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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2001

Commission File No. 000-20931

VENTANA MEDICAL SYSTEMS, INC.

(Exact name of small business issuer as
specified in its charter)


|                                          |  |                                   
|----------------------------------------- |  | ----------------------------------
|Delaware                                  |  | 94-2976937                        
|(State of Incorporation)                  |  | (IRS Employer
	Identification No.)
|                                         
|1910 Innovation Park Drive
	Tucson, AZ    |  | 85737                             
|(Address of principal executive
	offices) |  | (Zip Code)                        

Registrants telephone number, including
area code:

(520) 887-2155


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

None


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

Common Stock, $.001 par value


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be
contained, to the best of registrants knowledge, in
definitive proxy or other information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.  o

The aggregate value of voting stock held by
non-affiliates of the Registrant was approximately $311,139,348
based upon the average of the high and low prices of the
Registrants Common Stock reported for such date on the
Nasdaq National Market. Shares of Common Stock have been
excluded in that such persons may be deemed to be affiliates.
The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of
February 28, 2002, the Registrant had outstanding
16,234,769 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Not applicable



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PART I

This report on Form 10-K may contain
projections, estimates and other forward-looking statements that
involve a number of risks and uncertainties. For a discussion of
factors that may affect the outcome projected in such
statements, see Cautionary Factors That May Affect Future
Results, beginning on page 12. While this outlook
represents our current judgment on the future direction of our
business, such risks could cause actual results to differ
materially from our future performance listed below. We
undertake no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events
and circumstances arising after the date of this report on
Form 10-K.

For our current and historical financial
positions, see Selected Financial Data, beginning on
page 24.

Item 1.     Description
of Business

Summary of Our Business

Unless the context requires otherwise, all
references to we, our or us refer to Ventana Medical Systems,
Inc., a corporation originally incorporated in the state of
Delaware in 1993 and its six subsidiaries:



| |   |                                    
| | - | -----------------------------------
| |  | Ventana Medical Systems, GmbH      
|
| |  | Ventana Medical Systems, Japan K.K.
|
| |  | Ventana Medical Systems, Pty. Ltd. 
|
| |  | Ventana Medical Systems, S.A.      
|
| |  | BioTek Solutions, Inc.             
|
| |  | BioTechnology Tools, Inc.          

We develop, manufacture and market instruments
and consumables that are used to automate diagnostic and drug
discovery procedures in clinical histology laboratories and drug
discovery laboratories worldwide. Our instrument-reagent systems
are designed to prepare and to stain patient tissue or cells
mounted on a microscope slide for examination by a pathologist.
The consumable products we market that are required to operate
our instruments include reagents and other accessories. Our
systems are designed to provide users with automated
high-quality and consistent results with high throughput and
significant labor savings. Our clinical products are used by
anatomical pathology labs, which are labs that focus on the
analysis of human tissue, to assist anatomical pathologists in
the diagnosis of cancer and infectious diseases. Most anatomical
pathology labs are hospital-based, although some independent
reference labs offer histology services. Our drug discovery
products are used by research labs at large pharmaceutical and
biotechnology companies and medical research centers to assist
in the discovery of new drug targets. Our instruments have been
placed in the majority of the top fifty U.S. cancer centers,
which are recognized as leaders in cancer research and
treatment. These include Johns Hopkins Hospital, the Mayo
Clinic, Memorial Sloan-Kettering Cancer Center and M.D. Anderson
Medical Center.

The anatomical pathology lab is made up of
Histology and Cytology. Histology tests performed on our
instruments are used by pathologists and oncologists to assist
in the diagnosis of cancer and infectious diseases and to select
an appropriate therapy. According to the National Cancer
Institute, cancer is the second leading cause of death in the
United States. Mortality rates are improved by early detection
and the selection of appropriate therapies. Based upon our
modeling of the market, we estimate that anatomical pathology
labs worldwide purchase in excess of $1.0 billion in
instruments and consumables on an annual basis. In addition, the
pharmaceutical and biotechnology companies involved in analyzing
the human genome and proteome to accelerate new drug discovery
also benefit from automating the analysis of human and animal
tissue and cells.

Industry Overview

We target our instrument-reagent systems at two
markets: the anatomical pathology lab (Histology and Cytology)
and the drug discovery lab. We currently derive the majority of
our revenues and profits from

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ongoing sales of consumables and instruments to
histology labs, although we expect sales to labs engaged in drug
research to grow over time.


Histology

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accessioning
	Tissue is entered into the hospital information system for
	medical records and billing purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Grossing
	Following accessioning, the gross tissue specimen is examined by
	a pathologist. Several tissue samples are then cut from the
	gross specimen for further examination and placed in small
	plastic cassettes.                                                                                                                                                                                                                                                                                                                                               
|
| |  | Tissue
	Processing Cassettes from
	gross specimens are placed in an instrument called a tissue
	processor. Tissue processors preserve the tissue through the use
	of a fixative and infusing the tissue with paraffin so it can be
	more readily cut or sectioned.                                                                                                                                                                                                                                                                                                    
|
| |  | Embedding
	Processed tissue is removed from each cassette and embedded in a
	paraffin block to produce a tissue block of uniform size.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Sectioning
	Each tissue block is next transferred to the sectioning area of
	the lab where very thin sections are cut on a microtome and
	mounted on a microscope slide.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Hemotoxlyn and Eosin, or H&E,
	Staining Each microscope
	slide is then stained with two basic stains, Hemotoxlyn and
	Eosin, that help the pathologist identify each cells
	nucleus, cytoplasm and membrane.                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Microscopic
	Examination Finally, each
	H&E stained slide is examined by a pathologist using a
	microscope to determine if the tissue or cells are healthy or
	diseased. In particular, the pathologist is looking for the
	presence of microorganisms that could indicate an infectious
	disease or deformed cells that could indicate the presence of
	cancer. In cases where an H&E stained slide appears to have
	abnormalities, the pathologist performing the initial
	examination of a patient specimen may request that the slide
	undergo additional testing.

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



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Immunohistochemistry, or IHC, stains are used
	primarily by pathologists and oncologists assisting in the
	diagnosis of cancer and the determination of different treatment
	options. IHC staining is used to test for the presence or over
	expression of the proteins involved in cancer.
|
| |  | Special stains are used primarily to assist in
	the diagnosis of infectious diseases, although they can also be
	used to assist in cancer diagnosis. Special stains are chemical
	dye stains that localize to microorganisms found in tissue and
	to specific tissue types.                
|
| |  | In situ hybridization, or ISH, stains can be used
	to assist in the diagnosis of infectious diseases or genetic
	mutations that are usually associated with the presence of
	cancer.                                                                                                       

3



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

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

IHC Staining.We
estimate that there are in excess of 30 million slides
stained with IHC annually on a worldwide basis. The majority of
these slides are stained in the approximately 6,000
hospital-based histology labs. However, in North America and
Japan some hospitals send their IHC slides to regional reference
labs for staining rather than performing the work themselves. We
estimate that the number of IHC slides processed all across labs
in the U.S. is growing about 6%  8% annually due to:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | the increasing acceptance of the value of the
	technology by pathologists and oncologists;              
|
| |  | the increasing incidence of cancer as the
	population ages increases histology producing surgical cases;
|
| |  | the emergence of new stains that may influence
	therapy choices;                                        
|
| |  | a shrinking qualified labor pool; and                                                                   
|
| |  | the shifting of the market from manual to
	automated IHC slide processing.                              

We estimate that approximately 50% of the IHC
slides processed in North America and Europe are stained on
automated instruments. Most of the rest of the world is using
manual staining, a substantial growth opportunity as these users
convert to automated systems.

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

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

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

Her-2/neu testing.Her-2 is tested either by protein
overexpression or gene amplification. Whether in biopsied tissue
or in cytological fluid collected by ductal lavage, Her-2/neu
FISH testing is critical in determining the correct therapy for
a patient. We are the only company to offer a complete, fully
automated Her-2 triage method which incorporates both an FDA
approved protein assay, Pathway, and a HER-2 FISH assay, INFORM
Her-2/neu.

Cytology

Cytology is the microscopic study of cell samples
from various human body sites for the detection, diagnosis, and
management of human disease. In cytology labs, cytopathologists
seek to identify cells, which are either living (phase
microscopy) or dead (fixed) and prepared for viewing
(embedded, sectioned, and stained) on microscopes. The
cytotechnologist microscopically examines the morphologic
features of the cells, which are gathered by brush, lavage,
scraping or aspirate, relates these findings to the
patients clinical history, and renders a cytological
diagnosis. The pathologist then reviews all the findings and
reports out abnormal cases and all non-gynecologic cases. The
cytopathologists finding is used to aid the clinician with
patient

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diagnosis, assist with patient management and
provide a means to follow the progress or regression of a
particular disease.


Tests, which can assist the pathologist in
assessing patient samples, include special stains,
immunohistochemistry or in situ hybridization.

The U.S. Department of Health and Human Services
estimates that approximately 26.5 million of the
53 million sexually active women are infected with Human
Papillomavirus (HPV) with 1.75 million displaying evidence
of infection. Although most HPV is categorized as low patient
risk and does not progress to cancer, more than 25% (883,000
cases) of all HPV cases are high risk, which is responsible for
more than 95% of all cervical cancer cases. Our INFORM HPV in
situassays for liquid-based cytological specimens and
tissue specimens are used to determine if a patient is HPV
positive and if the infection is a high or low risk viral type.
These tests are fully automated on the BenchMark slide staining
system.

Drug
Research

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

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

Proteomics is the analysis of proteins encoded by
active genes  the direct cause of disease in the
body. It is believed that there are many more proteins in the
human body than genes. The human proteome is years away from
being decoded, but this task will be simplified, as the
functions of the estimated 30,000 human genes are uncovered. We
believe proteomics will likely increase in importance in
worldwide drug discovery labs.

Business Strategy

Our objectives are to: (1) expand our
worldwide leadership position in automating anatomical pathology
labs and (2) leverage the core technologies we have
developed for the anatomical pathology lab into drug discovery
labs. Our business strategies to achieve these objectives are as
follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide high-quality, innovative and flexible
	automation systems for tissue analysis.Our position as a leader in the
	histology lab automation market has been built on innovative
	automated instrument-reagent systems. These systems have been
	designed as broad enabling platforms that permit customers to
	easily expand their test menu and provide superior patient care
	with higher quality, consistent and timely tissue staining. Labs
	also benefit by increasing output and reducing labor costs
	through automation and walk-away convenience.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide high throughput, value-added testing
	systems for drug discovery applications.We believe the same strategies that we
	are using in the anatomical pathology market can be applied to
	the drug discovery marketplace through our product introductions.                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Maximize domestic and worldwide placement of
	automated systems in anatomical pathology and drug discovery
	laboratories.Automating manual work
	cells provides a competitive advantage by establishing a large
	base of instruments that other market entrants must overcome. We
	believe that our worldwide installed base of IHC, special stains
	and ISH instruments is larger than the instrument base of all of
	our competitors combined. The size and quality of our direct
	sales coverage permits us to maximize instrument placements and
	revenue stream per placement.                                                                                        
|
| |  | Ensure a steady sales stream of consumables
	for use in these instruments.Each
	IHC, special stains and ISH instrument placed provides a
	recurring revenue stream from reagents and other consumable
	supplies. Our strategy is to increase this revenue stream by
	automating manual lab activities and selling all the reagents
	required. In addition, we intend to continue expanding our menu
	of automated tests, thereby increasing the consumable revenue
	from each instrument placement. Typically, our instruments are
	closed systems that can only be operated with Ventana-produced
	consumables.                                                           
|
| |  | Continue on-going technological development
	and improvement of our instrumentation and reagents.Unlike most of our competitors who
	rely on outside design firms for the creation of their
	instrumentation, we design our products internally. We are
	designing new instrumentation, enhancing existing instruments
	and developing reagents for current and future customer
	applications. Our engineering, marketing and reagent research
	and development organizations work closely with their
	manufacturing counterparts on all new products to ensure cost
	effective production. These designs are protected with an
	aggressive intellectual property strategy.

History of the Company

In 1985, Ventana Medical Systems was incorporated
in California by a pathologist at the University of Arizona
Medical Center interested in the automation of IHC staining.
After obtaining venture capital funding, we launched our first
instrument-reagent system in 1991 before reincorporating in
Delaware in 1993. We have since launched numerous new products
using internally developed and acquired technologies.

Our Products

Our product offerings are summarized as follows:

Tissue
Processors

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

Staining
Systems and Associated Reagents

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



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | improved reliability, reproducibility and
	consistency of test results;       
|
| |  | faster turnaround time for test results;                                      
|
| |  | increased test throughput for the testing;                                    
|
| |  | reduced dependence on skilled technicians;                                    
|
| |  | ability to obtain maximum clinical information
	from minimally-sized biopsies;
|
| |  | ability to document processing protocols; and                                 
|
| |  | standardization of slide preparation among
	institutions.                     

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

IHC Staining.Our
first product launch in 1991 was an instrument-reagent system to
automate IHC staining. Prior to the introduction of this system,
all IHC staining was performed manually or with low-levels of
automation. In early 1996, we acquired BioTek Solutions, Inc.
and now enjoy a strong market share position in the
worldwide-automated IHC staining market.

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

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

Our NexES IHC staining system continues to be a
key tool in supporting the automation of mid-sized and smaller
volume customer accounts in IHC.

Our premier IHC system, the BenchMark, launched
in late 2000, has revolutionized the industry. It automates all
the steps in the IHC workcell with its baking through staining
(BTS) technology. This automation saves up to 90 minutes of
manual work required prior to an IHC run and allows walk-away
convenience. Additionally, this system will perform IHC and,
more complex, ISH stains. The BenchMark uses a barcode system
and is designed to run multiple tests on a single biopsy with
rapid turnaround time and without manual intervention. The
barcode, affixed to each slide, identifies the slide and testing
procedures to be performed. The BenchMark scans the slide,
dispenses the reagents and processes each slide with the unique
steps. Our software controls all aspects of the test procedures.
The dispensing, incubating (i.e. temperature and time control)
and washing performed using proprietary chemical/mechanical
methods are critical to obtaining precise, sensitive and rapid
test results. This makes the system reliable and easy to use,
reducing the slide processing time to less than two hours.

The BenchMark has a modular design using an
external personal computer operating in a Windows environment.
Each module holds up to 20 slides in the reaction chamber and 25
reagents on its reagent carousel. The modular design of the
BenchMark permits the linkage of up to eight BenchMark IHC/ ISH
or NexES Special Stains modules, creating the capacity to
process up to 160 slides. Therefore, the BenchMark offers
customers flexibility in meeting their test volume requirements.

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

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

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

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

The Special Stains module can be operated with
the same control computer that operates our NexES IHC and
BenchMark modules, with up to eight complete modules operated on
a system. This flexibility enables customers to design a
combination special stains/ IHC system that meets their specific
needs and provides flexibility for future lab growth. Presently,
our fourteen special stains kits account for 90% of all special
stains testing performed in histology labs. We plan to expand
our test menu so that our system can meet the special staining
needs of more than 95% of most laboratories. All of our kits are
developed using proprietary protocols.

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

In December 1999, we launched the Discovery
system for ISH and IHC staining in drug discovery labs. This
system can function as a high throughput processor of DNA
microarrays, RNA microarrays and tissue stains used to validate
drug leads. We anticipate this system will be sold primarily to
drug research companies.

Like the BenchMark system, the Discovery system
incorporates a number of important technological advances over
our earlier NexES IHC and Special Stains systems. In
contrast to the NexES IHC and Special Stains modules that heat
the entire reaction chamber to a pre-set temperature and
maintain that temperature during the entire processing cycle,
the Discovery system can accurately control the reaction
temperature for each slide. Individual slide heaters permit an
optimal protocol for each test and allow for the denaturing of
DNA, a critical step for detecting genetic abnormalities. We
have filed patents to protect inventions incorporated into the
Discovery system.

Our Discovery system is currently being used and
tested for use in the following drug discovery applications:
message expression analysis in tissue sections, protein
expression analysis in tissue and the hybridization of DNA and
RNA microarrays.

Research and Development

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

Our staff of 82 employees performs the majority
of our research and development activities. These efforts are
supplemented by consulting services and assistance from
scientific advisors. We spent $14.9 million in 2001, $11.1
million in 2000 and $7.1 million in 1999 on research and
development.

Instrumentation
Development Projects

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

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Reagent
Development Projects

Our reagent development is divided into five
principal areas:



| |   |                                            
| | - | -------------------------------------------
| |  | new antibody development;                  
|
| |  | detection chemistries;                     
|
| |  | Special Stain chemistries;                 
|
| |  | ISH clinical chemistries for BenchMark; and
|
| |  | ISH and IHC applications for the Discovery.

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

Customers

Our customers consist of hospital-based histology
labs, independent reference labs and drug discovery of large
pharmaceutical companies, biotechnology companies, government
labs and medical research centers. None of our customers
accounted for more than 5% of our consolidated revenues in 2001,
2000 or 1999.

Patents and Proprietary Rights

It is our internal strategy to patent key
technologies in the automation of and chemistry of analyzing
cells and tissues on microscope slides. Presently, we own
thirty-four active United States patents and numerous
corresponding foreign patents, and have filed patent
applications in the U.S. and abroad to cover our existing and
future products. Two U.S. patents were issued in 2001. These two
new patents complement our access to key technology through
exclusive and nonexclusive licenses, manufacturing supply
contracts and research support agreements. The expiration dates
of our issued United States patents range from September 2005 to
February 2018.

Our patent portfolio is divided into two
segments: instruments and reagents.

Instrument patents and applications include:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | three U.S. patents directed to the Liquid Cover
	Slip technology;                                                                                                  
|
| |  | the suite of patents related to the TechMate
	instrument that covers all aspects of the instrument including
	the algorithm for the interleaving of steps of a run;
|
| |  | three separate U.S. patents on reagent dispenser
	designs;                                                                                                         
|
| |  | five patents on apparatus for automated IHC
	tissue staining; and                                                                                                  
|
| |  | one patent on independently heatable slide
	staining apparatus.                                                                                                    

Reagent patents and applications include:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | tissue fixatives;                                                                                                                             
|
| |  | hybridization methods and compositions;                                                                                                       
|
| |  | IHC staining methods and reagents;                                                                                                            
|
| |  | biotin/avidin formulations and methods; and                                                                                                   
|
| |  | compositions and image based methods for manual
	and automated assessment of various types of cancer including
	breast, leukemia and prostate.

9



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##### 



Sales and Marketing

Our sales and marketing strategy is to provide
superior levels of customer service. In our major markets,
including North America, Japan and Europe, we achieve this goal
by selling our products directly to our customers and
controlling our telephone and field service forces. Our direct
sales force, believed to be the worlds largest covering
histology labs, is organized by region in North America, with
the exception of national and key accounts, and by country
internationally. In smaller markets, we rely on strategic
distributors to sell and service our products. Our efforts have
led to high levels of customer satisfaction and rapid response
to customer feedback.

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

Our worldwide marketing team is responsible for
identifying new product opportunities, working with R&D on
product development and driving worldwide revenues through
marketing support. In 2001, we established a cytology group to
drive market penetration of our INFORM HPV ASR product and to
develop a branded presence in the womens health field.

Competition

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

Tissue
Processor

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

Histology

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

Currently, direct competition comes from four
competitors selling instrument-reagent IHC staining systems.
These competitors are Dako, a privately held Danish company that
dominates the market for manual IHC reagents; BioGenex
Laboratories, Inc., a privately held U.S. company marketing
instruments with a reagent stream; LabVision Corporation, a
subsidiary of the publicly traded company, Apogent Technologies,
Inc., that supplies Dako with instruments, and markets its
instruments through distributors and direct salesforce; and
Diagnostics Products Corp. that markets high volume IHC staining
systems in Europe.

Two automated special stains systems compete with
our Special Stains module. CytoLogix Corp., a venture-backed
U.S. company, markets the Artisan Staining System. BioGenex also
markets special stains systems known as Optimax. We believe our
initial success in the special stains market will attract
additional competitors.

10



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##### 



Cytology

The current HPV cytology market is dominated by
Digene Corporation with their FDA approved, Hybrid Capture II
liquid based prep assay holding more than 95% of the HPV testing
market.

Drug
Discovery

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

Manufacturing

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

Medical device manufacturing operations are
required to follow the FDA Quality Systems Regulations. These
regulations subject our facilities to inspections, verifying the
compliance of requirements and requiring the maintenance of
documentation and controls for our manufacturing and quality
measures. We intend to implement manufacturing policies and
procedures enabling receipt of ISO certification 
global standards for the design of the manufacturing and quality
assurance processes.

Contracts

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

Employees

As of December 31, 2001, we had 543
full-time employees, including our 10 officers.

11



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##### 



Cautionary Factors That May Affect Future
Results



|                                                                                                                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Our inability to protect our patents and other
	proprietary rights could adversely affect our business                                                                                          |  | Our inability to protect our patents and other
	proprietary rights could adversely affect our business. We
	currently hold 34 United States patents, numerous corresponding
	foreign patents and we have filed additional United States and
	foreign patent applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                               
| we now own a number of U.S.
	patents and have applied for others, but cannot assure that new
	patents will be issued                                                                          |  | We cannot assure that our patent applications
	will result in the issuance of patents or that any issued
	patents will provide adequate protection against competitive
	technologies or will be held valid if challenged. Others may
	independently develop products or processes similar to ours or
	design around our patents, effectively circumventing them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                               
| we cannot be certain that we are
	the first to create any of our inventions because of the way the
	U.S. patent system works                                                                  |  | It cannot be known if we were the first creator
	of inventions covered by our patents or pending patent
	applications or that we were the first to file patent
	applications for such inventions. Patent applications in the
	United States are maintained in secrecy until either published
	or patents are issued, and publication of discoveries in
	scientific literature often lags behind actual discoveries by
	several months. Therefore, we cannot be certain that we are the
	first creator of inventions covered by our patents or pending
	patent applications, or that we were the first to file patent
	applications for such inventions.                                                                                                                                                                                                      
|                                                                                                                                                                                               
| if we are using inventions that
	have been patented by others, we would have to stop using the
	invention, obtain a license for it or redesign our product to
	get around the relevant patent |  | We may have to participate in
	interference proceedings declared by the United
	States Patent and Trademark Office to determine the priority of
	inventions. This could result in substantial costs. If any of
	the claims of third-party patents that purport to interfere with
	one of our patents or patents pending are upheld as valid and
	enforceable, we could be prevented from using the subject matter
	claimed in those patents. Alternatively, we may be required to
	obtain licenses from the patent owners of each of those patents
	or to redesign our products or processes to avoid infringement.
	We cannot assure that we would be able to obtain a license or,
	if we could, that the terms available would be acceptable or
	that we would be successful in any attempt to redesign our
	products or processes to avoid infringement.
|                                                                                                                                                                                               
| if we cannot get a license from
	the owner of a patent and cannot design around the patent, we
	may be subject to litigation                                                                  |  | If we do not obtain the necessary licenses, we
	could be subject to litigation and encounter delays in product
	introductions while attempting to design around such patents.
	Alternatively, the development, manufacture or sale of such
	products could be prevented. Litigation would result in
	significant costs as well as diversion of management time. We
	cannot predict the outcome of this type of litigation and, if
	litigation is decided against us, our results of operations may
	suffer.                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                               
| we are currently involved in
	several patent and trade secret litigation actions filed against
	others and filed against us                                                                   |  | Adverse determinations in one or more of these
	actions could result in a loss of proprietary rights, subject us
	to significant, material liabilities to the opposing parties and
	require us to seek licenses from such opposing parties or be
	prevented from marketing or selling some of our instruments,
	reagents and probes. Any of the preceding outcomes could have an
	adverse effect on our future business, financial conditions and
	operating results.                                                                                                                                                                                                                                                                                                                                                                                        

12



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|                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                         |  | Specifically, if we receive adverse
	determinations in the Cytologix litigation, described in the
	Legal Proceedings section beginning on page 20, and are
	determined to infringe Cytologix patents for Moving
	Platform Slide Stainer With Heating Elements
	(U.S. 6,180,061), or Random Access Slide Stainer with
	Independent Slide Heating Regulation (U.S. 6,183,693), we
	might be enjoined from manufacturing or selling our Discovery
	and BenchMark instruments, two of our principal products, which
	would have an adverse effect on our ability to fulfill our
	business plan and therefore on our future business, financial
	condition and operating results.                      
|                                                                                                                                        
|                                                                                                                                         |  | In addition, in November 2001, a complaint was
	filed by Digene Corporation, Gaithersburg, MD, alleging that we
	infringe upon two patents with the sale of our Inform HPV
	High-risk and Low-risk probe products. Although we feel that we
	have strong legal defenses to both infringement allegations, if
	we received an adverse determination, we might be enjoined from
	selling our Inform HPV probes, which may cause an adverse effect
	on our business, financial and operating results.                                                                                                                                                                                                     
|                                                                                                                                        
| we rely on trade secret protection
	for our confidential and proprietary information                                                   |  | We rely on trade secret protection for our
	confidential and proprietary information. We cannot assure that
	others will not independently develop proprietary information or
	techniques similar to ours, gain access to our trade secrets or
	disclose our technology, or that we can effectively protect our
	trade secrets. If we are forced to litigate to protect our trade
	secrets, we would have to absorb these significant costs and
	those associated with the diversion of our management. If any of
	the litigation we undertake is unsuccessful and results in the
	disclosure of our trade secrets, our results of operations would
	suffer.                                           
|                                                                                                                                        
| we cannot assure that
	confidentiality agreements with our employees, consultants and
	collaborators will serve their intended purpose |  | Our policy is to require our employees,
	consultants and significant scientific collaborators to sign
	confidentiality agreements. These agreements provide that
	information developed or made known to individuals during the
	course of the relationship is to be kept confidential and not
	disclosed to third parties, except in specific circumstances.
	Agreements with employees provide that all inventions conceived
	by the individual while working for us are our exclusive
	property. However, we cannot assure that these agreements will
	not be broken or that they will provide meaningful protection or
	adequate remedies for unauthorized use or disclosure of our
	trade secrets.
|                                                                                                                                        
|Risks Relating to Availability of Third-Party
	Reimbursement and Potential Adverse Effects of Health Care
	Reform                        |  | Our ability to sustain revenue growth and
	profitability depends on the ability of our customers to obtain
	adequate levels of third-party reimbursement for use of certain
	diagnostic tests in the United States, Europe and other
	countries. Currently, the availability of third-party
	reimbursement is limited and uncertain for some IHC tests.                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                        
|                                                                                                                                         |  | In the United States, our products are purchased
	primarily by medical institutions and laboratories that bill
	various third-party payors, such as Medicare, Medicaid, other
	government programs and private insurance plans, for the health
	care services provided to                                                                                                                                                                                                                                                                                                                                                                                                                              

