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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-K

(Mark One)
|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
     For the fiscal year ended December 31, 1997.

                                       or

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
     EXCHANGE  ACT OF 1934.  For the  transition  period from  _____________  to
     _____________ .
                        Commission File Number: 000-20931

                          Ventana Medical Systems, Inc.
             (Exact name of registrant as specified in its charter)

                Delaware                                    94-2976937
    (State or other jurisdiction of                       (I.R.S. employer
    incorporation or organization)                        identification no.)

           3865 North Business                                 85705
              Center Drive                                   (Zip Code)
               Tucson, AZ
(Address of principal executive offices)

       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, $0.001 par value
                                (Title of class)

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

     Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The  aggregate  value  of  voting  stock  held  by  non-affiliates  of  the
Registrant was approximately  $97,762,245 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 held by each  executive  officer  and
director and by each person who owns 5% or more of the outstanding  Common Stock
have been  excluded  in that such  persons may be deemed to be  affiliates.  The
determination of affiliate status is not necessarily a conclusive  determination
for other  purposes.  As of December 31, 1997, the  Registrant  had  outstanding
13,247,226 shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.


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                          VENTANA MEDICAL SYSTEMS, INC.

                                      INDEX
<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                             Number

<S>                                                                                                           <C>
PART I....................................................................................................... 1

     Item 1.  BUSINESS....................................................................................... 1
     Item 2.  PROPERTIES.....................................................................................23
     Item 3.  LEGAL PROCEEDINGS..............................................................................24
     Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................24

PART II......................................................................................................25

     Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND
                   RELATED STOCKHOLDER MATTERS ..............................................................25
     Item 6.  SELECTED FINANCIAL DATA........................................................................26
     Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                   RESULTS OF OPERATIONS.....................................................................27
     Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................33
     Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                   ACCOUNTING AND FINANCIAL DISCLOSURE.......................................................34

PART III.....................................................................................................35

     Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................35
     Item 11. EXECUTIVE COMPENSATION.........................................................................38
     Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................41
     Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................44

PART IV......................................................................................................45

     Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ..............................45

</TABLE>

<PAGE>


PART I

Item 1.  BUSINESS

The Company

     Ventana was incorporated in California in June 1985 and was  reincorporated
in  Delaware in December  1993.  As used in this Report on Form 10-K,  the terms
"Ventana"  and the  "Company"  refer to Ventana  Medical  Systems,  Inc. and its
subsidiaries,  Ventana  Medical  Systems,  S.A.,  Ventana  Medical Systems GmbH,
Ventana  Medical  Systems  Japan K.K.,  and BioTek  Solutions,  Inc.  unless the
context  otherwise  requires.  The  Company's  principal  executive  offices are
located  at 3865  North  Business  Center  Drive,  Tucson,  Arizona  85705.  Its
telephone number is (520) 887-2155.

     Overview

     Ventana develops,  manufactures and markets proprietary  instrument/reagent
systems that  automate  immunohistochemistry  ("IHC") and in situ  hybridization
("ISH") tests for the analysis of cells and tissues on microscope slides.  These
tests are important tools used in diagnosing and selecting appropriate treatment
for  cancer.  The  Company  believes  that  it is the  worldwide  leader  in the
automated  IHC testing  market,  as the  Company  estimates  that its  worldwide
installed  base of 1,199  instruments  as of December 31, 1997 is  approximately
four  times as  large as the  combined  installed  base of all of the  Company's
current  competitors.  Ventana has placed  instruments with 37 of the 42 leading
cancer  centers  according  to U.S.  News & World Report and 36 of the 42 cancer
centers  identified as principal  cancer research centers by the National Cancer
Institute,  including  the Mayo Clinic,  the Dana Farber Cancer  Institute,  The
Johns Hopkins  University,  the M.D. Anderson Cancer Center, the Fred Hutchinson
Cancer  Center,  and  Memorial   Sloan-Kettering  Cancer  Center.  Each  Ventana
proprietary  system  placed  typically  provides a recurring  revenue  stream as
customers consume reagents and supplies with each test conducted.  Consequently,
two key  elements  of the  Company's  strategy  are to  increase  the  number of
instrument placements and to maximize the recurring revenue stream per placement
through increased sales of reagents and supplies.

     In late 1991,  Ventana began commercial  shipment of its first system,  the
Ventana 320 instrument and related reagents used for automated IHC tests.  Since
then,  Ventana has developed and introduced the Ventana ES, the successor to the
320, as well as the Ventana gen II, which is capable of performing  ISH tests in
addition  to IHC  tests.  In  August  1997,  Ventana  introduced  the NexES as a
successor to the ES. These patient  priority  systems use Ventana's  proprietary
horizontal  slide  processing  technology to perform multiple tests rapidly on a
single  patient  biopsy.  In  February  1996,   Ventana  acquired  BioTek  which
introduced its first  automated IHC system,  the TechMate 1000, in 1992, and has
also  introduced  the successor  TechMate 500 instrument as well as the TechMate
250 instrument. BioTek's batch processing systems use proprietary vertical slide
processing  technology to reliably and cost effectively  process high volumes of
single tests on multiple patient  biopsies.  These  complementary  product lines
enable  Ventana to serve a broad range of customers.  Smaller  hospitals,  which
generally do not handle a high volume of cancer patients,  typically use patient
priority systems to meet their automated  testing needs.  Reference and research
laboratories  which serve numerous  institutions  typically use batch processing
systems to process large volumes of tests. Large hospitals with a high volume of
patients and a broad range of test  requirements  may use both patient  priority
and batch processing systems.

     Cancer  is  the  second  leading  cause  of  death  in the  United  States,
accounting for approximately 555,000 deaths per year.  Currently,  approximately
10 million people in the United States have a history of invasive cancer, and it
is  estimated  that 1.4 million new cases of invasive  cancer will be  diagnosed
each year.  Recent studies have  indicated  that the mortality  rates of certain
types of cancer have decreased  which may be attributed to, among other factors,
earlier detection and selection of appropriate  therapies.  The vast majority of
IHC testing  associated with cancer diagnosis and treatment in the United States
is conducted in an aggregate of  approximately  2,200 clinical  institutions and
reference  and research  laboratories  which the Company  estimates  creates the
opportunity  for the  placement  of as  many  as  2,500  automated  IHC  testing
instruments.  The Company  believes that less than 50% of such  institutions and
laboratories   currently   conduct  IHC  testing  on  an  automated  basis.  The
international  market for  automated  IHC and ISH  testing is  estimated  by the
Company to be approximately 1.5 times the size of the United States market, with
Europe accounting for the majority of the international market potential.  It is
further  estimated


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that automated IHC staining  systems have  penetrated  less than 15% of European
labs and less than 5% of the labs in Japan and the rest of the world.

     Currently,  most IHC  testing is  performed  manually  which  often  yields
inconsistency  of test  results.  As compared to manual IHC  testing,  Ventana's
automated systems provide improved reliability,  reproducibility and consistency
of test results.  The systems'  economic  advantages  include faster  turnaround
time,  increased test throughput and a reduced  dependence on skilled laboratory
technicians,  thereby reducing costs per test.  Additional  benefits include the
ability  to  perform  new and  emerging  diagnostic  tests and  improved  visual
clarity, which aids the interpretation of test results and the ability to obtain
maximum clinical information from minimally sized biopsies. The Company believes
it will play a critical,  expanding role in cancer  science as researchers  will
use Ventana  systems to accelerate  the  identification  and  development of new
tests   and  that  its   installed   base  of   instruments   will   speed   the
commercialization  and clinical  implementation  of such new tests.  The Company
anticipates  that its reagent test menu will expand due to the major emphasis of
cancer research on the identification of new prognostic IHC and ISH indicators.

Acquisition of BioTek

     Ventana  acquired BioTek in February 1996 for total  consideration of $19.1
million.  The acquisition of BioTek enhanced Ventana's  competitive position and
enabled the Company to become the worldwide  leader in the automated IHC and ISH
testing  market.  BioTek's  product line  complements  Ventana's and enables the
Company to meet the differing needs of customers  requiring  patient priority or
batch processing systems, or both.

     Historically,  BioTek generated lower gross margins than Ventana due to its
employment of a different  business strategy which primarily involved the use of
third  parties  for  key  activities.  BioTek's  instruments  were  produced  by
third-party  manufacturers  which prevented BioTek from capturing  manufacturing
margin.  BioTek's instruments have an open configuration,  enabling the customer
to use reagents  purchased from BioTek or others,  which impacted both the price
and  volume of  reagents  purchased  by  customers  from  BioTek.  In  contrast,
Ventana's instruments have a closed configuration  requiring the customer to use
Ventana's  prepackaged detection  chemistries.  BioTek also realized lower gross
margins  on  reagents  than  Ventana  due to  its  utilization  of  intermediate
materials in the  manufacturing  process which  resulted in the capture of fewer
value-added steps.  BioTek used Curtis Matheson  Scientific ("CMS") and DAKO A/S
("DAKO") as  third-party  distributors  in the United  States and  international
markets,  respectively, and supported its United States sales efforts with field
sales and technical  support  personnel.  As a result,  BioTek  experienced both
lower gross  margins on its United States sales than if it had sold its products
directly  and a higher  level of selling  expense  than  typically  incurred  in
conjunction with third-party distribution arrangements.

Industry Overview

     This Report on Form 10-K contains certain forward-looking statements within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange Act of 1934. Actual events or results may differ materially
from  those  projected  in the  forward-looking  statements  as a result  of the
factors described herein and in the documents  incorporated herein by reference.
Such  forward-looking  statements  include,  but are not limited to,  statements
concerning the risk of cancer; cancer screening;  improvements in automated IHC;
business  strategy;  development and introduction of new products;  research and
development;  marketing,  sales and  distribution;  manufacturing;  competition;
third-party  reimbursement;  government  regulation;  and  operating and capital
requirements.

     Immunohistochemistry

     Cancer is the second leading cause of death in the United States accounting
for approximately 555,000 deaths per year.  Currently,  approximately 10 million
people  in the  United  States  have a history  of  invasive  cancer,  and it is
estimated  that 1.4 million new cases will be diagnosed each year. In the United
States, the lifetime risk of developing invasive cancer is 47% for males and 38%
for  females.  The risk of  developing  cancer  increases  with  age.  Among the
principal forms of cancer are prostate,  lung, breast,  colon, rectal,  urinary,
ovarian and cervical cancer, along with leukemia and lymphoma.


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     Early  detection is one of the primary  factors in increasing the long term
survival of cancer patients. It is believed to be at least partially responsible
for  decreases in mortality  rates that have  recently been observed for several
types of cancer.  Health care professionals are increasing their emphasis on and
use of  screening  and  early  detection  programs  for  cancer  because  cancer
treatments  are  generally  significantly  more  effective  and less  costly the
earlier that cancer is detected. Complementing screening and early detection are
recent  advances in less invasive  biopsy methods that can obtain tissue samples
from progressively smaller tumors. As a result of these developments,  there has
been a steady  increase in the initial  diagnosis of invasive  cancer.  However,
smaller  tissue  samples  are  often  difficult  to  analyze  with   traditional
diagnostic tests,  increasing the dependence of surgical pathologists on IHC for
accurate diagnosis of early stage cancer.

     After  preliminary  screening  of a biopsy to  determine  the  presence  of
cancer,  IHC is the principal  diagnostic test method used for cancer  diagnosis
and therapy selection.  IHC tests use specific antibodies to identify and detect
antigens  (proteins) in cells and tissues which assist pathologists in assessing
various  aspects of a patient's  cancer.  IHC tests,  or assays,  have two major
components:  primary antibodies and detection chemistries.  The primary antibody
is the  specific  antibody  used to bind to the antigen in  question.  Detection
chemistries are composed of multiple reagents  including  secondary  antibodies,
enzyme  conjugates/complexes  and  chromogenic  enzyme  substrates  which  allow
visualization of the primary antibody.

     IHC tests are performed on cells and tumor tissue to:

     o determine the type of cancer

     o determine the site of the primary tumor

     o determine the degree of malignancy

     o determine if the cancer has metastasized

     o assist in the selection of the most appropriate therapy

     o monitor patient progress

     o develop a prognosis

     Correct prognosis is essential in selecting the appropriate therapy regimen
and  monitoring  program for  individual  cancer  patients.  IHC assays  provide
significant  prognostic  information  such as cell  cycle and  hormone  receptor
status  which,  in many  cases,  cannot  be  obtained  from  other  tests.  This
information  allows the  pathologist to improve risk assessment on an individual
patient basis. IHC testing is therefore instrumental to controlling and reducing
health care costs and improving  cancer  survival  rates because  earlier,  more
accurate diagnoses and prognoses can lead to earlier,  more targeted therapy and
may reduce the risk of use of an incorrect or inappropriate treatment.

     Manual IHC assays require skilled technical personnel to perform as many as
60 individual processes and can require several days to complete.  For the assay
to be successful,  each process must be performed in the proper sequence and for
the proper length of time. In addition, the length of time and the reagents used
for each of the steps varies  depending  upon the primary  antibody  used in the
assay.  The  complexity of manual IHC assays leads to poor  reproducibility  and
inconsistency  of  results.  Therefore,  while  IHC has been used  routinely  in
clinical  diagnosis  for over 10 years,  the  requirement  of skilled  technical
personnel,  labor intensity (approximately 40 slides per day per technician) and
lack of standardization has limited the growth of clinical IHC.

     The  development of new  diagnostic  systems  composed of  instruments  and
reagents  has  resulted  in the  automation  of tests in a number of  diagnostic
market segments.  The trend toward automation of diagnostic testing began in the
1960s  with  the  automation  of  hematology  testing  by  Coulter   Electronics
Corporation and clinical chemistry testing by Technicon Instruments Corporation.
In the 1980s, Abbott  Laboratories,  Inc. ("Abbott")  introduced two instruments
with proprietary prepackaged reagents to automate immunoassay tests performed on
serum or urine.  Ventana's  systems are fundamental  enabling  technologies that
overcome  major  obstacles,   including



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the inherent limitations of manual processing, which have historically prevented
both the broader use and growth of IHC.

In Situ Hybridization

     ISH tests are advanced  tests for infectious  disease and cancer  diagnosis
and other  applications  that  generate  visual  signals based on probes used to
detect the presence of specific  nucleic  acids  (DNA/RNA)  contained in a cell.
Over the next decade,  Ventana believes that ongoing research and development in
the field of molecular analysis will result in the continued introduction of new
IHC and ISH tests.

     ISH assays are  technically  far more  challenging and labor intensive than
IHC assays. In addition to requiring a similar number of processes which must be
performed in the proper  sequence and for the proper length of time,  ISH assays
require multiple wash solutions,  or buffers,  and the temperature at which each
of the steps must be executed  typically  ranges from 37 degrees C to 98 degrees
C. Furthermore, the conditions for each of these processes is dependent upon the
specific probe being used.  Due to this extreme degree of technical  difficulty,
there are very few  clinical  laboratories  capable  of  performing  manual  ISH
assays. Ventana's gen II system represents a fundamental enabling technology for
the rapid,  accurate  and cost  effective  identification  of unique RNA and DNA
(probe  diagnostics)  and is designed to overcome  the inherent  limitations  of
manual processing.

Ventana Strategy

     The Company's strategy is to strengthen its worldwide  leadership  position
in the automated IHC testing  market and to develop and expand the automated ISH
testing market. In order to implement this strategy, the Company intends to:

     Maximize Instrument Placements. The Company's strategy is to strengthen its
competitive  position in the automation of IHC testing by  establishing a larger
installed  base of  instruments  that  current or future  market  entrants  must
overcome.  The Company  estimates  that its  worldwide  installed  base of 1,199
instruments is approximately  four times as large as the combined installed base
of instruments of all of the Company's current competitors. The Company believes
that its placement of instruments  in 36 of the 42 cancer centers  identified as
principal cancer research  centers by the National Cancer  Institute  provides a
powerful  reference tool for potential new customers.  To facilitate  instrument
placements,  the Company offers customers a wide selection of instruments  which
address the patient  priority needs of hospital  clinical  laboratories  and the
batch   processing   needs  of  large   hospitals  and  reference  and  research
laboratories.  In order to satisfy the broad spectrum of customers'  operational
and  financial  criteria,  the  Company  intends to  continue  to offer  several
instrument procurement options,  including leases, direct sales, rentals and the
Qualified  Reagent  Installed Base program  ("QRIB") and to expand the range and
price points of its instrument  offerings.  In a QRIB, the Company  provides the
customer  with  the use of an  instrument  for up to six  months,  provided  the
customer  purchases  a minimum of $3,000 in  consumables.  At the end of the six
month period,  the customer  must elect to purchase,  rent or return the system.
The Company  believes it can  accelerate  the rate of expansion of its installed
base by increasing its emphasis on the placement of instruments through QRIBs.

     Maximize  Revenue Stream Per Placement.  Each instrument  placed  typically
provides  the  Company  with a  recurring  revenue  stream  through  the sale of
reagents and  supplies.  The Company  seeks to increase  this revenue  stream by
converting  all  existing  manual  tests  performed  by  the  customer  to  full
automation and by selling to the customer all reagents  required for such tests.
The Company  then seeks to have the  customer  expand its test menu  through the
inclusion  of all tests that are offered by Ventana as well as new tests as they
are  introduced.  To meet these  objectives,  the  Company's  systems  have been
designed as broad  enabling  platforms  which permit  customers to easily expand
their test menu. The Company also has a comprehensive customer education program
which includes on-site technical training in instrument use, user group meetings
and Company-sponsored  national teleconferences with leading medical experts who
regularly update customers on diagnostic and testing developments.

     Develop New and Enhanced Products. Since 1991, the Company has successfully
introduced and commercialized the Ventana NexES, the Ventana ES, the Ventana gen
II, the  TechMate  500 and the  TechMate  250, as well as systems to support all
these instrument platforms. Ventana is also developing additional instruments to
automate  other labor  intensive  activities  in  histology  labs,  particularly
special  stains,  and a full  panel of  immunofluorescence  assays on the NexES,
targeted at renal and dermatological  pathology labs. Ventana is also


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developing next generation ISH  instruments.  The Company intends to continue to
innovate in the field of automated cellular  diagnostics through the development
and introduction of new instruments, software and reagents.

     Encourage  Standardization of Clinical  Diagnostic  Practices.  The Company
intends to support  efforts to standardize  clinical  practices in the diagnosis
and complete  characterization  of various types of cancer through  professional
education  programs  for  pathologists  and  research  collaborations.   Uniform
practice  guidelines  for the  laboratory  diagnosis  of  cancer  are  just  now
beginning to be established and accepted. As an example, the American Society of
Clinical Oncology recently released its  recommendations for the use of selected
hormone/protein  markers in which it recommended that all breast cancer cases be
tested for estrogen  receptor and  progesterone  receptor in order to select the
optimal  course  of  therapy.  The  Company's  automated  systems  allow for the
widespread  standardization of testing methods that could be clinically relevant
in this effort. In addition, the Company's educational programs will be designed
to disseminate  these and other practice  recommendations  as they are developed
and to assist  clinicians and  professional  organizations in the formulation of
additional guidelines.

     Expand  Intellectual  Property  Position.  The Company  seeks to expand its
intellectual  property position by entering into strategic alliances,  acquiring
rights of first refusal on future commercial developments and licensing existing
technologies.  The  Company  evaluates  and intends to pursue the  licensing  of
nucleic  acid  probe  technology  for ISH  applications  from  biopharmaceutical
companies,  research  institutions and others. In conjunction with gen II system
placements, the Company has entered into agreements with customers which provide
the Company with a right of first refusal to  commercialize  new tests developed
by such customers for use on the gen II system.  The Company believes  customers
have been  willing  to enter into these  arrangements  because  the gen II is an
enabling platform that facilitates the development and  commercialization of new
ISH tests.

