this document. A court may determine that patents held by third parties are valid and infringed by us and we may be required to:



| |  |  | pay damages, including up to treble damages and the other partys attorneys fees, which may be substantial;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | cease the development, manufacture, use and sale of products that infringe the patent rights of others, through a court-imposed sanction called an injunction;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expend significant resources to redesign our technology so that it does not infringe others patent rights, or to develop or acquire non-infringing intellectual property, which
may not be possible;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | discontinue manufacturing or other processes incorporating infringing technology;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | pay royalties, including back royalties for products already sold; and/or
| | - |  | -------------------------------------------------------------------------



| |  |  | obtain licenses to the infringed intellectual property, which many not be available to us on acceptable terms, or at all.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

Even if infringement claims against us are without merit, defending a lawsuit takes significant time, is expensive, and may divert managements
attention from other business concerns. Any significant adverse ruling in one of our litigation matters may have a negative affect on our operations and cause our stock price to decline.

It is possible that we may be forced to pay damages to CytoLogix which exceed the amounts we have reserved.

We have
been involved in litigation with CytoLogix, Inc., pursuant to which a jury determined that we infringed certain CytoLogix patents  see Part II, Item 1, Legal Proceedings. The patents in question relate to prior versions of our BENCHMARK
and DISCOVERY instruments and do not apply to the current versions of the BENCHMARK XT / LT and DISCOVERY XT instruments. In September 2005, the Court of Appeals upheld certain of the jury findings of patent infringement, and the case is expected to
proceed to trial on the issue of damages. We have accrued a liability of $5.0 million in this regard. At trial, CytoLogix may advance arguments for damages several times higher than the amount we have accrued. In view of the complexity of this case
and the inherent uncertainty of patent infringement litigation, there is a possibility the amount of damages paid to CytoLogix could be substantially different from the $5.0 million we have accrued and if substantial, could cause the price of our
stock to decline.



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|Item 1A. | Risk Factors  (continued)
|-------- | --------------------------



Our future growth depends on our ability to develop and successfully introduce new products, product extensions
and improvements to existing products to address unmet patient and market needs.

Our future growth is dependent upon, among other
factors, our ability to develop, obtain regulatory approval for, manufacture, sell and achieve market acceptance of new products, product extensions and improvements to our existing products. The extent of, and rate at which, market acceptance and
penetration are achieved by future products is a function of many variables. These variables include price, safety, efficacy, reliability, marketing and sales efforts, the availability of third-party reimbursement for our new products, the existence
of competing products and general economic conditions affecting purchasing patterns. Our ability to market and sell new products, product extensions and improvements to our existing products may also be subject to government regulation, including
clearance/approval by the FDA and foreign government agencies. Any failure in our ability to successfully develop, obtain regulatory approval for, manufacture, sell and achieve market acceptance of our new products, product extensions or
improvements to our existing products could have a material adverse effect on our operating results and our business.

We cannot assure you that we will
be able to fund our future capital requirements through internal sources or from other sources.

We anticipate our existing capital
resources and borrowing capacity will be adequate to satisfy our capital requirements for the next 12 months. Our future capital requirements will depend on many factors including:



| |  |  | possible acquisitions of complementary businesses, products, or technologies;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the extent that our products gain market acceptance;
| | - |  | ----------------------------------------------------



| |  |  | the mix of instruments placed through direct sales, rental, or through our PEP program;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the progression of our product development programs;
| | - |  | ----------------------------------------------------



| |  |  | competing technological and market developments;
| | - |  | ------------------------------------------------



| |  |  | expansion of our sales and marketing activities;
| | - |  | ------------------------------------------------



| |  |  | the cost of manufacturing scale-up activities; and
| | - |  | --------------------------------------------------



| |  |  | our ability to sustain profitability with the uncertain timing of regulatory approvals.
| | - |  | ---------------------------------------------------------------------------------------

We may require additional capital resources and cannot assure you that capital will be available to the extent required, on terms acceptable to us, or at all. In the event that we acquire complementary businesses,
products, or technologies we may have to issue debt or raise additional capital in the equity markets. Any such future capital requirements that results in the issuance of equity securities would dilute the interests of our existing stockholders.