13



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##### 



|                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                            |  | their patients. Third-party payors may deny
	reimbursement to our customers if they determine that a
	prescribed device or diagnostic test has not received
	appropriate FDA or other governmental regulatory clearances or
	approvals, is not used in accordance with cost-effective
	treatment methods as determined by the payor, or is
	experimental, unnecessary or inappropriate. The success of our
	products may depend on the extent that appropriate reimbursement
	levels for the costs of such products and related treatment are
	obtained by our customers from government authorities, private
	health insurers and other organizations, such as health
	maintenance organizations, or HMOs.
|                                                                                                           
|                                                                                                            |  | Third-party payors are increasingly challenging
	the prices charged for medical products and services. The trend
	towards managed health care in the United States and the
	concurrent growth of organizations such as HMOs could
	significantly influence the purchase of health care services and
	products.                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                           
|                                                                                                            |  | Cost containment measures that health care payors
	are instituting and the impact of any health care reform could
	have a material adverse effect on the levels of reimbursement
	our customers receive from third-party payors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                           
|A reduction in government funding to research
	centers would reduce their ability to purchase our
	products |  | Some of our products are sold to universities,
	research laboratories, private foundations and other
	institutions where funding is dependent upon grants from
	government agencies, such as the National Institutes of Health.
	Research funding by the government could be significantly
	reduced. Any such reduction may materially affect the ability of
	many of our research customers to purchase our products.                                                                                                                                                                                                                                                                                     
|                                                                                                           
|Future operating results may fluctuate
	depending on:                                                       |  | Our operating results may fluctuate depending on
	sales of instruments and sales of reagents. If actual earnings
	in a given quarter are less than analyst estimates, our stock
	price could be adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                           
| how many instruments we sell and
	under what terms they are sold                                          |  | The initial placement of an instrument is subject
	to a longer, less consistent sales cycle than the sale of
	reagents. Instruments are typically sold in the latter part of a
	quarter and in the fourth quarter of the year due to the buying
	patterns of our customers. The degree of fluctuation will depend
	on the timing, level and mix of instruments placed through
	direct sales, PEP programs and rentals. Our future operating
	results are likely to fluctuate from period to period because
	instrument sales are likely to remain an important part of
	revenues in the near future.                                                                                                       
|                                                                                                           
| changes in our sales
	force                                                                               |  | Our sales force is responsible for customer
	sales, placement, and support. If we fail to replace members of
	our sales force in a timely manner or if we fail to train our
	sales force adequately with regards to our products and
	services, it may adversely affect sales of instruments and
	reagents.                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                           
| how much reagent our customers
	use                                                                       |  | Additionally, average daily reagent use by
	customers may fluctuate, contributing to future fluctuations in
	revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

14



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##### 





|                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| our operating results may be
	affected by other factors                                                                           |  | Other factors that may result in fluctuations in
	operating results include:                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                   
|                                                                                                                                    |  |  the timing of new product
	announcements and the introduction of new products and new
	technologies by us and our competitors;                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                   
|                                                                                                                                    |  |  our ability to collect receivables
	and maximize payables;                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                   
|                                                                                                                                    |  |  market acceptance of our current or
	new products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                   
|                                                                                                                                    |  |  quarter-to-quarter buying patterns of
	our customers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                   
|                                                                                                                                    |  |  developments with respect to
	regulatory matters;                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                   
|                                                                                                                                    |  |  availability and cost of raw
	materials from our suppliers;                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                   
|                                                                                                                                    |  |  competitive pricing pressures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                   
|                                                                                                                                    |  |  increased research and development
	expenses; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                   
|                                                                                                                                    |  |  increased marketing and sales
	expenses associated with the implementation of our market
	expansion strategy for our instrument and reagent products.                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                   
|Effectively managing our growth may be
	difficult                                                                                   |  | We have grown and continue to grow rapidly by
	adding new products and by hiring new employees. This growth is
	likely to place a significant strain on our managerial,
	accounting, operational and financial resources and systems. To
	manage our growth, we must implement systems and train and
	manage our employees. If we are not successful in managing our
	expanding operations effectively, we may experience operating
	problems such as customer service issues, reduced sales and
	internal operating issues.
|                                                                                                                                   
|Our ability to develop new products will be
	important to our success                                                               |  | A large part of our future growth and
	profitability will be dependent on our ability to develop,
	introduce and market new instruments and reagents used in
	disease diagnosis and treatment selection. Our products could
	also be rendered obsolete or noncompetitive by virtue of
	technological innovations in the fields of cellular or molecular
	diagnostics.                                                                                                                                                       
|                                                                                                                                   
| our ability to develop new
	products is partly dependent on the work of others and our
	ability to license their work             |  | We depend, in part, on the success of medical
	research done by others in developing new antibodies, nucleic
	acid probes and clinical diagnostic procedures that can be
	adapted for use in our systems. We may need to license some of
	these technologies. We may not be able to get these licenses on
	terms that would allow us to economically develop and market new
	products. If this were to occur, our operating results would
	suffer.                                                                          
|                                                                                                                                   
| if any of our products under
	development or those planned for development are not successful
	our operating results would suffer |  | We have products that are currently under
	development, in initial testing, in pre-clinical stages, or
	being evaluated in clinical settings, and have products
	scheduled for future development. There are risks associated
	with these products.                                                                                                                                                                                                                                                                         
|                                                                                                                                   
|                                                                                                                                    |  | These products:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                   
|                                                                                                                                    |  |  may prove to be unreliable from a
	diagnostic standpoint;                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                   
|                                                                                                                                    |  |  may be difficult to manufacture in an
	efficient manner;                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                   
|                                                                                                                                    |  |  may fail to receive necessary
	regulatory clearances;                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                   
|                                                                                                                                    |  |  may not achieve market acceptance; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

15



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|                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                       |  |  may encounter other unanticipated
	difficulties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                      
|                                                                                                                       |  | If any of these developments were to occur our
	operating results would suffer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                      
|A large portion of our expenses are fixed so,
	if our revenues are below expectations, we may not perform as
	expected |  | A significant portion of our expenses are based
	on our expectation of a higher level of revenues in the future
	and are relatively fixed in nature. Therefore, if revenue levels
	are below expectations, operating results in a given period are
	likely to be adversely affected because we will not be able to
	spread these expenses over a larger revenue base.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                      
|We need to reveal the benefits of our products
	to the medical community in order to be successful                     |  | The use of automated systems to perform
	diagnostic tests is relatively new. Historically, laboratory
	personnel have manually performed diagnostic tests that are now
	performed by our automated systems. Our ability to sell products
	is dependent on our ability to demonstrate to the medical
	community the benefits of automated diagnostic testing using our
	products. The quality and price of our products compared to
	manual testing and to our competitors products will affect
	acceptance and sales of our products. If the medical community
	were not receptive to our products our results would suffer.                                                                                                                                                                                                                                                                                         
|                                                                                                                      
|Our products are subject to extensive
	government regulation in the U.S. and abroad                                    |  | The manufacturing, marketing and sale of our
	products are subject to extensive government regulation in the
	U.S. and in other countries. The process of obtaining and
	maintaining regulatory approval can be lengthy, expensive and
	have uncertain results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                      
| in the U.S., our products are
	regulated as medical devices by the FDA                                               |  | In the U.S., the FDA regulates as medical
	devices, instruments, diagnostic tests and reagents that are
	traditionally manufactured and commercially marketed as finished
	test kits or equipment. Some clinical laboratories, however,
	choose to purchase individual reagents intended for specific
	analysis, as well as to develop and prepare their own finished
	diagnostic tests. The FDA promulgated a rule that regulates the
	reagents sold to clinical laboratories as analyte specific
	reagents. The rule restricts sales of these reagents to clinical
	laboratories certified under the Clinical Laboratory Improvement
	Amendments of 1988, or CLIA, as high complexity testing
	laboratories. We intend to market some diagnostic products as
	finished test kits or equipment, and others as individual
	reagents. Consequently, some of these products are regulated as
	analyte specific reagents.
|                                                                                                                      
| the specific operating
	requirements are contained in the Federal Food, Drug and
	Cosmetic Act                       |  | The Federal Food, Drug and Cosmetic Act govern
	the design, testing, manufacture, safety, efficacy, labeling,
	storage, record keeping, approval, advertising and promotion of
	our products. There are two principal FDA regulatory review
	paths for medical devices: the 510(k) pre-market notification
	process and the pre-market approval (PMA) process. The PMA
	process typically requires the submission of more extensive
	clinical data and is more costly and time-consuming to complete
	than the 510(k) process.                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                      
| Medical devices require FDA
	approval prior to marketing in the U.S.                                                 |  | Medical devices generally require FDA approval or
	clearance prior to marketing in the United States. The process
	of obtaining FDA clearances or approvals necessary to market
	medical devices can be time-consuming, expensive and uncertain.
	We cannot assure that                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

16



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##### 



|                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                          |  | any clearance or approval will be granted or that
	FDA review will not involve delays that would harm our ability
	to market and sell our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                         
|                                                                                                                                          |  | Further, clearances or approvals may be
	conditional and place substantial restrictions on the marketing
	of the product. We also cannot assure that the FDA will not
	require additional data, require further clinical studies or
	obtain a PMA, and incur further cost and delay in product
	introduction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                         
| although our IHC and ISH products
	have not needed 510(k) approval, some of our future products
	may                                    |  | With respect to automated IHC testing functions,
	our instruments have been categorized by the FDA as automated
	cell staining devices and have been exempted from the 510(k)
	notification process. To date, ISH tests have not received FDA
	approval or clearance and, therefore, use of the Discovery for
	ISH tests will be restricted to research applications. New
	instrument products could require future 510(k) clearances.                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                         
| some of our antibody products may
	require PMA approval if marketed in a particular way                                                 |  | Antibodies we may wish to market, with labeling
	indicating they can be used in the diagnosis of particular
	diseases, may require PMA approval. In addition, the FDA has
	proposed that some antibody products may be subjected to a
	costly pre-filing certification process. Certain products are
	currently sold for research use and are labeled accordingly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                         
| if we do not comply with
	regulatory requirements, or we fail to get approval for our
	products, our results of operations would suffer |  | If we do not comply with applicable regulatory
	requirements, we could be subject to, among other consequences,
	fines, injunctions, civil penalties, suspensions or loss of
	regulatory approvals, recalls or seizures of products, operating
	restrictions and criminal prosecutions. In particular, the FDA
	enforces regulations prohibiting the marketing of products for
	non-indicated uses. In addition, governmental regulations may be
	established that could prevent or delay regulatory approval of
	our products. Delays in or failure to receive approval of
	products we plan to introduce, loss of, or additional
	restrictions on or limitations relating to previously received
	approvals, other regulatory action against us, or changes in the
	applicable regulatory climate could cause our results of
	operations to suffer.
|                                                                                                                                         
| we and our customers are inspected
	for compliance with FDA regulations                                                                 |  | We are required to register as a medical device
	manufacturer with the FDA and are inspected on a routine basis
	for regulatory compliance. Our clinical laboratory customers are
	subject to CLIA, intended to ensure the quality and reliability
	of medical testing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                         
| other laws and regulations may
	adversely affect our operations                                                                         |  | In addition to these regulations, we are subject
	to numerous federal, state and local laws and regulations
	relating to such matters as safe working conditions and
	environmental matters. We cannot assure that these laws will not
	adversely affect results of operations in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                         
|There are risks associated with the
	acquisition of businesses, products or technologies                                                  |  | We may make additional acquisitions of
	complementary businesses, products or technologies in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

17



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##### 





|                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                             |  | Acquisitions of companies, divisions of
	companies, or products entail numerous risks, including:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                            
|                                                                                                             |  |  the potential inability to
	successfully integrate acquired operations and products or to
	realize anticipated synergies, economies of scale or other value;                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                            
|                                                                                                             |  |  diversion of managements
	attention; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                            
|                                                                                                             |  |  loss of key employees of acquired
	operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                            
| acquisitions may not be profitable
	and returns may not justify the price paid                             |  | We cannot assure that we will not incur problems
	in any future acquisitions, or that future acquisitions will
	increase our profitability. We also cannot assure that we will
	realize value from any acquisitions that would justify the
	consideration paid. Problems such as these could cause our
	results of operations to suffer.                                                                                                                                                                                                                                                        
|                                                                                                            
| we may issue stock, borrow money,
	incur expenses or create goodwill                                       |  | Any future acquisitions may result in the
	issuance of shares of our equity securities, including common
	stock. The issuance of additional shares of common stock could
	affect the market price. We may borrow money, have large
	write-offs and create goodwill or other intangible assets that
	could result in amortization expense. These factors may cause
	our results of operations to suffer.                                                                                                                                                                                         
|                                                                                                            
|We may be affected if a new instrument that
	uses cheaper reagents is developed                              |  | In the future, our ability to sell instruments
	and reagents may be affected by the design of our systems that
	require customers to buy our reagents. This would be true if
	competitors are successful in developing and introducing new IHC
	instruments or offering reagent supply arrangements with pricing
	or other terms more favorable than those we offer. Increased
	competition in reagent supply could also affect sales of
	reagents to batch processing instrument customers since those
	instruments do not require the use of our reagents.                                    
|                                                                                                            
|We depend on key personnel with whom we have
	no employment contracts                                        |  | We are dependent upon the retention of principal
	members of our management, Board of Directors, scientific,
	technical, marketing and sales staffs and the recruitment of
	additional personnel. We do not have employment agreements with
	any of our executive officers and we do not maintain key
	person life insurance on any of our personnel. We compete
	with other companies, academic institutions, government entities
	and other organizations for qualified personnel. If we could not
	hire or retain qualified personnel; it would cause our results
	of operations to suffer.
|                                                                                                            
|Manufacturing Risks                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                            
| as we increase production of our
	products, we may experience problems in production                       |  | We have manufactured patient-priority instruments
	and reagents for commercial sale since late 1991. Manufacturing
	of our TechMate 500 instrument is performed by third parties. As
	we continue to increase production of such instruments and
	reagents and develop and introduce new products, we may
	experience difficulties in manufacturing. We must continue to
	increase production volumes of instruments and reagents in a
	cost-effective manner to be profitable.                                                                                                                 
|                                                                                                            
| as we increase production, we must
	stay in compliance with the rules and regulations of various
	agencies |  | To increase production levels, we will need to
	scale-up our manufacturing facilities, increase our automated
	manufacturing capabilities and continue to comply with FDA
	Quality Systems                                                                                                                                                                                                                                                                                                                                                                                                      

18



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##### 



|                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                          |  | Regulations and other standards prescribed by
	various federal, state and local regulatory agencies in the
	United States and other countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                         
| our quality problems arising from
	internal manufacturing issues or third party supplier
	failures                                                                      |  | We cannot assure that manufacturing and quality
	problems will not arise as we increase our manufacturing
	operations or that scale-up can be achieved in a timely manner
	or at a commercially reasonable cost. Manufacturing or quality
	problems, or difficulties in the manufacturing scale-up could
	affect our operating results.                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                         
|We depend on key suppliers to provide some of
	the components and raw materials for our reagents; if that
	supply is interrupted, our results of operations could
	suffer |  | 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 that the materials or reagents needed,
	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 material
	adverse effect on our ability to manufacture our products.
	Developing an alternative or additional suppliers could be time
	consuming and expensive.                                                                                     
|                                                                                                                                                                         
|We rely on others to make certain custom parts
	for our instruments; if these parts are not supplied or
	delivered on time, our results of operations would
	suffer       |  | A number of components used to manufacture
	instruments are made on a custom basis to our specifications and
	are available from a limited number of sources. If the supply of
	materials or components from any of these vendors were delayed
	or interrupted for any reason, or if the quality or reliability
	of the materials or components is not adequate for use in our
	instruments, our ability to make instruments in a timely fashion
	could be impaired and our results of operations would suffer.                                                                                                                                                                                                                                          
|                                                                                                                                                                         
|Some of our manufacturing processes involve
	the use of environmentally hazardous materials                                                                               |  | Our manufacturing processes, primarily those
	involved in producing some of our reagent products, require the
	use of potentially hazardous and carcinogenic chemicals. We are
	required to comply with applicable federal, state and local laws
	regarding the use, storage and disposal of these materials.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                         
| if it is found that we or our
	third party disposal service has violated any environmental
	laws, we could incur substantial liability                                  |  | We currently use third-party disposal services to
	remove and dispose of the hazardous materials. Despite our
	policy of being vigilant with regard to monitoring these third
	parties, we could inadvertently violate environmental laws and
	also encounter claims from individuals, governmental authorities
	or others in connection with the disposal and handling of these
	hazardous materials. We could be required to incur additional
	expenditures for hazardous materials management or environmental
	compliance. The costs associated with environmental claims,
	violations of environmental laws or regulations, hazardous
	materials management and compliance with environmental laws
	could cause our results of operations to suffer.
|                                                                                                                                                                         
|We cannot assure that we will be able to fund
	our future capital requirements through internal sources, our
	existing line of credit or from other sources               |  | We anticipate that 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                         
|                                                                                                                                                                          |  |  the extent that our products gain
	market acceptance;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

19



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##### 





| |  |                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  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;                                                                                                                                                                                                                                                                                                                         
|
| |  |  possible acquisitions of
	complementary businesses, products or technologies; and                                                                                                                                                                                                                                                                                       
|
| |  |  our ability to sustain profitability
	with the uncertain timing of regulatory approvals.                                                                                                                                                                                                                                                                                
|
| |  | We may require additional capital resources and
	cannot assure that capital will be available to the extent
	required, on terms acceptable to us or at all. Any such future
	capital requirements could result in the issuance of equity
	securities, which may affect the market price of our common
	stock and would dilute the interests of our existing
	stockholders.

Item 2.     Properties

Currently, our U.S. research laboratories,
instrument and reagent manufacturing facilities and
administrative offices are located in approximately 182,400
square feet of owned space in Tucson, Arizona and 5,766 square
feet of leased space in Chicago, Illinois. The lease for the
Chicago facility expires on September 15, 2008. In the
third quarter of 2001, we moved our instrument manufacturing
into a new facility in Tucson. In the fourth quarter 2001, we
moved reagent manufacturing, our U.S. research laboratories and
our administration offices into the same facility. In August
2001, we purchased an additional 19 acres of vacant land
adjacent to our Tucson facility to support future expansion.

Currently, we own a 39,000 square foot office
building for our European operations in Strasbourg, France. This
building was acquired in June 2000 and financed through a
sale/leaseback.

Our Japanese operations are located in 3,000
square feet of leased office space in Tokyo. We moved into this
space in July 2000 and signed a 2-year lease that expires in
July 2002.

Item 3.     Legal
Proceedings

In January 1997, four individuals who are former
BioTek noteholders who held in the aggregate approximately
$1.1 million in principal amount of BioTek notes filed an
action, TSE, ET AL. v. VENTANA MEDICAL SYSTEMS, INC., ET AL. No.
97-37, against the Company and certain of its directors and
stockholders in the United States District Court for the
District of Delaware. The complaint alleged, among other things,
that the company violated federal and California securities laws
and engaged in common law fraud in connection with the BioTek
shareholders consent to the February 1996 merger of BioTek
into Ventana and the related conversion of BioTek notes into
Ventana notes. Plaintiffs seek compensatory damages in excess of
the principal amount of their BioTek notes, as well as punitive
damages, and fees and costs.

On April 25, 1997, plaintiffs filed an
Amended Complaint. The Amended Complaint made the same
allegations as the original Complaint and added a claim under
North Carolina securities laws. On December 16, 1997, we
filed a motion to dismiss plaintiffs Amended Complaint. On
September 23, 1998, the Court issued its Order granting in
part and denying in part our motion to dismiss. The Court
dismissed plaintiffs claims based upon the North Carolina
securities laws and Californias insider-trading statute.
Plaintiffs surviving claims included violations of federal
and California securities laws, common law fraud and breach of
fiduciary duty. On June 5, 2000, we filed a motion for
summary judgment on all of plaintiffs remaining claims. On
November 22, 2000, the Court issued an Order granting our
motion for summary

20



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##### 



judgment in its entirety. Plaintiffs subsequently
filed a notice of appeal on December 8, 2000. The appeal
was fully briefed as of August 31, 2001 and the hearing of
the appeal took place before the Third Circuit on
February 4, 2002. No decision has yet been rendered by the
Third Circuit.


On June 15, 1999, we filed a proof of claim
against Oncor, Inc. in an action pending in the United States
Bankruptcy Court for the District of Delaware titled IN RE
ONCOR, INC., No. 9-437 (JJF). Our claims arise out of an
Asset Purchase Agreement dated November 23, 1998 and
related documents wherein we acquired Oncors
unincorporated In Situ Hybridization Technology Division and
rights related thereto. In February 2000, we filed an amended
proof of claim alleging, inter alia, that Oncor breached the
terms of the Asset Purchase Agreement by purporting to transfer
or assign to us Oncors rights under a license agreement,
which were not transferable or assignable under the
circumstances then existing. The amended proof of claim seeks
damages of no less than approximately $7.3 million. On
August 17, 2000, Oncor filed an Omnibus Objection to
Claims, which included our claims. However, the Omnibus
Objection did not set forth any specific allegations with
respect to our claims. On July 20, 2001, we filed our
response to the Omnibus Objection reasserting our original claim
and discovery has commenced. We continue to believe our claims
are meritorious and that we will prevail, however, the results
of the proceedings are uncertain and there can be no assurance
to that effect.

On December 9, 1999, we filed an action,
VENTANA MEDICAL SYSTEMS, INC. v. CYTOLOGIX CORP.,
No. CIV99-606 TUC FRZ, alleging patent infringement seeking
monetary damages and injunctive relief in the United States
District Court in Tucson. The original complaint was amended
March 21, 2000 by the addition of another patent to the
litigation. We believe our claims are meritorious and that we
will prevail, however, results of the proceedings are uncertain
and there can be no assurance to that effect.

CytoLogix Corp. has filed three separate actions
against us in various courts. The first action is CYTOLOGIX v.
VENTANA, Case No. 00-12231 REK, filed Oct. 27, 2000 in
federal district court in Boston. The complaint claims, under
state-law based unfair competition law, that 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, treble damages (unspecified amount) and an
injunction against our further sales of Discovery and BenchMark
instruments. Cytologix filed a motion to amend their complaint
to add the related claims of attempted monopolization and
monopolization under the Sherman Act, and various Lanham Act
violations. We believe that we have meritorious defenses to the
claims in this action and that resolution of this matter will
not have a material adverse effect on our business, financial
condition or results of operation; however, the results of the
proceeding are uncertain and there can be no assurance to that
effect. Trial is scheduled to begin on July 15, 2002.

The second is CYTOLOGIX v. VENTANA, Case
No. 4 Ni 54/00 (EU) (Nullity suit), filed November 9,
2000 in the German Federal Patent Court, Munich, Germany. In a
decision at the oral hearing March 20, 2002, the German
Federal Patent Court ruled that our German patent
no. DE 69117052.5, which covers various aspects of our
previous generation GEN II automated slide staining system,
is invalid. The technology addressed by the German patent is
unrelated to the technologies involved in any of the other
patent litigations, including the individual slide heating
technology that is the subject of the Boston-based patent
litigation. The decision affects our ability to enforce this
patent in Germany subject to an appeal and final decision on
validity.

The third action is CYTOLOGIX v. VENTANA, Case
No. 01-10178 REK, filed January 30, 2001 in the U.S.
District Court, Eastern District of Massachusetts. This
complaint claims that we infringed on CytoLogixs patent
No. 6,180,061, entitled Moving Platform Slide Stainer
with Heating Elements, and was later amended to add U.S.
Patent No. 6,183,693, issued Feb. 7, 2001, entitled
Random Access Slide Stainer with Independent Slide Heating
Regulation, both assigned to CytoLogix Corporation.
CytoLogix seeks assignment of our patent applications claiming
the independent slide heater idea, treble damages (unspecified
amount) and an injunction against our further sales of Discovery
and BenchMark instruments. Cytologix filed a motion amending
their complaint to add the related claims of attempted
monopolization and monopolization under the Sherman Act, and
various Lanham Act violations. We believe that we have
meritorious defenses to

21



---



##### 



the claims in this action; however the results of
the proceeding are uncertain and there can be no assurance to
that effect. The trial has been set for July 15, 2002 and
is concurrent with Case No. CV12231 REK above.