Products

     The  Company  offers  proprietary   systems  composed  of  instrumentation,
reagents  and  consumable  products  which are  designed to enable  clinical and
research   laboratories  to  perform  standardized  IHC  and  ISH  testing.  The
proprietary nature of the Company's systems is based upon the  interrelationship
among the electronics and mechanical and software  control of the instrument and
the  stabilization,   composition,  packaging  and  delivery  of  reagents.  The
Company's broad line of products  includes  patient priority systems targeted to
hospital clinical  laboratories and  batch-processing  systems targeted to large
hospital  clinical  laboratories  and reference and research  laboratories.  The
Company's  patient priority systems are "closed" in that customers must purchase
detection chemistries from Ventana in order to operate the instruments. Although
the  Company's  existing  batch  processing  systems are "open,"  providing  the
customer with the ability to purchase  reagents from either the Company or other
sources,  users of  approximately  83% of the Company's  United States installed
batch  processing  systems  regularly  purchase  reagents from the Company.  The
following are the principal  benefits of automated  cellular and tissue analysis
using the Company's integrated systems as compared with manual methods:

     o    improved reliability, reproducibility and consistency of test results

     o    faster turnaround time for test results

     o    increased test throughput for the testing laboratory

     o    ability to perform new and emerging molecular tests

     o    reduced dependence on skilled laboratory technicians

     o    ability to perform special  staining  applications  (batch  processing
          instruments)

     o    ability to obtain maximum clinical  information  from  minimally-sized
          biopsies

     o    ability   to   document   processing   protocols   (patient   priority
          instruments)

     o    enhanced  cellular  differentiation  through  multiple  staining  on a
          single slide

     o    standardization of slide preparation among institutions

     In addition to these  critical  clinical and  operational  advantages,  the
Company has determined that its automated  approach has cost advantages as well.
To  confirm  the cost  advantages  of  automated  analysis  using the


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Company's  instruments as compared to manual  methods,  the Company  completed a
cost study involving 11  representative  users of the Company's  systems.  These
users encompass a cross-section of the Company's customers and include hospitals
of varying sizes and a reference laboratory. The cost data compiled in the study
was based on the users'  internal  allocations  of IHC test  costs and  includes
equipment  amortization.  The results of the study  indicate that  automated IHC
analysis  using the  Company's  products  results  in cost  savings  per test of
approximately 10% as compared to manual methods.

Instrument Products

     Patient Priority Instruments. Ventana currently offers two patient priority
systems,  the Ventana NexES and the Ventana gen II. The Ventana patient priority
systems provide a complete automated  approach,  requiring users to only prepare
specimens and place them on microscope  slides. The patient priority systems are
barcode  driven and are designed for multiple  tests on a single  patient biopsy
with rapid turnaround time and walk-away convenience. A barcode label affixed to
each  slide  positively  identifies  the  slide  and the test  procedures  to be
performed.  The  instrument  scans the  barcodes  on the slides and the  reagent
dispenses  and processes  each slide with the unique steps  necessary to perform
each test. The Company's  proprietary  software controls all aspects of the test
procedures.  The steps of  dispensing,  incubating  (i.e.  temperature  and time
control)  and  washing  are  performed  by the  instrument  using  a  series  of
proprietary  chemical/mechanical methods developed by Ventana. These methods are
critical to  obtaining  precise,  sensitive  and rapid test results and make the
system  reliable and easy to use.  Typically,  the  processing  of slides on the
instrument requires less than two hours.

     The Ventana NexES is based upon a modular  design and an external  personal
computer  operating  under a Windows 95 environment for software  control.  Each
module  holds up to 20 slides in the  reaction  chamber  and 25  reagents on its
reagent carousel. The modular design of the NexES and external personal computer
permits the linkage of up to eight NexES modules together, creating the capacity
to process up to 160 slides.  The NexES  therefore  offers  users a  significant
degree of flexibility as users can purchase from one to eight modules  depending
upon their test volume requirements.

     The  Ventana  gen II uses the same  basic  architecture  as the  Ventana ES
instrument and has additional  functions enabling it to perform ISH tests. These
functions  are (i) an  improved  heating  system  which  allows  for  incubation
temperatures of up to 98 degrees C, (ii) rapid  incubation  temperature  cycling
and (iii) additional and improved wash stations which permit the use of multiple
buffers  and  instrument  controlled  changes in the  concentration  of buffers.
Ventana's gen II system  represents a fundamental  enabling  technology  for the
rapid,  accurate and cost effective  identification of unique RNA and DNA (probe
diagnostics)  and is designed to overcome  the  inherent  limitations  of manual
processing.

     Batch  Processing  Instruments.   The  Company's  line  of  TechMate  batch
processing  instruments  are designed for large  volume  testing  using a single
antibody on multiple  patient  biopsies and research  applications in which long
incubation  times and unique detection  chemistries are required.  The Company's
batch  processing  instruments  employ  capillary  action to perform  IHC tests.
Patient  biopsies are placed on capillary  gap slides which  maintain a space of
predetermined  width between adjacent slides when loaded into TechMate  systems.
Reagents are loaded into  disposable  reagent  trays and  programmable  software
directs  the  instrument  to apply the  reagents  in the  proper  sequence.  The
instrument  immerses the bottoms of the slides in the reagents as programmed and
the  reagents  are drawn up the slide and over the tissue  specimen by capillary
action.  After each reagent  application and incubation,  the instrument removes
the reagent  from the  specimen by placing the slides onto  disposable  blotting
pads.

     The Company's original batch instrument, the TechMate 1000, has a 300 slide
capacity.  This large capacity is suited to large reference  laboratories  which
run a limited number of antibody tests on vast numbers of patient biopsies.  The
Company has ceased  production of the TechMate 1000.  The successor  instrument,
the TechMate  500, has a 120 slide  capacity,  which is applicable to both large
and moderately-sized reference laboratories and large research laboratories. The
TechMate  250,  which has a 40 slide  capacity,  is targeted  primarily  for the
European and other international markets.


                                       6
<PAGE>


Reagent and Consumable Products

     Reagent Products

     Reagent   products  are  composed  of  primary   antibodies  and  detection
chemistries,  each of which is  required  for an IHC test.  Customers  that have
patient  priority systems must use Ventana  detection  chemistries on all tests;
such customers have the option of purchasing  primary antibodies from Ventana or
other sources.  Customers who have the Company's batch  processing  systems have
the option of purchasing both antibodies and detection  chemistries from Ventana
or other  sources.  Users of  approximately  83% of the Company's  United States
installed batch processing systems regularly purchase reagents from the Company.

     Primary  Antibodies.  Ventana  sells a line  of in  excess  of 100  primary
antibodies used to detect antigens in combination with detection  chemistry kits
on the Company's  instruments.  Ventana  markets all of the  antibodies  used to
perform the IHC tests that currently account for more than 85% of total IHC test
volume.

     Detection Kits. Detection  chemistries  typically account for approximately
65-70% of the total  expenditures  for  reagents  required  to perform IHC tests
using  the  Company's   instruments.   Ventana  produces  a  line  of  detection
chemistries for use on both patient priority and batch processing  systems which
provide the user with standardized reagents,  thereby giving the user convenient
and rapid results. The detection  chemistries have been developed by the Company
using proprietary  formulations  which, when combined with the Company's primary
antibodies and other  reagents,  optimize the results of tests  performed on the
Company's instruments.  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. The patient priority system utilizes detection kits which
include  (i) a DAB Kit  which  generates  a brown  color;  (ii) an AEC Kit which
generates  a deep  red  color;  (iii)  an  Alkaline  Phosphatase  Red Kit  which
generates a bright red color;  and (iv) an Alkaline  Phosphatase  Blue Kit which
generates  a deep blue  color.  The  Company  currently  sells DAB and  Alkaline
Phosphatase  Red for use with its batch  processing  instruments.  The detection
kits  are  designed  to  perform  tests on a wide  variety  of  specimens,  so a
laboratory can, for example,  perform tests on tissue  preserved in paraffin and
on frozen tissue  simultaneously.  The Company's detection chemistries have been
formulated to provide long term stability for reproducibility and ease of use as
well as a high signal to noise ratio for optimal sensitivity.

     Consumable Products

     Ventana offers a line of consumable  ancillary  products that are necessary
for processing  slides on the Company's  instruments.  These include buffers for
optimizing the IHC reaction and  counterstains  for staining cell nuclei,  which
are used with  both  patient  priority  and batch  processing  instruments.  The
buffers  ensure  good  morphology,   low  backgrounds  and  high  signals.   The
counterstains provide additional convenience for the customer by eliminating the
need for additional  processing of the slides after staining on the  instrument.
For use with patient priority  instruments,  Ventana also supplies a proprietary
liquid  coverslip  used  to  inhibit   evaporation   during  processing  in  the
instrument,  fixatives  for  maintaining  the  morphology  of cells or  tissues,
enzymes for unmasking  antigens and slide  barcodes for use in  identifying  the
slide  and its  specific  IHC  reaction  steps.  For use with  batch  processing
instruments,  the Company also provides  disposable reagent trays which are used
to hold the reagents during IHC reactions, capillary gap slides and wicking pads
used for reagent removal between applications.

Markets and Customers

     There are  approximately  4,200  acute care  hospitals  and  clinics in the
United States. Of these,  there are approximately  1,900 hospitals with over 200
beds,  which perform the vast majority of surgical and other medical  procedures
related to cancer diagnosis and treatment. In addition,  there are approximately
200 reference and research  laboratories and approximately 100 biotechnology and
pharmaceutical companies,  which also perform substantial numbers of IHC and ISH
tests.  These  health  care  institutions  represent  a  total  instrument  site
potential  of 2,200  locations.  Ventana  considers  this to be its core  market
segment  for cancer  testing  and  focuses  the bulk of its sales and  marketing
efforts on these institutions.

     The  Company  estimates  there  are as many as 2,500  instrument  placement
opportunities  in the 2,200  potential  instrument  site locations in the United
States. The international  market for instrument  placements is


                                       7
<PAGE>


estimated  by the Company to be  approximately  1.5 times the size of the United
States  market.  Europe  is  estimated  to  account  for  the  majority  of  the
international  market  potential,  and Japan, the Pacific Rim and Latin American
markets constitute the balance of the international market opportunity.

     As of December  31,  1997,  the Company had 746  instrument  placements  in
approximately  605 of the 2,200 potential  United States  instrument  sites. The
Company believes that less than 50% of such United States  potential  instrument
sites currently  conduct IHC testing on an automated basis. The Company believes
that its worldwide  installed base of 1,199  instruments as of December 31, 1997
is  approximately  four  times  as  large  as the  combined  installed  base  of
instruments of all of the Company's current competitors.

     Ventana  has  placed  instruments  with  37 of the  top 42  cancer  centers
according to U.S. News & World Report and 36 of the 42 cancer centers identified
as principal cancer research centers by the National Cancer Institute, including
the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University,
the M.D. Anderson Cancer Center, the Fred Hutchinson Cancer Center, and Memorial
Sloan-Kettering Cancer Center.

     The Company  believes that the NexES system it introduced in 1997 will have
particular  appeal to those hospitals which are currently  losing  reimbursement
revenue as a result of not performing IHC tests  internally.  The Company's QRIB
placement program may enhance smaller  hospitals' ability to compete with larger
hospitals by providing  on-site IHC testing and consultation  without an initial
capital expenditure.

Sales, Marketing and Customer Support

     Ventana  markets and sells its  instruments  and reagents  through a direct
sales force in North America, certain European countries, and Japan. It has also
established distribution relationships in other countries and has a distribution
arrangement  with DAKO, a  manufacturer  and supplier of reagents used in manual
IHC  testing.  The  distribution  arrangement  with DAKO stemmed from the BioTek
acquisition and only relates to batch processing  systems for certain  countries
outside the United States.

     Ventana's  direct  sales force in North  America now  consists of 34 direct
representatives,   5  regional  managers,  10  field-based  technical  marketing
representatives  and 7  field  service  engineers.  Ventana's  patient  priority
systems are sold through its direct  sales  force.  The sales force is organized
around  geographic  territories,  which have been designed to provide each sales
representative  with an approximately equal number of sales  opportunities.  The
sales force is also divided  between a national  account  sales force,  which is
focused on large  users and an U.S.  hospital  sales  force,  which calls on all
other  accounts.  The Company's sales  representatives  typically have technical
backgrounds or prior medical capital equipment sales  experience.  The Company's
sales  representatives are incentivized to increase instrument  placements.  The
sales  representatives as well as the technical  marketing  representatives  are
incentivized to maximize recurring reagent sales.

     BioTek  entered into a  distribution  agreement  with CMS in January  1993.
Under the agreement,  CMS had exclusive  United States  distribution  rights for
TechMate  instruments and related reagents.  The agreement  required CMS to make
good-faith  commercial  efforts to  purchase  certain  specified  quantities  of
instruments and to maintain a sufficient  inventory of reagents to meet customer
requests.  The  agreement  with  CMS was set to  expire  in  April  1998 but was
terminated in October 1997.

     Ventana's sales force in Europe consists of 15 sales and support  personnel
located in France and  Germany.  This sales force  markets  and sells  Ventana's
patient priority systems direct in France, Germany,  Austria,  Switzerland,  and
the Benelux countries and markets and sells through distributor relationships in
Italy, Spain and Scandinavia.  This sales force is geographically  organized and
is  compensated  in a manner  similar to the United States sales force.  Ventana
expects to  significantly  expand its direct sales and  marketing  activities in
Europe in 1998.  Ventana's  sales  force in Japan  consists  of three  sales and
support personnel.  Ventana expects to significantly expand its direct sales and
marketing  activities in Japan after the Company receives import permits for its
reagents.

     BioTek  entered into its agreement with DAKO in September  1994.  DAKO is a
market leader in Europe in supplying  reagents for use in manual IHC tests.  The
agreement provides DAKO with exclusive rights to distribute TechMate instruments
and related  accessories in Europe and several other territories.  The agreement
also permits DAKO to supply  customers with its own reagents for the instruments
in return for paying BioTek a fixed dollar


                                       8
<PAGE>


royalty amount.  For each TechMate 500 instrument  installed at a customer site,
the royalty is payable over a five year term.  For each  TechMate 250 shipped to
DAKO, a prepaid  royalty amount of $7,000 is paid by DAKO.  Under the agreement,
DAKO is subject to certain minimum purchase requirements for instruments.

     In  connection  with  BioTek's  agreement  with  DAKO,  DAKO made two loans
secured by a pledge of  substantially  all of  BioTek's  assets.  DAKO also made
prepayments on future  instrument sales and reagent  royalties to BioTek.  These
loans and prepayments were used to fund TechMate 250 instrument  development and
working  capital  requirements.  On September 25, 1996,  BioTek and DAKO entered
into the  Amendment  Agreement for the purpose of  addressing  several  matters,
including repayment of the secured loans and prepayments.  At December 31, 1997,
the net aggregate  outstanding  balance of the secured loans and prepayments was
$0.5 million.  The secured loans and  prepayments are recorded as long-term debt
in the Company's Consolidated Financial Statements.

     In connection with the Amendment Agreement, DAKO paid the Company a royalty
of $0.5  million and the Company  paid DAKO $0.5  million as a reduction  of the
balance of the prepayments in 1996. Under the Amendment Agreement, the remaining
secured loans and prepayments will be repaid through discounts on DAKO purchases
of  TechMate  instruments  from  BioTek at  recoupment  rates  specified  in the
Amendment  Agreement.  The Amendment  Agreement also establishes certain minimum
purchase and delivery  commitments  for  TechMate  250  instruments,  as well as
pricing  for  certain  quantities  of  TechMate  250  instruments.  Pricing  for
additional  quantities  of  TechMate  250  instruments  was not  resolved in the
Amendment  Agreement  and the parties are currently in  disagreement  as to such
pricing.  Currently,  DAKO is purchasing  such  instruments  at the price levels
established  by the Company.  However,  DAKO has,  pursuant to the  distribution
agreement, initiated binding arbitration proceedings to resolve such pricing. In
the event such arbitration  proceedings are determined adversely to the Company,
the pricing of TechMate 250 instruments to DAKO would be on terms less favorable
to the Company than the current  pricing  terms and the amount of secured  loans
and prepayments recouped per instrument sale would also be reduced.

     Furthermore,  during the course of ongoing  discussions with DAKO since the
acquisition of BioTek,  DAKO has,  among other things,  asserted that BioTek has
not fulfilled its  obligations  with respect to the  development  and commercial
introduction of the TechMate 250  instrument.  The Company denies this assertion
and believes that it is in substantial  compliance  with its  obligations  under
these  development  milestones.  In  particular,  the Company  believes that its
contract  manufacturing  agreement  with LJL will  enable it to  satisfy  DAKO's
requirements for TechMate 250 instruments.  Nevertheless,  the negotiations with
DAKO  could  result  in an  attempt  by DAKO to  exercise  contractual  remedies
available to it under the  distribution  agreement  and the terms of the secured
loans, which remedies include (i) requiring repayment of the secured loans in 12
equal  quarterly  installments  commencing  upon a default by BioTek and (ii) an
irrevocable   license   to   manufacture   TechMate   instruments   for   resale
internationally and a related reduction in the fixed dollar royalty rate paid by
DAKO to BioTek for each  instrument  included in the royalty  base.  The Company
could also experience an interruption  in the  distribution of batch  processing
instruments outside the United States or become involved in litigation with DAKO
with  respect  to  the  current  distribution  agreement,  which  would  involve
significant  costs as well as  diversion  of  management  time.  There can be no
assurance  that the  Company  would  prevail  in any  litigation  involving  the
agreement.  Furthermore,  there can be no assurance  as to the future  course or
outcome of the Company's  negotiations  with DAKO or as to the Company's  future
relationship  with DAKO. If DAKO were  successful  in obtaining a  manufacturing
license  for  TechMate  instruments,  the  Company  could  experience  a loss of
instrument  revenue which could have a material  adverse effect on the Company's
business, financial condition and results of operations. The Company anticipates
that DAKO is  developing an instrument to eliminate its reliance on the TechMate
250; the release of such an  instrument  could  adversely  affect the  Company's
ability to supply instruments beyond current commitment levels.

     Ventana's  sales and  marketing  strategy  for its  systems  is  focused on
increasing its penetration of the hospital and laboratory market through several
instrument  placement  options.  The Company places  instruments  through direct
sales including nonrecourse leases,  instrument rentals and the Company's QRIBs.
In a QRIB,  the Company  provides the customer with the use of an instrument for
up to six  months,  provided  the  customer  purchases  a  minimum  of $3,000 in
consumables.  At the end of the six month  period,  the  customer  must elect to
purchase,  rent or return the system.  As of December 31, 1997,  the Company had
placed 105 instruments through QRIBs.

     A key component of the Company's  business strategy is to increase the sale
of reagents into its installed  instrument base through a high level of customer
support.  The Company's technical marketing  representatives  assist in training
customers  in the use of the  Company's  systems and seek to  increase  customer
reagent  utilization  by


                                       9
<PAGE>


facilitating  the transfer of workload from manual  procedures.  Through  direct
customer contact, the Company's technical marketing  representatives are able to
promote  sales of reagents and suggest new IHC test  applications  to customers.
New customers  receive initial training on the systems either in the field or at
Ventana's  facilities  in Tucson,  Arizona.  The Company's  technical  marketing
representatives  then visit the customer to provide additional on-site training.
Thereafter,  Ventana actively supports customers with periodic product bulletins
and provides 24-hour customer  telephone  support.  Ventana actively markets its
products  through  participation  at  industry  trade  shows,  video  and  audio
presentations by leading pathologists and direct mail.

Manufacturing

     The Company manufactures its patient priority instruments at its facilities
in Tucson,  Arizona.  The Company has  recently  expanded  its patient  priority
instrument  manufacturing  facilities and operations in Tucson and believes that
this expansion will provide the Company with sufficient  manufacturing  capacity
to meet its  anticipated  requirements  for  patient  priority  instruments  for
approximately the next three years.  Components for patient priority instruments
are  purchased  from  a  variety  of  vendors,   subject  to  stringent  quality
specifications.  The  components  are  assembled  by  Ventana's  highly  skilled
manufacturing  technicians  into finished  products.  A quality  assurance group
performs  tests at  regular  intervals  in the  manufacturing  cycle  to  verify
compliance  with  the  Company's  specifications  and  regulatory  requirements,
including Good Manufacturing Practices ("GMP") requirements.