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|Item 1A. | Risk Factors  (continued)
|-------- | --------------------------



If we make acquisitions or divestitures, we could encounter difficulties that harm our business.

We may acquire companies, products or technologies that we believe to be complementary to the present or future direction of our business. If we engage
in such acquisitions, we may have difficulty integrating the acquired personnel, financials, operations, products or technologies. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees,
increase our expenses, subject us to liabilities, and increase our risk of litigation which could harm our business. If we use cash to acquire companies, products or technologies, it may divert resources available for other purposes. If we use our
common stock to acquire companies, products or technologies, it may substantially dilute the percentage of the company held by stockholders who own securities prior to the acquisition.

We are subject to a complex system of domestic and foreign taxation and unanticipated changes in our tax rates or exposure to additional tax liabilities could affect our profitability.

We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject
to the allocation of expenses in different jurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, in the valuation of deferred tax assets and liabilities
or in tax laws, or by material audit assessments, which could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable
income in the United States. In addition, the amount of tax we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability. Further tax law changes in jurisdictions
in which we conduct business could materially affect our profitability.

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 our reagents, we are required to adhere to Quality System regulations, which require us to 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. If we are unable to pass these inspections or maintain compliance, our product sales and profitability could suffer.

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 affected.

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

Sales of our products in the European Union or EU are subject to
strict regulatory requirements, and approval is never certain. All of our products must be in compliance with the In VitroDiagnostics Directive and bear the CE mark before being imported for sale in the EU. The CE mark is a
symbol



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|Item 1A. | Risk Factors  (continued)
|-------- | --------------------------



indicating the device conforms to the essential requirements of the applicable directive and can be commercially distributed throughout the EU. The In
VitroDiagnostic 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 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.

Further, we ship our products into European markets, which are also subject to governmental environmental regulations such as the Restriction of
Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) which will be effective July 1, 2006, and the Directive on Waste Electrical and Electronic Equipment. These directives focus on limiting the amounts of certain
elements, such as lead, in electrical devices, and providing for the authorized disposal of the electrical devices and their components. We cannot assure you that compliance with these regulations will not have a material adverse effect on our
operating results and our business.

Clinical Laboratory Improvement Act or CLIA regulations could harm our business by limiting the potential market
for our products.

Customers using our products for clinical use in the United States may be regulated under the 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.

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 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 proves inadequate for use in our instruments, our ability to make
instruments in a timely fashion could be impaired, and our results of operations would suffer.



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|Item 1A. | Risk Factors  (continued)
|-------- | --------------------------



We could bring litigation to enforce our intellectual property rights, which might 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:



| |  |  | our patents and pending patent applications use technology that we invented first;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | we were the first to file patent applications for these inventions;
| | - |  | -------------------------------------------------------------------



| |  |  | others will not independently develop similar or alternative technologies or duplicate our technologies;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | any of our pending patent applications will result in issued patents; or
| | - |  | ------------------------------------------------------------------------



| |  |  | any patents issued to us will provide a basis for commercially viable products, will provide us with any competitive advantages, or will not face third-party challenges or be the
subject of further proceedings limiting their scope or resulting in their invalidation.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may become involved in
interference proceedings in the U.S. Patent and Trademark Office to determine the priority of our inventions. We also could 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 have serious adverse effects on our business and could affect
our profitability.

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 contractual 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, competitors may independently
develop trade secrets and proprietary technology similar to ours. We may not be able to maintain the confidentiality of information.