On November 19, 2001 a patent infringement
claim was filed against us titled DIGENE CORPORATION v. VENTANA
MEDICAL SYSTEMS, INC., (Case No. 01-752) in Delaware
Federal District Court. This complaint alleges that we infringed
two US patents held by Digene, U.S. 4,849,331 and 4,849,332 by
our INFORM HPV High-risk and Low-risk probe products. We
filed an answer denying the allegations on Feb. 4, 2002. Digene
seeks, among other remedies, an injunction against the sale of
our INFORM products. This litigation is in a very early stage.
However, we believe that we have meritorious defenses to the
infringement claims of Digene and we intend to defend ourselves
vigorously, however we cannot assure you that we will prevail on
either claim.

On March 8, 2002, Ventana filed a new patent
infringement action against Cytologix in Arizona Federal
District Court, Case No. (CIV02-117TUCRCC), alleging
infringement of U.S. Patent No. 6,352,861 (Automated
Biological Reaction Apparatus) by the making, using and
selling of the ARTISAN automated staining system. The suit
seeks injunction relief including a temporary restraining order
or a preliminary injunction against the continued making, using
and selling of the instrument. We believe our claims are
meritorious and that we will prevail, however, results of the
proceedings are uncertain and there can be no assurance to that
effect.

With respect to each of the matters above,
managements estimate of the potential loss, if any, is set
forth therein unless such an estimate is not possible. It is the
opinion of management the ultimate resolution of these
contingencies will not have material adverse effect on our
financial condition, results of operations or cash flows.

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

We did not submit any matter for a vote by our
shareholders, through the solicitation of proxies or otherwise,
during the fourth quarter of the fiscal year covered by this
report.

22



---



##### 



PART II

Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters.

Our common stock is listed on the NASDAQ National
Market. The closing price of our common stock on
December 31, 2001 was $22.62. The following table shows the
high and low bid prices in dollars per share for the last two
years as reported by NASDAQ. These prices may not be the prices
that you would pay to purchase a share of our common stock
during the periods shown.

|                             |  |     |       |      |  |   |       | 
|---------------------------- |  | --- | ----- | ---- |  | - | ----- | 
|                             |  | Low |       | High
|                             |  |     |       |     
|Year Ended December 31, 2000 |  |     |       |      |  |   |       | 
|First Quarter                |  | $   | 21.63 |      |  | $ | 69.50 | 
|Second Quarter               |  | $   | 23.00 |      |  | $ | 49.25 | 
|Third Quarter                |  | $   | 20.00 |      |  | $ | 28.63 | 
|Fourth Quarter               |  | $   | 17.06 |      |  | $ | 33.00 | 
|Year Ended December 31, 2001 |  |     |       |      |  |   |       | 
|First Quarter                |  | $   | 15.88 |      |  | $ | 24.25 | 
|Second Quarter               |  | $   | 20.00 |      |  | $ | 32.25 | 
|Third Quarter                |  | $   | 18.27 |      |  | $ | 35.45 | 
|Fourth Quarter               |  | $   | 20.19 |      |  | $ | 25.87 | 

As of December 31, 2001, we had
approximately 4,790 beneficial holders of our common stock.

Dividend Policy

Holders of our common stock are entitled to
receive dividends only when declared by our Board of Directors.
Our line of credit with Bank of America forbids us from
declaring dividends on any of our equity securities. To date
dividends have never been declared or paid and we do not plan to
make any dividend payments in the future. Instead we will
reinvest in the expansion and development of our business. If
the Board of Directors decides to declare a dividend in the
future, the decision will be based on our earnings, financial
condition, cash requirements and any other factors they deem
relevant.

23



---



##### 



Item 6.     Selected
Financial Data

Selected Consolidated Financial Data

|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |        |        | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                                                                  |                                                              |                                      
|                                                                                  |                                                              | Year Ended December 31,              
|                                                                                  |                                                              |                                      
|                                                                                  |                                                              | 1997                                  |         | 1998   |        | 1999 |         | 2000   |        | 2001
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |     
|                                                                                  |                                                              |                                      
|                                                                                  |                                                              | (in thousands, except per share data)
|Statement of Operations Data:                                                     |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Sales:                                                                            |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  | Reagents and other                                           |                                       | $       | 22,905 |        |      | $       | 31,967 |        |      | $       | 45,340 |        |   | $       | 49,682  |        |   | $       | 61,586 |       
|                                                                                  | Instruments                                                  |                                       |         | 9,248  |        |      |         | 15,737 |        |      |         | 24,069 |        |   |         | 21,467  |        |   |         | 26,227 |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  |                                                              | Total net sales                       |         |        | 32,153 |      |         |        | 47,704 |      |         |        | 69,409 |   |         |         | 71,149 |   |         |        | 87,813 | 
|Cost of goods sold                                                                |                                                              |                                       | 11,138  |        |        |      | 14,542  |        |        |      | 21,218  |        |        |   | 36,377  |         |        |   | 27,622  |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Gross profit                                                                      |                                                              |                                       | 21,015  |        |        |      | 33,162  |        |        |      | 48,191  |        |        |   | 34,772  |         |        |   | 60,191  |       
|Operating expenses:                                                               |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  | Research and development                                     |                                       |         | 3,050  |        |      |         | 5,057  |        |      |         | 7,078  |        |   |         | 11,116  |        |   |         | 14,929 |       
|                                                                                  | Selling, general and administrative                          |                                       |         | 16,953 |        |      |         | 23,805 |        |      |         | 32,381 |        |   |         | 43,800  |        |   |         | 42,760 |       
|                                                                                  | Amortization of acquisition costs                            |                                       |         | 509    |        |      |         | 599    |        |      |         | 1,051  |        |   |         | 1,474   |        |   |         | 1,575  |       
|                                                                                  | Impairment charges and other expenses                        |                                       |         | 1,656  |        |      |         | 3,160  |        |      |         |       |        |   |         | 4,519   |        |   |         |       |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Income (loss) from operations                                                     |                                                              |                                       | (1,153  | )      |        |      | 541     |        |        |      | 7,681   |        |        |   | (26,137 | )       |        |   | 927     |       
|Interest and other income (expense)                                               |                                                              |                                       | 781     |        |        |      | 1,089   |        |        |      | (370    | )      |        |   | 1,346   |         |        |   | 826     |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Income (loss) before taxes and cumulative
	effect of accounting change            |                                                              |                                       | (372    | )      |        |      | 1,630   |        |        |      | 7,311   |        |        |   | (24,791 | )       |        |   | 1,753   |       
|(Provision for) benefit from income taxes                                         |                                                              |                                       |        |        |        |      |        |        |        |      | 5,500   |        |        |   | (350    | )       |        |   | (311    | )     
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Income (loss) before cumulative effect of
	accounting change                      |                                                              |                                       | (372    | )      |        |      | 1,630   |        |        |      | 12,811  |        |        |   | (25,141 | )       |        |   | 1,442   |       
|Cumulative effect of accounting change, net of
	tax(1)                            |                                                              |                                       |        |        |        |      |        |        |        |      |        |        |        |   | (2,154  | )       |        |   |        |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Net income (loss)                                                                 |                                                              | $                                     | (372    | )      |        | $    | 1,630   |        |        | $    | 12,811  |        |        | $ | (27,295 | )       |        | $ | 1,442   |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Amounts per common share, diluted:                                                |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  | Income (loss) before cumulative effect of
	accounting change |                                       | $       | (.03   | )      |      | $       | .11    |        |      | $       | .88    |        |   | $       | (1.70   | )      |   | $       | .09    |       
|                                                                                  | Cumulative effect of accounting change                       |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         | (.15    | )      |   |         |       |       
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  |                                                              | Net income (loss) per share, diluted  |         | $      | (.03   | )    |         | $      | .11    |      |         | $      | .88    |   |         | $       | (1.85  | ) |         | $      | .09    | 
|                                                                                  |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Pro forma income (loss) assuming the
	accounting change is applied retroactively: |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|                                                                                  | Net income (loss)                                            |                                       | $       | (523   | )      |      | $       | 1,282  |        |      | $       | 11,668 |        |   | $       | (25,141 | )      |   | $       | 1,442  |       
|                                                                                  | Net income (loss) per common share, diluted                  |                                       | $       | (.04   | )      |      | $       | .09    |        |      | $       | .80    |        |   | $       | (1.70   | )      |   | $       | .09    |       
|Balance Sheet Data:                                                               |                                                              |                                       |         |        |        |      |         |        |        |      |         |        |        |   |         |         |        |   |         |       
|Cash, cash equivalents and short-term investments                                 |                                                              | $                                     | 18,902  |        |        | $    | 2,424   |        |        | $    | 1,787   |        |        | $ | 38,512  |         |        | $ | 12,280  |       
|Long-term debt and redeemable preferred stock                                     |                                                              |                                       | 471     |        |        |      | 1,907   |        |        |      | 2,044   |        |        |   | 3,408   |         |        |   | 2,521   |       
|Working capital                                                                   |                                                              |                                       | 28,524  |        |        |      | 22,277  |        |        |      | 28,408  |        |        |   | 49,977  |         |        |   | 36,269  |       
|Total assets                                                                      |                                                              |                                       | 48,352  |        |        |      | 56,280  |        |        |      | 73,161  |        |        |   | 109,582 |         |        |   | 110,985 |       
|Accumulated deficit                                                               |                                                              |                                       | (33,782 | )      |        |      | (32,152 | )      |        |      | (19,341 | )      |        |   | (46,636 | )       |        |   | (45,194 | )     
|Total stockholders equity                                                        |                                                              |                                       | 42,403  |        |        |      | 45,784  |        |        |      | 60,500  |        |        |   | 87,088  |         |        |   | 94,153  |       



---



|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 1 to the Consolidated Financial
	Statements in Form 10-K attached for information regarding
	the change in the accounting for revenue recognition in
	accordance with Staff Accounting Bulletin
	(SAB) No. 101.

24



---



##### 



The following tables contain summary unaudited
quarterly consolidated statements of operations for the four
quarters ended December 31, 2001 and the four quarters
ended December 31, 2000. We have prepared the quarterly
consolidated statements of operations data on the same basis as
the Consolidated Statements of Operations beginning on page F-3.
Our results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of
operations in any period should not be considered indicative of
the results to be expected for any future period.

Summary Quarterly

Condensed Consolidated Financial
Data


|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |        |        | 
|-------------------------------------------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                               |                                     |                                      
|                                                               |                                     | Year Ended December 31, 2001         
|                                                               |                                     |                                      
|                                                               |                                     | First                                 |        | Second  |        | Third   |        | Fourth 
|                                                               |                                     | Quarter                               |        | Quarter |        | Quarter |        | Quarter
|                                                               |                                     |                                       |        |         |        |         |        |        
|                                                               |                                     |                                      
|                                                               |                                     | (in thousands, except per share data)
|Statement of Operations Data:                                  |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Sales:                                                         |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|                                                               | Reagents and other                  |                                       | $      | 13,764  |        |         | $      | 15,143  |        |   | $      | 15,735 |        |   | $      | 16,944 |       
|                                                               | Instruments                         |                                       |        | 5,516   |        |         |        | 6,195   |        |   |        | 5,922  |        |   |        | 8,594  |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|                                                               |                                     | Total net sales                       |        |         | 19,280 |         |        |         | 21,338 |   |        |        | 21,657 |   |        |        | 25,538 | 
|Cost of goods sold                                             |                                     |                                       | 6,175  |         |        |         | 7,051  |         |        |   | 6,472  |        |        |   | 7,924  |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Gross profit                                                   |                                     |                                       | 13,105 |         |        |         | 14,287 |         |        |   | 15,185 |        |        |   | 17,614 |       
|Operating expenses:                                            |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|                                                               | Research and development            |                                       |        | 3,306   |        |         |        | 3,850   |        |   |        | 4,137  |        |   |        | 3,636  |       
|                                                               | Selling, general and administrative |                                       |        | 10,759  |        |         |        | 10,221  |        |   |        | 10,440 |        |   |        | 11,340 |       
|                                                               | Amortization of acquisition costs   |                                       |        | 372     |        |         |        | 382     |        |   |        | 381    |        |   |        | 440    |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Income (loss) from operations                                  |                                     |                                       | (1,332 | )       |        |         | (166   | )       |        |   | 227    |        |        |   | 2,198  |       
|Interest and other income                                      |                                     |                                       | 339    |         |        |         | 286    |         |        |   | 135    |        |        |   | 66     |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Income (loss) before taxes                                     |                                     |                                       | (993   | )       |        |         | 120    |         |        |   | 362    |        |        |   | 2,264  |       
|Provision for income taxes                                     |                                     |                                       | (134   | )       |        |         | (105   | )       |        |   | (72    | )      |        |   |       |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Net income (loss)                                              |                                     | $                                     | (1,127 | )       |        | $       | 15     |         |        | $ | 290    |        |        | $ | 2,264  |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Net income (loss) per common share                             |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|                                                               |  Basic                             |                                       | $      | (.07    | )      |         | $      | .00     |        |   | $      | .02    |        |   | $      | .14    |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|                                                               |  Diluted                           |                                       | $      | (.07    | )      |         | $      | .00     |        |   | $      | .02    |        |   | $      | .14    |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Shares used in computing net income (loss) per
	share, basic   |                                     |                                       | 15,575 |         |        |         | 15,970 |         |        |   | 16,031 |        |        |   | 16,074 |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       
|Shares used in computing net income (loss) per
	share, diluted |                                     |                                       | 15,575 |         |        |         | 16,722 |         |        |   | 16,784 |        |        |   | 16,517 |       
|                                                               |                                     |                                       |        |         |        |         |        |         |        |   |        |        |        |   |        |       

25



---



##### 



|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |        |        | 
|---------------------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------ | ------- | ------ | ------- | ------- | ------- | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                       |                                       |                                      
|                                                                       |                                       | Year Ended December 31, 2000         
|                                                                       |                                       |                                      
|                                                                       |                                       | First                                 |        | Second  |        | Third   |         | Fourth 
|                                                                       |                                       | Quarter                               |        | Quarter |        | Quarter |         | Quarter
|                                                                       |                                       |                                       |        |         |        |         |         |        
|                                                                       |                                       |                                      
|                                                                       |                                       | (in thousands, except per share data)
|Statement of Operations Data:                                          |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|Sales:                                                                 |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|                                                                       | Reagents and other                    |                                       | $      | 12,001  |        |         | $       | 12,304  |        |   | $      | 12,703 |        |   | $      | 12,674 |       
|                                                                       | Instruments                           |                                       |        | 5,125   |        |         |         | 6,419   |        |   |        | 5,196  |        |   |        | 4,727  |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|                                                                       |                                       | Total net sales                       |        |         | 17,126 |         |         |         | 18,723 |   |        |        | 17,899 |   |        |        | 17,401 | 
|Cost of goods sold                                                     |                                       |                                       | 5,970  |         |        |         | 18,782  |         |        |   | 5,786  |        |        |   | 5,839  |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|Gross profit (loss)                                                    |                                       |                                       | 11,156 |         |        |         | (59     | )       |        |   | 12,113 |        |        |   | 11,562 |       
|Operating expenses:                                                    |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|                                                                       | Research and development              |                                       |        | 1,984   |        |         |         | 3,461   |        |   |        | 2,665  |        |   |        | 3,006  |       
|                                                                       | Selling, general and administrative   |                                       |        | 7,960   |        |         |         | 14,930  |        |   |        | 9,816  |        |   |        | 11,094 |       
|                                                                       | Amortization of acquisition costs     |                                       |        | 278     |        |         |         | 391     |        |   |        | 381    |        |   |        | 424    |       
|                                                                       | Impairment charges and other expenses |                                       |        |        |        |         |         | 4,519   |        |   |        |       |        |   |        |       |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|(Loss) income from operations                                          |                                       |                                       | 934    |         |        |         | (23,360 | )       |        |   | (749   | )      |        |   | (2,962 | )     
|Interest and other income (expense)                                    |                                       |                                       | (48    | )       |        |         | 452     |         |        |   | 508    |        |        |   | 434    |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|(Loss) income before taxes and cumulative effect
	of accounting change |                                       |                                       | 886    |         |        |         | (22,908 | )       |        |   | (241   | )      |        |   | (2,528 | )     
|Provision for income taxes                                             |                                       |                                       | (350   | )       |        |         |        |         |        |   |       |        |        |   |       |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|(Loss) income before cumulative effect of
	accounting change           |                                       |                                       | 536    |         |        |         | (22,908 | )       |        |   | (241   | )      |        |   | (2,528 | )     
|Cumulative effect of accounting change net of
	tax(1)                  |                                       |                                       | (2,154 | )       |        |         |        |         |        |   |       |        |        |   |       |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|Net loss                                                               |                                       | $                                     | (1,618 | )       |        | $       | (22,908 | )       |        | $ | (241   | )      |        | $ | (2,528 | )     
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|Per common share:                                                      |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|(Loss) income before cumulative effect of
	accounting change           |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|                                                                       |  Basic                               |                                       | $      | .04     |        |         | $       | (1.52   | )      |   | $      | (.02   | )      |   | $      | (.17   | )     
|                                                                       |  Diluted                             |                                       | $      | .03     |        |         | $       | (1.52   | )      |   | $      | (.02   | )      |   | $      | (.17   | )     
|Net loss                                                               |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|                                                                       | Basic                                |                                       | $      | (.11    | )      |         | $       | (1.52   | )      |   | $      | (.02   | )      |   | $      | (.17   | )     
|                                                                       | Diluted                              |                                       | $      | (.11    | )      |         | $       | (1.52   | )      |   | $      | (.02   | )      |   | $      | (.17   | )     
|Shares used in computing net loss per share, basic                     |                                       |                                       | 14,305 |         |        |         | 15,097  |         |        |   | 15,186 |        |        |   | 15,307 |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       
|Shares used in computing net loss per share,
	diluted                  |                                       |                                       | 16,467 |         |        |         | 15,097  |         |        |   | 15,186 |        |        |   | 15,307 |       
|                                                                       |                                       |                                       |        |         |        |         |         |         |        |   |        |        |        |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the fourth quarter of 2000, the Company
	changed its method of accounting for revenue recognition in
	accordance with Staff Accounting Bulletin No. 101,
	Revenue Recognition in Financial Statements. Pursuant to
	Financial Accounting Statement No. 3, Reporting
	Financial Changes in Interim Financial Statements, effective
	January 1, 2000, the Company recorded the cumulative effect
	of the accounting change and accordingly, the quarterly
	information for the first three quarters of 2000, which had been
	previously reported, have been restated. No restatement of 1999
	is required under the implementation guidance of Staff
	Accounting Bulletin No. 101.

26



---



##### 



Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Introduction

In Managements Discussion and Analysis we
explain our general financial condition and the results of
operations including:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | what factors affect our business;                                                                                     
|
| |  | what our earnings and costs were in 2001 and 2000;                                                                    
|
| |  | why those earnings and costs were different from
	the year before;                                                    
|
| |  | where our earnings came from;                                                                                         
|
| |  | how all of this affects our overall financial
	condition; and                                                         
|
| |  | what our research and development expenditures
	were in 2001 and 2000 and what we expect to spend in the near
	future.

Forward-Looking Statements

Some statements contained in this Annual Report,
including, without limitation, statements containing the words
believes, anticipates,
estimates, expects, and words of similar
import, constitute forward-looking statements. You
should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described in the
Cautionary Factors section beginning on page 12, among
others and those included in other documents we file with the
SEC.

Critical Accounting Policies and
Estimates

Our discussion and analysis of financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent liabilities. On an on-going
basis, we evaluate our estimates, including those related to bad
debts, inventories, investments, intangible assets, income
taxes, warranty obligations and contingencies and litigation. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other resources. Actual
results may differ from these estimates under different
assumptions or conditions.

We have adopted the following critical accounting
policies used in the preparation of our consolidated financial
statements.

Revenue
Recognition

Revenue from instrument sales made directly to
the end user is generally recognized upon completion of
installation. However, if the end user already has the identical
instrument installed at the same location we recognize the
revenue from that sale upon shipment. Revenue from reagents is
recognized upon shipment. Service contract revenue is deferred
and recognized ratably over the service period obligations,
which are typically one to three years. Out-of-warranty work is
recognized as services are rendered.

A portion of our instrument revenue is from sales
made to distributors under agreements that require them to
assume responsibility for product installation without recourse
to us. Revenue for instruments sold under these agreements is
recognized upon shipment to the distributor. There are certain
foreign distributors for which revenue is not recognized until
the instrument is installed and accepted by the end user.

27



---



##### 



Bad
Debt

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.

Inventory

We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of the inventory and the estimated market value
based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional
inventory write-downs may be required.

Goodwill and
Intangible Asset Impairment

In assessing the recoverability of the goodwill
and other intangibles we must make assumptions regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to
record impairment charges for these assets not previously
recorded. On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assetswhich require us to analyze our
goodwill for impairment issues during the first six months of
fiscal 2002 and then on a periodic basis thereafter. During the
year ended December 31, 2001, we did not record any
impairment losses related to goodwill and other intangible
assets.

Capitalized
Software

We capitalize certain internal expenses related
to developing computer software used in the instruments we sell.
Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. The
R&D group considers technological feasibility to have been
established for a product when all of the following conditions
have been met: a) the detail program design has been
completed and it has been determined that the necessary skills,
hardware and software technology are available to produce the
product, b) the detail program design has been traced to
product specifications and c) all high-risk development
issues have been resolved through coding and testing. Upon
general release to customers of the product in which the
software is included, capitalization ceases and such costs are
amortized using the straight-line method over an estimated life
of 5 years. The determination of whether or not these
capitalized costs are impaired involves significant judgment.
Changes in strategy and/or market conditions could significantly
impact these judgments and require adjustments to recorded asset
balances.

Warranties

We generally provide a warranty for the first
year of use on all instruments sold. We provide for the
estimated cost of instrument warranties at the time revenue is
recognized. While we are committed to quality, our warranty
obligation is affected by product failure rates, material usage
and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to
the estimated warranty liability may be required.

Investments
in Equity Securities

We hold preferred stock and a warrant in a small
cap public company having operations or technology in areas
within or adjacent to our strategic focus, and whose share price
is highly volatile. We would assess the estimated fair value of
such investments based upon a periodic evaluation of the
investees operating results and financial condition. We would
incur an investment impairment charge when we believe an
investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor
operating results of underlying investments could result in
losses or an inability to recover the carrying value of the
investments that may not be reflected in an investments
current carrying value, thereby possibly requiring an impairment
charge in the future.

28



---



##### 



Deferred Tax
Assets

We record a valuation allowance to reduce our
deferred tax assets to the amount that we believe is more likely
than not to be realized. We have considered future taxable
income in assessing the need for the valuation allowance. In the
event we determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to income in the
period such determination was made. Likewise, should we
determine that we would be able to realize our deferred tax
assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax assets would increase income in
the period such determination was made.

Legal
Contingencies

We are currently involved in certain legal
proceedings. We do not believe these proceedings will have a
material adverse effect on our consolidated financial position.
It is possible, however, that future results of operations for
any particular quarterly or annual period could be materially
affected by changes in our assumptions, or the effectiveness of
our strategies, related to these proceedings.

Results of Operations

Comparison of
2001 and 2000

Net sales increased to $87.8 million in 2001
from $71.1 million in 2000. Net revenues for reagents and
other increased by 24% from 2000 to 2001. Net revenues for
instruments increased by 22% from 2000. The increase for
reagents was primarily due to the growth in the underlying
installed base and the launch of new reagent systems. Increased
instrument revenue from 2000 to 2001 was primarily due to
continued market acceptance of the BenchMark system, launched in
late 2000, and strong performance from our IHC and Special
Stains instruments.

Our total gross margin percentage increased to
69% in 2001, up from 49% in 2000. The gross margin in 2000 was
impacted by charges totaling $11.8 million. Absent these
charges, gross margin percentage increased 4% primarily due to
the higher margin reagent and other sales mix as a percentage of
sales.

Research and development spending increased
$3.8 million in 2001, or 34% from 2000, primarily due to
increased spending on product development programs, including
the development of chemistry applications for DNA microarrays
and messenger RNA tissue testing.

Selling, general and administrative
(SG&A) expenses decreased $1.0 million, or (2%),
in 2001 compared to 2000, primarily due to charges of $5.7
million recorded in 2000 associated with the discontinuation of
various products and with the revaluation of field instruments
brought about with the launch of the BenchMark instrument.
Absent this charge, SG&A increased by $4.7 million, or 12%,
as we continued to invest in key areas including our direct
sales force, product strategy and customer support, to position
ourselves for future market opportunities.

Amortization of goodwill and other
acquisition-related intangibles increased $0.1 million, or
7%, in 2001 compared to 2000. The increase for the period was
primarily due to a full years impact of the 2000
acquisition of Quantitative Diagnostic Laboratories, Inc. We
recorded approximately $1.6 million in amortization of our
intangible assets during 2001 and are currently determining the
portion that will not be subject to future amortization under
SFAS 142. The provisions of these standards are not expected to
have a significant effect on our financial position or operating
results.

Interest and other, net decreased
$0.5 million, or 39%, in 2001 compared to 2000. The
decrease is primarily due to lower average investment balances
in 2001 compared to 2000 as well as lower market rates of return
as interest rates fell throughout 2001. The lower balances were
primarily the result of the 2001 investment in the
Companys new facility in Tucson, Arizona.