     A  number  of the  components  used in the  NexES  and gen II  systems  are
fabricated on a custom basis to the Company's  specifications  and are currently
obtained from a limited number of sources. To date, however, the Company has not
experienced  any  material  disruptions  in the supply of such  components.  The
Company believes that additional suppliers,  if required,  could be obtained and
qualified.  To date, the Company has not  experienced  significant  difficulties
with manufacturing yields and has experienced minimal manufacturing waste in the
patient priority instrument manufacturing process.

     The  Company  has  relationships  with  third-party  manufacturers  for the
manufacture of batch  processing  instruments.  The Company has contracted  with
Kollsman  Manufacturing  Company,  Inc.  for the  manufacture  of  TechMate  500
instruments  and with LJL  Biosystems,  Inc. for the manufacture of TechMate 250
instruments.

     Reagents sold for use with the Company's  patient priority  instruments are
manufactured  by Ventana,  which  purchases  basic raw  materials  and  performs
value-added  manufacturing processes,  such as formulation and packaging, at its
facilities.  Certain components and raw materials, primarily antibodies, used in
the  manufacturing of the Company's  reagent products are currently  provided by
single source  vendors.  To date, the Company has not  experienced  any material
disruptions  in  supply  from  these  vendors  and  has  experienced  levels  of
manufacturing waste in the reagent  manufacturing process that it believes to be
below industry averages.

     Reagents sold for use with the Company's batch processing  instruments have
been manufactured at Ventana's Tucson  facilities since September 1996.  Ventana
has converted the manufacturing process for such reagents to the process used by
Ventana  in  which  basic  raw  materials  are used  and  important  value-added
activities are performed internally. As a result of this transition,  Ventana is
positioned to capture margin and value added which was lost through  payments to
third-party  manufacturers,  to increase economies of scale in both raw material
purchasing  and  manufacturing,  to standardize  procedures  and  processes,  to
increase control over scheduling and to improve manufacturing flexibility.

     The Company's reagent manufacturing process at its Tucson, Arizona facility
is currently semi-automated.  The Company anticipates that as production volumes
increase it will  increase the level of  automation.  The Company  currently has
sufficient  reagent  manufacturing  capacity to meet its  anticipated  needs for
approximately  the next two years. The Company's  long-term plans are to build a
separate  reagent  manufacturing  facility in the Tucson  area to  increase  its
reagent  manufacturing  capacity  and increase  the level of  automation  of the
manufacturing process. The Company anticipates  commencing  construction of this
facility in 1999.

     The  Company's  manufacturing  operations  are  required to be conducted in
accordance  with  GMP  requirements.   GMP  requires  the  Company  to  maintain
documentation  and  process  control  in a  prescribed  manner  with  respect to
manufacturing,  testing and quality control. In addition, the Company is subject
to FDA inspections to verify compliance with FDA requirements.  The Company also
intends to implement  manufacturing  policies and


                                       10
<PAGE>


procedures, which will enable the Company to receive ISO 9000 certification. ISO
9000  standards  are global  standards  for  manufacturing  process  control and
quality  assurance.  The  Company  will be  required  to obtain  the CE mark for
continued sale of its products in the countries  comprising the European  Union.
The CE mark is an international  symbol of quality assurance and compliance with
applicable European Union medical device directives.

Research & Development and Engineering

     The Company has focused its research,  development and engineering  efforts
on the development of innovative reagent and instrument systems.

     As of December 31, 1997,  Ventana's  Research & Development and Engineering
groups consisted of 27 persons,  many of whom have graduate  degrees.  Ventana's
research and development  activities are performed primarily in-house by Ventana
employees.  These efforts are supplemented by consulting services and assistance
from  Ventana's  scientific  advisors.  The Company is  developing  reagents for
existing  instrument  bases  and new  products.  In  addition,  the  Company  is
developing new instruments and enhancing existing instruments.

     During the fiscal years ended  December 31,  1997,  1996 and 1995,  Ventana
spent $3.1 million, $2.7 million and $2.2 million, respectively, on research and
development.

Reagent Development Projects

     Ventana's reagent  development is divided into four principal areas.  These
include  new  antibody  development,   detection   chemistries,   special  stain
chemistries,  and ISH  chemistries.  Ventana  continues  to monitor  third-party
development of new primary  antibodies.  Antibodies  recognizing  new prognostic
markers for monitoring  breast cancer patients were introduced in February 1998.
These, in combination  with other antibodies  currently  available from Ventana,
constitute a panel of antibodies useful in determining therapeutic  alternatives
and  predicting  therapy  outcomes  for breast  cancer  patients.  In  addition,
fluorescent-labeled  antibodies  have been  developed  which  were first sold in
March  1998.   These   antibodies  are  useful  in  determining  the  renal  and
dermatopathological  status of patients.  Ventana also  continues to improve the
sensitivity and specificity of detection  chemistries.  An amplification kit was
introduced in the third quarter of 1997 which, when used in conjunction with any
of  Ventana's  existing  detection   chemistries,   allows  smaller  amounts  of
diagnostic  markers to be  visualized  in tissues.  In  addition,  projects  are
ongoing  that will  further  improve the  sensitivity  of the present  detection
choices.

     Reagent  development  also  supports  the  development  of  new  instrument
systems.  A complete reagent product line was introduced in conjunction with the
August 1997 market launch of the NexES instrument.  Projects to provide reagents
for instrument  systems continue in two major new instrument system  development
areas - special  stains and ISH.  Development  of reagents  for the  predominant
special  stains used in the histology  laboratory is proceeding  toward a fourth
quarter,  1998  market  availability.  Development  of  nucleic  acid  probe and
detection  ISH kits,  to detect the  causative  agents for  numerous  infectious
diseases,  is ongoing.  An agreement with Chiron to utilize bDNA  technology for
HIV and other  infectious  disease  agents was completed in the first quarter of
1998 and will provide the  required  sensitivity  for ISH tests.  The Company is
currently in discussion  with various  universities,  hospitals,  and commercial
organizations  regarding  other  potential  areas of  opportunities  for the ISH
system.

Instrumentation Development Projects

     Ventana's  instrumentation  development  is focused on  continuous  product
improvement and new product  innovation.  The Company believes that the platform
used by the modular IHC system,  NexES,  will enable it to develop  more rapidly
new products which achieve these goals. Specifically,  Ventana has two new major
instrument  systems in development.  The first is a special stains module which,
when introduced in late 1998, will be fully  integrated into the NexES platform.
This system will allow Ventana to expand into new markets in our base  histology
business.  The second is an ISH module,  which uses a highly innovative  heating
system to achieve the temperature  consistency  required for the ISH procedures.
When introduced in late 1998, it will also be integrated into the NexES platform
and will have a full  complement  of  reagents,  which are used in clinical  ISH
applications.


                                       11
<PAGE>


     In addition,  the Company will be  introducing in the first half of 1998, a
new bar code printing system.  This system will use a proprietary  label,  which
has been developed exclusively for Ventana's instrument system.

     Ventana continues to explore new opportunities in instrument systems, which
add value to the customer.  Plans are being developed for new systems to further
capitalize  on the  Company's  success  with  its  patient  priority  and  batch
processing systems.

Patents and Proprietary Rights

     Ventana has pursued a strategy of patenting key technology as it relates to
both the  automation  and the  chemistry  of  analyzing  cells  and  tissues  on
microscope slides. Ventana holds 16 United States patents and 20 foreign patents
and has filed additional United States and foreign patent  applications.  Six of
Ventana's United States patents were issued in 1997. Several of Ventana's issued
United States patents relate to reagent  formulations  and methods,  including a
reagent  formulation  characterized  by  long-term  stability  and a  method  of
inhibiting evaporation of reagents during processing. Other issued United States
patents relate to a reagent dispenser,  a tissue fixative and various aspects of
the capillary  gap  technology  and methods and devices for batch  processing of
slides.   Pending   applications  relate  to  mechanical  aspects  of  automated
instruments  for performing  reactions on slides and processing  methods used in
these instruments. In addition, a patent application filed by the Company covers
an  evaporation   inhibitor  liquid  that  is  effective  for  high  temperature
applications. The expiration dates of the Company's issued United States patents
range from September 2005 to November 2013.

     There can be no  assurance  that the  Company's  patent  applications  will
result in patents being issued 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 those of the
Company or design around or otherwise circumvent patents issued to the Company.

     Because patent  applications in the United States are maintained in secrecy
until  patents are issued and since  publication  of  discoveries  in scientific
literature  tends to lag behind actual  discoveries by several  months,  Ventana
cannot be certain  that it was the first  creator of  inventions  covered by its
patents or pending patent  applications  or that it was the first to file patent
applications for such inventions.  Moreover, the Company may have to participate
in interference  proceedings  declared by the United States Patent and Trademark
Office  to  determine  the  priority  of  inventions,   which  could  result  in
substantial  cost to the  Company.  In the  event  that any  relevant  claims of
third-party  patents are upheld as valid and  enforceable,  the Company could be
prevented from  practicing the subject matter claimed in such patents,  or would
be required to obtain licenses from the patent owners of each of such patents or
to redesign its products or  processes  to avoid  infringement.  There can be no
assurance  that such  licenses  would be available  or, if  available,  would be
available  on terms  acceptable  to the  Company  or that the  Company  would be
successful  in any  attempt to  redesign  its  products  or  processes  to avoid
infringement.  If the Company does not obtain  necessary  licenses,  it could be
subject to litigation  and encounter  delays in product  introductions  while it
attempts  to  design  around  such  patents.  Alternatively,   the  development,
manufacture or sale of such products could be prevented. Litigation would result
in significant  cost to the Company as well as diversion of management time. The
outcome of any such litigation  cannot be predicted with any assurance.  Adverse
determinations  in any such proceedings  could have a material adverse effect on
the Company's business, financial condition and results of operations.

     BioTek is a party to litigation  initiated by BioGenex  Laboratories,  Inc.
("BioGenex") relating to past infringements of patent rights of BioGenex. In May
1997, a judgement was rendered against BioTek, which BioTek has appealed.  For a
discussion of these proceedings, see Item 3 below entitled "Legal Proceedings."

     Ventana also relies upon trade secret  protection for its  confidential and
proprietary  information.  There  can  be no  assurance  that  others  will  not
independently  develop  substantially   equivalent  proprietary  information  or
techniques,  gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant  cost to the Company as well
as diversion of management time. Adverse  determinations in any such proceedings
or  unauthorized  disclosure  of  Ventana  trade  secrets  could have a material
adverse  effect on  Ventana's  business,  financial  condition  and  results  of
operations.


                                       12
<PAGE>


     Ventana's  policy is to require its employees,  consultants and significant
scientific   collaborators  to  execute  confidentiality   agreements  upon  the
commencement  of an employment or consulting  relationship  with Ventana.  These
agreements generally provide that all confidential information developed or made
known to the individual during the course of the individual's  relationship with
Ventana 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 in the course of rendering services to Ventana shall
be the exclusive property of Ventana.  There can be no assurance,  however, that
these  agreements  will not be  breached  or that they will  provide  meaningful
protection or adequate  remedies for unauthorized use or disclosure of Ventana's
trade secrets.

Competition

     Competition  in the  diagnostic  industry  is intense  and is  expected  to
increase.  Competition  in the  diagnostic  industry  is based on,  among  other
things,  product  quality,  performance,  price and the  breadth of a  company's
product  offerings.  Ventana's  instrument  and  reagent  systems  for IHC tests
compete with products  offered by various  manufacturers  as well as with manual
diagnostic methods. In addition, flow cytometry can be used for cellular testing
and may, in certain  markets,  be competitive with the Company's  products.  The
Company's  competitors may succeed in developing products that are more reliable
or effective or less costly than those  developed by the Company and may be more
successful  than the Company in  manufacturing  and  marketing  their  products.
Although  the Company  plans to continue to develop new and  improved  products,
there are other  companies  engaged in research and  development  of  diagnostic
devices or reagents, and the introduction of such devices or alternative methods
for diagnostic testing could hinder the Company's ability to compete effectively
and could have a material  adverse effect on the Company's  business,  financial
condition and results of operations.

     In the instrument market, several companies, including Leica (a division of
Leitz Microscope GmbH),  Shandon Scientific Limited (a division of Life Sciences
International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC
tests and can be used with any supplier's  reagents,  which may be attractive to
certain customers. As of December 31, 1997, the Company had an installed base of
1,199  instruments  which the  Company  estimates  is more  than four  times the
combined  installed  base  of  instruments  of  all  of  the  Company's  current
competitors. The Company has included semi-automated instruments manufactured by
its  competitors in arriving at its estimates of its market share.  In addition,
future  growth  in the  market  for  automated  IHC  instruments  may  result in
additional market entrants and increased competition,  including more aggressive
price  competition.  Many of the  companies  selling  or  developing  diagnostic
devices and instruments and many potential  entrants in the automated IHC market
have   financial,   manufacturing,    marketing   and   distribution   resources
significantly greater than those of Ventana. In addition,  many of these current
and potential  competitors have long-term supplier  relationships with Ventana's
existing and  potential  customers.  These  competitors  may be able to leverage
existing  customer  relationships  to  enhance  their  ability  to place new IHC
instruments.  Competition in the market for automated IHC instruments, including
the advent of new market entrants and increasing price competition, could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

     In the  market  for  reagents,  the  Company  encounters  competition  from
suppliers of primary antibodies and detection  chemistries.  The major suppliers
of primary  antibodies in the anatomical  pathology  market in the United States
are DAKO, BioGenex and Coulter Immunotech.  The principal suppliers of detection
chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The
Company's  patient  priority  instruments  require  the  use  of  the  Company's
detection  chemistries but can be used with primary antibodies supplied by third
parties,  and the Company's batch  processing  instruments can be used with both
detection   chemistries  and  primary  antibodies  supplied  by  third  parties.
Accordingly,  the  Company  encounters  significant  competition  in the sale of
reagents  for use on those of its  instruments  that can be used  with  reagents
supplied by third  parties.  Lower prices for reagents  used in manual IHC tests
could also limit the growth of automation.  Certain of the Company's current and
potential  competitors  in the  reagent  market have  financial,  manufacturing,
marketing  and  distribution  resources  greater  than  those  of  the  Company.
Competition  in the market for reagents  could also  increase as a result of new
market entrants  providing more favorable  reagent supply  arrangements than the
Company,  including lower reagent prices.  In particular,  DAKO has introduced a
lower cost  semi-automated  IHC  instrument in the United States and is offering
reagent supply arrangements that have resulted in increased competition for both
instruments and reagents. In addition, new entrants in the instrument market may
seek to enhance their  competitive  position  through reduced reagent pricing or
more favorable supply  arrangements;  the Company's current instrument customers
may find it  attractive  to purchase  primary  antibodies  for patient  priority
instruments  and  primary   antibodies  and  detection



                                       13
<PAGE>


chemistries for batch processing  instruments from such  competitors.  Increased
competition  in the reagent  market could have a material  adverse effect on the
Company's business, financial condition and results of operations.

Government Regulation

     The manufacturing, marketing and sale of the Company's products are subject
to  regulation  by  governmental  authorities  in the  United  States  and other
countries.  In the United  States,  clinical  diagnostic  devices are subject to
rigorous Food and Drug Administration ("FDA") regulation. The Federal Food, Drug
and Cosmetic Act governs the design,  testing,  manufacture,  safety,  efficacy,
labeling,  storage, record keeping,  approval,  advertising and promotion of the
Company's products.  Obtaining  regulatory approval for new products within this
regulatory  framework may take a number of years and involves the expenditure of
substantial  resources.  In  addition,  there  can  be no  assurance  that  this
regulatory  framework  will not change or that  additional  regulation  will not
arise,  which  may  affect  approval  of or  delay  an  application  or  require
additional expenditures by the Company.

     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  analytes and develop and
prepare their own finished  diagnostic  tests.  Although  neither the individual
reagents nor the finished tests prepared from them by the clinical  laboratories
have  traditionally  been regulated by the FDA, the FDA has recently  proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as  medical  devices.  The  proposed  rule would  also  restrict  sales of these
reagents  to  clinical  laboratories  certified  under the  Clinical  Laboratory
Improvement Amendments of 1988 ("CLIA") as high complexity testing laboratories.
The Company intends to market some diagnostic  products as finished test kits or
equipment and others as individual reagents;  consequently, some or all of these
products will be regulated as medical devices.

     The Company's clinical  diagnostic systems are regulated by the FDA under a
3-tier  classification  system -- Class I, II and III. The degree of regulation,
as well as the cost and time required to obtain regulatory approvals,  generally
increases  from Class I to Class III. Most  diagnostic  devices are regulated as
Class I or Class II devices,  although  certain  diagnostic tests for particular
diseases may be  classified as Class III devices.  Prior to entering  commercial
distribution,  most Class I, II, or III medical  devices must undergo FDA review
under  one of two  basic  review  schemes  depending  upon the type of device or
procedure.  These review schemes are the 510(k) pre-market  notification process
and the pre-market  approval ("PMA") process. A 510(k) notification is generally
a filing submitted to demonstrate that the device in question is  "substantially
equivalent" to another legally  marketed  device.  Approval under this procedure
may be granted within 90 days, but generally takes longer,  and in some cases up
to a year or more. Class I and II devices, as well as certain Class III devices,
for  which the FDA has not  called  for a PMA,  are  reviewed  under the  510(k)
process.  For all other Class III products,  the manufacturer must file a PMA to
show that the product is safe and effective based on extensive  clinical testing
and controlled trials among several diverse testing sites and population groups.
These  controlled  trials  may be  conducted  under  an  Investigational  Device
Exemption  ("IDE")  cleared by the FDA,  or they may be  conducted  without  FDA
review if exempt  from IDE  requirements.  The PMA  process  typically  involves
significantly  more  clinical  testing than does the 510(k)  procedure and could
involve a  significantly  longer FDA review period after the date of filing.  In
responding  to a PMA  application,  the FDA can  either  accept it for filing or
reject it and require the  manufacturer to include  additional  information in a
resubmitted  application.  PMA applications  that are accepted for filing may be
reviewed by a FDA scientific  advisory panel, which issues either a favorable or
unfavorable  recommendation  regarding  the device.  The FDA is not bound by the
panel's recommendation, but tends to give it significant weight. By law, the PMA
process is to be completed  within 180 days of acceptance of the PMA application
for filing,  although this time period can be, and typically is, extended by the
FDA. A PMA application can take from one to several years to complete, and there
can be no assurance  that any  submitted  PMA  application  will  ultimately  be
approved.  Further,  clearance or approval may place substantial restrictions on
to whom and the  indications for which the product may be marketed or to whom it
may be marketed.  Additionally,  there can be no assurance that the FDA will not
request  additional  data, or request that the Company conduct further  clinical
studies.

         With  respect  to  automated  IHC  testing  functions,   the  Company's
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 and,  therefore,  use of the gen II for ISH tests
will be restricted to research


                                       14
<PAGE>


applications. New instrument products that the Company may develop and introduce
could require 510(k) notifications and clearances or PMA applications.

     All of the detection  chemistries and most of the primary antibody products
being sold by the Company are currently classified as Class II devices.  Many of
Ventana's  detection  chemistries  have received 510(k)  clearance from the FDA.
Some of the  antibodies  being  marketed by the Company are labeled for in vitro
diagnostic use and have received 510(k)  clearance from the FDA. The Company may
wish to market certain  antibodies with a label indicating that they can be used
in the diagnosis of particular diseases,  including cancer. These devices may be
classified as Class III devices and may therefore require a PMA.