Recent legislation
requires us to undertake an annual evaluation of our internal control over financial reporting that may identify internal control weaknesses requiring remediation that could harm our reputation or subject us to investigation and sanctions by
regulatory authorities.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually assess, test,
and evaluate the design and operating effectiveness of our internal control over financial reporting, or ICFR. While we have concluded that our ICFR was effective as of December 31, 2005, we cannot predict the outcome of our testing in future
periods. If we conclude in future periods that our ICFR is not effective, we may be required to change our ICFR to remediate deficiencies, which could result in lost investor confidence in the reliability of our financial statements, and may subject
us to investigation and/or sanctions, by regulatory authorities. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented, or amended from time to time, we may not be able to ensure we
can conclude on an ongoing basis that we have effective controls over financial reporting in accordance with Section 404, and our independent auditors may not be able to render the required attestation concerning our assessment and the
effectiveness of the internal controls over financial reporting. If we fail to maintain an effective internal control environment or our independent auditors are unable to render the required attestation, it could have a material adverse effect on
investor confidence in our reported financial information. Any such events could adversely affect our financial results and/or the market price of our common stock.



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|Item 1A. | Risk Factors  (continued)
|-------- | --------------------------



Recent regulations related to equity compensation will affect our earnings and could impact our ability to attract
and retain key personnel.

Since our inception, we have used stock options and other long-term equity incentives as a fundamental
component of our employee compensation packages and have accounted for them using the intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees.We believe that stock options and other long-term equity incentives
directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with us. In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payments, or SFAS
No. 123R, which changed U.S. GAAP in such a way to require us to record a charge to earnings for the fair value of employee stock option grants and other share based compensation beginning in the first quarter of 2006. This regulation will
negatively impact our earnings for those share based awards that vest after December 31, 2005.

In addition, regulations implemented
by NASDAQ requiring shareholder approval for all stock option plans could make it more difficult for us to grant equity-based awards to employees in the future. To the extent that these or other new regulations make it more difficult or expensive to
grant options to employees, we may incur compensation costs, productivity losses, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our
business.



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|Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------

On September 8, 1998, our Board of Directors authorized us to repurchase up to 1.5 million shares of our common stock in the open market or in privately negotiated transactions. In May 2004, our Board of
Directors approved the repurchase of another 2.0 million shares and in May 2006, our Board of Directors approved the repurchase of an additional 2.0 million shares. During the six months ended June 30, 2006, we re-purchased 365,820 of
common stock for $13.4 million. The repurchased shares were returned to the status of authorized but un-issued shares. The timing and amount of any future repurchases will depend on market conditions and corporate considerations.

Stock Repurchases During the Second Quarter 2006



|                               |  |                       |  |                             |  |                                                                              |  |                                                                             
|------------------------------ |  | --------------------- |  | --------------------------- |  | ---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------
|Period                         |  | Total Numberof Shares |  | Average PricePaid Per Share |  | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |  | MaximumNumber of Sharesthat may yet
beRepurchased Underthe Plans or Programs
|April 1, 2006 - April 30, 2006 |  |                      |  |                            |  |                                                                             |  | 1,011,880                                                                   
|May 1 - May 31, 2006           |  |                      |  |                            |  |                                                                             |  | 3,011,880                                                                   
|June 1 - June 30, 2006         |  |                      |  |                            |  |                                                                             |  | 3,011,880                                                                   



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Ventana Medical Systems, Inc.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable.



31



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##### Table of Contents

Ventana Medical Systems, Inc.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

The Company distributed its Definitive Proxy Statement and Annual Report to Stockholders on or about April 3, 2006 to each stockholder of record on March 13, 2006, for its Annual Meeting of Stockholders held May 11, 2006 at
10:00 a.m., local time (the Annual Meeting). At the Companys Annual Meeting, the Stockholders were asked to consider two proposals.