29



---



##### 



Fiscal 2000 results were negatively impacted by
$22.5 million in write-offs and accruals relating to
several different issues. The following table summarizes the
2001 reserve activity:

|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |   | 
|---------------------------------------------------------------- | ------------------------------------------- | ------- | ----- | -------------- |  | -------- | ----- | --------- |  | -------------- | ----- | ----- |  | - | ------ | ------ | - | - | - | - | 
|                                                                 |                                             |         |       | Reserve        |  |          |       |           |  | Reserve       
|                                                                 |                                             |         |       | Balances as of |  | Costs    |       | Revision  |  | Balances as of
|                                                                 |                                             | Initial |       | December 31,   |  | Incurred |       | to        |  | December 31,  
|                                                                 |                                             | Charges |       | 2000           |  | in 2001  |       | Estimates |  | 2001          
|                                                                 |                                             |         |       |                |  |          |       |           |  |               
|                                                                 |                                             |         |       |                |  |          |       |          
|                                                                 |                                             |         |       | (In thousands) |  |          |       |          
|Reagent dispenser quality issue                                  |                                             | $       | 5,355 |                |  | $        | 2,510 |           |  | $              | 867   |       |  | $ | (1,643 | )      |   | $ |  |  
|Exit of electron microscopy product line                         |                                             |         | 4,581 |                |  |          |      |           |  |                |      |       |  |   |       |        |   |   |  |  
|Impairment of inventory, diagnostic instruments
	and intangibles |                                             |         | 8,615 |                |  |          | 1,310 |           |  |                | 1,460 |       |  |   | 150    |        |   |   |  |  
|Cost to close Gaithersburg facility                              |                                             |         | 2,611 |                |  |          | 1,117 |           |  |                | 967   |       |  |   | (150   | )      |   |   |  |  
|Other charges including contracted R&D                           |                                             |         | 1,362 |                |  |          |      |           |  |                |      |       |  |   |       |        |   |   |  |  
|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |  
|                                                                 | Total impairment charges and other expenses |         | $     | 22,524         |  |          | $     | 4,937     |  |                | $     | 3,294 |  |   | $      | (1,643 | ) |   | $ |  | 
|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |  

The $1.6 million revision to the estimate
was due to the favorable resolution of outstanding accounts
receivable balances related to the reagent dispenser quality
issue and were reflected in the 2001 financial statements as a
reduction in SG&A expenses. However, an additional
$0.8 million charge was recorded as a charge to SG&A
expenses during the year due to our uncertainty of how the
worldwide recession will impact our customer base and their
ability to pay.

The deferred tax assets and valuation allowance
decreased by $0.5 million during 2001. The decrease relates
primarily to expiring state net operating loss carry forwards
and reversal of temporary differences. No additional valuation
allowance was considered necessary for the deferred tax assets
of $8.8 million as management believes that it is more
likely than not such assets will be recovered.

At December 31, 2001, we have net operating
loss carry forwards for state and federal income tax purposes of
approximately $11.2 million and $18.7 million,
respectively. These state and federal carry forwards will begin
to expire in 2005 and 2007, respectively, if not previously
utilized. Approximately $0.6 million of state net operating
loss carry forwards expired unused in 2001. We also have
research and development tax credit carry forwards of
approximately $1.9 million that begin to expire in 2005, if
not previously utilized. Utilization of our net operating loss
carry forwards will be subject to limitations due to the
change in ownership provisions of the Internal
Revenue Code of 1996, as amended, as a result of our prior
issuances of equity securities. These carry forwards, therefore,
may expire prior to being fully utilized. Future financings may
cause additional changes in ownership and further limitations on
the use of federal net operating loss carry forwards. In
addition, we have certain foreign net operating loss carry
forwards approximating $7.4 million. We will continue to
closely monitor operating results and analyze our ability to
recover these deferred assets in the very near term.

Comparison of
2000 and 1999

Net sales increased to $71.1 million in 2000
from $69.4 million in 1999. Our revenue growth of 2% was
impacted by reagent dispenser quality issues experienced in the
second and third quarters of 2000. We also changed our method of
revenue recognition for products that require installation at
the customers site in accordance with Staff Accounting
Bulletin (SAB) No. 101 Revenue Recognition in
Financial Statements. The change in revenue recognition
method had a favorable effect of $0.6 million on net sales
for 2000. The cumulative effect of the accounting change
resulted in a charge to operations of $2.2 million (net of
an income tax benefit of $1.4 million), which is included
in operations for the year ended December 31, 2000.

Gross margin of 49% in 2000 was impacted by
second quarter 2000 charges totaling $11.8 million
associated with reagent dispenser quality issues, planned
relocation of our Gaithersburg, Maryland production facility,
exiting the electron microscopy product line and write-down of
older generation staining instruments

30



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in anticipation of the launch of the BenchMark
advanced staining system in the fourth quarter of 2000. The
charges, in conjunction with the additional investment in
manufacturing management and quality systems infrastructure,
accounted for the decrease from the 69% gross margin achieved in
1999.


Fiscal 2000 results were negatively impacted by
$22.5 million in write-offs and accruals relating to
several different issues. The following table summarizes details
of the impairment charges and other expenses:

|                                                                 |                                             |         |       |                |  |           |       |                |  |   |      |     |   |   |       |       | 
|---------------------------------------------------------------- | ------------------------------------------- | ------- | ----- | -------------- |  | --------- | ----- | -------------- |  | - | ---- | --- | - | - | ----- | ----- | 
|                                                                 |                                             |         |       | Costs          |  |           |       |               
|                                                                 |                                             |         |       | Incurred       |  |           |       | Reserve       
|                                                                 |                                             |         |       | through        |  | Revision  |       | Balances as of
|                                                                 |                                             | Initial |       | December 31,   |  | to        |       | December 31,  
|                                                                 |                                             | Charges |       | 2000           |  | Estimates |       | 2000          
|                                                                 |                                             |         |       |                |  |           |       |               
|                                                                 |                                             |         |       |                |  |          
|                                                                 |                                             |         |       | (In thousands) |  |          
|Reagent dispenser quality issue                                  |                                             | $       | 5,355 |                |  | $         | 3,117 |                |  | $ | 272  |     |   | $ | 2,510 |      
|Exit of electron microscopy product line                         |                                             |         | 4,581 |                |  |           | 4,060 |                |  |   | (521 | )   |   |   |      |      
|Impairment of inventory, diagnostic instruments
	and intangibles |                                             |         | 8,615 |                |  |           | 7,798 |                |  |   | 493  |     |   |   | 1,310 |      
|Cost to close Gaithersburg, Maryland facility                    |                                             |         | 2,611 |                |  |           | 1,200 |                |  |   | (294 | )   |   |   | 1,117 |      
|Other charges including contracted R&D                           |                                             |         | 1,362 |                |  |           | 1,362 |                |  |   |     |     |   |   |      |      
|                                                                 |                                             |         |       |                |  |           |       |                |  |   |      |     |   |   |       |      
|                                                                 | Total impairment charges and other expenses |         | $     | 22,524         |  |           | $     | 17,537         |  |   | $    | (50 | ) |   | $     | 4,937 | 
|                                                                 |                                             |         |       |                |  |           |       |                |  |   |      |     |   |   |       |      

Charges of $5.4 million were related to
quality problems with our dispensers and reagents used with the
majority of our staining instruments. As a result, charges were
taken to write-off inventory and set up reserves to cover
product replacements, returns, and warranty matters.

A charge of $4.6 million was recorded to
account for our decision to exit our electron microscopy
(EM) product line. Charges were taken to write-down all EM
inventory and field instruments to their net realizable value.
In addition, goodwill recognized in the BTTI acquisition was
written down $1.4 million to reflect the impact of product
discontinuance.

Charges of $8.6 million were recorded in
recognition of the decreased value of certain instrument
inventory, fixed assets and intangible assets given the launch
of our new BenchMark advanced staining system in 2000. In
addition, intangible assets associated with the Companys
1996 acquisition of BioTek Solutions, Inc. were written down
$3.1 million to reflect the impact of product
discontinuation. The TechMate IHC staining system product line
acquired in the BioTek transaction was among those whose value
was impacted by the launch of BenchMark.

We also recognized charges of $2.6 million
relating to closure of our production facility in Gaithersburg,
Maryland. The Gaithersburg facility was acquired in late 1998
with the acquisition of all the oncology assets of Oncor, Inc.

Other charges recognized in 2000 totaled
$1.4 million, which included expenses related to contracted
research and development being handled by an outside company.

Research and development expenses increased by
$4 million in 2000 versus 1999, to 16% of net sales from
10% in 1999. The spending increase reflects our ongoing research
and development efforts in a variety of areas such as the launch
of the BenchMark advanced IHC and ISH Staining System, the US
launch of our Discovery system, the December 2000 launch of our
Pathway test for breast cancer patients and further expansion of
our Special Stains reagent menu.

Selling, general and administrative expenses
increased by $11.4 million in fiscal 2000 over fiscal 1999
and increased as a percent of net sales to 62% in 2000 from 47%
in 1999. The spending increase is attributed primarily to the
charges recorded in the second quarter of 2000 associated with
various product discontinuations and revaluations of field
instruments given the launch of BenchMark.

31



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Impairment charges of $4.5 million were
recognized in 2000 in conjunction with the write down of
intangibles associated with the BioTechnology Tools and BioTek
acquisitions. The charges reflect the impact of various product
discontinuations on expected future cash flows.

Amortization expense increased to
$1.5 million in 2000 from $1.1 million in 1999.
Intangible assets increased in 2000 through the acquisition of
QDL Laboratories and a payment made to Vysis on a license to
market certain consumables.

Interest and other income, net, was income of
$1.3 million in 2000 versus an expense of $0.4 million
in 1999. The interest income was attributed to the investment of
proceeds from the private placement of 1,250,000 shares of
common stock in 2000.

No additional income tax benefit was recognized
in 2000 related to the deferred tax asset that arose relative to
the increase in the net operating loss carry forward and other
future tax deductible items as it could not be readily
determined whether such assets will be recoverable in the near
term. Our valuation allowance increased by $8.3 million in
2000 to $10.7 million at December 31, 2000.

The majority of our deferred tax assets relate to
net operating loss carryforwards. At December 31, 2000, we
had $21 million and $18 million in federal and state
net operating loss carryforwards for income tax purposes,
respectively. The state and federal net operating loss
carryforwards will begin to expire in 2005 and 2007,
respectively, if not previously utilized. In addition, we had
certain foreign net operating loss carryforwards of $6.9 million
and research and development credits of $1 million.

As a result of the above, our net loss for 2000
was $27.3 million, which included $22.5 million in
impairment charges and other expenses recognized in the second
quarter of 2000 and included the adverse impact of
$2.2 million related to the change in accounting principle
for the adoption of SAB No. 101.

Liquidity and Capital Resources

Cash and cash equivalents were $12.3 million
at December 31, 2001, a decrease of $26.2 million from
December 31, 2000. Spending against cash reserves was
attributable to our ongoing investment in the growth of the
business including working capital, the construction of our new
facility in Tucson, Arizona, substantially completed in November
2001 and partially offset by cash generated from the exercise of
employee stock options and warrants.

Net cash used in our operating activities was
$5.3 million in 2001 compared to net cash provided by our
operating activities of $2.2 million in fiscal year 2000.
The decrease is primarily attributable to changes in working
capital. During 2001 cash used in operating activities differed
from net income as a result of increased working capital
balances exceeding depreciation and amortization expense.

Net cash used in investing activities in 2001 and
2000 was $25.7 million and $19.3 million,
respectively. This is primarily attributable to spending on the
construction of our new facility in Tucson, Arizona,
substantially completed in November 2001, and our transaction
with Molecular Diagnostics, Inc.

Net cash provided by financing activities in 2001
and 2000 was $4.8 million and $54.3 million, respectively.
Financing activities in fiscal year 2001 consisted primarily of
$5.7 million in proceeds from the issuance of common stock
due to the exercise of warrants, stock options and employee
stock purchases. This was partially offset by payments of
$0.9 million on long-term debt. Financing activities in
fiscal year 2000 consisted primarily of proceeds from our
private equity placement of 1.25 million shares of common
stock, issuance of common stock from stock option exercises and
financing of our new European facility located in Strasbourg,
France.

We believe that our current cash and cash
equivalents, line of credit and cash generated from operations
will satisfy funding requirements including working capital and
capital expenditure for the next twelve months.

32



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Foreign Currency Risk

The value of the U.S. Dollar affects our
financial results. Changes in exchange rates may positively or
negatively affect our revenues, gross margins, operating
expenses and shareholders equity as expressed in
U.S. Dollars. We have determined that hedging of non-U.S.
Dollar net monetary assets is not cost effective and instead
attempt to minimize currency exposure risk through working
capital management. There can be no assurance that such an
approach will be successful, especially if a significant and
sudden decline occurs in the value of local currencies. We
conduct a growing portion of our business in the Euro, the
Japanese Yen and the Australian Dollar.

New Pronouncements

In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141 (SFAS 141), Business Combinationsand
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. For fiscal
2001, the amortization provisions of SFAS 142 apply to
goodwill and other intangible assets acquired after
June 30, 2001. For fiscal 2002, the provision will apply to
all goodwill and other intangible assets. We will adopt the new
rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2002, including the
required impairment tests. We recorded approximately
$1.6 million in amortization of its intangible assets
during 2001 that is being evaluated by management to determine
which portion will be subject to no future amortization under
SFAS 142. The provisions of these standards are not
expected to have a significant effect on our financial position
or operating results.

In August 2001, FASB issued SFAS No. 144
(SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assetsthat is applicable to financial statements
issued for fiscal years beginning after December 15, 2001.
The FASBs new rule on asset impairment supersedes SFAS
No. 121 (SFAS 121), Accounting for the Impairment
or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Ofand portions of APB Opinion 30,
Reporting the Results of Operationsfor a Disposal of a
Segment of a Business. This Standard provides a single
accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. The Standard also required expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as
of the measurement date as presently required. The provisions of
this Standard are not expected to have a significant effect on
our financial position or operating results.



|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
	About Market Risk

We are exposed to financial market risks,
including changes in interest rates and foreign currency
exchange rates and equity price changes in Molecular
Diagnostics, Inc. (MCDG) up to the maximum amount of our
investment. Nevertheless, the fair value of our investment
portfolio and related income would not be significantly impacted
by either a 100 basis point increase or decrease in interest
rates, due primarily to the short-term nature of the major
portion of our investment portfolio. At December 31, 2001,
our only cash equivalent investments are in money market
accounts and overnight reverse repurchase agreements
($9.6 million) that are reflected as cash equivalents
because all maturities are within 90 days. Our interest
rate risk with respect to existing investments is limited due to
the short-term duration of these arrangements and the
yields earned which approximate current interest rates.

At present, we have only $3.4 million in
debt obligations and there are no borrowings under our line of
credit facility at December 31, 2001. As such, our interest
rate risk is limited with respect to existing debt. A sizable
portion of our revenue and capital spending is transacted in
U.S. Dollars. However, we do at times enter into these
transactions in other currencies, such as the Euro, the Japanese
Yen and the Australian Dollar. No hedging transactions were
entered into to limit this exposure. We are exposed to equity
price risks

33



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##### 



on an investment in preferred stock and warrant
to purchase securities of MCDG. We have not attempted to reduce
or eliminate the market exposure on this warrant.




|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statement and Supplementary
	Data

The Independent Auditors Report,
Consolidated Financial Statements and Notes to Consolidated
Financial Statements begin on Page F-1.



|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with
	Accountants on Accounting and Financial Disclosure

Not applicable.

34



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##### 



PART III

Item 10.     Directors
and Executive Officers

Pursuant to our Certificate of Incorporation, as
amended, our Board of Directors currently consists of eight
persons, divided into three classes serving staggered terms of
three years. Currently there are two Class I directors,
three Class II directors and three Class III
directors. The terms of the Class III directors will expire
at the 2005 Annual Meeting of Shareholders. The terms of the
Class II directors and Class I directors will expire
in 2004 and 2003 respectively.

|                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Jack W. Schuler(Age
	61)
	Class III Director
	Chairman of the Nominating Committee               |  | Mr. Schuler has served as a director of
	Ventana since April 1991 and as Chairman of the Board of
	Directors since November 1995. Mr. Schuler has been
	Chairman of the Board of Directors of Stericycle, Inc. since
	March 1990. Mr. Schuler is also a partner in Crabtree
	Partners. Prior to joining Stericycle, Mr. Schuler held
	various executive positions at Abbott from December 1972 through
	August 1989, serving most recently as President and Chief
	Operating Officer. He is currently a Director of Medtronic, Inc.
	and Chiron Corporation. Mr. Schuler received a B.S. in
	Mechanical Engineering from Tufts University and an M.B.A. from
	Stanford University.                                    
|John Patience(Age
	54)
	Class III Director
	Member of the Compensation and Nominating Committees |  | Mr. Patience has served as a director of Ventana
	since July 1989 and as Vice Chairman since January 1999. Since
	April 1995, Mr. Patience has been a partner in Crabtree
	Partners. Mr. Patience was a co-founder and served as a
	General Partner of Marquette Venture Partners from January 1988
	until March 1995. Marquette was one of our initial investors.
	Mr. Patience was previously a partner in the consulting
	firm of McKinsey & Co., specializing in health care. He
	is currently a Director of Stericycle, Inc. Mr. Patience
	received a B.A. in Liberal Arts and an L.L.B. from the
	University of Sydney, Australia and an M.B.A. from the
	University of Pennsylvania Wharton School of Business.
|Tammy J. Brach(Age
	37)                                                                          |  | Ms. Brach joined Ventana in September 1999
	and is Vice President of Quality Assurance and Regulatory
	Affairs. Before joining Ventana, Ms. Brach was Vice
	President of Service Center Operations at ADP and prior to that
	she worked at Current Incorporated as the Head of Quality and
	Purchased Product Development. Ms. Brach has a B.S. in
	Industrial Engineering from Texas A&M and an M.B.A. from
	Drake University.                                                                                                                                                                                                                                                                                       
|Christopher M. Gleeson(Age 52)
	Class II Director                                                |  | Mr. Gleeson became President and Chief
	Executive Officer and a director in May 1999. He joined Ventana
	in March 1999 as Executive Vice President and Chief Operating
	Officer. Prior to joining the Company, Mr. Gleeson was
	Senior Vice President of Bayer Diagnostics and General Manager
	of the U.S. commercial Operations for Chiron Diagnostics,
	and prior to that, the founder, owner and Managing Director of
	Australian Diagnostics Corporation, a leading diagnostics
	distributor in Australia.                                                                                                                                                                                                       
|Kendall B. Hendrick(Age 42)                                                                      |  | Mr. Hendrick joined Ventana in August 1998
	and is currently the Vice President and General Manager of
	Research & Development. From April 1990 to August 1998,
	Mr. Hendrick held various product development management
	positions with Abbott Laboratories, Diagnostics Division, most
	recently as the Director of the Architect Research &
	Development Program. Mr. Hendrick holds a B.S. in
	Mechanical Engineering from Virginia Polytechnic Institute.                                                                                                                                                                                                                                                       

35



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|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Hitoshi Isobe(Age
	51)     |  | Mr. Isobe joined Ventana in January 1998 and
	is currently Vice President and General Manager of Ventana,
	Japan K.K. Prior to joining Ventana, Mr. Isobe was Chief
	Operating Officer of BioMerieux, Japan. Prior to BioMerieux he
	held various management positions at Dainabot K.K., a leading
	diagnostic company in Japan. Mr. Isobe holds a B.A. in
	Commercial Law from Ehime University in Japan.                                                                                                                                      
|Timothy B. Johnson(Age 40) |  | Mr. Johnson joined Ventana as Vice President
	and General Manager, Manufacturing Operations in February 2002.
	From 1993 until joining Ventana, Mr. Johnson held various
	management positions with Hill-Rom Company a subsidiary of
	Hillenbrand Industries, most recently as Vice President of
	Marketing and Vice President and General Manager, Maternal &
	Infant Care Strategic Business Unit. Mr. Johnson has a B.S.
	in Operation and Systems Management from Indiana University.                                                       
|Kirk M. Kimler(Age
	39)    |  | Mr. Kimler joined the Company in 1999 and is
	currently the Vice President of Worldwide Strategic
	Marketing  Histology. From August 1988 to October
	1999, Mr. Kimler held various sales and marketing positions
	with Abbott Laboratories, Diagnostics Division to include
	Marketing Manager, Architect and South East Commercial
	Operations. Prior to Abbott, Mr. Kimler was an officer in
	the United States Army. Mr. Kimler holds a B.A. in
	Economics from the University of Notre Dame and an M.B.A. from
	the University of Chicago.
|James LaFrance(Age
	43)    |  | Mr. LaFrance joined Ventana as Vice
	President of Worldwide Strategic Marketing  Cytology
	in November 2001. Mr. LaFrance spent 16 years with
	Bayer Diagnostics in various management roles, most recently as
	Vice President of Marketing & Business Development for the
	global Near Patient Testing division. Mr. LaFrance has a
	B.A. in Economics from the University of Connecticut, an M.B.A.
	from the University of Notre Dame and is a C.P.A.                                                                                       
|Nicholas Malden(Age
	44)   |  | Mr. Malden joined Ventana as Chief Financial
	Officer in October 2000. From 1985 until joining Ventana,
	Mr. Malden held various financial management positions with
	Duracell International Inc. and subsequently The Gillette
	Company, most recently as Vice President-Finance for the
	Duracell Global Business Management Group. Mr. Malden has a
	B.A. in Political Science from Grinnell College and an M.B.A.
	from Emory University.                                                                                                   
|Hany Massarany(Age
	40)    |  | Mr. Massarany joined Ventana in July 1999
	and is currently Vice President and General Manager of North
	America Commercial Operations. Prior to joining Ventana,
	Mr. Massarany held management positions with Bayer
	Diagnostics and Chiron Diagnostics. Mr. Massarany has a
	B.S. from Monash University in Australia and an M.B.A. from the
	University of Melbourne.                                                                                                                                                                       
|Mark Nechita(Age 42)       |  | Mr. Nechita joined Ventana in June 2000, as
	Vice President, Human Resources, Environmental Health and
	Safety. Prior to joining Ventana, Mr. Nechita worked in
	Human Resources in the United States and internationally for RJR
	Nabisco, FMC and most recently, Cordant Technologies where he
	was Vice President, Human Resources for their Huck Fasteners
	unit. Mr. Nechita has a B.S. in Industrial and Labor
	Relations from Cornell University.                                                                                        

36



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##### 



|                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bernard O.C. Questier(Age 48)                                                                                          |  | Mr. Questier joined Ventana in October 1995
	and is currently Vice President and General Manager of Europe,
	Middle East & Africa. From October 1990 until joining
	Ventana, Mr. Questier held a number of management positions
	in E.I. DuPont de Nemours, most recently as Business Manager for
	NEN Life Science Products in Europe. Mr. Questier received
	a degree in Chemical Engineering from the Technical Institute in
	Oostende, Belgium.                                                                                                                                                                                                                                                                           
|Rex J. Bates(Age
	78)
	Class II Director
	Chairman of the Audit Committee and Member of the Nominating
	Committee      |  | Mr. Bates has served as a director of
	Ventana since April of 1996. From August 1991 to May 1995,
	Mr. Bates served on the Board of Directors of Twentieth
	Century Industries and was a member of its compensation
	committee. Prior to Twentieth Century Industries, Mr. Bates
	served as the Vice-Chairman of the Board of Directors of the
	State Farm Mutual Automobile Insurance Company. Mr. Bates
	also served as State Farms Chief Investment Officer. In
	March of 1991, Mr. Bates retired from State Farm. Prior to
	Mr. Bates employment with State Farm, he was a
	partner in the investment firm of Stein, Roe & Farnham in
	Chicago. Mr. Bates received a B.S. and an M.B.A. from the
	University of Chicago.
|Edward M. Giles(Age
	66)
	Class II Director
	Member of the Compensation and Audit Committees                           |  | Mr. Giles has served as a director of
	Ventana since September 1992. Mr. Giles has served as Chairman
	of The Vertical Group, Inc., a venture capital investment firm,
	since January 1989. Mr. Giles was previously President of
	F. Eberstadt & Co., Inc., a securities firm and Vice
	Chairman of Peter B. Cannell & Co., Inc., an investment
	management firm. He is currently a Director of Synthetech, Inc.
	Mr. Giles received a B.S.Ch.E. in Chemical Engineering from
	Princeton University and an M.S. in Industrial Management from
	the Massachusetts Institute of Technology.                                                                                                                                    
|Thomas M. Grogan, M.D.(Age 56)
	Class III Director                                                                     |  | Dr. Grogan is a founder, a Director,
	Chairman Emeritus, Chief Scientific Officer and Medical Director
	of Ventana. He has served as a director since the founding of
	the Company in June 1985 and as Chairman of the Board of Ventana
	from June 1985 to November 1995. He is also currently a
	professor of pathology at the University of Arizona, College of
	Medicine, where he has taught since 1979. He received a B.A. in
	Biology from the University of Virginia and an M.D. from George
	Washington School of Medicine. Dr. Grogan completed a
	post-doctorate fellowship at Stanford University.                                                                                                                 
|Mark C. Miller(Age
	46)
	Class I Director
	Member of the Audit Committee                                               |  | Mr. Miller has served as a director of
	Ventana since January 2001. Mr. Miller has also been
	President and Chief Executive Officer and a Director of
	Stericycle, Inc. since May 1992. Prior to joining Stericycle,
	Mr. Miller served as Vice President Pacific/ Asia/ Africa
	for the International Division of Abbott Laboratories, which he
	joined in 1977 and where he held a number of management and
	marketing positions. Mr. Miller also serves on the board of
	directors of AmericasDoctor.com, Inc. and Lake Forest Hospital.
	Mr. Miller received a B.S. in Computer Science from Purdue
	University.                                                                                                          
|James R. Weersing(Age 62)
	Class I Director
	Chairman of the Compensation Committee and Member of the Audit
	Committee |  | Mr. Weersing has served as a director of
	Ventana since October 1994. Since 1984, Mr. Weersing has
	been a Managing Director of MBW Venture Partners, a venture
	capital investment firm. Mr. Weersing has also served as
	President of JRW Technology, Inc., a consulting firm and, since
	January 2000, President and CEO of Iomed, Inc. Mr. Weersing
	received a B.S.M.E. and an M.B.A. from Stanford University.                                                                                                                                                                                                                                                                                                          

37



---



##### 



Section 16(a) Beneficial Ownership
Reporting Compliance

During the last year Mr. Giles failed to
file one report on Form 4 in a timely manner. Such
transactions have subsequently been reported.