     After products have been cleared for marketing by the FDA, the Company will
be subject  to  continuing  FDA  obligations.  Clearances  may be  withdrawn  or
products  may  be  recalled  if  compliance  with  regulatory  standards  is not
maintained or if problems  occur after the product  reaches the market.  The FDA
may require surveillance programs to monitor the effect of products,  which have
been commercialized,  and has the power to prevent or limit further marketing of
the  product  based on the  results of these  post-marketing  programs.  The FDA
enforces regulations  prohibiting the marketing of products for unapproved uses.
Further,  if the Company wanted to make changes on a product after FDA clearance
or  approval,  including  changes  in  indications  or  intended  use  or  other
significant modifications to labeling or manufacturing, additional clearances or
approvals would be required. The FDA has broad regulatory and enforcement powers
including  the  ability  to levy  fines and civil  penalties,  suspend  or delay
issuance  of  approvals,  seize  or  recall  products,  withdraw  clearances  or
approvals,  restrict or enjoin the  marketing of products,  and impose civil and
criminal  penalties,  any one or more of which  could  have a  material  adverse
effect upon the Company.

     The  Company  is  subject  to FDA GMP  regulations.  The  Company is in the
process of implementing  policies and procedures which are intended to allow the
Company to receive ISO 9000  certification.  ISO 9000  standards  are  worldwide
standards  for   manufacturing   process  control,   documentation  and  quality
assurance.  There can be no  assurance  that the Company will be  successful  in
meeting ISO 9000 certification requirements.  Under GMP regulations and ISO 9000
standards,  the Company is subject to ongoing FDA and  international  compliance
inspections.

     Laboratories using the Company's diagnostic devices for clinical use in the
United States are regulated under CLIA,  which is intended to ensure the quality
and  reliability of medical  testing.  Regulations  implementing  CLIA establish
requirements  for  laboratories  and  laboratory   personnel  in  the  areas  of
administration,  participation and proficiency testing, patient test management,
quality  control,  personnel,  quality  assurance  and  inspection.  Under these
regulations, the specific requirements that a laboratory must meet depend on the
complexity  of  the  test  being  performed  by  the   laboratory.   Under  CLIA
regulations,  all laboratories  performing  moderately complex or highly complex
tests  will  be  required  to  obtain  either  a  registration   certificate  or
certificate of accreditation from the Health Care Financing Administration. CLIA
requirements  may prevent some clinical  laboratories  from using certain of the
Company's  diagnostic products.  Therefore,  there can be no assurance that CLIA
regulations and future  administrative  interpretations  of CLIA will not have a
material  adverse impact on the Company by limiting the potential market for the
Company's products.

     The Company sells  products in certain  international  markets and plans to
enter additional  international markets.  International sales of medical devices
are subject to foreign  government  regulation,  the  requirements of which vary
substantially  from country to country.  These range from  comprehensive  device
approval  requirements for some or all of the Company's  medical device products
to requests for product data or certifications. FDA approval is required for the
export of Class III devices.

     In addition to the foregoing,  the Company is subject to numerous  federal,
state and local laws and  regulations  relating to such  matters as safe working
conditions,   laboratory  and  manufacturing  practices,  fire  hazard  control,
disposal  of   hazardous  or   potentially   hazardous   substances   and  other
environmental  matters. To date,  compliance with these laws and regulations has
not had a material effect on the Company's financial  position,  and the Company
has no plans for material  capital  expenditures  relating to such matters.  The
Company  currently uses third-party  disposal  services to remove and dispose of
the hazardous  materials used in its processes.  The Company could in the future
encounter claims from individuals,  governmental authorities or other persons or
entities  in  connection  with  exposure  to or  disposal  or  handling  of such
hazardous  materials or violations of  environmental  laws

                                       15
<PAGE>

by the Company or its contractors and could also be required to incur additional
expenditures for hazardous  materials  management or  environmental  compliance.
Costs associated with environmental claims,  violations of environmental laws or
regulations,  hazardous  materials  management and compliance with environmental
laws could have a material adverse effect on the business,  financial  condition
or results of operations of the Company.

     Although the Company believes it will be able to comply with all applicable
regulations  regarding the  manufacture  and sale of diagnostic  products,  such
regulations are always subject to change and depend heavily upon  administrative
interpretations.  Delays in or failure to receive  clearances  or  approvals  of
products the Company plans to introduce, or changes in the applicable regulatory
climates  could have a material  adverse  effect  upon the  business,  financial
condition or results of operations of the Company.

Third-Party Reimbursement

     Third-party  payors,  such as governmental  programs and private  insurance
plans,  can  indirectly  affect the  pricing or relative  attractiveness  of the
Company's  products by regulating the maximum amount of reimbursement  they will
provide to the Company's  customers for diagnostic  testing services.  In recent
years, health care costs have risen  substantially,  and third-party payors have
come under increasing pressure to reduce such costs. In this regard, legislative
proposals  relating  to  health  care  reform  and cost  containment  have  been
introduced at the state and federal levels. The  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  the
Company's  customers  receive  from  third-party  payors  and as a result on the
Company's  ability to market and sell its  products.  Such factors  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

Product Liability and Recalls; Product Liability Insurance

     The marketing and sale of the Company's diagnostic instruments and reagents
entails  risk of product  liability  claims.  The Company has product  liability
insurance  coverage  with  a per  occurrence  maximum  of  $2.0  million  and an
aggregate  annual  maximum of $5.0 million.  There can be no assurance that this
level of insurance  coverage  will be adequate or that  insurance  coverage will
continue to be  available  on  acceptable  terms or at all. A product  liability
claim or recall could have a material adverse effect on the Company's  business,
reputation, financial condition and results of operations.

Employees

     As of December 31, 1997,  Ventana  employed 211 persons full time. Of these
employees,  102 were engaged in sales, marketing and service, 27 in research and
development, 56 in manufacturing and 26 in general and administrative functions.
None of Ventana's  employees are covered by a collective  bargaining  agreement.
Ventana considers its relations with its employees to be satisfactory.

Backlog

     Ventana  typically ships orders for instruments and reagents  shortly after
receipt, and accordingly does not maintain a significant backlog.

Additional Risk Factors

Continuing Losses; Uncertainty of Future Profitability

     The  Company  has  incurred  cumulative  losses of $33.8  million  from its
inception in 1985 through December 31, 1997. BioTek sustained  cumulative losses
of $18.2  million from its  inception in October 1990 until its  acquisition  by
Ventana. The Company's ability to achieve and sustain profitability is dependent
on a variety of factors including the extent to which its instrument and reagent
systems  continue to achieve market  acceptance,  the Company's  ability to sell
reagents to its customers,  the Company's ability to compete  successfully,  the
Company's ability to develop,  introduce, market and distribute existing and new
diagnostic  systems,  the  level of  expenditures  incurred  by the  Company  in
investing in product development and sales and marketing,  the Company's ability
to expand  manufacturing  capacity  as  required  and the  receipt  of  required
regulatory  approvals  for products  developed


                                       16
<PAGE>


by the Company. There can be no assurance that the Company will be successful in
these efforts.  Moreover,  the level of future profitability,  if any, cannot be
accurately  predicted and there can be no assurance that  profitability  will be
sustained  on a quarterly or annual  basis,  or at all, or that the Company will
not incur operating losses in the future.

Future Fluctuations in Operating Results

     The Company derives revenues from the sale of reagents and instruments. The
initial placement of an instrument is subject to a longer, less consistent sales
cycle than the sale of reagents, which begin and are typically recurring once an
instrument  is placed.  The  Company's  future  operating  results are likely to
fluctuate  substantially  from  period to period  because  instrument  sales are
likely to remain an important part of revenues in the near future. The degree of
fluctuation  will  depend on the  timing,  level and mix of  instruments  placed
through  direct sales and  instruments  placed  through  QRIBs and  rentals.  In
addition,  average daily  reagent use by customers may fluctuate  from period to
period, which may contribute to future fluctuations in revenues.

     Sales of  instruments  may fluctuate from period to period because sales to
the Company's  international  distributors  typically  provide such distributors
with  several  months  of  instrument  inventory,  which the  distributors  will
subsequently seek to place with end-users.  The Company's  instrument  installed
base includes  instruments shipped to DAKO A/S ("DAKO") and recognized as sales.
Furthermore,  due  both  to the  Company's  increased  sales  focus  on  smaller
hospitals and laboratories and the relatively high reagent sales growth rates in
recent fiscal periods,  the rate of growth in reagent sales in future periods is
likely to be below that  experienced  during the past  several  fiscal  periods.
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 the  Company  and its  competitors,  market  acceptance  of the
Company's  current or new  products,  developments  with  respect to  regulatory
matters, availability and cost of raw materials from its suppliers,  competitive
pricing pressures,  increased research and development  expenses,  and increased
marketing and sales expenses associated with the implementation of the Company's
market  expansion  strategies for its instrument  and reagent  products.  Future
instrument   and  reagent  sales  could  also  be  adversely   affected  by  the
configuration of the Company's patient priority  systems,  which require the use
of the Company's detection  chemistries,  particularly if and to the extent that
competitors  are successful in developing and introducing new IHC instruments or
if competitors offer reagent supply  arrangements  having pricing or other terms
more favorable than those offered by the Company.  Such increased competition in
reagent supply could also adversely affect sales of reagents to batch processing
instrument  customers  since  those  instruments  do not  require the use of the
Company's reagents. In connection with future introductions of new products, the
Company  may  be  required  to  incur  charges  for  inventory  obsolescence  in
connection  with unsold  inventory of older  generations  of products.  To date,
however,  the Company has not incurred  material charges or expenses  associated
with inventory  obsolescence  in connection with new product  introductions.  In
addition,  a significant portion of the Company's expense levels is based on its
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.

Rate of Market Acceptance and Technological Change

     Use of automated  systems to perform  diagnostic  tests is relatively  new.
Historically,  the diagnostic tests performed by the Company's systems have been
performed manually by laboratory personnel. The rate of market acceptance of the
Company's  products  will be  largely  dependent  on the  Company's  ability  to
persuade the medical community of the benefits of automated  diagnostic  testing
using the  Company's  products.  Market  acceptance  and sales of the  Company's
products may also be affected by the price and quality of the  Company's and its
competitors' products. The Company's products could also be rendered obsolete or
noncompetitive by virtue of technological  innovations in the fields of cellular
or molecular  diagnostics.  Failure of the Company's  products to achieve market
acceptance  would  have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.


                                       17
<PAGE>


Risks Associated with Development and Introduction of New Products

     The Company's future growth and profitability  will be dependent,  in large
part,  on its  ability to  develop,  introduce  and market new  instruments  and
reagents used in diagnosing and selecting  appropriate  treatment for cancer and
additional  disease  states.  In  particular,   the  Company  must  successfully
introduce the NexES on a timely basis and continue the  commercialization of the
TechMate 250. These  instruments are smaller  capacity,  lower cost  instruments
than the Company's  current  instruments  and are necessary to expand the market
opportunity at smaller hospitals and reference laboratories in the United States
and Europe.  The Company  depends in part on the success of medical  research in
developing  new  antibodies,   nucleic  acid  probes  and  clinical   diagnostic
procedures  that can be adapted for use in the Company's  systems.  In addition,
the Company  will need to obtain  licenses on  satisfactory  terms to certain of
these  technologies,  for  which  there  can  be no  assurance.  Certain  of the
Company's  products  are  currently  under   development,   initial  testing  or
preclinical or clinical evaluation by the Company.  Other products are scheduled
for future  development.  Products  under  development  or scheduled  for future
development  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 may encounter other
unanticipated difficulties. The failure of the Company to develop, introduce and
market new  products on a timely  basis or at all could have a material  adverse
effect on the Company's business, financial condition and results of operations.

Manufacturing Risks

     The Company has only manufactured patient priority instruments and reagents
for commercial  sale since late 1991, and  manufacturing  of the Company's batch
processing  instruments is performed by third parties.  As the Company continues
to increase  production  of such  instruments  and  reagents  and  develops  and
introduces new products,  it may from time to time  experience  difficulties  in
manufacturing.  The Company  must  continue to  increase  production  volumes of
instruments and reagents in a  cost-effective  manner in order to be profitable.
To  increase   production   levels,  the  Company  will  need  to  scale-up  its
manufacturing facilities,  increase its automated manufacturing capabilities and
continue  to comply  with the  current  good  manufacturing  practices  ("GMPs")
prescribed by the United States Food and Drug  Administration  ("FDA") and other
standards prescribed by various federal,  state and local regulatory agencies in
the United States and other  countries,  including the  International  Standards
Organization ("ISO") 9000 Series certifications.  There can be no assurance that
manufacturing  and quality problems will not arise as the Company  increases its
manufacturing  operations  or that such  scale-up  can be  achieved  in a timely
manner or at a commercially  reasonable cost.  Manufacturing or quality problems
or  difficulties  or delays in  manufacturing  scale-up  could  have a  material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Dependence Upon Key Suppliers

     The  Company's  reagent  products  are  formulated  from both  chemical and
biological  materials  utilizing  proprietary  Ventana  technology  as  well  as
standard processing techniques.  Certain components and raw materials, primarily
antibodies,  used in the  manufacturing  of the Company's  reagent  products are
currently provided by single-source  vendors. There can be no assurance that the
materials or reagents  needed by the Company  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 the Company's  ability to manufacture its products until a new
source of supply is obtained.  The use of  alternative  or additional  suppliers
could be time consuming and expensive.  In addition,  a number of the components
used to manufacture  the NexES and gen II instruments are fabricated on a custom
basis to the Company's specifications and are currently available from a limited
number  of  sources.  Consequently,  in the event the  supply  of  materials  or
components  from any of these vendors were delayed or interrupted for any reason
or in the event of quality  or  reliability  problems  with such  components  or
suppliers,  the Company's  ability to supply such instruments could be impaired,
which could have a material adverse effect on the Company's business,  financial
condition and results of operations.


                                       18
<PAGE>


Dependence Upon Third-Party Manufacturers for Batch Processing Instruments

     The  Company  relies  on two  outside  parties  to  manufacture  its  batch
processing  instruments.   Kollsman  Manufacturing  Company,  Inc.  ("Kollsman")
currently   manufactures   the  TechMate  500  instrument  under  a  contractual
relationship  with  the  Company.  The  Company  has  entered  into  a  contract
manufacturing agreement with LJL BioSystems, Inc. ("LJL") for the manufacture of
the TechMate 250 instrument.  There can be no assurance that these manufacturers
will be able to  meet  the  Company's  product  needs  in a  satisfactory,  cost
effective or timely manner. The Company's reliance on third-party  manufacturers
involves a number of  additional  risks,  including  the  absence of  guaranteed
capacity and reduced  control over  delivery  schedules,  quality  assurance and
costs.  The amount and timing of resources to be devoted to these  activities by
such  manufacturers are not within the control of the Company,  and there can be
no assurance that manufacturing  problems will not occur in the future. Any such
manufacturing  or supply  problems  could have a material  adverse effect on the
Company's business,  financial condition and results of operations.  The Company
has committed to future  purchases from Kollsman  totaling $1.1 million and from
LJL totaling $0.3 million.

Risks Associated with European Distribution Relationship

     In Europe,  batch processing  instruments are sold through DAKO, which also
pays BioTek a royalty for each  instrument in exchange for the right to sell its
own reagents for use with such systems.  The  agreement  with DAKO provides DAKO
with exclusive  distribution  rights for batch processing  instruments in Europe
and  other  territories,   subject  to  certain  performance  requirements.  The
agreement  expires in December  1999.  Accordingly,  the Company is likely to be
dependent  upon DAKO for  international  sales of batch  processing  instruments
through this date.

     In  connection  with  BioTek's  agreement  with  DAKO,  DAKO made two loans
secured by a pledge of  substantially  all of  BioTek's  assets.  DAKO also made
prepayments on future  instrument sales and reagent  royalties to BioTek.  These
loans and prepayments were used to fund TechMate 250 instrument  development and
working capital requirements. In 1996, BioTek and DAKO entered into an amendment
to their  existing  agreement  (the  "Amendment  Agreement")  for the purpose of
addressing  several  matters,  including  repayment of these  secured  loans and
prepayments.  At December 31, 1997, the net aggregate outstanding balance of the
secured loans and prepayments was $0.5 million

     In connection with the Amendment Agreement, DAKO paid the Company a royalty
of $0.5  million and the Company  paid DAKO $0.5  million as a reduction  of the
balance of the prepayments in 1996. Under the Amendment Agreement, the remaining
$0.5 million of secured loans and prepayments  will be repaid through  discounts
on DAKO  purchases  of  TechMate  instruments  from BioTek at  recoupment  rates
specified in the Amendment  Agreement.  The Amendment Agreement also establishes
certain minimum purchase and delivery  commitments for TechMate 250 and TechMate
500  instruments,  as well as pricing for  certain  quantities  of TechMate  250
instruments.  Pricing for additional  quantities of TechMate 250 instruments was
not  resolved  in the  Amendment  Agreement  and the parties  are  currently  in
disagreement as to such pricing.  Currently, DAKO is purchasing such instruments
at the price  levels  established  by the  Company.  However,  the parties  may,
pursuant to the distribution agreement, initiate binding arbitration proceedings
to  resolve  such  pricing.  In  July  1997,  DAKO  initiated  such  arbitration
proceedings.  If the  determination  is adverse to the  Company,  the pricing of
TechMate 250 instruments to DAKO would be on terms less favorable to the Company
than the current  pricing terms and the amount of secured loans and  prepayments
recouped per instrument sale would also be reduced.

     During the course of ongoing discussions with DAKO since the acquisition of
BioTek, DAKO has, among other things, asserted that BioTek has not fulfilled its
obligations  with respect to the development and commercial  introduction of the
TechMate 250 instrument.  The Company denies this assertion and believes that it
is in  substantial  compliance  with its  obligations  under  these  development
milestones and has asserted that DAKO has not met certain obligations under such
agreement.  In particular,  the Company believes that its contract manufacturing
agreement  with LJL will enable it to satisfy DAKO's  requirements  for TechMate
250 instruments.  Nevertheless,  the  negotiations  with DAKO could result in an
attempt  by DAKO to  exercise  contractual  remedies  available  to it under the
distribution  agreement  and the  terms of the  secured  loans,  which  remedies
include  (i)  requiring  repayment  of the secured  loans in 12 equal  quarterly
installments commencing upon a default by BioTek and (ii) an irrevocable


                                       19
<PAGE>


license to manufacture  TechMate  instruments for resale  internationally  and a
related  reduction in the fixed  dollar  royalty rate paid by DAKO to BioTek for
each instrument  included in the royalty base. The Company could also experience
an interruption in the distribution of batch processing  instruments outside the
United  States or become  involved in  litigation  with DAKO with respect to the
current distribution agreement, which would involve significant costs as well as
diversion of management  time.  There can be no assurance that the Company would
prevail in any litigation involving the agreement.  Furthermore, there can be no
assurance as to the future course or outcome of the Company's  negotiations with
DAKO  or as to the  Company's  future  relationship  with  DAKO.  If  DAKO  were
successful in obtaining a manufacturing  license for TechMate  instruments,  the
Company  could  experience  a loss of  instrument  revenue  which  could  have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.