The first proposal was the ratification of the appointment of the Companys independent registered public accounting firm (Ernst & Young LLP) for the fiscal year ending December 31, 2006. The
results were:



|             |  |           
|------------ |  | ----------
|For:         |  | 34,229,584
|Against:     |  | 103,351   
|Abstentions: |  | 1,501     

The second proposal involved the election of directors. The existing Board of Directors selected
two nominees: Mark Miller and James Weersing, who ran unopposed. The results were:



|               |  |            |  |                         
|-------------- |  | ---------- |  | ------------------------
|               |  | Votes For  |  | Votes Againstor Withheld
|Mark Miller    |  | 34,316,839 |  | 17,597                  
|James Weersing |  | 34,294,884 |  | 39,552                  



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Ventana Medical Systems, Inc.



|Item 5. | Other Information
|------- | -----------------

Not Applicable.



|Item 6. | Exhibits
|------- | --------

See Exhibits Index



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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.



|                    |  |  |  |                               |  |                     |  |                                                             
|------------------- |  |  |  | ----------------------------- |  | ------------------- |  | ------------------------------------------------------------
|                    |  |  |  | Ventana Medical Systems, Inc.
|                    |  |  | 
|Date: July 28, 2006 |  |  |  | By:                           |  | /s/ Nicholas Malden
|                    |  |  |  |                               |  |                     |  | Nicholas Malden                                             
|                    |  |  |  |                               |  |                     |  | Senior Vice President, Chief Financial Officer and
Secretary



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##### Table of Contents

EXHIBITS



|              |  |                                                                        |  |        
|------------- |  | ---------------------------------------------------------------------- |  | -------
|ExhibitNumber |  | Description                                                            |  | Notes  
|3.1           |  | Restated Certificate of Incorporation or Registrant                    |  | (1)    
|              |  |                                                                       
|3.2           |  | Bylaws of Registrant                                                   |  | (1)    
|              |  |                                                                       
|4.1           |  | Specimen Common Stock Certificate                                      |  | (1)    
|              |  |                                                                       
|10.1          |  | Form of Indemnification Agreement for directors and officers           |  | (1)    
|              |  |                                                                       
|10.2          |  | 1988 Stock Option Plan and forms of agreements thereunder              |  | (1)    
|              |  |                                                                       
|10.3          |  | 1996 Stock Option Plan and forms of agreements thereunder              |  | (1)    
|              |  |                                                                       
|10.4          |  | 1996 Employee Stock Purchase Plan                                      |  | (1)    
|              |  |                                                                       
|10.5          |  | 1996 Directors Option Plan                                             |  | (1)    
|              |  |                                                                       
|10.6          |  | 1998 Nonstatutory Stock Option Plan and forms of agreements thereunder |  | (2),(3)
|              |  |                                                                       
|10.7          |  | 2001 Outside Director Stock Option Plan                                |  | (4)    
|              |  |                                                                       
|10.8          |  | 2005 Equity Incentive Plan and forms of agreements thereunder          |  | (5)    
|              |  |                                                                       
|10.9          |  | 2005 Employee Stock Purchase Plan and forms of agreements thereunder   |  | (5)    
|              |  |                                                                       
|31.1          |  | Certification of Chief Executive Officer                               |  |        
|              |  |                                                                       
|31.2          |  | Certification of Chief Financial Officer                               |  |        
|              |  |                                                                       
|32.1          |  | Section 1350 Certification of Chief Executive Officer                  |  |        
|              |  |                                                                       
|32.2          |  | Section 1350 Certification of Chief Financial Officer                  |  |        



|(1) | Filed with the Registration Statement on Form S-l (Commission File No. 333-4461), declared effective by the Commission July 26, 1996.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



|(2) | Form of agreements filed with the Registration Statement on Form S-8 (Commission File No. 333-92883), filed with the Commission on December 16, 1999.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Form of 1998 Nonstatutory Stock Option Plan, as amended, agreements filed with the Registration Statement on Form S-8 (Commission File No. 333-105976), filed with the
Commission on June 10, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Filed with the Registration Statement on Form S-8 (Commission File No. 333-69658), filed with the Commission on September 19, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



|(5) | Filed with the Definitive Proxy Statement on Schedule 14A (Commission File No. 000-20931) on March 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------------



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