Item 11.     Executive
Compensation

The following table sets forth all compensation
paid to our chief executive officer and the four most highly
compensated executive officers for services rendered during the
last three completed fiscal years.

Summary Compensation Table

|                            |                                 |      |      |              |  |                     |         |            |  |              |        |                  |  |  |   |         |     |  |        |         |  |  |        |         |    
|--------------------------- | ------------------------------- | ---- | ---- | ------------ |  | ------------------- | ------- | ---------- |  | ------------ | ------ | ---------------- |  |  | - | ------- | --- |  | ------ | ------- |  |  | ------ | ------- | ---
|                            |                                 |      |      |              |  |                     |         |            |  |             
|                            |                                 |      |      |              |  |                     |         | Long-Term  |  |             
|                            |                                 |      |      |              |  | Compensation Awards |         |           
|                            |                                 |      |      | Annual       |  |                     |         |           
|                            |                                 |      |      | Compensation |  | Restricted          |         | Securities |  |             
|                            |                                 |      |      |              |  | Stock               |         | Underlying |  | All Other   
|Name and Principal Position |                                 | Year |      | Salary ($)   |  | Bonus ($)           |         | Awards ($) |  | Options/SARs |        | Compensation ($)
|                            |                                 |      |      |              |  |                     |         |            |  |              |        |                 
|Christopher M. Gleeson      |                                 |      | 2001 |              |  |                     | 234,802 |            |  |              |       |                  |  |  |  |         |     |  |       |         |  |  |       |        
|                            | President, Chief Executive      |      |      | 2000         |  |                     |         | 226,719    |  |              |        |                 |  |  |   |        |     |  |        | 20,625  |  |  |        | 105,359 | (1)
|                            | Officer and Director            |      |      | 1999         |  |                     |         | 163,846    |  |              |        | 10,000           |  |  |   |        |     |  |        | 200,000 |  |  |        | 20,625  | (1)
|Nicholas Malden             |                                 |      | 2001 |              |  |                     | 212,115 |            |  |              |       |                  |  |  |  |         |     |  | 3,901  |         |  |  | 30,343 | (1)    
|                            | Vice President, Chief           |      |      | 2000         |  |                     |         | 62,436     |  |              |        |                 |  |  |   |        |     |  |        | 45,000  |  |  |        |        |    
|                            | Financial Officer and Secretary |      |      | 1999         |  |                     |         |           |  |              |        |                 |  |  |   |        |     |  |        |        |  |  |        |        |    
|Kendall B. Hendrick         |                                 |      | 2001 |              |  |                     | 188,666 |            |  |              |       |                  |  |  |  |         |     |  | 8,760  |         |  |  |       |        
|                            | Vice President,                 |      |      | 2000         |  |                     |         | 173,200    |  |              |        | 13,000           |  |  |   | 263,750 | (3) |  |        | 14,481  |  |  |        |        |    
|                            | General Manager of              |      |      | 1999         |  |                     |         | 156,914    |  |              |        | 5,000            |  |  |   |        |     |  |        | 10,502  |  |  |        | 7,212   | (1)
|                            | Research & Development          |      |      |              |  |                     |         |            |  |              |        |                  |  |  |   |         |     |  |        |         |  |  |        |         |    
|Bernard O.C. Questier(4)    |                                 |      | 2001 |              |  |                     | 168,380 |            |  |              |       |                  |  |  |  |         |     |  | 7,317  |         |  |  | 8,800  | (2)    
|                            | Vice President, General         |      |      | 2000         |  |                     |         | 161,629    |  |              |        |                 |  |  |   |        |     |  |        | 13,107  |  |  |        | 8,800   | (2)
|                            | Manager of Europe,              |      |      | 1999         |  |                     |         | 153,375    |  |              |        |                 |  |  |   |        |     |  |        | 12,670  |  |  |        | 8,800   | (2)
|                            | Middle East & Africa            |      |      |              |  |                     |         |            |  |              |        |                  |  |  |   |         |     |  |        |         |  |  |        |         |    
|Hany Massarany              |                                 |      | 2001 |              |  |                     | 163,077 |            |  |              | 29,119 |                  |  |  |  |         |     |  | 14,182 |         |  |  | 9,464  | (2)    
|                            | Vice President, General         |      |      |              |  |                     |         |            |  |              |        |                  |  |  |   |         |     |  |        |         |  |  |        |         |    
|                            | Manager of North America        |      |      | 2000         |  |                     |         | 101,994    |  |              |        |                 |  |  |   |        |     |  |        | 21,610  |  |  |        | 9,100   | (2)
|                            | Commercial Operations           |      |      | 1999         |  |                     |         | 56,642     |  |              |        |                 |  |  |   |        |     |  |        | 20,000  |  |  |        | 9,100   | (2)



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Relocation expenses inclusive of tax
	reimbursement on non-deductible portion.                                                                                                                                                      
|   
|(2) | Automobile allowance.                                                                                                                                                                                                               
|   
|(3) | Grant of 10,000 shares of restricted stock on
	October 31, 2000. For the purposes of this table, the
	shares are valued at $26.375 (the market price on
	October 30, 2000). The shares will vest five years from the
	date of grant.
|   
|(4) | Please see Employment Agreements on
	Page 39 for information with respect to currency
	fluctuations.                                                                                                                              

Aggregate Option Exercises in the Last Fiscal
Year and Year-End Values.The
following table sets forth, for each of the executives named in
the summary compensation table above, information with respect
to each

38



---



##### 



exercise of stock options during the fiscal year
ended December 31, 2001 and the value of unexercised
options at December 31, 2001.


Aggregate Option Exercises in Fiscal 2001 and
Year-End Values

|                       |  |              |   |              |  |                        |   |                         |  |             |        |               |  |  |         |  |  |  |           |  |  |  |         | 
|---------------------- |  | ------------ | - | ------------ |  | ---------------------- | - | ----------------------- |  | ----------- | ------ | ------------- |  |  | ------- |  |  |  | --------- |  |  |  | ------- | 
|                       |  |              |   |              |  |                        |   |                         |  |            
|                       |  |              |   |              |  | Number of Securities   |   |                        
|                       |  |              |   |              |  | Underlying Unexercised |   | Value of Unexercised   
|                       |  |              |   |              |  | Options at             |   | In-the-Money Options   
|                       |  | Shares       |   |              |  | December 31, 2001      |   | at December 31, 2001(1)
|                       |  | Acquired on  |   | Value        |  |                        |   |                        
|Name                   |  | Exercise (#) |   | Realized ($) |  | Exercisable            |   | Unexercisable           |  | Exercisable |        | Unexercisable
|                       |  |              |   |              |  |                        |   |                         |  |             |        |              
|Christopher M. Gleeson |  |              |  |              |  |                        |  |                         |  |             | 88,333 |               |  |  | 132,292 |  |  |  | 382,453   |  |  |  | 604,047 | 
|Nicholas Malden        |  |              |  |              |  |                        |  |                         |  |             | 11,851 |               |  |  | 37,050  |  |  |  | 29,361    |  |  |  | 93,884  | 
|Kendall B. Hendrick    |  |              |  |              |  |                        |  |                         |  |             | 44,676 |               |  |  | 24,067  |  |  |  | 92,278    |  |  |  | 26,517  | 
|Bernard O.C. Questier  |  |              |  |              |  |                        |  |                         |  |             | 83,830 |               |  |  | 13,057  |  |  |  | 1,016,547 |  |  |  | 23,776  | 
|Hany Massarany         |  |              |  |              |  |                        |  |                         |  |             | 24,291 |               |  |  | 31,501  |  |  |  | 59,319    |  |  |  | 62,510  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value of in-the-money stock
	options represents the positive spread between the exercise
	price of stock options, which ranges from $0.84 per share to
	$27.375 per share and the fair market value for our common stock
	of $22.62 per share as of December 31, 2001, which was the
	closing price of our common stock on December 31, 2001.

Employment Agreements

We have an employment agreement with Bernard O.C.
Questier, our Vice President of European Operations. The
agreement provides for annual compensation of $168,380, which is
fixed to the French Franc to protect against currency
fluctuations should the United States Dollar depreciate relative
to the French Franc; however, if the United States dollar
appreciates relative to the French Franc,
Mr. Questiers salary shall remain unchanged. The
agreement states that if Mr. Questier is terminated, he
will continue to be paid through the quarter in which notice of
termination is given plus one additional full quarter. The
agreement does not provide for any specified term of employment.
We currently have no employment contracts or agreements with any
other officers named in the Summary Compensation Table or with
any other person.

Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

The Compensation Committee of the Board of
Directors consists of Jack W. Schuler, James Weersing and
Edward M. Giles. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries
and incentive compensation for our employees and consultants.
However, the Compensation Committee has full power and authority
to grant stock options to our executive officers under the 1996
Stock Option Plan.

39



---



##### 



Option Grants in the Last Fiscal
Year

The following table sets forth information with
respect to each grant of stock options made during the fiscal
year ended December 31, 2001 to each executive officer
named in the preceding Summary Compensation Table:

Individual Grants

|                       |  |            |         |            |  |             |     |            |  |                      |        |        |  |  |         |  |  |  |         |  |  |  |         | 
|---------------------- |  | ---------- | ------- | ---------- |  | ----------- | --- | ---------- |  | -------------------- | ------ | ------ |  |  | ------- |  |  |  | ------- |  |  |  | ------- | 
|                       |  |            |         |            |  |             |     |            |  |                     
|                       |  |            |         |            |  |             |     |            |  | Potential Realizable
|                       |  |            |         |            |  |             |     |            |  | Value at Assumed    
|                       |  |            |         |            |  |             |     |            |  | Annual Rates of     
|                       |  | Number of  |         |            |  |             |     |            |  | Stock Price         
|                       |  | Securities |         | % of Total |  |             |     |            |  | Appreciation for    
|                       |  | Underlying |         | Options    |  | Exercise or |     |            |  | Option Term(4)      
|                       |  | Options    |         | Granted in |  | Base Price  |     | Expiration |  |                     
|Name                   |  | Granted(1) |         | 2001(2)    |  | ($Sh)(3)    |     | Date       |  | 5%($)                |        | 10%($)
|                       |  |            |         |            |  |             |     |            |  |                      |        |       
|Christopher M. Gleeson |  |            |        |            |  |             |    |            |  |                      |       |        |  |  |        |  |  |  |        |  |  |  |        | 
|Nicholas Malden        |  |            | 2,550(a | )          |  |             | 0.3 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 34,078  |  |  |  | 86,361  | 
|                       |  |            | 1,351(b | )          |  |             | 0.2 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 18,055  |  |  |  | 45,754  | 
|Kendall Hendrick       |  |            | 5,400(a | )          |  |             | 0.7 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 72,166  |  |  |  | 182,882 | 
|                       |  |            | 3,360(b | )          |  |             | 0.4 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 44,903  |  |  |  | 113,793 | 
|Bernard O. C. Questier |  |            | 4,810(a | )          |  |             | 0.6 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 64,281  |  |  |  | 162,900 | 
|                       |  |            | 2,507(b | )          |  |             | 0.3 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 33,504  |  |  |  | 84,905  | 
|Hany Massarany         |  |            | 9,500(a | )          |  |             | 1.2 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 126,958 |  |  |  | 321,737 | 
|                       |  |            | 4,682(b | )          |  |             | 0.6 | %          |  | $                    | 21.250 |        |  |  | 1/22/11 |  |  |  | 62,570  |  |  |  | 158,565 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The above options were granted under our 1996
	Stock Option Plan. Vesting periods are as follows: (a) five
	years and (b) immediate.                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Based on an aggregate of 799,018 options granted
	by us during the year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | The option exercise price per share was equal to
	the fair market value of our common stock on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | The 5% and 10% assumed annual rates of compounded
	stock price appreciation are mandated by rules of the Securities
	and Exchange Commission. There can be no assurance provided to
	any executive officer or any other holder of our securities that
	the actual stock price appreciation over the 10-year option term
	will be at the assumed 5% and 10% levels or at any other defined
	level. Unless the market price of our common stock appreciates
	over the option term, no value will be realized from the option
	grants made to the executive officers.

40



---



##### 



Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table sets forth information, as of
February 28, 2002 with respect to the number of shares of
our common stock beneficially owned by individual directors, by
all of our directors and officers as a group and by persons
known by us to own more than 5% of our common stock. We have no
other class of voting stock outstanding. The information for the
non-directors and officers has been derived from their
respective 13-G filings as of December 31, 2001.

|                                                    |                           |           |           |            |  |  |      |  | 
|--------------------------------------------------- | ------------------------- | --------- | --------- | ---------- |  |  | ---- |  | 
|                                                    |                           |           |           | Percent of
|                                                    |                           |           |           | Common    
|                                                    |                           | Number of |           | Stock     
|Name and Address of Beneficial Owner                |                           | Shares    |           | Shares    
|                                                    |                           |           |           |           
|Kopp Investment Advisors, Inc.                      |                           |           | 2,597,901 |            |  |  | 16.0 | 
|                                                    | 7701 France Avenue South  |           |           |            |  |  |      |  | 
|                                                    | Suite 500                 |           |           |            |  |  |      |  | 
|                                                    | Edina, MN 55435           |           |           |            |  |  |      |  | 
|Wellington Management Co. LLP                       |                           |           | 1,794,300 |            |  |  | 11.1 | 
|                                                    | 75 State Street           |           |           |            |  |  |      |  | 
|                                                    | Boston, MA 02109          |           |           |            |  |  |      |  | 
|MBW Venture Partners. L.P.                          |                           |           | 1,042,348 |            |  |  | 6.4  | 
|                                                    | 365 South Street          |           |           |            |  |  |      |  | 
|                                                    | Morristown, NJ 07960      |           |           |            |  |  |      |  | 
|Franklin Resources Asset Management                 |                           |           | 858,800   |            |  |  | 5.3  | 
|                                                    | 777 Mariners Island Blvd. |           |           |            |  |  |      |  | 
|                                                    | San Mateo, CA 94404       |           |           |            |  |  |      |  | 
|Jack W. Schuler(3)                                  |                           |           | 1,463,715 |            |  |  | 9.0  | 
|John Patience(4)                                    |                           |           | 783,665   |            |  |  | 4.8  | 
|Edward M. Giles(5)                                  |                           |           | 600,857   |            |  |  | 3.7  | 
|Thomas M. Grogan, M.D.(6)                           |                           |           | 122,228   |            |  |  | *    | 
|Rex J. Bates(7)                                     |                           |           | 117,259   |            |  |  | *    | 
|Christopher M. Gleeson(8)                           |                           |           | 115,255   |            |  |  | *    | 
|Bernard O.C. Questier(9)                            |                           |           | 83,976    |            |  |  | *    | 
|Kendall B. Hendrick(10)                             |                           |           | 60,093    |            |  |  | *    | 
|James R. Weersing(11)                               |                           |           | 59,115    |            |  |  | *    | 
|Hitoshi Isobe(12)                                   |                           |           | 54,157    |            |  |  | *    | 
|Hany Massarany(13)                                  |                           |           | 30,702    |            |  |  | *    | 
|Kirk M. Kimler(14)                                  |                           |           | 30,093    |            |  |  | *    | 
|Mark C. Miller(15)                                  |                           |           | 28,333    |            |  |  | *    | 
|Nicholas Malden(16)                                 |                           |           | 15,361    |            |  |  | *    | 
|Mark Nechita(17)                                    |                           |           | 12,468    |            |  |  | *    | 
|Tammy J. Brach(18)                                  |                           |           | 10,538    |            |  |  | *    | 
|James LaFrance                                      |                           |           | 0         |            |  |  | *    | 
|Timothy B. Johnson                                  |                           |           | 0         |            |  |  | *    | 
|All Directors and Officers as a group
	(18 persons) |                           |           | 3,587,815 |            |  |  | 22.1 | 



---



|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                            
|   
|(1) | Except as indicated in the footnotes to this
	table and pursuant to applicable community property laws, the
	persons named in the table have sole voting and investment power
	with respect to all shares of our common stock. Except as
	indicated, the address of all persons listed is
	1910 Innovation Park Drive, Tucson, AZ 85737.

41



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Applicable percentage of ownership is based on
	16,234,769 shares of common stock outstanding as of
	February 28, 2002, together with shares issuable pursuant
	to applicable options of such stockholder that may be exercised
	within 60 days after February 28, 2002. Shares of
	common stock subject to options currently exercisable or
	exercisable within 60 days after February 28, 2002,
	are deemed outstanding for computing the percentage ownership of
	the person holding such options, but are not deemed outstanding
	for computing the percentage of any other person.
|   
|(3) | Includes 345,208 shares issuable upon the
	exercise of options exercisable within 60 days of
	February 28, 2002, held by Mr. Schuler;
	73,512 shares beneficially owned by Mr. Schuler, as
	custodian for Tanya Eva Schuler; 73,512 shares beneficially
	owned by Mr. Schuler, as custodian for Therese Heidi
	Schuler; 73,512 shares beneficially owned by
	Mr. Schuler, as custodian for Tino Hans Schuler;
	20,000 shares beneficially owned by the Schuler Family
	Foundation, and; 1,250 shares owned by Mrs. Schuler.                                                            
|   
|(4) | Includes 349,791 shares issuable upon the
	exercise of options exercisable within 60 days of
	February 28, 2002, held by Mr. Patience, as well as
	4,800 shares held in the name of Mrs. Patience.                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) | Includes 478,501 shares beneficially owned by
	Vertical Fund Associates, L.P. Also includes 48,608 shares
	issuable upon the exercise of options exercisable within
	60 days of February 28, 2002, held by Mr. Giles.
	Also includes 37,462 beneficially owned by Edward M.
	Giles IRA. Mr. Giles, one of our directors, is chairman of
	the Vertical Group, Inc. Mr. Giles disclaims beneficial
	ownership of the shares beneficially owned by such entities
	affiliated with the Vertical Group, Inc., except to the extent
	of his partnership interest therein.                    
|   
|(6) | Includes 64,380 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Dr. Grogan.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | Includes 48,608 shares issuable upon the exercise
	of options exercisable within 60 days of February 28,
	2002, held by Mr. Bates.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(8) | Includes 101,409 shares issuable upon the
	exercise of options exercisable within 60 days of
	February 28, 2002, held by Mr. Gleeson.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(9) | Includes 80,220 shares issuable upon the exercise
	of options exercisable within 60 days of February 28,
	2002, held, held by Mr. Questier.                                                                                                                                                                                                                                                                                                                                                                                                                                            



|     |                                                                                                                                                                                                                                                                                             
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 66,766 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Hendrick.                                                                                                                                                           
|    
|(11) | Includes 48,608 shares issuable upon the exercise
	of options exercisable within 60 days of February 2002,
	held by Mr. Weersing. Includes 6,209 shares beneficially
	owned by James R. Weersing and Mary H. Weersing,
	Trustees of the Weersing Family Trust U/ D/ T dated
	April 24, 1991.
|    
|(12) | Includes 54,157 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Isobe.                                                                                                                                                              
|    
|(13) | Includes 29,334 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Massarany.                                                                                                                                                          
|    
|(14) | Includes 27,361 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Kimler.                                                                                                                                                             
|    
|(15) | Includes 28,333 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Miller.                                                                                                                                                             
|    
|(16) | Includes 15,361 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2001, held by Mr. Malden.                                                                                                                                                             
|    
|(17) | Includes 11,769 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Mr. Nechita.                                                                                                                                                            
|    
|(18) | Includes 9,556 shares issuable upon exercise of
	options exercisable within 60 days of February 28,
	2002, held by Ms. Brach.                                                                                                                                                               

42



---



##### 



Item 13.     Certain
Relationships and Related Transactions

On February 8, 2001, our Board of Directors
unanimously approved, with Messrs. Schuler and Patience
abstaining, an additional option to purchase 50,000 shares
to each of Messrs. Schuler and Patience. These options
carry an exercise price of $20.4375 per share, which was equal
to the fair market value of our common stock on the date of
grant. The options vest on a monthly basis over a 12-month
period commencing on February 26, 2001. This grant was a
renewal of an arrangement that has been in place since
February 26, 1996 by which Messrs. Schuler and
Patience devote a significant portion of their work time to our
business.

43



---



##### 



PART IV

Item 14.     Exhibits
and Reports on Form 10-K

1.     Financial
Statements

The following consolidated financial statements
of Ventana Medical Systems, Inc. and Report of Ernst & Young
LLP, Independent Auditors, are in this Form 10-K.

|                                                                                                      |  |  |     | 
|----------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Ernst & Young LLP, Independent
	Auditors                                                    |  |  | F-1 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                         |  |  | F-2 | 
|Consolidated Statements of Operations for the
	Years Ended December 31, 2001, 2000 and 1999           |  |  | F-3 | 
|Consolidated Statements of Stockholders
	Equity for the Years Ended December 31, 2001, 2000 and 1999 |  |  | F-4 | 
|Consolidated Statements of Cash Flow for the
	Years Ended December 31, 2001, 2000 and 1999            |  |  | F-5 | 
|Notes to Consolidated Financial Statements                                                            |  |  | F-6 | 

2.     Financial
Statement Schedules for the Years ended December 31, 2001,
2000 and 1999

Schedule II  Valuation and
Qualifying Accounts has been provided on page 46. All other
schedules are omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated
financial statements or notes thereto.

3.     Exhibits

The following Exhibits are filed herewith
pursuant to Rule 601 of Regulation S-K:

|        |  |                                                                         |  |       |    |  
|------- |  | ----------------------------------------------------------------------- |  | ----- | -- | -
|Exhibit |  |                                                                         |  |      
|Number  |  | 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 | )
|10.7    |  | 2001 Outside Director Stock Option Plan                                 |  |       | (3 | )
|21.1    |  | Subsidiaries of Registrant                                              |  |       |    |  
|23.1    |  | Consent of Ernst & Young LLP, Independent
	Auditors                     |  |       |    |  



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Filed with the Registration Statement on
	Form S-1 (Commission File No. 333-4461), declared effective
	by the Commission July 26, 1996.
|   
|(2) | Filed with the Registration Statement on
	Form S-8 (Commission File No. 333-92883), filed with the
	Commission on December 16, 1999.   
|   
|(3) | Filed with the Registration Statement on
	Form S-8 (Commission File No. 333-69658), filed with the
	Commission on September 19, 2001.  

We did not file any reports on Form 8-K
during the last quarter of the fiscal year ended
December 31, 2001.

44



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Tucson,
State of Arizona, on this 27th day of March 2002.



| |                              
| | -----------------------------
| | VENTANA MEDICAL SYSTEMS, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ NICHOLAS MALDEN

| |                                
| | -------------------------------
| |                                
| | Nicholas Malden                
| | Vice President, Chief Financial
| | Officer and Secretary          

Pursuant to the requirements of the Securities
Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:

|                                                 |  |                                                                                                      |  |               
|------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                                                |  | Date          
|                                                 |  |                                                                                                      |  |               
|                                                
|/s/ CHRISTOPHER M. GLEESONChristopher M. Gleeson |  | President, Chief Executive Officer and Director
	(Principal Executive Officer)                       |  | March 27, 2002
|                                                
|/s/ NICHOLAS MALDENNicholas Malden               |  | Vice President, Chief Financial Officer and
	Secretary (Principal Financial
	and Accounting Officer) |  | March 27, 2002
|                                                
|/s/ REX J. BATESRex J. Bates                     |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ EDWARD M. GILESEdward M. Giles               |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ THOMAS M. GROGANThomas M. Grogan             |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ MARK C. MILLERMark C. Miller                 |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ JOHN PATIENCEJohn Patience                   |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ JACK W. SCHULERJack W. Schuler               |  | Director                                                                                             |  | March 27, 2002
|                                                
|/s/ JAMES R. WEERSINGJames R. Weersing           |  | Director                                                                                             |  | March 27, 2002

45



---



##### 



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

VENTANA MEDICAL SYSTEMS, INC.

|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |   |       | 
|---------------------------- | ----------------------------- | -------------------------------- |  | ---------- | ----- | -------- |  | ---------- | ------ | ---------- |  | - | ---- | ---- |  | - | ----- | --- |  | - | ----- | 
|                             |                               |                                  |  |            |       |          |  |           
|                             |                               |                                  |  | Additions  |       |          |  |           
|                             |                               |                                  |  |            |       |          |  |           
|                             |                               | Balance at                       |  | Charged to |       | Charged  |  |            |        | Balance at
|                             |                               | Beginning                        |  | Costs and  |       | to Other |  |            |        | End of    
|Description                  |                               | of Period                        |  | Expenses   |       | Accounts |  | Deductions |        | Period    
|                             |                               |                                  |  |            |       |          |  |            |        |           
|                             |                               |                                 
|                             |                               | (in thousands)                  
|Year Ended December 31, 2001 |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             | Deducted from asset accounts: |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |   |      
|                             |                               | Allowance for doubtful accounts  |  | $          | 2,639 |          |  | $          | (1,014 | )          |  | $ | 147  | (1)  |  | $ | 252   | (2) |  | $ | 1,520 | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             |                               | Allowance for obsolete inventory |  | $          | 2,357 |          |  | $          |       |            |  | $ |     |      |  | $ | 1,746 | (3) |  | $ | 611   | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|Year Ended December 31, 2000 |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             | Deducted from asset accounts: |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |   |      
|                             |                               | Allowance for doubtful accounts  |  | $          | 883   |          |  | $          | 1,895  |            |  | $ | 30   | (1)  |  | $ | 169   | (2) |  | $ | 2,639 | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             |                               | Allowance for obsolete inventory |  | $          | 476   |          |  | $          | 4,310  |            |  | $ |     |      |  | $ | 2,429 | (3) |  | $ | 2,357 | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|Year Ended December 31, 1999 |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             | Deducted from asset accounts: |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |   |      
|                             |                               | Allowance for doubtful accounts  |  | $          | 694   |          |  | $          | 196    |            |  | $ | (152 | )(1) |  | $ | 159   | (2) |  | $ | 883   | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  
|                             |                               | Allowance for obsolete inventory |  | $          | 104   |          |  | $          | 408    |            |  | $ |     |      |  | $ | 36    | (3) |  | $ | 476   | 
|                             |                               |                                  |  |            |       |          |  |            |        |            |  |   |      |      |  |   |       |     |  |  



---



|    |                                                       
|--- | ------------------------------------------------------
|(1) | Charged to revenue                                    
|   
|(2) | Uncollectible accounts written off, net of
	recoveries
|   
|(3) | Inventories written off, net of recoveries            

46



---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors

Ventana Medical Systems, Inc.