Risks Associated with Past and Future Acquisitions

     Although the Company has no pending agreements or commitments,  the Company
may make  additional  acquisitions  of  complementary  businesses,  products  or
technologies in the future.  Acquisitions of companies,  divisions of companies,
or products  entail  numerous  risks,  including (i) the potential  inability to
successfully   integrate   acquired   operations  and  products  or  to  realize
anticipated  synergies,  economies  of scale or other value,  (ii)  diversion of
management's  attention and (iii) loss of key employees of acquired  operations.
No assurance can be given that the Company will not incur  problems with respect
to any  future  acquisitions,  and there  can be no  assurance  that any  future
acquisitions  will result in the Company becoming  profitable or, if the Company
achieves  profitability,  that such  acquisition  will  increase  the  Company's
profitability.  Furthermore,  there can be no  assurance  that the Company  will
realize  value  from  any  such   acquisition,   which  equals  or  exceeds  the
consideration  paid. Any such problems  could have a material  adverse effect on
the  Company's  business,  financial  condition  and results of  operations.  In
addition,  any  future  acquisitions  by the  Company  may  result  in  dilutive
issuances  of equity  securities,  the  incurrence  of  additional  debt,  large
one-time write-offs and the creation of goodwill or other intangible assets that
could  result in  amortization  expense.  These  factors  could  have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Risks Relating to Patents and Proprietary Rights

     The Company's  success depends,  in part, on its ability to obtain patents,
maintain trade secret protection and operate without  infringing the proprietary
rights  of  others.  There  can  be  no  assurance  that  the  Company's  patent
applications will result in patents being issued or that any issued patents will
provide adequate  protection  against  competitive  technologies or will be held
valid if challenged.  Others may independently develop products similar to those
of the Company or design around or otherwise  circumvent  patents  issued to the
Company. In the event that any relevant claims of third-party patents are upheld
as valid and  enforceable,  the Company could be prevented  from  practicing the
subject matter claimed in such patents,  or would be required to obtain licenses
from the patent  owners of each of such  patents or to redesign  its products or
processes to avoid  infringement.  There can be no assurance  that such licenses
would be available or, if available, would be on terms acceptable to the Company
or that the Company  would be successful in any attempt to redesign its products
or processes  to avoid  infringement.  If the Company does not obtain  necessary
licenses,  it could be subject to  litigation  and  encounter  delays in product
introductions  while it attempts to design around such  patents.  Alternatively,
the  Company's  development,  manufacture  or  sale of such  products  could  be
prevented by the patent holder.  Litigation  would result in significant cost to
the Company as well as diversion of management time.  Adverse  determinations in
any such  proceedings  could have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

     Ventana also relies upon trade secret  protection for its  confidential and
proprietary  information.  There  can  be no  assurance  that  others  will  not
independently  develop  substantially   equivalent  proprietary  information  or
techniques,  gain access to Ventana's trade secrets or disclose such technology,
or that Ventana can effectively protect its trade secrets. Litigation to protect
Ventana's trade secrets would result in significant  cost to the Company as well
as diversion of management time. Adverse  determinations in any such proceedings
or  unauthorized  disclosure  of  Ventana  trade  secrets  could have a material
adverse  effect on  Ventana's  business,  financial  condition  and  results  of
operations.



                                       20
<PAGE>


     BioTek is a party to litigation  initiated by BioGenex  Laboratories,  Inc.
("BioGenex")  relating to certain alleged past infringements of patent rights of
BioGenex.  In May 1997, a judgement was issued against BioTek,  which BioTek has
appealed.  For a  discussion  of these  proceedings,  see Item 3 below  entitled
"Legal Proceedings."

Uncertainty of Future Funding of Capital Requirements

     The Company anticipates that its existing capital resources,  including the
net proceeds of the secondary offering of its Common Stock completed in February
1997 and interest earned  thereon,  and available  borrowing  capacity under the
Company's  revolving  credit  line  will be  adequate  to  satisfy  its  capital
requirements  for at least the next 18  months.  The  Company's  future  capital
requirements  will  depend on many  factors,  including  the extent to which the
Company's products gain market acceptance, the mix of instruments placed through
direct sales or through  QRIBs,  progress of the Company's  product  development
programs,  competing  technological  and market  developments,  expansion of the
Company's sales and marketing  activities,  the cost of  manufacturing  scale-up
activities,  possible  acquisitions  of  complementary  businesses,  products or
technologies, the extent and duration of operating losses, the Company's ability
to sustain  profitability  and timing of regulatory  approvals.  The Company may
require additional capital resources and there is no assurance such capital will
be available to the extent  required,  on terms  acceptable to the Company or at
all. Any such future capital requirements could result in the issuance of equity
securities, which would be dilutive to existing stockholders.

Dependence on Key Personnel

     The Company is dependent  upon the  retention  of principal  members of its
management, Board of Directors, scientific, technical, marketing and sales staff
and  the  recruitment  of  additional  personnel.  With  the  exception  of  one
individual,  the Company does not have an employment  agreement  with any of its
executive officers. The Company does not maintain "key person" life insurance on
any of its  personnel.  The  Company  competes  with other  companies,  academic
institutions,   government   entities  and  other  organizations  for  qualified
personnel in the areas of the  Company's  activities.  The  inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.

Uncertainties Related to Government Funding

     A portion of the  Company's  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,  however,  may be significantly
reduced  under several  budget  proposals  being  discussed by the United States
Congress or for other  reasons.  Any such  reduction may  materially  affect the
ability of many of the  Company's  research  customers to purchase the Company's
products.

FDA and Other Government Regulation

     The manufacturing, marketing and sale of the Company's products are subject
to extensive  and rigorous  government  regulation  in the United  States and in
other countries.  In the United States and certain other countries,  the process
of obtaining and maintaining required regulatory approvals is lengthy, expensive
and uncertain.  In the United States,  the FDA  regulates,  as medical  devices,
clinical  diagnostic  tests and  reagents,  as well as  instruments  used in the
diagnosis  of adverse  conditions.  The Federal  Food,  Drug,  and  Cosmetic Act
governs the design, testing,  manufacture,  safety, efficacy, labeling, storage,
record keeping,  approval,  advertising and promotion of the Company's products.
There are two principal FDA  regulatory  review paths for medical  devices:  the
510(k) pre-market  notification  ("510(k)") process and the pre-market  approval
("PMA")  process.  The PMA process  typically  requires the  submission  of more
extensive clinical data and is costlier and more time-consuming to complete than
the 510(k) process.

     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  analyses and develop and
prepare their own finished  diagnostic  tests.  Although  neither the individual
reagents nor the finished tests prepared from them by the clinical  laboratories
have  traditionally  been regulated by the FDA, the FDA has recently  proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as  medical  devices.  The  proposed  rule would  also  restrict


                                       21
<PAGE>


sales of these reagents to clinical  laboratories  certified  under the Clinical
Laboratory  Improvement  Amendments of 1988 ("CLIA") as high complexity  testing
laboratories. The Company intends to market some diagnostic products as finished
test kits or equipment and others as individual reagents;  consequently, some or
all of these products may be regulated as medical devices.

     Medical devices  generally require FDA approval or clearance prior to being
marketed  in the United  States.  The process of  obtaining  FDA  clearances  or
approvals  necessary to market medical devices can be time-consuming,  expensive
and  uncertain,  and there can be no  assurance  that any  clearance or approval
sought by the Company will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of the Company's  products.  Further,
clearances or approvals may place  substantial  restrictions  on the indications
for  which  the  product  may  be  marketed  or to  whom  it  may  be  marketed.
Additionally, there can be no assurance that the FDA will not require additional
data,  require that the Company conduct further clinical studies or obtain a PMA
causing the Company to incur further cost and delay.

     With respect to automated IHC testing functions,  the Company's 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 gen II for ISH
tests will be restricted to research applications.  New instrument products that
the Company may  introduce  could  require  future  510(k)  clearances.  Certain
antibodies  that the Company may wish to market with  labeling  indicating  that
they  can be used in the  diagnosis  of  particular  diseases  may  require  PMA
approval.  In addition,  the FDA has proposed that some of the antibody products
that  Ventana  may wish to market be  subjected  to a  pre-filing  certification
process.  Certain of the Company's  products are currently sold for research use
and are labeled as such.

     Failure to comply with applicable regulatory  requirements can, among other
consequences, result in 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  nonindicated  uses.  In addition,
governmental  regulations  may  be  established  that  could  prevent  or  delay
regulatory approval of the Company's  products.  Delays in or failure to receive
approval  of products  the Company  plans to  introduce,  loss of or  additional
restrictions or limitations  relating to previously  received  approvals,  other
regulatory  action against the Company or changes in the  applicable  regulatory
climate could individually or in the aggregate have a material adverse effect on
the Company's business, financial condition and results of operations.

     The Company is also required to register as a medical  device  manufacturer
with the FDA and is inspected on a routine basis by the FDA for compliance  with
its  regulations.  The Company's  clinical  laboratory  customers are subject to
CLIA,  which is  intended  to ensure  the  quality  and  reliability  of medical
testing.

     In  addition  to these  regulations,  the  Company is  subject to  numerous
federal,  state and local laws and regulations  relating to such matters as safe
working  conditions and  environmental  matters.  There can be no assurance that
such laws or regulations  will not in the future have a material  adverse effect
on the Company's business, financial condition and results of operations.

Risks  Relating to  Availability  of  Third-Party  Reimbursement  and  Potential
Adverse Effects of Health Care Reform

     The  Company's  ability to sustain  revenue  growth and  profitability  may
depend on the ability of the Company's  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,  the Company's  products are purchased  primarily by
medical  institutions and laboratories  which bill various  third-party  payors,
such as Medicare,  Medicaid,  other  government  programs and private  insurance
plans,  for the health care  services  provided to their  patients.  Third-party
payors may deny reimbursement to the Company's  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 the Company's  products may depend
on the extent to which  appropriate  reimbursement  levels for the costs of such
products and related  treatment  are obtained by the  Company's  customers  from
government authorities,


                                       22
<PAGE>


private  health  insurers and other  organizations,  such as health  maintenance
organizations  ("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.  In addition,  the federal  government and certain members of Congress
have proposed,  and various state  governments  have adopted or are considering,
programs to reform the health care system. These proposals are focused, in large
part,  on  controlling  the  escalation  of health care  expenditures.  The 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 the Company's  customers  receive from third-party  payors and the
Company's ability to market and sell its products and consequently  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

Environmental Matters

     Certain  of the  Company's  manufacturing  processes,  primarily  processes
involved in manufacturing certain of the Company's reagent products, require the
use of potentially hazardous and carcinogenic chemicals. The Company is required
to comply  with  applicable  federal,  state and local laws  regarding  the use,
storage and disposal of such materials.  The Company  currently uses third-party
disposal  services to remove and dispose of the hazardous  materials used in its
processes.  The Company could in the future encounter  claims from  individuals,
governmental  authorities  or other  persons  or  entities  in  connection  with
exposure to or disposal or handling of such hazardous materials or violations of
environmental  laws by the Company or its contractors and could also be required
to  incur  additional   expenditures  for  hazardous  materials   management  or
environmental compliance. Costs associated with environmental claims, violations
of  environmental  laws  or  regulations,  hazardous  materials  management  and
compliance with  environmental  laws could have a material adverse effect on the
Company's business, financial condition and results of operations.

Potential Volatility of Stock Price

     The Company's Common Stock, like the securities of other medical device and
life sciences companies, has exhibited price volatility, and such volatility may
occur in the  future.  In  addition,  the  stock  market  has from  time to time
experienced  extreme price and volume fluctuations that have affected the market
price  of  many  companies  and  have  often  been  unrelated  to the  operating
performance  of  particular  companies.  Factors  such  as  fluctuations  in the
Company's operating results,  announcements of technological  innovations or new
products by the Company or its competitors, FDA and other government regulation,
developments with respect to patents or proprietary rights, public concern as to
the safety of products developed by the Company or others,  changes in financial
analysts' estimates or recommendations  regarding the Company and general market
conditions  may  have a  material  adverse  effect  on the  market  price of the
Company's  Common  Stock.  The Company's  results of  operations  may, in future
periods,  fall below the  expectations  of public market  analysts and investors
and, in such event,  the market  price of the  Company's  Common  Stock could be
materially adversely affected.


Item 2.  PROPERTIES

     Ventana's  research  laboratories,  instrument  and  reagent  manufacturing
facilities and administrative offices are located in approximately 45,000 square
feet of leased space in Tucson,  Arizona. The leases for these facilities expire
at various times between November 1999 and March 2001, subject to renewal terms.
The  Company   believes  its   facilities  are  adequate  to  meet  its  current
requirements  and  facilities  for  anticipated  future   requirements  will  be
available on commercially reasonable terms.


                                       23
<PAGE>


Item 3.  LEGAL PROCEEDINGS

     In March  1995,  BioGenex  sued BioTek in the U.S.  District  Court for the
Northern  District of California for  infringement of certain patent rights held
by  BioGenex  relating  to an  antigen  retrieval  method  used  in  IHC  tests.
BioGenex's  claims  include  claims of both direct,  indirect  and  contributory
infringement.   BioTek  denied   infringement  and  asserted  several  defenses,
including  invalidity  of the patent that is the subject of the  litigation.  In
April 1995,  BioTek  ceased  offering the products  that were the subject of the
alleged infringements.  A court-mandated judicial settlement conference was held
in January  1997 and no  settlement  was reached.  In May 1997, a judgement  for
approximately  $850,000 was rendered against BioTek,  which BioTek has appealed.
There can, however, be no assurance that BioTek will be successful on appeal. In
June 1997, the Company obtained a letter of credit for approximately $900,000 to
cover the judgement and interest.

     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
alleges,  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
substantial compensatory damages several times in excess of the principal amount
of their BioTek notes,  as well as substantial  punitive  damages,  and fees and
costs. On April 25, 1997,  plaintiffs  filed an Amended  Complaint.  The Amended
Complaint makes the same allegations as the original Complaint, and adds a claim
under North Carolina  securities laws. In May of 1997, the Company made a motion
to  transfer  the action to the  district of Arizona,  or  alternatively  to the
Central  District of California,  which was denied by the court. On December 16,
1997,  the Company  filed a motion to dismiss the  Amended  Complaint,  which is
pending in the Court. There is currently a stay of discovery while the motion to
dismiss is pending.  Based on the facts known to date, the Company believes that
the claims are without merit and intends to vigorously  contest this suit. After
consideration  of the nature of the claims and the facts  relating to the merger
and the BioTek note  exchange,  the  Company  believes  that it has  meritorious
defenses  to the  claims  and that  resolution  of this  matter  will not have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations; however, the results of the proceedings are uncertain and
there can be no assurance to that effect.

     On July 16,  1997,  a  shareholder  demand  to  review  and copy  corporate
documents  pursuant to Section 220 of the Delaware  General  Corporation Law was
denied by the Company. As a result, an action entitled, Leung v. Ventana Medical
Systems,  Inc., CA. No. 15812,  was filed in the Court of Chancery for the State
of Delaware.  The plaintiff,  who is related to the plaintiffs in the securities
action, discussed in the preceding paragraph,  seeks inspection of certain books
and record of the Company.  Defendants believe the plaintiff seeks the documents
for an improper  purpose and intend to defend this case  vigorously.  A trial on
March 3, 1998  resulted in the judge  ordering the parties to reach an agreement
without a court order. The agreement provides for the plaintiff's  attorney only
to review the corporate documents supplied.

     In connection with the disagreement as to the price to be charged by BioTek
to DAKO for the sale of  TechMate  250  instruments,  DAKO filed an  arbitration
request with the International Chamber of Commerce in July 1997. The arbitration
is currently  scheduled for October 1998.  The Company  believes its position is
strong; however, the results of the proceedings are uncertain.


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not Applicable


                                       24
<PAGE>


                                     PART II


Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's  Common Stock is traded on the Nasdaq National Market (ticker
symbol  VMSI).  The number of record  holders of the  Company's  Common Stock at
December  31, 1997 was 336.  The Company  has not paid any  dividends  since its
inception and does not intend to pay any dividends in the foreseeable future.

     The Company  completed an initial  public  offering of 1,963,975  shares of
Common Stock in July 1996 and a secondary public offering of 1,881,066 shares of
Common  Stock in  February,  1997.  Prior to the initial  public  offering,  the
Company's Common Stock was not publicly traded.

     Quarterly high and low stock prices are as follows:

             Quarter Ended                                  High        Low
             -------------                                  ----        ---

December 31, 1997                                         $  17     $  13 1/8
September 30, 1997                                          17 1/8       13
June 30, 1997                                               14 1/2        9
March 31, 1997                                               19        13 1/2


                                       25
<PAGE>


Item 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated  statement of operations data set forth below for
the years ended December 31, 1997,  1996 and 1995,  except for the components of
net sales as well as the balance sheet data as of December 31, 1997, are derived
from the Company's audited Consolidated  Financial Statements included elsewhere
in this Report on Form 10-K. The selected  consolidated  statement of operations
data set forth below for the years ended December 31, 1994 and 1993,  except for
the components of net sales,  are derived from audited  financial  statements of
the Company not included in this Report on Form 10-K. The  historical  financial
information  for the periods  presented  are not  necessarily  indicative of the
results which may be realized in the future. The selected consolidated financial
data set forth below should be read in conjunction with "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  and  the
Consolidated  Financial  Statements and Notes thereto included elsewhere in this
Report on Form 10-K.
<TABLE>
<CAPTION>

                                                             Year Ended December 31,
                                             ________________________________________________________
                                             1993         1994         1995       1996         1997
                                             ----         ----         ----       ----         ----
                                                       (in thousands,  except per share data)
<S>                                         <C>         <C>         <C>         <C>         <C>
Statement of Operations Data(1):

Sales:
Instruments .............................   $  1,162    $  2,588    $  4,644    $  8,591    $  9,248
 Reagents  and  other ...................      1,519       3,339       5,969      15,538      22,905
                                            --------    --------    --------    --------    ---------
  Total net sales .......................      2,681       5,927      10,613      24,129      32,153
Cost  of  goods sold ....................      1,722       2,531       4,282      10,632      11,138
                                            --------    --------    --------    --------    ---------
 Gross profit ...........................        959       3,396       6,331      13,497      21,015
 Operating  expenses:
 Selling,  general and  administrative ..      4,067       6,899       7,435      11,206      16,953
 Research and development ...............      2,100       1,926       2,239       2,749       3,050
 Nonrecurring  expenses .................       --          --          --        10,262       1,656
 Amortization  of acquisition  costs ....       --          --          --           424         509
                                            --------    --------    --------    --------    ---------
Loss from operations ....................     (5,208)     (5,429)     (3,343)    (11,144)     (1,153)
Other income  (expense) .................        229          59          74        (137)         781
                                            --------    --------    --------    --------    ---------
Net loss ................................   $ (4,979)   $ (5,370)   $ (3,269)   $(11,281)   $   (372)
                                            ========    ========    ========    ========    ========

Per share data(2):
Net loss per share, as adjusted,
  basic and diluted .....................   $   (.79)   $   (.80)   $   (.43)   $  (1.22)   $   (.03)
                                            ========    ========    ========    ========    ========
Shares used in computing net loss per
 share, as  adjusted ....................      6,308       6,725       7,571       9,243      12,778
                                            ========    ========    ========    ========    ========
</TABLE>


                                                          December 31, 1997
                                                      -------------------------
                                                          (in thousands)
Balance Sheet Data:
Cash, cash  equivalents and short-term  investments .        $ 18,902
Long-term  debt  .  . . . . . . . . . . . . . . . . .              471
Working  capital  . . . . . . . . . . . . . . . . . .           28,714
Total  assets  .  . . . . . . . . . . . . . . . . . .           48,352
Accumulated  deficit  .  .  . . . . . . . . . . . . .         ( 33,782)
Total  stockholders'  equity  . . . . . . . . . . . .           42,403


(1)  See Note 12 to Consolidated  Financial Statements in Form 10-K attached for
     information regarding the Acquistion of BioTek Solutions, Inc.

(2)  See Note 1 to Consolidated  Financial  Statements in Form 10-K attached for
     information concerning the computation of net loss per share, as adjusted.


                                       26
<PAGE>


Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The  following  discussion  of  the  financial  condition  and  results  of
operations  of  Ventana  should  be read in  conjunction  with the  Consolidated
Financial  Statements and related Notes thereto included  elsewhere in this Form
10-K.  This  Report on Form 10-K  contains  certain  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the  Securities  Exchange  Act of 1934.  Actual  events or results may differ
materially from those projected in the forward-looking statements as a result of
the  factors  described  herein  and in the  documents  incorporated  herein  by
reference.  Such  forward-looking  statements  include,  but are not limited to,
statements  concerning the risk of cancer;  cancer  screening;  improvements  in
automated IHC; business strategy;  development and introduction of new products;
research and  development;  marketing,  sales and  distribution;  manufacturing;
competition; third-party reimbursement; government regulation; and operating and
capital requirements.

Overview

     Ventana develops,  manufactures and markets proprietary  instrument/reagent
systems that automate IHC and ISH tests for the analysis of cells and tissues on
microscope slides.  Each Ventana  proprietary system placed typically provides a
recurring  revenue stream as customers consume reagents and supplies sold by the
Company with each test conducted.  Reagents consist of two components: a primary
antibody  and a  detection  chemistry  which is used to  visualize  the  primary
antibody.  Therefore,  the  principal  economic  drivers for the Company are the
number,  type and method of placement of instruments  and the amount of reagents
and consumables used by the customer.  The Company's strategy is to maximize the
number of instruments  placed with  customers and thereby  increase its ongoing,
higher margin reagent  revenue  stream.  The Company  expects that reagents will
comprise a greater  proportion of total  revenues in the future as its installed
base of instruments increases.

     In February 1996,  Ventana  acquired BioTek for aggregate  consideration of
$19.1  million,  consisting  of cash,  promissory  notes and the  assumption  of
liabilities.  BioTek,  founded in 1990,  markets and sells automated  diagnostic
systems that perform reliable, high volume batch processing of a single IHC test
on multiple  patient  biopsies.  Ventana  acquired BioTek for several  strategic
reasons including its installed instrument base and complementary  product line.
Historically,  BioTek  generated lower gross and operating  margins than Ventana
due to its employment of a different  business strategy which primarily involved
the use of third parties for key components of its business operations. BioTek's
instruments  were produced by third-party  manufacturers  which prevented BioTek
from  capturing   manufacturing  margin.   BioTek's  instruments  have  an  open
configuration,  enabling the customer to use reagents  purchased  from BioTek or
others  which  impacted  both the price  and  volume of  reagents  purchased  by
customers from BioTek. In contrast,  patient priority  instruments have a closed
configuration  requiring  the customer to use  Ventana's  prepackaged  detection
chemistries.  BioTek also realized  lower gross margins on reagents than Ventana
due to its utilization of intermediate  materials in the  manufacturing  process
which resulted in the capture of fewer  value-added  steps.  BioTek used CMS and
DAKO as third-party distributors in the United States and international markets,
respectively, and supported its United States sales efforts with field sales and
technical support personnel. As a result, BioTek experienced lower gross margins
on United  States sales than if it had sold its  products  directly as well as a
higher level of selling  expense than  typically  incurred in  conjunction  with
third-party distribution arrangements.

     Ventana's  strategy  regarding  BioTek  is to  continue  to  integrate  the
operations of BioTek into the Ventana  business model,  in which  manufacturing,
sales and marketing  activities are performed by Company employees.  The Company
completed in 1997 the conversion of BioTek's reagent manufacturing activities to
the process used by Ventana in which basic raw  materials are used and important
value-added  steps are performed  internally.  The Company  believes that in the
near term it will be more cost effective to continue  sourcing batch  processing
instruments  from  third-party  manufacturers.  The  Company  has  manufacturing
agreements  with Kollsman for production of the TechMate 500 instrument and with
LJL for  production the TechMate 250  instrument.  The Company and CMS agreed to
terminate  in October  1997 the United  States  distribution  agreement  between
BioTek and CMS. The  international  distribution  agreement with DAKO expires in
December 1999.


                                       27
<PAGE>


     The Company places instruments through direct sales,  including nonrecourse
leases,  instrument  rentals and the Company's  qualified reagent installed base
program  ("QRIB").  In a QRIB, the Company provides the customer with the use of
an instrument  for a period up to six months  provided the customer  purchases a
minimum  of  $3,000 in  consumables.  At the end of the six  month  period,  the
customer must elect to purchase, rent or return the system. For QRIB placements,
the  Company  incurs the cost of  manufacturing  or  procuring  instruments  and
recognizes  revenues only at the time of the instrument is either sold or rented
rather  than at the time of  instrument  placement.  The  manufacturing  cost of
instruments  placed through QRIBs or rentals is charged to cost of goods sold by
depreciating standard costs over a period of four years.

     From its  inception in 1985 through  December  31, 1997,  Ventana  incurred
aggregate net losses of $33.8 million,  including  $10.3 million  related to the
expensing  of  in-process   research  and  development  and  integration   costs
associated  with the  acquisition of BioTek.  Similarly,  BioTek  incurred $18.2
million in losses from  operations  from its  inception  in October 1990 through
acquisition  by Ventana.  Although the Company  achieved an operating  profit in
three quarters of 1997,  the level of future  profitability,  if any,  cannot be
accurately  predicted and there can be no assurance that  profitability  will be
sustained  on a quarterly or annual  basis,  or at all, or that the Company will
not incur operating losses in the future.

     The Company's future results of operations may fluctuate significantly from
period to period  due to a variety  of  factors.  The  initial  placement  of an
instrument is subject to a longer,  less consistent sales cycle than the sale of
reagents  which begin and typically are recurring  once an instrument is placed.
The  Company's  operating  results are likely to  fluctuate  substantially  from
period to period because instrument sales are likely to remain an important part
of revenues in the near  future.  The degree of  fluctuation  will depend on the
timing, level and mix of instruments placed through direct sales and instruments
rented.  In addition,  average daily reagent use by customers may fluctuate from
period to period, which may contribute to future fluctuations in revenues. Sales
of  instruments  may also  fluctuate  from period to period because sales to the
Company's  international  distributors  typically provide such distributors with
several months of instrument inventory, which the distributors will subsequently
seek to place with end-users.  The Company's  instrument installed base includes
instruments  shipped to DAKO and recognized as sales.  Furthermore,  due both to
the Company's  increased sales focus on smaller  hospitals and  laboratories and
the  relatively  high reagent sales growth rates in recent fiscal  periods,  the
rate of growth in  reagent  sales in future  periods  is likely to be below that
experienced  during the past  several  fiscal  periods.  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 the
Company and its competitors,  market  acceptance of the Company's current or new
products, developments with respect to regulatory matters, availability and cost
of raw  materials  purchased  from  suppliers,  competitive  pricing  pressures,
increased sales and marketing expenses associated with the implementation of the
Company's market expansion  strategies for its instruments and reagent products,
and increased  research and  development  expenditures.  Future  instrument  and
reagent  sales  could also be  adversely  affected by the  configuration  of the
Company's  patient  priority  systems,  which  require the use of the  Company's
detection  chemistries,  particularly if and to the extent that  competitors are
successful in developing and  introducing  new IHC instruments or if competitors
offer reagent supply  arrangements  having pricing or other terms more favorable
than those offered by the Company.  Such increased competition in reagent supply
could also  adversely  affect sales of reagents to batch  processing  instrument
customers  since  those  instruments  do not  require  the use of the  Company's
reagents.  In connection with future introductions of new products,  the Company
may be required to incur charges for inventory  obsolescence  in connection with
unsold inventory of older generations of products. To date, however, the Company
has  not  incurred  material  charges  or  expenses  associated  with  inventory
obsolescence  in  connection  with new product  introductions.  In  addition,  a
significant  portion of the Company's expense levels is based on its expectation
of a higher level of revenues in the future and is  relatively  fixed in nature.
Therefore,  if revenue  levels are below  expectations,  operating  results in a
given period are likely to be adversely affected.

     Total net sales grew from $2.7 million in 1993 to $32.2  million in 1997, a
compound annual growth rate of 86%.  Instrument  sales grew from $1.2 million in
1993 to $9.2  million in 1997,  a compound  annual  growth rate of 68%.  Reagent
sales  increased  from $1.5 million in 1993 to $22.9 million in 1997, a compound
annual growth rate of 97%. The growth in revenues is primarily  attributable  to
the growth in (i) instrument  placements and (ii) the instrument  installed base
and the associated  corresponding  increase in the aggregate  recurring  reagent
revenue stream. The Company's installed base of instruments increased from 74 at
December 31, 1993 to 801 at December 31, 1996 and to 1,199 at December 31, 1997.
Instrument  placements  have increased in every year,  from 56 in 1993 to 265 in
1996 and 398 in 1997.


                                       28
<PAGE>


     Gross margin  increased  from 36% in 1993 to 56% in 1996 and 65% in 1997 as
both instrument and reagent gross margins increased.  Gross margin increased due
to higher  level of revenues  available to cover fixed costs and to economies of
scale and efficiencies in purchasing and manufacturing activities.  Research and
development and selling,  general and administrative expenses were maintained at
levels that anticipated a higher level of revenues in the future, which resulted
in  operating  losses  in each year  between  1993 and  1996.  The  nonrecurring
expenses  related  to the  litigation  against  BioTek of $1.7  million  was the
primary reason for the Company experiencing an operating loss in 1997.

Results of Operations

Years Ended December 31, 1997, 1996 and 1995

     Ventana acquired BioTek on February 26, 1996.  Consequently,  approximately
10 months of BioTek operations are included in the results of operations for the
year ended December 31, 1996.

     Net Sales.  Presented below is a summary of net sales for each of the three
years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                     ------------------------------------------------------------------
                            1995                    1996                   1997
                     -------------------     -------------------    -------------------
                        $     % of Sales        $     % of Sales       $     % of Sales
                     -------  ----------     -------  ----------    -------  ----------
                                            (dollars in thousands)
<S>                  <C>           <C>       <C>           <C>      <C>           <C>
Sales Summary:

Instruments          $ 4,644        44%      $ 8,591        36%     $ 9,248        29%
Reagents and other     5,969        56%       15,538        64%      22,905        71%
                     -------      -----      -------      -----     -------     ------
   Total net sales   $10,613       100%      $24,129       100%     $32,153       100%
                     =======      =====      =======      =====     =======     ======
</TABLE>

     Net sales for the year ended  December  31, 1997  increased by 33% to $32.2
million from $24.1 million for the year ended  December 31, 1996.  Net sales for
the year ended  December 31, 1996  increased by 127% to $24.1 million from $10.6
million for the year ended  December 31, 1995.  The  increases in net sales were
attributable  to increases in  instrument  sales as well as increases in reagent
sales.  Instrument  sales increased over the prior year by 8% in 1997 and 85% in
1996,  respectively.  Reagent sales increased over the prior year by 47% in 1997
and 160% in 1996, respectively.

     Instrument  sales in 1997  increased  due to a 40% increase in unit volume,
which was partly  attributable  to the fact that BioTek's  TechMate  instruments
were sold  throughout  1997,  but only for 10 months in 1996. In fact,  sales of
TechMate  250's to DAKO  increased more than 100%  year-to-year.  However,  this
volume increase was partially  offset by the relatively low unit prices received
from DAKO and slightly  lower prices for patient  priority  systems.  Instrument
sales in 1996 increased due to increased unit volume and the introduction of the
gen II ISH  instrument and $3.2 million of instrument  sales  resulting from the
acquisition of BioTek.  Instrument sales in 1995 were positively impacted by the
high selling prices associated with the gen II instrument placements.

     Reagent and other sales in 1997  increased  due to sales of reagents to new
customers  from new  instruments  placed  during  the year,  increased  sales to
existing  customers and increased  reagent  sales and royalties  generated  from
BioTek  products.  In 1996,  reagent and other sales increased for much the same
reasons but also as a result of higher  average  unit prices.  In 1995,  reagent
sales increased from the prior year, but at a lesser rate,  since BioTek revenue
did not benefit the Company  until March 1996.  There was no royalty  revenue in
1995.

     The portion of the Company's sales  generated by its European  subsidiaries
increased to about 10% in the year ended  December 31, 1997 from about 8% in the
year ended  December 31, 1996,  which was, in turn, a decrease  from about 9% in
the year ended  December  31,  1995.  The  increase in the  proportion  of sales
generated in Europe in 1997 was  attributable  to major  investments in European
infrastructure.  See discussion on selling,  general and administrative expenses
below.  The  decrease  in this  percentage  in 1996 was caused by high growth in
North


                                       29
<PAGE>


America at the same time the Company was financially unable to invest rapidly in
Europe until completion of its initial public offering in July 1996. The Company
has also begun to build an  infrastructure  in Japan, but had no direct sales in
that country through December 31, 1997.

     Gross Margin.  Gross profit for the year ended  December 31, 1997 increased
to $21.0 million from $13.5 million in the year ended December 31, 1996 and $6.3
million in the year ended  December  31,  1995.  Gross margin was 65% in 1997 as
compared to 56% in 1996 and 60% in 1995.  The increase in gross margin from 1996
to 1997 was  primarily  due to the  introduction  in  August  1997 of the  NexES
instrument,  which has a lower  manufacturing cost than the ES and due to higher
margins on reagents  due to the  implementation  of  aggressive  cost  reduction
programs and the  integration of BioTek reagent  manufacturing  process into the
Ventana model.  The decline in gross margins from 1995 to 1996 was primarily due
to the  inclusion of 10 months of BioTek's  operations  which had lower  overall
margins.  BioTek  experienced  lower gross margins than Ventana on a stand-alone
basis  because  of  BioTek's  (i) use of  third-party  distributors,  (ii) lower
value-added reagent  manufacturing  strategy and (iii) lower reagent volumes and
pricing due to the open  configuration of BioTek's  instruments.  The decline in
gross margin caused by these factors was partially offset by increased economies
of scale and  manufacturing  efficiencies  brought about by the  integration  of
batch  processing  and reagent  manufacturing  into  Ventana's  Tucson,  Arizona
manufacturing operations. Instrument gross margins declined slightly during 1996
as a result  of the  addition  of the  lower  gross  margin  sales  of  TechMate
instruments.  Reagent gross margins in 1995  increased  compared to 1994 because
the Company (i)  discontinued its primary antibody  promotional  programs,  (ii)
obtained lower material prices from higher purchasing volumes and (iii) achieved
improvements  in  manufacturing  efficiencies.  Reagent  gross  margins for 1996
declined slightly.

     Research  and  Development.  Research and  development  expense in the year
ended  December 31, 1997 increased to $3.1 million from $2.7 million in the year
ended  December 31, 1996 and $2.2  million in the year ended  December 31, 1995.
Research and development  expenses for 1997 related primarily to the development
of new  reagents  and  instruments,  including  the  NexES  instrument  and  new
prognostic  markers.  Research and development  expense in 1996 and 1995 related
primarily to the  development  of new reagents and  instruments,  including  the
NexES  instrument,  the new gen II  instrument  and  development  of  additional
primary antibodies.

     Selling,  General and  Administrative.  Presented below is a summary of the
components of SG&A expense and their respective  percentages of net sales during
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
                                            Year Ended December 31,
                     ------------------------------------------------------------------
                            1995                    1996                   1997
                     -------------------     -------------------    -------------------
                        $     % of Sales        $     % of Sales       $     % of Sales
                     -------  ----------     -------  ----------    -------  ----------
                                            (dollars in thousands)
<S>                  <C>            <C>      <C>            <C>     <C>           <C>
SG&A Summary:
Sales and marketing  $ 5,674        53%      $ 8,387        35%     $12,409       39%
Administration         1,761        17%        2,819        11%       4,544       14%
                     -------      -----      -------      -----     -------     -----


      Total SG&A     $ 7,435        70%      $11,206        46%     $16,953       53%
                     =======      =====      =======      =====     =======     =====
</TABLE>

     SG&A expense in the year ended December 31, 1997 increased to $17.0 million
from $11.2  million in the year ended  December 31, 1996 and $7.4 million in the
year ended December 31, 1995.  SG&A expense as a percentage of net sales was 53%
of net sales in 1997,  which was an increase from 46% of net sales in 1996 and a
decrease  from 70% of net sales in 1995.  The  fluctuation  in SG&A expense from
period to period  reflects the growth of Ventana's  internal sales and marketing
organization  to facilitate its market  expansion  strategy and a  corresponding
increase  in  infrastructure  expenses  to  support a larger  business  base and
ongoing  clinical  practice  standardization  programs.  The growth in sales and
marketing  expense is the result of the  decision  by the Company to service the
market through its own sales and marketing staff,  expenses necessary to support
the growth of the Company and in 1996 expenses  associated  with ongoing support
activities resulting from the BioTek acquisition. The increase in administrative
expense  is  associated  with  the  Company's   regulatory  strategy  and  costs
associated  with supporting an expanding  business base,  particularly in Europe
and Japan.


                                       30
<PAGE>


Income Taxes

     Ventana and BioTek have neither  provided  for nor paid any federal  income
taxes  since their  respective  inceptions  because  neither  company  generated
taxable  income in any fiscal  year.  At  December  31,  1997,  Ventana  had net
operating loss  carryforwards  for federal and state  purposes of  approximately
$13.6 and $9.8 million, respectively. These federal and state carryforwards will
begin to  expire in 1998,  if not  previously  utilized.  The  Company  also has
research and development tax credit  carryforwards of approximately $1.0 million
which will begin to expire in 2005, if not previously  utilized.  Utilization of
Ventana's net operating loss carryforwards will be subject to limitations due to
the "change in ownership"  provisions  of the Internal  Revenue Code of 1986, as
amended  (the  "Code") as a result of the  Company's  prior  issuances of equity
securities.  These  carryforwards,  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 carryforwards.  Due
to the  losses  incurred  by Ventana  since  inception,  deferred  tax assets of
approximately   $10.3   million  at  December   31,   1997,   related  to  these
carryforwards,  credits and temporary  differences,  have been fully reserved in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109").

Quarterly Consolidated Results of Operations

     The following  table  contains  summary  unaudited  quarterly  consolidated
statements of operations  data for the four  quarters  ended  December 31, 1997.
Management has prepared the quarterly consolidated statements of operations data
on the same basis as the Consolidated Statements of Operations contained in this
Report on Form 10-K.  The Company's  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
<TABLE>
<CAPTION>

                                                               1997
                                           -------------------------------------------
                                            First        Second      Third      Fourth
                                            Quarter      Quarter     Quarter    Quarter
                                           --------    ---------    ---------  --------
                                              (in thousands, except per share data)

<S>                                        <C>         <C>            <C>        <C>
Statement of Operations Data:
Sales
   Instruments .........................   $  1,971    $  1,919       2,142      3,216
   Reagents and other ..................      4,987       5,534       5,872      6,512
                                           --------    --------    --------   --------
   Total net sales .....................      6,958       7,453       8,014      9,728
Cost of goods sold .....................      2,701       2,780       2,511      3,146
                                           --------    --------    --------   --------
Gross profit ...........................      4,257       4,673       5,503      6,582
Operating expenses:
   Selling,  general and  administrative      3,378       3,630       4,555      5,390

   Research and development ............        729         714         702        905
Nonrecurring expenses ..................         --       1,656          --         --
Amortization of intangibles ............        127         127         128        127
                                           --------    --------    --------   --------
Income (loss) from operations ..........         23      (1,454)        118        160
Interest income (expense) ..............        186          76          (5)       524

Net income (loss)                          $    209    $ (1,378)   $    113   $    684
                                           ========    ========    ========   ========
Net  income  (loss)  per share (1),  as
 adjusted,
   Basic and diluted ..................    $    .02    $   (.11)   $    .01   $    .05
                                           ========    ========    ========   ========
Shares  used  in  computing  net  income
(loss) per share, as adjusted, (1) .....     12,924      12,924      13,989     14,176
                                           ========    ========    ========   ========
</TABLE>

(1)  See Note to  Consolidated  Financial  Statements  in Form 10-K attached for
     information  concerning the computation of net income (loss) per shares, as
     adjusted.


                                       31
<PAGE>


Liquidity and Capital Resources

     Since inception,  the Company's  expenses have  significantly  exceeded its
revenues,  resulting in  accumulated  losses of $33.8 million as of December 31,
1997.  The  Company  has funded its  operations  primarily  through  the private
placement of approximately $31.6 million in equity and debt securities, its July
1996 initial  public  offering  which resulted in net proceeds to the Company of
$17.0 million (after giving effect to the partial exercise of the  underwriter's
over-allotment  option) and its February 1997 follow-on  offering which resulted
in net  proceeds to the Company of $26.1  million  (after  giving  effect to the
partial exercise of the underwriter's over-allotment option). As of December 31,
1997 the  Company's  principal  source of  liquidity  consisted of cash and cash
equivalents of $18.9 million and borrowing capacity under its $2.75 million bank
revolving line of credit. As of December 31, 1997, approximately $1.4 million of
this  revolving  line of  credit  had been  utilized  for  letters  of credit to
facilitate  certain  contract  manufacturing  arrangements for the production of
TechMate 500  instruments and to secure the judgement  against  BioTek,  pending
appeal,  leaving a revolving credit  availability of approximately $1.3 million.
Borrowings  under the Company's bank credit  facility are secured by a pledge of
substantially  all of the Company's assets and bear interest at the bank's prime
rate. The Company is currently negotiating a new revolving line of credit in the
amount of $5 million with sublimits available to its foreign subsidiaries.