We have audited the accompanying consolidated
balance sheets of Ventana Medical Systems, Inc., as of
December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial
statement schedule listed in item 14(2). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Ventana Medical
Systems, Inc., at December 31, 2001 and 2000 and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Phoenix, Arizona

January 25, 2002 except for


Note 17 as which the date is


March 20, 2002


F-1



---



##### 



VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |         |         | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                            |                                                                                                                                                                      |                                           
|                                            |                                                                                                                                                                      | December 31,                              
|                                            |                                                                                                                                                                      |                                           
|                                            |                                                                                                                                                                      | 2001                                       |        | 2000   
|                                            |                                                                                                                                                                      |                                            |        |        
|                                            |                                                                                                                                                                      |                                           
|                                            |                                                                                                                                                                      | (in thousands, except                     
|                                            |                                                                                                                                                                      | per share data)                           
|ASSETS                                     
|Current assets:                             |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            | Cash and cash equivalents                                                                                                                                            |                                            | $      | 12,280  |         |  | $      | 38,512  |        
|                                            | Trade accounts receivable, net of allowance for
	doubtful accounts of $1,520 and $2,639, respectively                                                                |                                            |        | 20,448  |         |  |        | 16,682  |        
|                                            | Inventories                                                                                                                                                          |                                            |        | 11,763  |         |  |        | 8,100   |        
|                                            | Prepaid expenses                                                                                                                                                     |                                            |        | 520     |         |  |        | 460     |        
|                                            | Deferred tax assets                                                                                                                                                  |                                            |        | 2,386   |         |  |        | 4,417   |        
|                                            | Other current assets                                                                                                                                                 |                                            |        | 752     |         |  |        | 492     |        
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            |                                                                                                                                                                      | Total current assets                       |        |         | 48,149  |  |        |         | 68,663  | 
|Property and equipment, net                 |                                                                                                                                                                      |                                            | 41,432 |         |         |  | 22,329 |        
|Intangibles, net                            |                                                                                                                                                                      |                                            | 12,192 |         |         |  | 12,296 |        
|Capitalized software development costs, net |                                                                                                                                                                      |                                            | 1,743  |         |         |  | 1,190  |        
|Deferred tax assets, net of current portion |                                                                                                                                                                      |                                            | 6,416  |         |         |  | 4,385  |        
|Other assets                                |                                                                                                                                                                      |                                            | 1,053  |         |         |  | 719    |        
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            |                                                                                                                                                                      | Total assets                               |        | $       | 110,985 |  |        | $       | 109,582 | 
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY      
|Current liabilities:                        |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            | Accounts payable                                                                                                                                                     |                                            | $      | 4,733   |         |  | $      | 5,943   |        
|                                            | Other current liabilities                                                                                                                                            |                                            |        | 9,578   |         |  |        | 13,143  |        
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            |                                                                                                                                                                      | Total current liabilities                  |        |         | 14,311  |  |        |         | 19,086  | 
|Long-term debt                              |                                                                                                                                                                      |                                            | 2,521  |         |         |  | 3,408  |        
|Commitments and Contingencies               |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|Stockholders equity:                       |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            | Common stock  $.001 par value;
	50,000,000 shares authorized, 16,110,466 and 15,444,122 shares
	issued and outstanding at December 31, 2001 and 2000,
	respectively |                                            |        | 16      |         |  |        | 15      |        
|                                            | Additional paid-in-capital                                                                                                                                           |                                            |        | 140,587 |         |  |        | 134,862 |        
|                                            | Accumulated deficit                                                                                                                                                  |                                            |        | (45,194 | )       |  |        | (46,636 | )      
|                                            | Accumulated other comprehensive income (loss)                                                                                                                        |                                            |        | (656    | )       |  |        | (553    | )      
|                                            | Treasury stock40,000 shares, at cost                                                                                                                                |                                            |        | (600    | )       |  |        | (600    | )      
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            |                                                                                                                                                                      | Total stockholders equity                 |        |         | 94,153  |  |        |         | 87,088  | 
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        
|                                            |                                                                                                                                                                      | Total liabilities and stockholders equity |        | $       | 110,985 |  |        | $       | 109,582 | 
|                                            |                                                                                                                                                                      |                                            |        |         |         |  |        |        

See accompanying notes.

F-2



---



##### 



VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |        |     |        | 
|--------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------- | ----------------- | ------ | --- | ----- | ------- | ------- | ----- | ------- | ------ | ------ | --- | ------ | 
|                                                                                        |                                               |                                      
|                                                                                        |                                               | Years Ended December 31,             
|                                                                                        |                                               |                                      
|                                                                                        |                                               | 2001                                  |                   | 2000   |     | 1999 
|                                                                                        |                                               |                                       |                   |        |     |      
|                                                                                        |                                               |                                      
|                                                                                        |                                               | (in thousands, except per share data)
|Sales:                                                                                  |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Reagents and other                            |                                       | $                 | 61,586 |     |       | $       | 49,682  |       |         | $      | 45,340 |    
|                                                                                        | Instruments                                   |                                       |                   | 26,227 |     |       |         | 21,467  |       |         |        | 24,069 |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        |                                               |                                       | 87,813            |        |     |       | 71,149  |         |       |         | 69,409 |       
|Cost of goods sold                                                                      |                                               |                                       | 27,622            |        |     |       | 36,377  |         |       |         | 21,218 |       
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Gross profit                                                                            |                                               |                                       | 60,191            |        |     |       | 34,772  |         |       |         | 48,191 |       
|Operating expenses:                                                                     |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Research and development                      |                                       |                   | 14,929 |     |       |         | 11,116  |       |         |        | 7,078  |    
|                                                                                        | Selling, general and administrative           |                                       |                   | 42,760 |     |       |         | 43,800  |       |         |        | 32,381 |    
|                                                                                        | Amortization of acquisition costs             |                                       |                   | 1,575  |     |       |         | 1,474   |       |         |        | 1,051  |    
|                                                                                        | Impairment charges and other expenses         |                                       |                   |       |     |       |         | 4,519   |       |         |        |       |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Income (loss) from operations                                                           |                                               |                                       | 927               |        |     |       | (26,137 | )       |       |         | 7,681  |       
|Interest and other income (expense)                                                     |                                               |                                       | 826               |        |     |       | 1,346   |         |       |         | (370   | )     
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Income (loss) before taxes and cumulative effect
	of accounting change                  |                                               |                                       | 1,753             |        |     |       | (24,791 | )       |       |         | 7,311  |       
|(Provision for) benefit from income taxes                                               |                                               |                                       | (311              | )      |     |       | (350    | )       |       |         | 5,500  |       
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Income (loss) before cumulative effect of
	accounting change                            |                                               |                                       | 1,442             |        |     |       | (25,141 | )       |       |         | 12,811 |       
|Cumulative effect of accounting change, net of
	applicable income tax benefit of $1,436 |                                               |                                       |                  |        |     |       | (2,154  | )       |       |         |       |       
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        |                                               |                                       | Net income (loss) |        | $   | 1,442 |         |         | $     | (27,295 | )      |        | $   | 12,811 | 
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Basic earnings per common share:                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Before cumulative effect of accounting change |                                       | $                 | .09    |     |       | $       | (1.70   | )     |         | $      | .95    |    
|                                                                                        | Cumulative effect of accounting change        |                                       |                   |       |     |       |         | (.15    | )     |         |        |       |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        |                                               |                                       | Net income (loss) |        | $   | .09   |         |         | $     | (1.85   | )      |        | $   | .95    | 
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Diluted earnings per common share:                                                      |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Before cumulative effect of accounting change |                                       | $                 | .09    |     |       | $       | (1.70   | )     |         | $      | .88    |    
|                                                                                        | Cumulative effect of accounting changes       |                                       |                   |       |     |       |         | (.15    | )     |         |        |       |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        |                                               |                                       | Net income (loss) |        | $   | .09   |         |         | $     | (1.85   | )      |        | $   | .88    | 
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|Pro forma amounts assuming the accounting
	changes are applied retroactively:           |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Net income (loss)                             |                                       | $                 | 1,442  |     |       | $       | (25,141 | )     |         | $      | 11,668 |    
|                                                                                        | Net income (loss) per common share:           |                                       |                   |        |     |       |         |         |       |         |        |        |    
|                                                                                        |                                               |  Basic                               |                   | $      | .09 |       |         | $       | (1.70 | )       |        | $      | .88 |       
|                                                                                        |                                               |  Diluted                             |                   | $      | .09 |       |         | $       | (1.70 | )       |        | $      | .80 |       
|Shares used in computing earnings per common
	share:                                    |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        |  Basic                                       |                                       |                   | 15,905 |     |       |         | 14,770  |       |         |        | 13,478 |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       
|                                                                                        | Diluted                                      |                                       |                   | 16,427 |     |       |         | 14,770  |       |         |        | 14,636 |    
|                                                                                        |                                               |                                       |                   |        |     |       |         |         |       |         |        |       

See accompanying notes.

F-3



---



##### 



VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------------- | ---------- | ---------- |  | ----------- | -- | ------------- |  | ------------- | ------- | ----- |  | ----- | ------- | - |  | - | ---- | - |  | - | ---- | - |  | - | ------- | -
|                                                      |  |                                   |            |            |  |             |    | Accumulated   |  |               |         |      
|                                                      |  | Common Stock                      |            | Additional |  |             |    | Other         |  |               |         |      
|                                                      |  |                                   |            | Paid-In    |  | Accumulated |    | Comprehensive |  | Treasury      |         |      
|                                                      |  | Shares                            |            | Amount     |  | Capital     |    | Deficit       |  | Income (Loss) |         | Stock |  | Total
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |      
|                                                      |  |                                  
|                                                      |  | (in thousands, except share data)
|Balance at January 1, 1999                            |  |                                   | 13,421,819 |            |  | $           | 13 |               |  | $             | 78,716  |       |  | $     | (32,152 | ) |  | $ | (193 | ) |  | $ | (600 | ) |  | $ | 45,784  |  
|Net income                                            |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       | 12,811  |   |  |   |     |   |  |   |     |   |  |   | 12,811  |  
|Translation adjustment                                |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   | 78   |   |  |   |     |   |  |   | 78      |  
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Comprehensive income                                  |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 12,889  |  
|Sale of common stock  other                          |  |                                   | 171,821    |            |  |             | 1  |               |  |               | 1,826   |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 1,827   |  
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 1999                          |  |                                   | 13,593,640 |            |  |             | 14 |               |  |               | 80,542  |       |  |       | (19,341 | ) |  |   | (115 | ) |  |   | (600 | ) |  |   | 60,500  |  
|Net loss                                              |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       | (27,295 | ) |  |   |     |   |  |   |     |   |  |   | (27,295 | )
|Translation adjustment                                |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   | (438 | ) |  |   |     |   |  |   | (438    | )
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Comprehensive loss                                    |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | (27,733 | )
|Sale of common stock net of issuance costs of
	$3,154 |  |                                   | 1,250,000  |            |  |             | 1  |               |  |               | 46,846  |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 46,847  |  
|Sale of common stock  other                          |  |                                   | 600,482    |            |  |             |   |               |  |               | 6,052   |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 6,052   |  
|Tax benefit from stock options                        |  |                                   |           |            |  |             |   |               |  |               | 1,422   |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 1,422   |  
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2000                          |  |                                   | 15,444,122 |            |  |             | 15 |               |  |               | 134,862 |       |  |       | (46,636 | ) |  |   | (553 | ) |  |   | (600 | ) |  |   | 87,088  |  
|Net income                                            |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       | 1,442   |   |  |   |     |   |  |   |     |   |  |   | 1,442   |  
|Translation adjustment                                |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   | (103 | ) |  |   |     |   |  |   | (103    | )
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Comprehensive income                                  |  |                                   |           |            |  |             |   |               |  |               |        |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 1,339   |  
|Sale of common stock  other                          |  |                                   | 666,344    |            |  |             | 1  |               |  |               | 5,725   |       |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 5,726   |  
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2001                          |  |                                   | 16,110,466 |            |  | $           | 16 |               |  | $             | 140,587 |       |  | $     | (45,194 | ) |  | $ | (656 | ) |  | $ | (600 | ) |  | $ | 94,153  |  
|                                                      |  |                                   |            |            |  |             |    |               |  |               |         |       |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  

See accompanying notes.

F-4



---



##### 



VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |        |        |  
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | -
|                                                                                                     |                                                          |                                                     
|                                                                                                     |                                                          | Years Ended December 31,                            
|                                                                                                     |                                                          |                                                     
|                                                                                                     |                                                          | 2001                                                 |         | 2000   |         | 1999
|                                                                                                     |                                                          |                                                      |         |        |         |     
|                                                                                                     |                                                          |                                                     
|                                                                                                     |                                                          | (in thousands)                                      
|Operating activities:                                                                                |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Net income (loss)                                                                                    |                                                          | $                                                    | 1,442   |        |         | $    | (27,295 | )      |         | $ | 12,811 |       
|Adjustments to reconcile net income
	(loss) to net cash (used in) provided by operating
	activities: |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|                                                                                                     | Depreciation and amortization                            |                                                      |         | 6,806  |         |      |         | 5,497  |         |   |        | 3,689  |       
|                                                                                                     | Cumulative effect of accounting change                   |                                                      |         |       |         |      |         | 2,154  |         |   |        |       |       
|                                                                                                     | Non-cash intangibles and property and equipment
	charges |                                                      |         |       |         |      |         | 7,914  |         |   |        |       |       
|                                                                                                     | Benefit from deferred taxes                              |                                                      |         |       |         |      |         | (1,255 | )       |   |        | (5,980 | )     
|Changes in operating assets and liabilities net
	of effects from acquisitions:                       |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|                                                                                                     | Accounts receivable                                      |                                                      |         | (3,766 | )       |      |         | 4,094  |         |   |        | (4,245 | )     
|                                                                                                     | Inventories                                              |                                                      |         | (3,663 | )       |      |         | 5,374  |         |   |        | (2,465 | )     
|                                                                                                     | Other assets                                             |                                                      |         | (1,339 | )       |      |         | (631   | )       |   |        | (1,002 | )     
|                                                                                                     | Accounts payable                                         |                                                      |         | (1,210 | )       |      |         | 1,926  |         |   |        | 481    |       
|                                                                                                     | Other current liabilities                                |                                                      |         | (3,565 | )       |      |         | 4,389  |         |   |        | 815    |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|                                                                                                     |                                                          | Net cash (used in) provided by operating
	activities |         |        | (5,295  | )    |         |        | 2,167   |   |        |        | 4,104  |  
|Investing activities:                                                                                |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Purchase of property and equipment                                                                   |                                                          |                                                      | (23,844 | )      |         |      | (15,150 | )      |         |   | (6,843 | )     
|Purchase of intangible assets                                                                        |                                                          |                                                      | (1,471  | )      |         |      | (1,617  | )      |         |   | (78    | )     
|Acquisition of Biotechnology Tools,
	Inc.                                                            |                                                          |                                                      |        |        |         |      |        |        |         |   | (358   | )     
|Acquisition of Quantitative Diagnostic
	Laboratories                                                 |                                                          |                                                      |        |        |         |      | (2,500  | )      |         |   |       |       
|Investment in preferred stock and warrant in
	Molecular Diagnostic, Inc.                             |                                                          |                                                      | (358    | )      |         |      |        |        |         |   |       |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|                                                                                                     |                                                          | Net cash used in investing activities                |         |        | (25,673 | )    |         |        | (19,267 | ) |        |        | (7,279 | )
|Financing activities:                                                                                |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Net proceeds from private placement                                                                  |                                                          |                                                      |        |        |         |      | 46,847  |        |         |   |       |       
|Issuance of common stock                                                                             |                                                          |                                                      | 5,726   |        |         |      | 6,052   |        |         |   | 2,460  |       
|Net change in long term debt                                                                         |                                                          |                                                      | (887    | )      |         |      | 1,364   |        |         |   |       |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Net cash provided by financing activities                                                            |                                                          |                                                      | 4,839   |        |         |      | 54,263  |        |         |   | 2,460  |       
|Effect of exchange rate changes on cash                                                              |                                                          |                                                      | (103    | )      |         |      | (438    | )      |         |   | 78     |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Net (decrease) increase in cash and cash
	equivalents                                                |                                                          |                                                      | (26,232 | )      |         |      | 36,725  |        |         |   | (637   | )     
|Cash and cash equivalents, beginning of year                                                         |                                                          |                                                      | 38,512  |        |         |      | 1,787   |        |         |   | 2,424  |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Cash and cash equivalents, end of year                                                               |                                                          | $                                                    | 12,280  |        |         | $    | 38,512  |        |         | $ | 1,787  |       
|                                                                                                     |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|Supplemental cash flow information:                                                                  |                                                          |                                                      |         |        |         |      |         |        |         |   |        |       
|                                                                                                     | Income taxes paid                                        |                                                      | $       | 311    |         |      | $       | 350    |         |   | $      | 104    |       
|                                                                                                     | Interest paid                                            |                                                      | $       | 330    |         |      | $       | 278    |         |   | $      | 145    |       

See accompanying notes.

F-5



---



##### 



VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except per share
data)


1.     Organization
and Significant Accounting Policies

Organization:Ventana Medical Systems, Inc. (the
Company) develops, manufactures and markets
proprietary instruments and reagents that automate diagnostic
procedures used for molecular analysis of cells. At present, the
Companys principal markets are North America, Europe,
Japan and Australia.

Revenue Recognition:During the year ended
December 31, 2000, the Company changed its methods of
revenue recognition for its products that require installation
at the customers site in accordance with Staff Accounting
Bulletin (SAB) No. 101 Revenue Recognition in
Financial Statements. Previously, the Company had recognized
revenue for products upon shipment to the customer, but prior to
installation. Under the new accounting method adopted
retroactive to January 1, 2000, revenue from instrument
sales made directly to the end user is generally recognized upon
completion of installation. However, if the end user already has
the identical instrument installed at the same location we
recognize the revenue from that sale upon shipment. Revenue from
reagents is recognized upon shipment. Service contract revenue
is deferred and recognized ratably over the service period
obligations, which are typically one to three years. Beginning
January 1, 2001, the Company invoices customers for
products, excluding service contracts, when the transaction can
be recognized as revenue.

A portion of the Companys revenue is from
sales made to distributors under agreements that require the
distributors to assume responsibility for product installation
without recourse to the Company. Revenue for instruments sold
under these agreements is recognized upon shipment to the
distributor. There are certain foreign distributors in which
revenue is not recognized until the instrument is installed and
accepted by the end user.

The cumulative effect of the accounting change
resulted in a charge to operations of $2,154 (net of an income
tax benefit of $1,436), which is included in operations for the
year ended December 31, 2000. The effect of the change on
the year-ended 2000 was to decrease income before cumulative
effect of accounting change by $539 ($0.04 per basic and diluted
shares, respectively).

Principles of Consolidation: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 Japan K.K., Ventana
Medical Systems Australia Pty. Ltd., BioTek Solutions, Inc.
(BioTek) and BioTechnology Tools, Inc. (BTTI). All significant
intercompany accounts and transactions have been eliminated.

Reclassifications:Certain prior year amounts have been
reclassified to conform with the current period presentation.

Use of Estimates:The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.

Cash and Cash Equivalents:Cash equivalents include investments
(primarily money market accounts and overnight reverse
repurchase agreements) with maturities of three months or less
from the date of purchase.

Inventories:Inventories, principally chemical,
biological and instrument parts and reagents and finished
instruments, are stated at the lower of cost (first-in first-out
basis) or market.

F-6



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Organization
and Significant Accounting
Policies  (Continued)


Property and Equipment:Property and equipment are stated at
cost. Depreciation is computed using the straight-line method
over estimated useful lives of three to twenty years.
Amortization of leasehold improvements is calculated using a
straight-line method over the lesser of the term of the lease or
useful life of the asset. Property and equipment includes
diagnostic instruments used for sales demonstrations or placed
with customers under several types of arrangements, including
cancelable reagent plans (RAPs), performance evaluation period
programs (PEP) and rentals. PEP instruments are placed with
customers for evaluation periods of up to six months. The
customer is required to purchase a minimum amount of reagents
and at the end of the evaluation period must purchase, rent or
return the instrument. The manufacturing cost of demonstration,
RAP, PEP and rental instruments is amortized over a period of 3
to 4 years to cost of goods sold (RAPs and rentals) and
selling, general and administrative expenses (PEPs and
demonstrations).

Intangibles:Intangible assets consist primarily of
goodwill, customer base, developed technology, workforce in
place, supply agreements and patents. Such assets are amortized
on a straight-line basis over estimated useful lives ranging
from 5 to 15 years.

Impairment is recognized in operating results if
a permanent decline in value occurs. The Company measures
possible impairment of its intangible assets periodically by
comparing the undiscounted cash flows generated by those assets
to their carrying values. The Company periodically evaluates the
useful lives assigned to the various categories of intangible
assets considering such factors as: (i) demand,
obsolescence, competition, market share and other economic
factors; (ii) legal and regulatory provisions; and
(iii) the periods expected to be benefited.

Capitalized Software Development Costs:The Company capitalizes certain
internal expenses related to developing computer software used
in the Companys instruments. Costs incurred prior to the
establishment of technological feasibility are charged to
research and development expense. Upon general release to
customers of the product in which the software is included,
capitalization ceases and such costs are amortized using the
straight-line method over the estimated life of 5 years.
Capitalized software costs and accumulated costs are as follows
at December 31:

|                              |  |      |       |      |  |   |       | 
|----------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                              |  | 2001 |       | 2000
|                              |  |      |       |     
|Capitalized costs             |  | $    | 2,808 |      |  | $ | 1,764 | 
|Less accumulated amortization |  |      | 1,065 |      |  |   | 574   | 
|                              |  |      |       |      |  |   |       | 
|                              |  | $    | 1,743 |      |  | $ | 1,190 | 
|                              |  |      |       |      |  |   |       | 

Equity Investments:The Company uses the cost method of
accounting for equity investments in entities for which it holds
less than 20% equity interest. These investments are included in
other assets on the Companys consolidated balance sheet.
Investments are considered to be impaired when a decline in fair
value is judged to be other-than-temporary. The Company employs
a systematic methodology that considers available evidence in
evaluating potential impairment of its investments. Once a
decline in fair value is determined to be other-than-temporary,
an impairment charge is recorded and a new cost basis in the
investment is established.

Derivatives:In the
first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging
Activities. This statement provides a comprehensive and
consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 requires that
an entity recognize derivatives as either assets or liabilities
on the consolidated balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. For a derivative designated as a fair
value hedge, the change in fair value is recognized in earnings

F-7



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Organization
and Significant Accounting
Policies  (Continued)


in the period of change together with the
offsetting change in fair value of the hedged item attributed to
the risk being hedged. For a derivative designated as a cash
flow hedge, the effective portion of the derivatives
change in fair value is initially reported as a component of
accumulated other comprehensive income (loss) and
subsequently reclassified into earnings when the hedged exposure
affects earnings. The ineffective portion of the change in fair
value is reported in earnings immediately.

The Company has an investment in a warrant to
purchase securities of a company that can be net share settled.
This warrant is deemed a derivative financial instrument and is
not designated as a hedging instrument. The change in fair value
on this investment is recognized in earnings in the period of
change.

Shipping Costs:Substantially all costs of shipping
products to customers are included in costs of sales.

Concentration of Credit Risk:The Company sells its instruments and
reagent products primarily to hospitals, medical clinics,
reference laboratories and universities. Credit losses have been
minimal to date. The Company invests its excess cash primarily
in U.S. government securities and bank money market accounts and
has an established policy relating to diversification and
maturities that is designed to maintain safety and liquidity.
The Company has not experienced any material losses on its cash
equivalents or short-term investments.

No single customer accounted for 5% or more of
the Companys 2001, 2000 or 1999 net sales.

Foreign Currency Translations:The financial statements of foreign
subsidiaries have been translated into U.S. Dollars in
accordance with Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation.All balance
sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have
been translated using the average exchange rate for the year.
The gains and losses resulting from the changes in exchange
rates from year to year have been reported in other
comprehensive income. The effect on the consolidated statements
of operations of transaction gains and losses is not material
for all years presented.

Income Taxes:The
Company accounts for income taxes using the liability method.
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
and liabilities and are measured using enacted tax rates and
laws expected to be in effect when the differences are expected
to reverse. Valuation allowances are established when necessary
to reduce the carrying amount of deferred tax assets to their
net realizable value.