     During the period  from March  through May 1996,  the  Company  raised $5.1
million through the private placement of subordinated  notes ("Ventana  Notes").
In  connection  with the  issuance of the  Ventana  Notes,  the  Company  issued
warrants to  purchase  an  aggregate  of 887,740  shares of Common  Stock of the
Company at an  exercise  price of $5.82 per share.  The  proceeds of the Ventana
Notes were used to fund the cash portion of the BioTek acquisition consideration
and to provide working capital. Additionally, in connection with the acquisition
of BioTek,  Ventana  issued an  aggregate  of $12.0  million in  exchange  notes
(collectively,  the "Exchange Notes") to the holders of outstanding indebtedness
of BioTek.  The Exchange  Notes bore interest at the rate of 7% per annum,  with
interest  forgiven if the  Exchange  Notes were repaid in full prior to February
26, 1997. The Exchange Notes provided each holder with the opportunity, during a
30-day period,  to convert Exchange Notes into shares of Ventana Common Stock at
a  conversion  price of $13.53  per share.  Upon  expiration  of the  conversion
period,  an aggregate of $3.0 million in principal amount of Exchange Notes were
converted  into 222,973  shares of Common Stock and an aggregate of $9.0 million
of Exchange Notes remained  outstanding.  In September 1996, the Company offered
to pay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5%
of the principal  amount of such notes.  On October 18, 1996, the Company repaid
$3.7 million of Exchange Notes and Ventana Notes at a discounted  amount of $3.4
million.  All notes tendered for repayment  were repaid on the foregoing  terms.
Following such repayment, the aggregate outstanding principal amount of Exchange
Notes and Ventana Notes was $10.3 million.

     On February 18, 1997, the Company closed a secondary offering of its Common
Stock in which it sold  1,881,066  shares of its Common Stock to the public with
net proceeds of $26.1 million received by the Company. On February 19, 1997, the
Company  repaid $10.3  million in principal of  outstanding  Exchange  Notes and
Ventana  Notes  out  of  the  proceeds  of its  Secondary  Offering.  All of the
outstanding Promissory Notes issued in connection with its acquisition of BioTek
on February 26, 1996 were thereby  repaid in accordance  with the  provisions of
the Note  Agreements  which  provided  that  repayment  could  be made  prior to
February 26, 1997 with no interest due and payable thereon.  Accrued interest of
$0.6 million was reversed into income in February 1997.

     During the year ended  December 31, 1997,  the Company used for  operations
and investing activities approximately $4.5 million in cash versus $16.1 million
for the year ended December 31, 1996.

     In  connection  with  BioTek's  agreement  with  DAKO,  DAKO made two loans
secured by a pledge of  substantially  all of  BioTek's  assets.  DAKO also made
prepayments on future  instrument sales and reagent  royalties to BioTek.  These
loans and prepayments were used to fund TechMate 250 instrument  development and
working capital  requirements.  In September 1996,  BioTek and DAKO entered into
the Amendment Agreement for the purpose of addressing several matters, including
repayment of the secured  loans and  prepayments.  The  prepayments  do not bear
interest.  The secured loans and  prepayments  are recorded as long term debt in
the  Company's  Consolidated  Financial  Statements.  Pursuant to the  Amendment
Agreement,  DAKO paid the Company a royalty of $0.5 million and the Company paid
DAKO $0.5  million as a reduction of the balance of the  prepayments.  Under the
Amendment Agreement,  the remaining secured loans and prepayments will be repaid
through  discounts  on DAKO  purchases  of TechMate  instruments  from BioTek at
recoupment rates specified in the Amendment Agreement. At December 31, 1997, the
net aggregate  outstanding balance of the secured loans and prepayments was $0.5
million.


                                       32
<PAGE>


Upon termination of the  distribution  agreement or in the event of a default by
BioTek under the distribution  agreement,  these loans may be converted to fixed
term  loans  that will be due and  payable  in 12 equal  quarterly  installments
commencing upon such event.

     The Company believes that the proceeds of its secondary offering,  together
with its existing  capital  resources,  cash  generated  from product  sales and
available  borrowing capacity under bank credit facilities will be sufficient to
satisfy its working capital  requirements  for at least the next 18 months.  The
Company's future capital requirements will depend on many factors, including the
extent  to which the  Company's  products  gain  market  acceptance,  the mix of
instruments  placed  through  direct  sales,  QRIBs or Rentals,  progress of the
Company's  product  development  programs,  competing  technological  and market
developments,  expansion of the Company's  sales and marketing  activities,  the
cost  of   manufacturing   scale  up  activities,   possible   acquisitions   of
complementary businesses,  products or technologies,  the extent and duration of
operating  losses and the timing of  regulatory  approvals.  The  Company may be
required  to raise  additional  capital in the future  through  the  issuance of
either debt  instruments or equity  securities,  or both.  There is no assurance
that  such  capital  will  be  available  to the  extent  required  or on  terms
acceptable to the Company, or at all.

Foreign Exchange Risk

     The Company does not currently hedge against foreign currency fluctuations.
As a result, to the extent local currency revenues and expenses in the Company's
foreign  subsidiaries  are translated into U.S.  dollars at differing rates over
time,  the Company may  experience  fluctuations  in its operating  results.  In
addition,   to  the  extent  that  the  Company's  European   subsidiaries  have
receivables and liabilities in non-local currencies, unrealized gains and losses
may be  recorded  in  other  income  (expense)  as a  result  of  currency  rate
fluctuations.

Impact of Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and  display  of  comprehensive  income  and  its  components  in the  financial
statements.  SFAS No. 130 is effective for fiscal years beginning after December
15, 1997.  Reclassification of financial statements for earlier periods provided
for  comparative  purposes  is  required.  The  Company  is in  the  process  of
determining  its  preferred  format.  The  adoption of SFAS No. 130 will have no
impact on the Company's  consolidated results of operations,  financial position
or cash flows.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures  about Segments of an Enterprise and Related  Information,  which is
effective for years  beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial reports.  It also establishes  standards for related disclosures about
products and services,  geographic  areas, and major customers.  SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the company will adopt the new requirements retroactively in
1998.  Management  has not  completed  its review of SFAS No. 131,  but does not
anticipate that the adoption of this statement will have  significant  effect on
the Company's reported segments.

Readiness for the Year 2000

     The Company has  developed a plan to modify its  information  technology to
recognize  the year  2000 and has  begun  converting  critical  data  processing
systems. The Company currently expects the project to be substantially  complete
by the second  quarter of 1998.  The cost of this project will be immaterial and
the Company does not expect it to have a significant  effect on  operations.  In
addition,  the Company will continue to implement  systems with strategic  value
and expects to implement a major upgrade of all management  information  systems
by early 1999.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Independent  Auditors' Report,  Consolidated  Financial  Statements and
Notes to Consolidated Financial Statements begin on page F-1.


                                       33
<PAGE>


Item 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         [Not Applicable]


                                       34
<PAGE>


                                    PART III


Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information  regarding the directors
and executive officers of the Company as of December 31, 1997:

<TABLE>
<CAPTION>

Name                        Age   Position
----                        ---   --------
<S>                         <C>   <C>
Jack W. Schuler (1) (III)    57   Chairman of the Board of Directors
Henry T. Pietraszek (I)      51   President, Chief Executive Officer and Director
Michael K. Cusack            40   Vice President, International
Carl Kunkleman               38   Vice President, Sales
Brian J. McGraw              37   Vice President, Engineering
Johnny D. Powers, Ph.D.      36   Vice President, Operations
Bernard O. C. Questier       44   Vice President, European Operations
Russell Richerson, Ph.D.     46   Vice President, Research & Development
Pierre H. Sice               54   Vice President,  Chief Financial &
                                   Administrative Officer and Secretary
Tamaki Tateiwa               58   Vice President, Japan Operations
Stephen A. Tillson, Ph.D.    57   Vice President,  Scientific Affairs and Quality Assurance
Rex J. Bates (2) (II)        74   Director
R. James Danehy (3)  (III)   52   Director
Edward M. Giles (1) (II)     62   Director
Thomas M. Grogan, M.D. (III) 52   Director
John Patience (2)(III)       50   Director
James R. Weersing(1)(2) (I)  58   Director


</TABLE>

----------------
(1)  Member of the Compensation Committee.

(2)  Member of the Audit Committee.

(3)  Resigned on January 26, 1998

(I)  Class I director.

(II) Class II director.

(III)Class III director.

     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., a specialized  medical
waste  management  company,  since March 1990.  Mr. Schuler is also a partner in
Crabtree  Partners,  a Chicago  based  venture  capital  firm.  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.,  Somatogen,  Inc. and
Chiron Corporation.  Mr. Schuler received a B.S. in Mechanical  Engineering from
Tufts University and an M.B.A. from Stanford University.

     Mr. Pietraszek became President,  Chief Executive Officer and a director in
March 1997. Prior to joining the Company, Mr. Pietraszek served as President and
Chief Executive Officer of Biostar,  Inc., a medical  diagnostic  company.  From
1975 to 1994,  Mr.  Pietraszek  held a variety of executive  positions at Abbott
Laboratories  and Takeda  Chemical  Industries.  From 1982 to 1986, he served as
President  of  Dainabot  K.K.,  a joint  venture  between


                                       35
<PAGE>


Abbott and  Dainippon  Pharmaceutical  Company of Japan and from 1980 to 1982 he
was Vice President of Field Service Operations for Abbott's Diagnostic Division.
He is a director of Specialty  Laboratories.  Mr. Pietraszek  received a B.S. in
Marketing from Gannon University.

     Mr. Cusack joined  Ventana as Vice President of Marketing in September 1994
and assumed  responsibility  as Vice President,  International in June 1996. Mr.
Cusack  has also  served as  President  Directeur  General  of  Ventana  Medical
Systems, S.A., a wholly-owned  subsidiary of Ventana, since September 1995. From
November 1992 until joining Ventana, Mr. Cusack acted as General Manager, Europe
and Mideast for CYTYC S.A.R.L., a medical diagnostics company with operations in
the United States and abroad.  Prior to CYTYC, Mr. Cusack held various marketing
and managerial positions with Abbott's Diagnostics Division. Mr. Cusack received
a B.S. from the University of Delaware and an M.B.A. from Temple University.

     Mr.  Kunkleman joined Ventana as Vice President of Sales in June 1997. From
April 1990 to June 1997 Mr. Kunkleman held various sales and marketing positions
at TAP  Pharmaceuticals,  a joint venture between Abbott Laboratories and Takeda
Chemical.  Mr.  Kunkleman  received a B.S. in Marketing  from the  University of
Maryland.

     Mr. McGraw has served as Vice  President of  Engineering  since April 1997.
Prior to that, Mr. McGraw had been Director of  Engineering  since December 1994
and a Senior  Engineer  when he joined  Ventana  in 1991.  From July 1997  until
August 1991, Mr. McGraw held various  management and system design  positions in
Abbott  Laboratories'  Diagnostics  Division.  Mr.  McGraw  received  a B.S.  in
Mechanical Engineering from West Virginia University.

     Dr. Powers joined Ventana as Vice President of Operations in November 1996.
From June 1990  until  joining  Ventana,  Dr.  Powers  held  various  management
positions  with  Organon  Teknika  Corporation,  a medical  diagnostic  company,
serving most  recently as Director of  Manufacturing  Technologies.  Dr.  Powers
holds a Ph.D. in Chemical  Engineering from North Carolina State University,  an
M.S.  in Chemical  Engineering  from  Clemson  University,  an M.B.A.  from Duke
University and a B.A. in Chemistry from Wake Forest University.

     Mr. Questier has served as Vice President of European Operations of Ventana
since  February 1996.  From October 1990 until joining  Ventana in October 1995,
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.

     Dr. Richerson joined Ventana as Vice President, Research and Development in
June 1997. From 1986 until joining Ventana,  Dr. Richerson held various research
and management positions with Abbott Laboratories'  Diagnostics  Division,  most
recently as the Director of the AxSym Product Development and as the Director of
Probe  Development.  Dr.  Richerson  holds  a Ph.D.  in  Biochemistry  from  the
University of Texas at Austin and a B.S. in Medical  Technology  from  Louisiana
State University.

     Mr. Sice joined  Ventana as Vice  President,  Chief  Financial  Officer and
Chief  Administrative  Officer  in  March  1997.  Mr.  Sice was  Executive  Vice
President and Chief  Financial  Officer from 1994 until 1997, and Vice President
and Chief Financial Officer from 1988 until 1994 at SensorMedics Corporation,  a
medical  device  company.  From 1986 until 1988 Mr.  Sice  served as Senior Vice
President and Chief Financial  Officer of Dataline  Service  Company.  From 1978
until 1986 Mr. Sice was  employed  at MAI Basic Four Inc.  in various  financial
management  capacities.  Mr. Sice received a B.S. in Mechanical Engineering from
Illinois Institute of Technology and a M.B.A. from the University of Michigan.

     Mr. Tateiwa has served as President of Ventana's wholly owned subsidiary in
Japan. Ventana Medical Systems Japan K.K. in Tokyo, since August 1997. From 1977
to 1997,  Mr. Tateiwa held various  management  positions with Dainabot K.K. Mr.
Tateiwa    received   a   B.S.   in   Engineering   from   the   University   of
Electro-Communications in Japan.

     Dr. Tillson has served as Vice President of Scientific  Affairs and Quality
Assurance  since August 1995.  From the time of his joining  Ventana in May 1992
until July 1995, Dr. Tillson served as Director of Scientific

                                       36
<PAGE>


Affairs and Quality Assurance. From January 1990 to May 1992, Dr. Tillson served
as a principal of Ticon Company  Consulting.  He has 25 years  experience in the
diagnostic and  pharmaceutical  industry.  Dr. Tillson holds a Ph.D. from Purdue
University and received a B.S. from California State Polytechnic  University and
an M.B.A. from St. Mary's College of California.

     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.S. from the University of Chicago.

     Mr. Danehy served as President and Chief Executive  Officer of Ventana from
September  1994 until  February  1997 and served as a director  of Ventana  from
September  1994 until his  resignation  on January 26,  1998.  From June 1994 to
September 1994, Mr. Danehy served as a consultant to the Company.  From November
1993 to June 1994, Mr. Danehy served as an interim Chief  Executive  Officer and
consultant  for BioStar  Diagnostics,  where he also  served as a director  from
January 1994 to March 1995.  Mr.  Danehy  received a B.S. in Chemistry  from St.
Joseph's College and an M.B.A. from Loyola University of Chicago.

     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
McWhorter Technologies, Inc. and 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.

     Dr. Grogan is a founder,  a director and Chairman  Emeritus 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
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.

     Mr.  Patience  has served as a director  of  Ventana  since July 1989.  Mr.
Patience was a co-founder and served as a General  Partner of Marquette  Venture
Partners, a venture capital investment firm, from January 1988 until March 1995.
Since April  1995,  Mr.  Patience  has been a partner in  Crabtree  Partners,  a
Chicago-based venture capital firm. Mr. Patience was previously a partner in the
consulting firm of McKinsey & Co.,  specializing in health care. He is currently
a director of TRO Learning,  Inc. and 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.

     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. Mr. Weersing served as a director of
Circadian,  Inc., an asthma dosage management company,  from December 1993 until
January  1996.  Circadian  filed  a  petition  under  Chapter  7 of the  federal
bankruptcy laws in January 1996. Mr. Weersing received an B.S.M.E. and an M.B.A.
from Stanford University.


                                       37
<PAGE>


Board of Directors

     As of December 31, 1997,  the Company had eight  directors.  The  Company's
Bylaws authorize the Company to have a board of 10 directors. All directors hold
office until the next annual meeting of stockholders  or until their  successors
have been  elected.  The  Company's  certificate  of  incorporation  and Bylaws,
however, provide that the Board of Directors is divided into three classes. Each
class consists of three or four directors. The terms of office of class I, class
II and class IIII directors  expire at the Company's  2000, 1998 and 1999 annual
meetings of stockholders,  respectively.  At each annual meeting of stockholders
at which the term of office of a particular  class of directors  first  expires,
the  persons  elected  to the  board  positions  represented  by such  class  of
directors  will be elected to serve  from the time of  election  until the third
annual meeting following election. Any additional  directorships  resulting from
an  increase  in the number of  directors  will be  distributed  among the three
classes of directors so that, as nearly as possible,  each class will consist of
one-third of the directors.  This  classification  of the Board of Directors may
have the effect of delaying or  preventing  changes in control or  management of
the Company.  Officers serve at the discretion of the Board of Directors.  There
are no family  relationships among any of the directors or executive officers of
the Company. The Company does not pay cash compensation to directors for serving
in that  capacity,  although the Company does  reimburse  directors for expenses
incurred in attending Board of Directors  meetings.  The Board of Directors has,
among other  committees,  a Compensation  Committee  that makes  recommendations
concerning salaries and incentive  compensation for employees of and consultants
to the Company and an Audit  Committee that reviews the results and scope of the
audit and other services provided by the Company's independent auditors.


Item 11.   EXECUTIVE COMPENSATION

     The  following   table  sets  forth  certain   information   regarding  the
compensation of the Company's Chief Executive Officer and each of the other four
most highly  compensated  executive  officers paid for services  rendered in all
capacities to the Company during the years ended December 31, 1995, December 31,
1996 and December 31, 1997 (collectively, the "Named Executive Officers").


                                       38
<PAGE>


                           Summary Compensation Table
<TABLE>
<CAPTION>


                                                                                  Long-Term
                                                                                 Compensation
                                                                                    Awards
                                                                         -----------------------------
                                               Annual Compensation        Restricted     Securities        All Other
                                               -------------------           Stock       Underlying         Annual
Name and Principal Position        Year     Salary($)       Bonus($)       Awards($)       Options      Compensation($)
---------------------------        ----     ---------       --------       ---------       -------      ---------------

<S>                                <C>        <C>                                          <C>                  <C>
Henry T. Pietraszek                1997       167,942          --               --         350,000              707(1)
 President and Chief Executive     1996          --            --               --            --               --
 Officer                           1995          --            --               --            --               --

Bernard O. C. Questier(3)          1997       150,000          --               --          10,000            8,800(2)
 Vice President, European          1996       137,500         7,500(4)          --            --              8,067(2)
 Operations                        1995          --            --                           36,956           57,200(5)

Pierre H. Sice                     1997       122,963                           --          55,000            8,264(1)
 Vice President, Finance and Chief 1996          --            --               --            --               --
 Financial Officer and Secretary   1995          --            --               --            --               --

Johnny D. Powers,  Ph.D            1997       118,375          --               --          15,000             --
 Vice President, Operations        1996        16,154        15,000(6)          --          35,000           23,872(1)
                                   1995          --            --               --            --               --

Michael K. Cusack                  1997       102,268          --               --           7,000             --
 Vice President, International     1996       100,130          --               --            --               --
                                   1995       100,054
</TABLE>

----------------

(1)  Relocation Expense

(2)  Automobile allowance

(3)  Mr. Questier  signed an employment  contract with the Company in October of
     1995 and  began  working  at the  Company  in  February  1996.  His  annual
     compensation is set at $150,000 and his salary 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.

(4)  Mr.  Questier  received a one-time  nonrecurring  $7,500  bonus in 1996 for
     signing his  employment  contract  in October of 1995 and  meeting  certain
     other conditions.

(5)  Consists of relocation  expenses of $55,000  associated with Mr. Questier's
     move from Germany to France, and a $2,200 automobile allowance.

(6)  Mr. Powers was offered a sign-on  bonus of $15,000 in  connection  with his
     joining the company.




                                       39
<PAGE>


Stock Option Information

         The following  table contains  information  concerning the stock option
grants made to each of the Named Executive  Officers for the year ended December
31, 1997.