Fair Value of Financial Instruments:The Companys cash and cash
equivalents, accounts receivable, accounts payable and long-term
debt represent financial instruments as defined by Statement of
Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. The carrying
value of these financial instruments is a reasonable
approximation of fair value, due to their current maturities.

Stock-Based Compensation:The Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees(APB No. 25) and related
Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123), requires the use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, because the
exercise price of the Companys stock options equals or
exceeds the fair market value of the underlying stock on the
dates of grant, no compensation expense is recognized.

Recently Issued Accounting Standards:In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), Business Combinationsand No. 142 (SFAS 142), Goodwill and Other
Intangible Assets, effective for fiscal years beginning
after December 15,

F-8



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Organization
and Significant Accounting
Policies  (Continued)


2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. For fiscal
2001, the amortization provisions of SFAS 142 apply to
goodwill and other intangible assets acquired after
June 30, 2001. For fiscal 2002, the provision will apply to
all goodwill and other intangible assets. The Company will adopt
the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of fiscal 2002, including
the required impairment tests. The Company recorded
approximately $1.6 million in amortization of its
intangible assets during 2001 that is being evaluated by
management to determine which portion will be subject to no
future amortization under SFAS 142. The provisions of these
standards are not expected to have a significant effect on the
Companys financial position or operating results.

In August 2001, FASB issued SFAS No. 144
(SFAS 144), Accounting for the Impairment or Disposal of
Long-Lived Assetsthat is applicable to financial statements
issued for fiscal years beginning after December 15, 2001.
The FASBs new rule on asset impairment supersedes SFAS
No. 121 (SFAS 121), Accounting for the Impairment
or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Ofand portions of APB Opinion 30,
Reporting the Results of Operationsfor a Disposal of a
Segment of a Business. This Standard provides a single
accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. The Standard also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as
of the measurement date as presently required. The provisions of
this Standard are not expected to have a significant effect on
the Companys financial position or operating results.

2.     Inventories

Inventories consist of the following:

|                                  |  |              |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2001         |        | 2000
|                                  |  |              |        |     
|Raw materials and work-in-process |  | $            | 5,611  |      |  | $ | 5,617  |  
|Finished goods                    |  |              | 6,763  |      |  |   | 4,840  |  
|Valuation reserve                 |  |              | (611   | )    |  |   | (2,357 | )
|                                  |  |              |        |      |  |   |        |  
|                                  |  | $            | 11,763 |      |  | $ | 8,100  |  
|                                  |  |              |        |      |  |   |        |  

F-9



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Property and
Equipment

Property and equipment consist of the following:

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |        | 2000
|                                               |  |              |        |     
|Land                                           |  | $            | 6,327  |      |  | $ | 2,987  | 
|Buildings                                      |  |              | 18,025 |      |  |   |       | 
|Diagnostic instruments                         |  |              | 10,216 |      |  |   | 8,402  | 
|Machinery and equipment                        |  |              | 8,902  |      |  |   | 6,985  | 
|Computers and related equipment                |  |              | 5,894  |      |  |   | 6,995  | 
|Fixed assets under capital lease               |  |              | 2,250  |      |  |   | 2,250  | 
|Furniture and fixtures                         |  |              | 1,252  |      |  |   | 616    | 
|Leasehold improvements                         |  |              | 294    |      |  |   | 867    | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  |              | 53,160 |      |  |   | 29,102 | 
|Less accumulated depreciation and amortization |  |              | 11,728 |      |  |   | 10,458 | 
|Projects in progress                           |  |              |       |      |  |   | 3,685  | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 41,432 |      |  | $ | 22,329 | 
|                                               |  |              |        |      |  |   |        | 

4.     Intangible
Assets

Intangible assets consist of the following:

|                     |  |              |        |      |  |   |        | 
|-------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2001         |        | 2000
|                     |  |              |        |     
|Goodwill             |  | $            | 7,182  |      |  | $ | 7,182  | 
|Customer base        |  |              | 4,100  |      |  |   | 4,100  | 
|Patents              |  |              | 1,857  |      |  |   | 1,778  | 
|Developed technology |  |              | 1,839  |      |  |   | 687    | 
|Supply contract      |  |              | 1,200  |      |  |   | 1,200  | 
|Licenses             |  |              | 240    |      |  |   |       | 
|Workforce in place   |  |              | 100    |      |  |   | 100    | 
|                     |  |              |        |      |  |   |        | 
|                     |  |              | 16,518 |      |  |   | 15,047 | 
|Less amortization    |  |              | 4,326  |      |  |   | 2,751  | 
|                     |  |              |        |      |  |   |        | 
|                     |  | $            | 12,192 |      |  | $ | 12,296 | 
|                     |  |              |        |      |  |   |        | 

F-10



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Other Current
Liabilities

Other current liabilities consist of the
following:

|                                   |  |              |       |      |  |   |        | 
|---------------------------------- |  | ------------ | ----- | ---- |  | - | ------ | 
|                                   |  |             
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2001         |       | 2000
|                                   |  |              |       |     
|Employee compensation and benefits |  | $            | 3,942 |      |  | $ | 3,147  | 
|Deferred revenue                   |  |              | 2,048 |      |  |   | 4,868  | 
|Current portion of long-term debt  |  |              | 850   |      |  |   | 836    | 
|Product warranty                   |  |              | 849   |      |  |   | 545    | 
|Securitization of receivables      |  |              | 358   |      |  |   |       | 
|Sales tax payable                  |  |              | 343   |      |  |   | 315    | 
|Legal reserve                      |  |              | 305   |      |  |   |       | 
|Contingent purchase consideration  |  |              |      |      |  |   | 1,377  | 
|Facility relocation                |  |              |      |      |  |   | 1,117  | 
|Other accrued liabilities          |  |              | 883   |      |  |   | 938    | 
|                                   |  |              |       |      |  |   |        | 
|                                   |  | $            | 9,578 |      |  | $ | 13,143 | 
|                                   |  |              |       |      |  |   |        | 

6.     Line of
Credit

The Company has a $10,000 line of credit
arrangement with a bank which is subject to renewal in May 2002.
Borrowings under the line are collateralized by the
Companys receivables, inventories, machinery and equipment
and intellectual property. The line of credit contains certain
financial covenants (measured quarterly) with which the Company
must comply, prohibits the payment of dividends on the
Companys stock and limits the number of treasury shares
the Company may purchase. In addition, borrowings are limited
based on outstanding accounts receivable of the Company, which
as of December 31, 2001 resulted in available borrowing of
$10,000, of which, $6,160 has been committed in support of
various standby letters of credit. At December 31, 2001,
the Company was in compliance with all covenants.

7.     Long-term
Debt

Long-term debt consists of the following:

|                                                                                                                                                 |  |              |       |      |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                                                                                                                 |  |             
|                                                                                                                                                 |  | December 31,
|                                                                                                                                                 |  |             
|                                                                                                                                                 |  | 2001         |       | 2000
|                                                                                                                                                 |  |              |       |     
|Notes payable for European facility, floating
	interest rates                                                                                    |  | $            | 2,024 |      |  | $ | 2,090 | 
|Note payable to a customer, installment payments
	over 16 quarters beginning January 1, 2000, interest
	accruing at 7% beginning January 1, 2000 |  |              | 723   |      |  |   | 1,135 | 
|Capital lease and other obligations, various
	terms and interest rates                                                                           |  |              | 624   |      |  |   | 1,019 | 
|                                                                                                                                                 |  |              |       |      |  |   |       | 
|                                                                                                                                                 |  |              | 3,371 |      |  |   | 4,244 | 
|Less current portion                                                                                                                             |  |              | 850   |      |  |   | 836   | 
|                                                                                                                                                 |  |              |       |      |  |   |       | 
|                                                                                                                                                 |  | $            | 2,521 |      |  | $ | 3,408 | 
|                                                                                                                                                 |  |              |       |      |  |   |       | 

F-11



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Long-term
Debt  (Continued)

Future payments under the above obligations are
as follows at December 31, 2001:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2002       |  | $ | 850   | 
|2003       |  |   | 612   | 
|2004       |  |   | 296   | 
|2005       |  |   | 170   | 
|2006       |  |   | 157   | 
|Thereafter |  |   | 1,286 | 
|           |  |   |       | 
|           |  | $ | 3,371 | 
|           |  |   |       | 

8.     Stockholders
Equity

Under the Companys 1988 Stock Option Plan
(the 1988 Plan), up to 1.34 million shares of common
stock have been reserved for grant to employees and directors.
In order to be incentive stock options (ISOs), options must be
granted at not less than 100% of fair market value of the
Companys stock on the date of grant. Options generally
vest over a four-year period and expire five to ten years after
the date of grant. However, the Board of Directors, at its
discretion, may decide the period over which options become
exercisable and their expiration dates.

In April 1996, the Companys Board of
Directors authorized the 1996 Stock Option Plan (the 1996
Plan). A total of 2.475 million shares of common
stock have been reserved for issuance under the 1996 Plan. In
order to be ISOs, options must be granted at not less than 100%
of the fair market value of the Companys stock on the
dates of grant. Options generally vest over four years (grants
made prior to 1998) or five years (1998 and subsequent grants)
and expire in ten years.

In April 1996, the Board of Directors authorized
the 1996 Employee Stock Purchase Plan (the 1996 Purchase
Plan). A total of 400,000 shares of common stock have been
reserved for issuance under the 1996 Purchase Plan. A total of
286,000 shares of common stock have been issued under the 1996
Purchase Plan at a prices ranging from $8.18 to $19.98 per
share. The 1996 Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, subject to
certain limitations. The price at which stock may be purchased
under the 1996 Purchase Plan is equal to 85% of the lower of the
fair market value of the common stock on the participants
entry date into the offering period or 85% of the fair market
value on the semi-annual purchase date.

In June 1996, the Company adopted the 1996
Director Stock Option Plan (the Director Plan) and
reserved a total of 250,000 shares of common stock for issuance
thereunder. Commencing with the Companys 1997 annual
meeting of stockholders, each nonemployee director was to be
granted a nonstatutory option to purchase an amount of shares of
the Companys common stock equal to 5 shares multiplied by
a fraction, the numerator of which shall be $15.00 and the
denominator of which shall be the fair market value of one share
of the Companys common stock on the dates of grant. The
exercise price of options granted under the Director Plan are
equal to the fair market value of one share of the
Companys common stock on the dates of grant. A total of
60,000 shares were issued under the Plan at
$10.125  $26.37 per share. Effective November
1998, the Director Plan was modified such that options are
granted on a discretionary basis at fair value on the date of
grant. 99,000 shares were issued under this version of the
Plan in 1998, bringing the total shares issued under the prior
and current version of the Director Plan to 159,000. Each option
granted under the Director Plan vests on a cumulative monthly
basis over a one-year period and has a 10-year term. The
Director Plan terminated in June 2001 and was replaced by the
2001 Outside Director Stock Option Plan.

F-12



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



8.     Stockholders
Equity  (Continued)


During 1997, the Company granted options to
purchase a total of 300,000 shares at $12.625 per share, fair
market value on the date of the grant, to two Directors of the
Company for consulting services to be performed through February
2000. All of these options have vested.

In September 1998, the Companys Directors
approved the repurchase of up to 750,000 shares of the
Companys common stock. A total of 40,000 shares were
repurchased under this authorization in 1998.

On March 9, 1998, the Companys Board
of Directors approved the establishment of a rights plan.
Pursuant to this plan, the Board of Directors declared a
dividend distribution of one Preferred Shares Purchase Right on
each outstanding share of the Companys Common Stock for
shareholders of record on May 8, 1998. Each right entitles
stockholders to buy 1/1000th of a share of the Companys
Series A Participating Preferred Stock at an exercise price
of eighty-five dollars ($85.00). The Rights become exercisable
following the tenth day after a person or group announces an
acquisition of 20% or more of the Companys Common Stock or
announces commencement of a tender offer the consummation of
which would result in ownership by the person or group of 20% or
more of the Common Stock. The Company is entitled to redeem the
Rights at $0.01 per Right at any time on or before the tenth day
following acquisition by a person or group of 20% or more of the
Companys Common Stock. If, prior to redemption of the
Rights, a person or group acquires 20% or more of the
Companys Common Stock, each Right not owned by a holder of
20% or more of the Common Stock will entitle its holder to
purchase, at the Rights then current exercise price, that
number of shares of Common Stock of the Company (or, in certain
circumstances as determined by the Board of Directors, cash,
other property or other securities) having a market value at
that time of twice the Rights exercise price. If, after
the tenth day following acquisition by a person or group of 20%
or more of the Companys Common Stock, the Company sells
more than 50% of its assets or earning power or is acquired in a
merger or other business combination transaction, the acquiring
person must assume the obligation under the Rights and the Right
will become exercisable to acquire Common Stock of the acquiring
person at the discounted price. At any time after an event
triggering exercisability of the Rights at a discounted price
and prior to the acquisition by the acquiring person of 50% or
more of the outstanding Common Stock, the Board of Directors of
the Company may exchange the Rights (other than those owned by
the acquiring person or its affiliates) for Common Stock of the
Company at an exchange ratio of one share of Common Stock per
Right.

In January 1999, the Companys Board of
Directors authorized the 1998 Nonstatutory Stock Option Plan
(the 1998 NSO Plan). Under this plan, a total of
1.50 million shares of common stock have been reserved for
issuance to employees and consultants of the Company, but under
no circumstances to officers or directors. Options generally
vest over five years and expire ten years after the date of
grant, however, the Board of Directors, at its discretion, may
decide the period over which options become exercisable and
their expiration dates.

In March 2000, the Company completed a private
placement of 1.25 million shares of its common stock,
raising $50 million in gross proceeds before deducting
commissions and expenses of the offering of $3.154 million.
The shares were registered with the SEC in April 2000 through
the filing of Registration Statement Form S-3.

In 2001, a warrant for the purchase of 465,000
shares of common stock was exercised at a strike price of $5.82
per share. The Company received $2.6 million in net
proceeds from the exercise of this warrant. The Company has no
outstanding warrants at December 31, 2001.

In May 2001, the stockholders approved the
adoption of the 2001 Outside Director Stock Option Plan
(the 2001 Director Plan) and reserved a total of
500,000 shares of common stock for issuance to directors who are
not also active full-time employees of the Company or another
company in which Ventana has a 50% or more voting interest. The
exercise price of options granted under the 2001 Director Plan
is equal to the fair market value of one share of the
Companys common stock on the dates of grant. A total of
130,000 shares

F-13



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



8.     Stockholders
Equity  (Continued)


were issued under the Plan in 2001. Each option
granted under the 2001 Director Plan vests on a cumulative
monthly basis over a one-year period and has a 10-year term.

Pro forma information regarding net
(loss) income and earnings per share is required by SFAS
No. 123 and such information has been determined as if the
Company had accounted for its employee stock options and
employee stock purchase plan under the fair value method of that
statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions: risk free interest
rates of 4.3%, 6.0% and 6.0%; an average expected time to
exercise of 5.8, 5 and 5 years; expected volatility of
62.6%, 83.5% and 50.7%; and no dividends for the fiscal years
ended December 31, 2001, 2000 and 1999, respectively.

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the Companys stock options have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock options.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the related vesting period. The Companys pro forma
information follows:

|                                       |         |                         |        |      |   |      |         |       |   |   |       |     | 
|-------------------------------------- | ------- | ----------------------- | ------ | ---- | - | ---- | ------- | ----- | - | - | ----- | --- | 
|                                       |         |                        
|                                       |         | Year Ended December 31,
|                                       |         |                        
|                                       |         | 2001                    |        | 2000 |   | 1999
|                                       |         |                         |        |      |   |     
|Pro forma net (loss) income            |         | $                       | (6,155 | )    |   | $    | (35,254 | )     |   | $ | 9,804 |    
|                                       |         |                         |        |      |   |      |         |       |   |   |       |    
|Pro forma net (loss) income per share: |         |                         |        |      |   |      |         |       |   |   |       |    
|                                       | Basic   |                         | $      | (.39 | ) |      | $       | (2.39 | ) |   | $     | .77 | 
|                                       | Diluted |                         | $      | (.37 | ) |      | $       | (2.39 | ) |   | $     | .67 | 

The above pro forma disclosure is not necessarily
representative of the effects on reported net income for future
years.

F-14



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



8.     Stockholders
Equity  (Continued)


A summary of the Companys stock option
activity and related information is as follows:

|                              |           |                           |           |                  |   |   |       |       | 
|----------------------------- | --------- | ------------------------- | --------- | ---------------- | - | - | ----- | ----- | 
|                              |           |                          
|                              |           | Outstanding Stock Options
|                              |           |                          
|                              |           |                           |           | Weighted Average
|                              |           | Number of                 |           | Exercise Price  
|                              |           | Options                   |           | Per Share       
|                              |           |                           |           |                 
|Balance at January 1, 1999    |           |                           | 1,920,000 |                  |   | $ | 13.52 |      
|                              | Granted   |                           |           | 1,035,000        |   |   |       | 18.23 | 
|                              | Exercised |                           |           | (133,000         | ) |   |       | 10.43 | 
|                              | Canceled  |                           |           | (343,000         | ) |   |       | 12.24 | 
|                              |           |                           |           |                  |   |   |       |      
|Balance at December 31, 1999. |           |                           | 2,479,000 |                  |   | $ | 15.47 |      
|                              | Granted   |                           |           | 876,000          |   |   |       | 23.15 | 
|                              | Exercised |                           |           | (377,000         | ) |   |       | 13.07 | 
|                              | Canceled  |                           |           | (475,000         | ) |   |       | 13.90 | 
|                              |           |                           |           |                  |   |   |       |      
|Balance at December 31, 2000. |           |                           | 2,503,000 |                  |   | $ | 18.14 |      
|                              | Granted   |                           |           | 799,000          |   |   |       | 22.34 | 
|                              | Exercised |                           |           | (117,000         | ) |   |       | 15.84 | 
|                              | Canceled  |                           |           | (204,000         | ) |   |       | 21.13 | 
|                              |           |                           |           |                  |   |   |       |      
|Balance at December 31, 2001. |           |                           | 2,981,000 |                  |   | $ | 19.07 |      
|                              |           |                           |           |                  |   |   |       |      

The weighted average fair values of stock options
granted during 2001, 2000 and 1999, for which the exercise price
was equal to the fair market value of the stock were $13.49,
$19.53 and $9.03 per share, respectively.

|                         |  |                                    |           |                     |  |              |       |             |  |          |     |  |  |  |           |  |  |   |       | 
|------------------------ |  | ---------------------------------- | --------- | ------------------- |  | ------------ | ----- | ----------- |  | -------- | --- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                                   
|                         |  | Stock Options at December 31, 2001
|                         |  |                                   
|                         |  |                                    |           |                    
|                         |  | Options Outstanding                |           | Options Exercisable
|                         |  |                                    |           |                    
|                         |  |                                    |           | Weighted            |  | Weighted     |       |            
|                         |  |                                    |           | Average             |  | Average      |       |             |  | Weighted
|                         |  | Number of                          |           | Exercise            |  | Remaining    |       |             |  | Average 
|                         |  | Options                            |           | Price               |  | Contractual  |       | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding                        |           | Outstanding         |  | Life (Years) |       | Exercisable |  | Price   
|                         |  |                                    |           |                     |  |              |       |             |  |         
|$ 0.60  $16.00.         |  |                                    | 602,000   |                     |  | $            | 11.21 |             |  |          | 5.6 |  |  |  | 581,000   |  |  | $ | 11.12 | 
|$16.19  $17.88.         |  |                                    | 737,000   |                     |  |              | 17.48 |             |  |          | 7.0 |  |  |  | 470,000   |  |  |   | 17.49 | 
|$20.00  $21.25.         |  |                                    | 756,000   |                     |  |              | 20.78 |             |  |          | 8.6 |  |  |  | 282,000   |  |  |   | 20.63 | 
|$22.06  $24.23.         |  |                                    | 652,000   |                     |  |              | 23.42 |             |  |          | 8.5 |  |  |  | 331,000   |  |  |   | 23.19 | 
|$24.50  $29.50.         |  |                                    | 234,000   |                     |  |              | 26.62 |             |  |          | 8.3 |  |  |  | 80,000    |  |  |   | 26.17 | 
|                         |  |                                    |           |                     |  |              |       |             |  |          |     |  |  |  |           |  |  |   |       | 
|                         |  |                                    | 2,981,000 |                     |  | $            | 19.07 |             |  |          | 7.5 |  |  |  | 1,744,000 |  |  | $ | 17.36 | 
|                         |  |                                    |           |                     |  |              |       |             |  |          |     |  |  |  |           |  |  |   |       | 

F-15



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Income
Taxes

Income (loss) before income taxes and
cumulative effect of accounting change is comprised as follows:

|         |  |                          |       |      |  |      |         |   |  |   |       | 
|-------- |  | ------------------------ | ----- | ---- |  | ---- | ------- | - |  | - | ----- | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2001                     |       | 2000 |  | 1999
|         |  |                          |       |      |  |     
|Domestic |  | $                        | (840  | )    |  | $    | (22,137 | ) |  | $ | 5,764 | 
|Foreign  |  |                          | 2,593 |      |  |      | (2,654  | ) |  |   | 1,547 | 
|         |  |                          |       |      |  |      |         |   |  |   |       | 
|         |  | $                        | 1,753 |      |  | $    | (24,791 | ) |  | $ | 7,311 | 
|         |  |                          |       |      |  |      |         |   |  |   |       | 

The components of the provision
(benefit) for income taxes before cumulative effect of an
accounting change are as follows:

|          |              |                          |     |      |  |      |     |     |  |   |        |        |  
|--------- | ------------ | ------------------------ | --- | ---- |  | ---- | --- | --- |  | - | ------ | ------ | -
|          |              |                         
|          |              | Years Ended December 31,
|          |              |                         
|          |              | 2001                     |     | 2000 |  | 1999
|          |              |                          |     |      |  |     
|Current:  |              |                          |     |      |  |      |     |     |  |   |        |       
|          | U.S. Federal |                          | $   |     |  |      | $   |    |  |   | $      | 150    |  
|          | State        |                          |     | 213  |  |      |     | 350 |  |   |        | 250    |  
|          | Foreign      |                          |     | 98   |  |      |     |    |  |   |        | 80     |  
|          |              |                          |     |      |  |      |     |     |  |   |        |       
|          |              |                          | 311 |      |  |      | 350 |     |  |   | 480    |       
|Deferred: |              |                          |     |      |  |      |     |     |  |   |        |       
|          | U.S. Federal |                          |     |     |  |      |     |    |  |   |        | (5,083 | )
|          | State        |                          |     |     |  |      |     |    |  |   |        | (897   | )
|          | Foreign      |                          |     |     |  |      |     |    |  |   |        |       |  
|          |              |                          |     |      |  |      |     |     |  |   |        |       
|          |              |                          | 311 |      |  |      | 350 |     |  |   | (5,980 | )     
|          |              |                          |     |      |  |      |     |     |  |   |        |       
|          |              | $                        | 311 |      |  | $    | 350 |     |  | $ | (5,500 | )     
|          |              |                          |     |      |  |      |     |     |  |   |        |       

A reconciliation of the U.S. Federal statutory
income tax rate to the effective tax rate follows:

|                                              |  |                          |       |      |  |      |       |    |  |  |        |   
|--------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ------ | --
|                                              |  |                         
|                                              |  | % of Pre-tax Income     
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  | 2001                     |       | 2000 |  | 1999
|                                              |  |                          |       |      |  |     
|U.S. Federal Statutory Rate                   |  |                          | 35.0  | %    |  |      | (35.0 | )% |  |  | 35.0   | % 
|State taxes                                   |  |                          | 7.9   |      |  |      | (6.5  | )  |  |  | 8.0    |   
|Domestic differences not previously benefited |  |                          |      |      |  |      |      |    |  |  | (8.0   | ) 
|Change in valuation allowance                 |  |                          | (25.2 | )    |  |      | 43.0  |    |  |  | (110.0 | ) 
|                                              |  |                          |       |      |  |      |       |    |  |  |        |   
|Effective tax rate                            |  |                          | 17.7  | %    |  |      | 1.5   | %  |  |  | (75.0  | )%
|                                              |  |                          |       |      |  |      |       |    |  |  |        |   

F-16



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



9.     Income
Taxes  (Continued)


Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Companys deferred tax
assets (liabilities) consist of the following:

|                          |                                        |                         |        |       |       |  |        |        |       | 
|------------------------- | -------------------------------------- | ----------------------- | ------ | ----- | ----- |  | ------ | ------ | ----- | 
|                          |                                        |                        
|                          |                                        | December 31,           
|                          |                                        |                        
|                          |                                        | 2001                    |        | 2000 
|                          |                                        |                         |        |      
|Non-current:              |                                        |                         |        |       |       |  |        |       
|                          | Net operating loss carry forwards      |                         | $      | 7,025 |       |  | $      | 7,011  |      
|                          | Foreign loss carry forwards            |                         |        | 3,100 |       |  |        | 3,105  |      
|                          | General business credit carry forwards |                         |        | 1,912 |       |  |        | 1,033  |      
|                          | Depreciation expense                   |                         |        | 1,873 |       |  |        | 1,242  |      
|                          | In-process R&D write-off               |                         |        | 922   |       |  |        | 999    |      
|                          | Capitalized software development costs |                         |        | (757  | )     |  |        | (1,015 | )    
|                          | AMT credit carry forward               |                         |        | 242   |       |  |        | 242    |      
|                          | Capitalized research and development   |                         |        | 192   |       |  |        | 630    |      
|                          | Other                                  |                         |        | 427   |       |  |        | 144    |      
|                          |                                        |                         |        |       |       |  |        |       
|                          |                                        |                         | 14,936 |       |       |  | 13,391 |       
|Current:                  |                                        |                         |        |       |       |  |        |       
|                          | Deferred revenue                       |                         |        | 763   |       |  |        | 1,489  |      
|                          | Allowance for bad debts                |                         |        | 608   |       |  |        | 1,124  |      
|                          | Facility shutdown accruals             |                         |        |      |       |  |        | 447    |      
|                          | Miscellaneous                          |                         |        | 1,015 |       |  |        | 1,357  |      
|                          |                                        |                         |        |       |       |  |        |       
|                          |                                        |                         | 2,386  |       |       |  | 4,417  |       
|                          |                                        |                         |        |       |       |  |        |       
|Total deferred tax assets |                                        |                         | 17,322 |       |       |  | 17,808 |       
|Valuation reserve         |                                        |                         | (8,520 | )     |       |  | (9,006 | )     
|                          |                                        |                         |        |       |       |  |        |       
|                          |                                        | Net deferred tax assets |        | $     | 8,802 |  |        | $      | 8,802 | 
|                          |                                        |                         |        |       |       |  |        |       

The deferred tax assets and valuation allowance
decreased by $486 during 2001. The decrease relates primarily to
expiring state net operating loss carry forwards and reversal of
temporary differences. No additional valuation allowance was
considered necessary for the deferred tax assets of $8,802 that
are reflected on the consolidated balance sheet at
December 31, 2001, as management believes that it is more
likely than not such assets will be recovered.

The deferred tax assets increased $2,677 during
2000 which was directly attributable to the cumulative effect of
the accounting change relating to the new revenue recognition
policy adopted January 1, 2000 and the income tax benefit
relating to stock option exercises by employees in the first
quarter of 2000 reflected in the Companys equity accounts.
The Company did not recognize any additional deferred tax assets
that arose in 2000 relative to the increases in the net
operating loss carry forwards as it could not be readily
determined with certainty to what extent such assets would be
recoverable in the future. As a result, the Companys
valuation allowance increased by $8,256 during 2000.

At December 31, 2001, the Company has net
operating loss carry forwards for federal and state income tax
purposes of approximately $18,677 and $11,247, respectively.
These state and federal carry forwards will begin to expire in
2005 and 2007, respectively, if not previously utilized.
Approximately $600 of state net operating loss carry forwards
expired unused in 2001. The Company also has research and
development tax

F-17



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



9.     Income
Taxes  (Continued)


credit carry forwards of approximately $1,900
that begin to expire in 2005, if not previously utilized.
Utilization of the Companys net operating loss carry
forwards will be subject to limitations due to the change
in ownership provisions of the Internal Revenue Code of
1996, as amended, as a result of the Companys prior
issuances of equity securities. These carry forwards, therefore,
may expire prior to being fully utilized. Future financings may
cause additional changes in ownership and further limitations on
the use of federal net operating loss carry forwards. In
addition, the Company has certain foreign net operating loss
carry forwards approximating $7,400.

10.     Commitments
and Contingencies

Lease
Commitments:

The Company leases an office facility and
equipment under certain operating leases. Future minimum lease
payments under operating leases at December 31, 2001 are as
follows:

|     |  |   |       | 
|---- |  | - | ----- | 
|2002 |  | $ | 862   | 
|2003 |  |   | 601   | 
|2004 |  |   | 427   | 
|2005 |  |   | 131   | 
|2006 |  |   | 97    | 
|     |  |   |       | 
|     |  | $ | 2,118 | 
|     |  |   |       | 

Lease expense totaled $2,163, $1,653 and $1,259
for the years ended December 31, 2001, 2000 and 1999,
respectively.

DAKO, a European distributor and customer,
initiated binding arbitration with the Company in 1997 regarding
the pricing of the Companys TechMate 250 product. The
dispute was settled in 1998 with the Company agreeing to pay
DAKO a total of $1,651 beginning January 2000 (see Note 7).

Litigation:

In January 1997, four individuals who are former
BioTek noteholders who held in the aggregate approximately
$1.1 million in principal amount of BioTek notes filed an
action, TSE, ET AL. v. VENTANA MEDICAL SYSTEMS, INC., ET AL.
No. 97-37, against the Company and certain of its directors
and stockholders in the United States District Court for the
District of Delaware. The complaint alleged, among other things,
that the Company violated federal and California securities laws
and engaged in common law fraud in connection with the BioTek
shareholders consent to the February 1996 merger of BioTek
into Ventana and the related conversion of BioTek notes into
Ventana notes. Plaintiffs seek compensatory damages in excess of
the principal amount of their BioTek notes, as well as punitive
damages, and fees and costs.

On April 25, 1997, plaintiffs filed an
Amended Complaint. The Amended Complaint made the same
allegations as the original Complaint and added a claim under
North Carolina securities laws. On December 16, 1997, the
Company filed a motion to dismiss plaintiffs Amended
Complaint. On September 23, 1998, the Court issued its
Order granting in part and denying in part the Companys
motion to dismiss. The Court dismissed plaintiffs claims
based upon the North Carolina securities laws and
Californias insider-trading statute. Plaintiffs
surviving claims included violations of federal and California
securities laws, common law fraud and breach of fiduciary duty.
On June 5, 2000, the Company filed a motion for summary
judgment on all of plaintiffs remaining claims. On
November 22, 2000, the Court issued an Order granting the
Companys motion for summary judgment in their entirety.
Plaintiffs subsequently filed a notice of appeal

F-18



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10.     Commitments
and Contingencies  (Continued)


on December 8, 2000. The appeal was fully
briefed as of August 31, 2001 and the hearing of the appeal
was held before the Third Circuit on February 4, 2002. No
decision has yet been rendered by the Third Circuit.

On June 15, 1999 the Company filed a proof
of claim against Oncor, Inc. in an action pending in the United
States Bankruptcy Court for the District of Delaware titled IN
RE ONCOR, INC., No. 9-437 (JJF). The Companys claims
arise out of an Asset Purchase Agreement dated November 23,
1998 and related documents wherein the Company acquired
Oncors unincorporated In Situ Hybridization Technology
Division and rights related thereto. In February 2000, the
Company filed an amended proof of claim alleging, inter alia,
that Oncor breached the terms of the Asset Purchase Agreement by
purporting to transfer or assign to the Company Oncors
rights under a license agreement, which were not transferable or
assignable under the circumstances then existing. The amended
proof of claim seeks damages of no less than approximately
$7.3 million. On August 17, 2000, Oncor filed an
Omnibus Objection to Claims, which included the Companys
claims. However, the Omnibus Objection did not set forth any
specific allegations with respect to the Companys claims.
On July 20, 2001, the Company filed a response to the
Omnibus Objection reasserting their original claim and discovery
has commenced. The Company continues to believe its claims are
meritorious and will prevail, however, the results of the
proceedings are uncertain and there can be no assurance to that
effect.

On December 9, 1999 the Company filed an
action, VENTANA MEDICAL SYSTEMS, INC. v. CYTOLOGIX CORP.,
No. CIV99-606 TUC FRZ, alleging patent infringement seeking
monetary damages and injunctive relief in the United States
District Court in Tucson. The original complaint was amended
March 21, 2000 by the addition of another patent to the
litigation. The Company believes its claims are meritorious and
will prevail, however, results of the proceedings are uncertain
and there can be no assurance to that effect.

CytoLogix Corp. has filed three separate actions
against the Company in various courts. The first action is
CYTOLOGIX v. VENTANA, Case No. 00-12231 REK, filed
Oct. 27, 2000 in federal district court in Boston. The
complaint claims, under state-law based unfair competition law,
that Ventana misappropriated CytoLogixs trade secrets
related to individual slide heating and incorporated such
secrets into the Companys Discovery and BenchMark
instruments. CytoLogix seeks assignment of the Companys
patent applications relating to individual slide heating
claiming the idea, treble damages (unspecified amount) and an
injunction against the Companys further sales of Discovery
and BenchMark instruments. Cytologix filed a motion to amend
their complaint to add the related claims of attempted
monopolization and monopolization under the Sherman Act, and
various Lanham Act violations. The Company believes it has
meritorious defenses to the claims in this action and that
resolution of this matter will not have a material adverse
effect on their business, financial condition or results of
operation; however, the results of the proceeding are uncertain
and there can be no assurance to that effect. Trial is scheduled
to begin on July 15, 2002.

The second is CYTOLOGIX v. VENTANA, Case
No. 4 Ni 54/00 (EU) (Nullity suit), filed
November 9, 2000 in the German Federal Patent Court,
Munich, Germany. CytoLogix seeks to invalidate the
Companys German patent (no. DE 69117052.5),
which covers various aspects of their automated, slide staining
system. The Company believes they can defend this patent through
the Nullity proceeding, however, results of the proceeding are
uncertain and there can be no assurance to that effect. The
Company responded to the original Cytologix filing on
March 15, 2001 and filed a supplementary response
January 29, 2002. Oral proceedings are currently scheduled
for March 20, 2002 (see note 17).

The third action is CYTOLOGIX v. VENTANA, Case
No. 01-10178 REK, filed January 30, 2001 in the
U.S. District Court, Eastern District of Massachusetts.
This complaint claims that the Company infringed on
CytoLogixs patent No. 6,180,061, entitled
Moving Platform Slide Stainer with Heating Elements,
and was later amended to add U.S. Patent
No. 6,183,693, issued Feb. 7, 2001, entitled
Random Access Slide

F-19



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10.     Commitments
and Contingencies  (Continued)


Stainer with Independent Slide Heating
Regulation, both assigned to CytoLogix Corporation.
CytoLogix seeks assignment of the Companys patent
applications claiming the independent slide heater idea, treble
damages (unspecified amount) and an injunction against the
Companys further sales of Discovery and BenchMark
instruments. Cytologix filed a motion to amend their complaint
to add the related claims of attempted monopolization and
monopolization under the Sherman Act, and various Lanham Act
violations. The Company believes it has meritorious defenses to
the claims in this action; however the results of the proceeding
are uncertain and there can be no assurance to that effect. The
trial has been set for July 15, 2002 and is concurrent with
Case No. CV12231 REK above.

On November 19, 2001 a patent infringement
claim was filed against the Company titled DIGENE CORPORATION v.
VENTANA MEDICAL SYSTEMS, INC., (Case No. 01-752) in
Delaware Federal District Court. This complaint alleges that the
Company infringed two U.S. patents held by Digene,
U.S. 4,849,331 and 4,849,332 by the Companys INFORM
HPV High-risk and Low-risk probe products. The Company filed an
answer denying the allegations on Feb. 4, 2002. Digene
seeks, among other remedies, an injunction against the sale of
the Companys INFORM products. This litigation is in a very
early stage. However, the Company believes that they have
meritorious defenses to the infringement claims of Digene and
intend to defend themselves vigorously, however they cannot
assure that they will prevail on either claim.

On March 8, 2002, Ventana filed a new patent
infringement action against Cytologix in Arizona Federal
District Court, Case No. (CIV02-117TUCRCC), alleging
infringement of U.S. Patent No. 6,352,861
(Automated Biological Reaction Apparatus) by the
making, using and selling of the ARTISAN automated
staining system. The suit seeks injunction relief including a
temporary restraining order or a preliminary injunction against
the continued making, using and selling of the instrument. The
Company believes its claims are meritorious and they will
prevail, however, results of the proceedings are uncertain and
there can be no assurance to that effect.

With respect to each of the matters above,
managements estimate of the potential loss, if any, is set
forth therein unless such an estimate is not possible. It is the
opinion of management, the ultimate resolution of these
contingencies will not have a material adverse effect on the
financial condition, results of operations or cash flows of the
Company.

11.     Benefit
Plan

Effective January 1, 1993, the Company
adopted a 401(k) Defined Contribution Benefit Plan (the Plan),
which covers substantially all employees of the Company from
their date of hire. The Plan permits participants to contribute
to the Plan, subject to Internal Revenue Code restrictions and
the Plan also permits the Company to make discretionary matching
contributions. During the years ended December 31, 2001 and
2000, the Company did not make any contributions to the Plan.

12.     Operating
Segment and Enterprise Data

The Company has two reportable segments: North
America (primarily the United States) and International
(primarily France, Germany, Japan and Australia). These
operating segments are the segments of the Company for which
separate financial information is available and for which
operating profit/ loss amounts are regularly evaluated by the
Companys Chief Operating Decision Maker (its Chief
Executive Officer) in deciding how to allocate resources and in
assessing performance.

The Companys Chief Operating Decision Maker
evaluates performance and allocates resources based on profit or
loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of
significant accounting policies. Inventory transfers to foreign
subsidiaries are made at standard cost. The North America
operations include corporate activity (including all interest

F-20



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



12.     Operating
Segment and Enterprise
Data  (Continued)


income) that benefits the Company as a whole. The
following summary includes net sales only to unaffiliated
customers. Net sales are attributed to segments based on the
location from which the shipment to the customer was made;
reagents and instruments are sold in each segment.

|                                      |  |                              |         |               |  |              |        |        |  |   |         |   |  |   |         | 
|------------------------------------- |  | ---------------------------- | ------- | ------------- |  | ------------ | ------ | ------ |  | - | ------- | - |  | - | ------- | 
|                                      |  |                             
|                                      |  | Year ended December 31, 2001
|                                      |  |                             
|                                      |  | North America                |         | International |  | Eliminations |        | Totals
|                                      |  |                              |         |               |  |              |        |       
|Sales to external customers           |  | $                            | 63,899  |               |  | $            | 23,914 |        |  | $ |        |   |  | $ | 87,813  | 
|Depreciation and amortization expense |  |                              | 5,765   |               |  |              | 1,041  |        |  |   |        |   |  |   | 6,806   | 
|Segment (loss) profit                 |  |                              | (1,053  | )             |  |              | 2,495  |        |  |   |        |   |  |   | 1,442   | 
|Segment assets                        |  |                              | 106,887 |               |  |              | 22,213 |        |  |   | (18,115 | ) |  |   | 110,985 | 
|Expenditures for long-lived assets    |  |                              | 23,597  |               |  |              | 2,101  |        |  |   |        |   |  |   | 25,698  | 

|                                      |  |                              |         |               |  |              |        |        |  |   |         |   |  |   |         |  
|------------------------------------- |  | ---------------------------- | ------- | ------------- |  | ------------ | ------ | ------ |  | - | ------- | - |  | - | ------- | -
|                                      |  |                             
|                                      |  | Year ended December 31, 2000
|                                      |  |                             
|                                      |  | North America                |         | International |  | Eliminations |        | Totals
|                                      |  |                              |         |               |  |              |        |       
|Sales to external customers           |  | $                            | 53,520  |               |  | $            | 17,629 |        |  | $ |        |   |  | $ | 71,149  |  
|Impairment charges and other expenses |  |                              | 4,519   |               |  |              |       |        |  |   |        |   |  |   | 4,519   |  
|Depreciation and amortization expense |  |                              | 4,490   |               |  |              | 1,007  |        |  |   |        |   |  |   | 5,497   |  
|Segment (loss) profit                 |  |                              | (24,393 | )             |  |              | (2,902 | )      |  |   |        |   |  |   | (27,295 | )
|Segment assets                        |  |                              | 106,742 |               |  |              | 18,278 |        |  |   | (15,438 | ) |  |   | 109,582 |  
|Expenditures for long-lived assets    |  |                              | 15,247  |               |  |              | 3,611  |        |  |   |        |   |  |   | 18,858  |  

|                                      |  |                              |        |               |  |              |        |        |  |   |         |   |  |   |        | 
|------------------------------------- |  | ---------------------------- | ------ | ------------- |  | ------------ | ------ | ------ |  | - | ------- | - |  | - | ------ | 
|                                      |  |                             
|                                      |  | Year ended December 31, 1999
|                                      |  |                             
|                                      |  | North America                |        | International |  | Eliminations |        | Totals
|                                      |  |                              |        |               |  |              |        |       
|Sales to external customers           |  | $                            | 53,692 |               |  | $            | 15,717 |        |  | $ |        |   |  | $ | 69,409 | 
|Depreciation and amortization expense |  |                              | 3,307  |               |  |              | 382    |        |  |   |        |   |  |   | 3,689  | 
|Segment profit (loss)                 |  |                              | 11,098 |               |  |              | 1,467  |        |  |   | 246     |   |  |   | 12,811 | 
|Segment assets                        |  |                              | 80,191 |               |  |              | 15,324 |        |  |   | (22,354 | ) |  |   | 73,161 | 
|Expenditures for long-lived assets    |  |                              | 5,439  |               |  |              | 1,840  |        |  |   |        |   |  |   | 7,279  | 

13.     Acquisitions

Quantitative
Diagnostic Laboratories, Inc.

The Company acquired Quantitative Diagnostic
Laboratories, Inc. (QDL) on April 1, 2000 for $2,500. QDL
is a specialty reference lab that provides quantitative
immunohistochemistry (IHC) services to pathologists and is also
involved in cancer research. The acquisition has been accounted
for as a purchase, which resulted in $2,152 allocated to
goodwill. The result of this acquisition is included in the
accompanying consolidated financial statements from the date of
acquisition. Goodwill recorded in connection with this
transaction is being amortized on a straight-line basis over a
5-year period.

14.     Transaction
With Molecular Diagnostics, Inc.

On November 2, 2001, the Company purchased
175,000 shares of Series D Convertible Preferred Stock in
Molecular Diagnostics, Inc. (MCDG) (convertible at $1.00 per
share), received a three-year warrant entitling the Company to
purchase 1,750,000 shares of common stock of MCDG at an exercise
price of $1.15 per share, and acquired intangible assets
relating to additional rights received under an amended license
and development agreement originally entered into on
March 24, 2000, with AccuMed International Inc., which was
acquired by MCDG on September 17, 2001. Under the amended
agreement, the Company received full

F-21



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



14.     Transaction
With Molecular Diagnostics,
Inc.  (Continued)


access to MCDGs proprietary image analysis
software and development tools and to certain imaging hardware
and any subsequent generation of imaging hardware technology.

The Company paid $1,750 for these items and based
on the respective fair values has allocated the amount as
follows:

|                                                    |  |   |       | 
|--------------------------------------------------- |  | - | ----- | 
|Developed Technology                                |  | $ | 1,152 | 
|Warrant                                             |  |   | 140   | 
|License                                             |  |   | 240   | 
|Investment in Series D Convertible Preferred
	stock |  |   | 218   | 
|                                                    |  |   |       | 
|                                                    |  | $ | 1,750 | 
|                                                    |  |   |       | 

The company amortizes the developed technology
and license on a straight-line basis over 5 years. The
value assigned to the warrant was based upon an independent
valuation and is accounted for as a derivative financial
instrument and marked-to-market each reporting period in
accordance with SFAS 133. The value assigned to the
investment in preferred stock is carried at cost.

15.     Impairment
Charges and Other Expenses

Fiscal 2000 results were negatively impacted by
$22,524 in write-offs and accruals relating to several different
issues. The following table summarizes details of the impairment
charges and other expenses and provides a rollforward of the
reserves through December 31, 2001:

|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |   | 
|---------------------------------------------------------------- | ------------------------------------------- | ------- | ----- | -------------- |  | -------- | ----- | --------- |  | -------------- | ----- | ----- |  | - | ------ | ------ | - | - | - | - | 
|                                                                 |                                             |         |       | Reserve        |  |          |       |           |  | Reserve       
|                                                                 |                                             |         |       | Balances as of |  | Costs    |       | Revision  |  | Balances as of
|                                                                 |                                             | Initial |       | December 31,   |  | Incurred |       | to        |  | December 31,  
|                                                                 |                                             | Charges |       | 2000           |  | in 2001  |       | Estimates |  | 2001          
|                                                                 |                                             |         |       |                |  |          |       |           |  |               
|Reagent dispenser quality issue                                  |                                             | $       | 5,355 |                |  | $        | 2,510 |           |  | $              | 867   |       |  | $ | (1,643 | )      |   | $ |  |  
|Exit of electron microscopy product line                         |                                             |         | 4,581 |                |  |          |      |           |  |                |      |       |  |   |       |        |   |   |  |  
|Impairment of inventory, diagnostic instruments
	and intangibles |                                             |         | 8,615 |                |  |          | 1,310 |           |  |                | 1,460 |       |  |   | 150    |        |   |   |  |  
|Cost to close Gaithersburg facility                              |                                             |         | 2,611 |                |  |          | 1,117 |           |  |                | 967   |       |  |   | (150   | )      |   |   |  |  
|Other charges including contracted R&D                           |                                             |         | 1,362 |                |  |          |      |           |  |                |      |       |  |   |       |        |   |   |  |  
|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |  
|                                                                 | Total impairment charges and other expenses |         | $     | 22,524         |  |          | $     | 4,937     |  |                | $     | 3,294 |  |   | $      | (1,643 | ) |   | $ |  | 
|                                                                 |                                             |         |       |                |  |          |       |           |  |                |       |       |  |   |        |        |   |   |   |  

Charges of $5,355 were related to quality
problems with the Companys dispensers and reagents used
with the majority of its staining instruments. As a result,
charges were taken to write-off inventory and set up reserves to
cover product replacements, returns and warranty matters.

A charge of $4,581 was recorded to account for
the Companys decision to exit its electron microscopy
(EM) product line. Charges were taken to write-down all EM
inventory and field instruments to their net realizable value.
In addition, goodwill recognized in the BTTI acquisition was
written down $1,445 to reflect the impact of certain product
discontinuance.

Charges of $8,615 were recorded in recognition of
the decreased value of certain instrument inventory, fixed
assets and intangible assets given the launch of the
Companys new BenchMark advanced staining system in 2000.
In addition, intangible assets associated with the
Companys 1996 acquisition of BioTek

F-22



---



##### 



VENTANA MEDICAL SYSTEMS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15.     Impairment
Charges and Other
Expenses  (Continued)


Solutions, Inc. were written down $3,074 to
reflect the impact of discontinuing certain products. The
TechMate IHC staining system product line acquired in the BioTek
transaction was among those whose value was impacted by the
launch of BenchMark.

The Company also recognized charges of $2,611
relating to closure of its production facility in Gaithersburg,
Maryland. The Gaithersburg facility was acquired in late 1998
with the acquisition of all the oncology assets of Oncor, Inc.

Other charges recognized in 2000 totaled $1,362
that included expenses related to contracted research and
development being handled by an outside company.

In 2001, the $1,643 revision to the estimate was
due to the favorable resolution of outstanding accounts
receivable balances related to the reagent dispenser quality
issue and were reflected in the 2001 financial statements as a
reduction in SG&A expenses.

16.     Net Income
(Loss) Per Share

The following tables sets forth the components of
the computation of 2001, 2000 and 1999 basic and diluted net
income (loss) per share:

|             |                                |                         |        |       |        |      |        |         |        |  |        |        |        | 
|------------ | ------------------------------ | ----------------------- | ------ | ----- | ------ | ---- | ------ | ------- | ------ |  | ------ | ------ | ------ | 
|             |                                | 2001                    |        | 2000  |        | 1999
|             |                                |                         |        |       |        |     
|Numerator:   |                                |                         |        |       |        |      |        |         |        |  |        |       
|             | Net income (loss)              |                         | $      | 1,442 |        |      | $      | (27,295 | )      |  | $      | 12,811 |       
|             |                                |                         |        |       |        |      |        |         |        |  |        |       
|Denominator: |                                |                         |        |       |        |      |        |         |        |  |        |       
|             | Basic:                         |                         |        |       |        |      |        |         |        |  |        |        |       
|             |                                | Weighted average shares |        |       | 15,905 |      |        |         | 14,770 |  |        |        | 13,478 | 
|             | Effect of dilutive securities: |                         |        |       |        |      |        |         |        |  |        |        |       
|             |                                | Employee stock options  |        |       | 522    |      |        |         |       |  |        |        | 656    | 
|             |                                | Warrants                |        |       |       |      |        |         |       |  |        |        | 502    | 
|             |                                |                         |        |       |        |      |        |         |        |  |        |       
|             |                                |                         | 16,427 |       |        |      | 14,770 |         |        |  | 14,636 |       
|             |                                |                         |        |       |        |      |        |         |        |  |        |       

Loss per share in 2000 is computed using the
weighted average number of shares of common stock outstanding;
common equivalent shares from stock options and warrants are
excluded from the computation in 2000 as their effect is
antidilutive.

17.     Subsequent
Event

On March 20, 2002, the German Federal Patent
Court ruled that the Companys German patent no. DE
69117052.5, which covers various aspects of the Companys
previous generation GEN II automated slide staining system,
is invalid. The technology addressed by the German patent is
unrelated to the technologies involved in any of the other
patent litigations, including the individual slide heating
technology that is the subject of the Boston-based patent
litigation. The decision affects the Companys ability to
enforce this patent in Germany subject to an appeal and final
decision on validity.

F-23



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##### 



EXHIBIT INDEX

|        |      |             |  |                                                                         |  |  |    |  
|------- | ---- | ----------- |  | ----------------------------------------------------------------------- |  |  | -- | -
|Exhibit |      |             |  |                                                                        
|Number  |      | 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 | )
|        | 10.7 |             |  | 2001 Outside Director Stock Option Plan                                 |  |  | (3 | )
|        | 21.1 |             |  | Subsidiaries of Registrant                                              |  |  |    |  
|        | 23.1 |             |  | Consent of Ernst & Young LLP, Independent
	Auditors                     |  |  |    |  



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|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Filed with the Registration Statement on
	Form S-1 (Commission File No. 333-4461), declared effective
	by the Commission July 26, 1996.
|   
|(2) | Filed with the Registration Statement on
	Form S-8 (Commission File No. 333-92883), filed with the
	Commission on December 16, 1999.   
|   
|(3) | Filed with the Registration Statement on
	Form S-8 (Commission File No. 333-69658), filed with the
	Commission on September 19, 2001.