                           Option Grants in Last Year

<TABLE>
<CAPTION>
                                      Individual Grants
                      -----------------------------------------------     Potential Realizable
                                                                          Value at Assumed
                      Number of                                          Annual Rates of Stock
                      Securities   % of Total    Exercise                 Price Appreciation
                      Underlying     Options     or Base                   for Option Term(4)
                       Options       Granted      Price     Expiration  -------------------------
Name                  Granted(1)   In 1997(2)   ($/Sh)(3)      Date         5%($)       10%($)
----                  ----------  ----------    ---------      ----         -----       ------

<S>                     <C>          <C>         <C>          <C>        <C>          <C>
Henry T. Pietraszek     350,000      24.4%       $12.25       4/18/07    $2,696,386   $6,833,171
Bernard O. C. Questier   10,000       0.7%       $12.25       4/18/07    $   77,040   $  195,233
Pierre H. Sice           55,000       3.8%       $12.25       4/18/07    $  423,718   $1,073,784
Johnny D. Powers, Ph.D.  15,000       1.0%       $12.25       4/18/07    $  115,559   $  292,850
Michael K. Cusack         7,000       0.5%       $12.25       4/18/07    $   53,928   $  136,663
</TABLE>

-----------------

(1)  Options were granted under the  Company's  1988 Stock Option Plan and under
     the Company's 1996 Stock Option Plan.  These generally vest over four years
     from the date of grant,  except the options granted to Mr. Pietraszek which
     vest over seven years.

(2)  Based on an aggregate of  1,436,460  options  granted by the Company in the
     year ended December 31, 1997 under the Company's  stock option plans to all
     employees of and consultants to the Company,  including the Named Executive
     Officers.

(3)  The  exercise  price per share of each  option was equal to the fair market
     value of the 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
     the Company's  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  the  Common  Stock
     appreciates over the option term, no value will be realized from the option
     grants made to the executive officers.



                                       40
<PAGE>



Aggregated Option Exercises in Last Year and Year-End Option Values

         The  following  table  sets  forth,  for  each of the  Named  Executive
Officers,  the shares  acquired  and the value  realized on  exercises  of stock
options  during the year ended  December  31, 1997 and the  year-end  number and
value of exercisable and unexercisable options.

<TABLE>
<CAPTION>

                                                      Number of Securities
                                                           Underlying                 Value of Unexercised
                          Shares                       Unexercised Options            In-the-Money Options
                         Acquired                     at December 31, 1997          at December 31, 1997(1)
                            on        Value     --------------------------------------------------------------
 Name                   Exercise(#) Realized($)   Exercisable   Unexercisable   Exercisable     Unexercisable
 ----                   ----------  -----------   -----------   -------------   -----------     -------------

<S>                       <C>         <C>          <C>             <C>             <C>           <C>
 Henry T. Pietraszek       --           --            --            350,000          --           1,050,000
 Bernard O.C. Questier     --           --          20,019           26,938        288,498          274,097
 Pierre H. Sice            --           --            --             55,000          --             165,000
 Johnny D. Powers, Ph.D.   --           --          10,209           39,791          --              45,000
 Michael K. Cusack         --           --          10,471           13,159        150,900          109,759
-----------------
</TABLE>


(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 $17.00  per share,  and the fair  market  value for the  Company's
     Common  Stock of $15.25 per share as of December  31,  1997,  which was the
     closing price of the Company's Common Stock on December 31, 1997.

Employment Agreements

     The Company has an employment  agreement  with Bernard O.C.  Questier,  its
Vice  President  of  European  Operations.  The  agreement  provides  for annual
compensation of $150,000,  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 also
provides for, in the event of Mr. Questier's termination, continued compensation
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. The Company currently has no employment contracts or agreements with
any of the other Named Executive Officers or with any other person.

Compensation Committee Interlocks and Insider Participation

     The  Compensation  Committee of the Board of Directors  consists of Jack W.
Schuler, Edward M. Giles and James R. Weersing. The Compensation Committee makes
recommendations  to the Board of Directors  concerning  salaries  and  incentive
compensation  for employees of and  consultants to the Company,  except that the
Compensation  Committee  has full power and  authority to grant stock options to
the Company's  executive officers under the Company's 1988 Stock Option Plan and
the Company's 1996 Stock Option Plan.


Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  sets forth  information  known to the  Company  with
respect to the beneficial  ownership of its Common Stock as of December 31, 1997
for (i) each person who is known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors,  (iii) each
Named  Executive  Officer and (iv) all  directors  and  executive  officers as a
group.



                                       41
<PAGE>


                                                       Shares Beneficially
     Certain Executive Officers,                           Owned as of
     Directors and  5% Stockholders                  December 31, 1997(1)(2)
     -------------------------------                -----------------------
                                                         Number     Percent
                                                         ------     -------

J. P. Morgan & Co. Inc.
  60 Wall Street
  New  York, NY 10015 ..............................   1,790,300      13.5%

Entities affiliated with Marquette
  Venture Partners(3)
  520 Lake Cook Rd., Suite 450 .....................   1,251,903       9.5%

MBW Venture Partners, L.P.(4)
  James R. Weersing
  365 South Street
  Morristown,  NJ 07960 ............................   1,442,349      10.8%

State Farm Mutual Automobile
  Insurance Company(5)
  One State Farm Plaza
  Bloomington, IL 61701 ............................     887,173       6.6%

Jack W. Schuler(6) .................................     972,440       7.3%

Henry T. Pietraszek ................................      71,500        *

Michael K. Cusack(7) ...............................      28,810        *

Johnny D. Powers, Ph.D.(8) .........................      11,667        *

Bernard O.C. Questier(9) ...........................      23,153        *

Pierre Sice ........................................           0        *

Rex J. Bates(10) ...................................      36,735        *

R. James Danehy ....................................     151,224       1.1%

Edward M. Giles(11) ................................     260,014       2.0%

Thomas M. Grogan, M.D.(12) .........................     170,063       1.3%

John  Patience(13) .................................     297,589       2.2%

James R. Weersing(4)(14) ...........................   1,458,439      10.9%


All directors and executive officers as
a group (17 persons) ...............................   3,527,531      25.6%


-----------------

*    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 Common
     Stock.

(2)  Applicable  percentage of ownership is based on 13,247,226 shares of Common
     Stock  outstanding  as of December 31, 1997 together  with shares  issuable
     pursuant to applicable  options and warrants of such stockholder  which may
     be exercised within 60 days after December 31, 1997. Shares of Common Stock
     subject to options  and/or  warrants  currently  exercisable or exercisable
     within 60 days after December 31, 1997 are deemed outstanding for computing
     the  percentage  ownership  of  the  person  holding  such  options  and/or
     warrants,  but are not deemed  outstanding  for computing the percentage of
     any other person.

(3)  Includes 872,795 shares  beneficially  owned by Marquette Venture Partners,
     L.P.;  247,218 shares  beneficially owned by Marquette Venture Partners II,
     L.P.; and 131,890 shares beneficially owned by MVP II Affiliate Fund, L.P.


                                       42
<PAGE>


(4)  Includes  162,059 shares issuable upon the exercise of warrants held by MBW
     Venture Partners, L.P. Mr. Weersing, a director of the Company, is Managing
     Director of MBW Venture Partners Limited. Mr. Weersing disclaims beneficial
     ownership of the shares  beneficially  owned by MBW Venture Partners,  L.P.
     except to the extent of his proportional partnership interest therein.

(5)  Includes  108,893  shares  issuable  upon the exercise of warrants  held by
     State Farm Mutual Automobile Insurance Company.

(6)  Includes  118,917  shares  issuable upon the exercise of warrants and 5,583
     shares issuable upon the exercise of options  exercisable within 60 days of
     December 31, 1997 held by Mr. Schuler;  73,512 shares beneficially owned by
     Mr. Schuler, as custodian for Tanya Eva Schuler; 73,513 shares beneficially
     owned by Mr.  Schuler,  as custodian for Therese Heidi Schuler;  and 73,512
     shares  beneficially  owned by Mr.  Schuler,  as  custodian  for Tino  Hans
     Schuler; 10,000 shares beneficially owned by The Schuler Family Foundation;
     and 1,250 shares owned by Mrs. Schuler.

(7)  Includes 11,703 shares issuable upon the exercise of options exercisable
     within 60 days of December 31, 1997 held by Mr. Cusack.

(8)  Includes  11,667 shares  issuable upon the exercise of options  exercisable
     within 60 days of December 31, 1997 held by Dr. Powers.

(9)  Includes  21,559 shares  issuable upon the exercise of options  exercisable
     within 60 days of December 31, 1997 held by Mr. Questier.

(10) Includes  11,173  shares  issuable  upon the exercise of warrants and 5,583
     shares issuable upon the exercise of options  exercisable within 60 days of
     December 31, 1997 held by Mr. Bates.

(11) Includes  230,903 shares  beneficially  owned by Vertical Fund  Associates,
     L.P.  Also  includes  5,583  shares  issuable  upon the exercise of options
     exercisable  within 60 days of December 31, 1997,  held by Edward M. Giles.
     Also includes 18,372 shares  beneficially owned by Edward M. Giles IRA plus
     5,156 shares issuable upon the exercise of warrants held by Edward M. Giles
     IRA.  Mr.  Giles,  a director of the  Company,  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.


(12) Includes 9,612 shares beneficially owned by Andrew Grogan and 10,612 shares
     beneficially  owned by Emily Grogan  including  7,710  shares  beneficially
     owned by C. Ovens, Inc. (of which 459 shares are issuable upon the exercise
     of warrants  held by C.  Ovens,  Inc.);  and 26,008  shares  issuable  upon
     exercise of options exercisable within 60 days of December 31, 1997 held by
     Dr. Grogan.

(13) Includes  96,689  shares  issuable  upon the exercise of warrants and 5,583
     shares issuable upon the exercise of options  exercisable within 60 days of
     December 31, 1997, held by Mr. Patience as well as 4,800 shares held in the
     name of Mrs. Patience.

(14) 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.
     Also includes 4,298 shares issuable upon the exercise of warrants and 5,583
     shares issuable upon the exercise of options  exercisable within 60 days of
     December 31, 1997, held by Mr. Weersing.


                                       43
<PAGE>


Item 13.  CERTAIN TRANSACTIONS

     In April and May 1996,  the Company sold an aggregate of 646,664  shares of
Common Stock to Jack Schuler, the Company's Chairman,  John Patience, a director
of the Company,  and venture  capital funds  affiliated  with Marquette  Venture
Partners  ("Marquette"),  a principal  stockholder of the Company, at a purchase
price of $1.62 per share.  Messrs.  Schuler and Patience paid the purchase price
for their  shares 10% in cash and 90% through a full  recourse  promissory  note
secured by the  underlying  shares of Common Stock.  Marquette paid the purchase
price for their  shares in cash.  These  stock  purchases  were  approved by the
Company's Board of Directors in principle in January 1996 and the specific terms
of the stock  purchases  were approved by the Board of Directors on February 23,
1996.  The  purchase  price of $1.62 per share  was  determined  by the Board of
Directors  of the Company in January  1996 and equals the fair  market  value of
Company's  Common Stock as of such date,  as  determined  by the board.  Messrs.
Schuler and Patience were provided with the opportunity to purchase these shares
in  connection   with  (i)  their  efforts  and  assistance  in  completing  the
acquisition  of  BioTek  Solutions,  Inc.  and  assisting  management  with  the
integration of the companies,  (ii) Mr. Schuler's  decision to serve as Chairman
of the Board of Directors and (iii) Mr. Schuler's and Mr. Patience's devotion of
a significant portion of their work time to the Company's business.  In February
1998,  Messrs.  Schuler and Patience each fully paid the promissory notes issued
in connection with their purchase of the shares.

     On  November  13,  1997,  the  Company's  Board  of  Directors  unanimously
approved,  with  Messrs.  Patience  and  Schuler  abstaining,  a renewal  of the
foregoing arrangement. Under this arrangement, Messrs. Schuler and Patience each
received options for 150,000 shares of Company Common Stock.  These options were
issued on the basis that Messrs. Patience and Schuler would devote a significant
percentage  of their work time to the  Company's  business and that Mr.  Schuler
would serve as Chairman of the Company's Board of Directors. The options vest on
a cumulative monthly basis over 24 months commencing  February 26, 1998 and have
an exercise price of $12.625 per share,  which is equal to the fair market value
of the Company's Common Stock on the date of grant.

     In February 1997, the Company  repaid certain  outstanding  notes issued in
connection  with  the  acquisition  of  BioTek  Solutions,  Inc.  and a  related
financing  transaction.  These notes were originally issued between February and
May 1996.  Under the terms of the  notes,  no  interest  would be payable if the
principal of the notes was repaid in full on or prior to February 26, 1997.  The
notes were repaid prior to such date, and, accordingly,  no interest was paid on
the  notes.  Holders  of the  notes  included  the  following  5%  stockholders,
directors and entities  affiliated with directors:  MBW Venture Partners,  L.P.,
Jack W.  Schuler,  certain  entities  with whom Edward M. Giles was  affiliated,
State Farm Mutual Automobile Insurance Company, John Patience,  Rex Bates, James
R. Weersing, and Thomas M. Grogan, M.D.


                                       44
<PAGE>


                                     PART IV


Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10K

1. Financial Statements

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

<TABLE>
<CAPTION>

                                                                                       Page
                                                                                       ----
<S>                                                                                   <C>
Ventana Medical Systems, Inc.
Report of Ernst & Young LLP, Independent Auditors                                       F-1
Audited Consolidated Financial Statements
  Consolidated  Balance Sheets as of December 31, 1996 and 1997                         F-2
  Consolidated Statements of Operations for the years ended December 31, 1995, 1996
   and 1997                                                                             F-3
  Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders'
  Equity (Deficit) for the years ended  December 31, 1995, 1996 and 1997                F-4
  Consolidated  Statements of Cash Flows for the years ended December 31, 1995, 1996
   and 1997                                                                             F-5
  Notes to Consolidated Financial Statements                                            F-6
</TABLE>


2. Financial Statement Schedules

     No schedules have been filed herein, because the information required to be
set forth therein is not  applicable or is shown in the Financial  Statements or
notes thereto.

3.   Exhibits

<TABLE>
<CAPTION>

    Exhibit
     Number                                          Exhibits
     ------                                          --------

<S>              <C>
   3.1(i)(b)(1)   Restated Certificate of Incorporation of Registrant.
   3.1(ii)(b)(1)  Bylaws of Registrant.
   4.1(1)         Specimen Common Stock Certificate.
   10.1(a)(1)+    DAKO Distribution Agreement dated September 27, 1994.
   10.1(b)(1)+    First Amendment to DAKO Distribution Agreement dated March 24, 1995.
   10.1(c)(1)+    Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1995.
   10.1(d)(2)++   Second amendment to DAKO Distribution Agreement dated September 25, 1996
   10.2(a)(1)     Kollsman Secured Promissory Note dated December 4, 1994.
   10.2(b)(1)     Development Secured Promissory Note dated March 24, 1995.
   10.3(1)+       Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993.
   10.4(a)(1)     Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996--Tranche 1.
   10.4(b)(1)     Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996--Tranche 2.
   10.4(c)(1)     Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 Tranche 3.
   10.5(a)(1)     Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 Tranche 1.
   10.5(b)(1)     Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 Tranche 2.
   10.6(1)        Form of Indemnification Agreement for directors and officers.
   10.7(a)(1)     1988 Stock Option Plan and forms of agreements thereunder.
   10.7(b)(1)     1996 Stock Option Plan and forms of agreements thereunder.
   10.8(a)(1)     1991 Employee Stock Purchase Plan.
   10.8(b)(1)     1996 Employee Stock Purchase Plan.
   10.8(c)(1)     1996 Directors Option Plan.
   10.9(1)        Questier Employment Agreement dated October 20, 1995.
   10.10(1)       Restated Investors Rights Agreement dated February 20, 1996.
   10.11(1)       Sublease of Premises between the Registrant and Jerry R. Jones &Associates, Inc., dated February 29,
                  1996, with attached Master Lease, dated October 26, 1988.
   10.12(1)       Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated
                  April 13, 1994.
   10.13(a)(1)    Agreement and Plan of Reorganization dated January 19, 1996.
   10.13(b)(1)    Agreement and Plan of Merger dated February 26, 1996.


                                       45
<PAGE>

   10.13(c)(1)    Escrow Agreement dated February 26, 1996.
   10.14(a)(1)    Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock.
   10.14(b)(1)    Form of Preferred Stock Purchase Warrant.
   10.14(c)(1)    MBW and Marquette Warrants dated August 21, 1992.
   10.15(a)(1)    Form of Convertible Unsecured Promissory Note.
   10.15(b)(1)    Form of Convertible Unsecured Promissory Note.
   10.17(1)+      Novocastra   Laboratories   Ltd.   Distribution  Agreement  dated August 19, 1992.
   10.18(1)+      LJL  BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996.
   10.19(a)(1)    Silicon Valley Bank Loan and Security Agreement dated February 20, 1995.
   10.19(b)(1)    Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996
   10.19(c)       Amendment to Silicon Valley Bank Loan and Security Agreement dated August 15, 1997
   11.1           Statement regarding computation of Per Share Earnings.
   13.1           The  Registrant's  Quarterly Report on Form 10-Q for the period ended September 30, 1997.
   21.1(1)        Subsidiaries of the Registrant.
   23.1           Consent of Ernst & Young LLP, Independent Auditors.
   27.1           Financial Data Schedule.

</TABLE>


(1)  Incorporated  by reference  to the  like-numbered  exhibit to  Registrant's
     Registration Statement on Form S-1 (Commission File No. 333-4461), declared
     effective by the Commission July 26, 1996.

(2)  Incorporated  by reference  to the  like-numbered  exhibit to  Registrant's
     Registration  Statement  on  Form  S-1  (Commission  File  No.  333-18471),
     declared effective by the Commission February 11, 1997.

+    Confidential  Treatment  has been  granted  for  certain  portions  of this
     Exhibit.

++   Confidential  Treatment  has been  requested  for certain  portions of this
     Exhibit.


                                       46
<PAGE>


                                   SIGNATURES

     Pursuant  to  the  requirements  of  the  Securities  Act,  the  registrant
certifies  that it has  reasonable  grounds to believe  that it meets all of the
requirements  for  filing on Form  10-K and has duly  caused  this  registration
statement  to be  signed  on its  behalf  by  the  undersigned,  thereunto  duly
authorized,  in the City of Tucson, State of Arizona, on this 30th day of March,
1998.

                                                   VENTANA MEDICAL SYSTEMS, INC.


                                                    By: /s/ Pierre H. Sice
                                                       -------------------------
                                                       Pierre H. Sice
                                                       Vice President and
                                                       Chief Financial Officer


                                POWER OF ATTORNEY


     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears below hereby  constitutes and appoints Pierre H. Sice and Christopher D.
Mitchell,  and each of them acting individually,  as his attorney-in-fact,  each
with full power of substitution,  for him in any and all capacities, to sign any
and all  amendments  to this Annual Report on 10-K,  and to file the same,  with
exhibits  thereto  and  other  documents  in  connection  therewith,   with  the
Securities  and Exchange  Commission,  hereby  ratifying and confirming all that
said attorney-in-fact,  or his substitutes, may do or cause to be done by virtue
hereof.

     Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities indicated:

<TABLE>
<CAPTION>
              Signature                                      Title                                    Date

<S>                                   <C>                                                        <C>
  /s/ Henry Pietraszek                 President and Chief Executive Officer (Principal          March 30, 1998
  -----------------------                           Executive Officer)
  (Henry Pietraszek)
  /s/ Pierre H. Sice                   Vice President and Chief Financial Officer                March 30, 1998
  -----------------------               (Principal Financial and Accounting Officer)
  (Pierre H. Sice)
  /s/ Edward M. Giles                                Director                                    March 30, 1998
  -----------------------
  (Edward M. Giles)
  /s/ Thomas M. Grogan                               Director                                    March 30, 1998
  -----------------------
 (Thomas M. Grogan)
  /s/ John Patience                                  Director                                    March 30, 1998
  -----------------------
 (John Patience)
  /s/ Jack W. Schuler                                Director                                    March 30, 1998
  -----------------------
 (Jack W. Schuler)
  /s/ James M. Weersing                              Director                                    March 30, 1998
  -----------------------                            --------                                    --------------
 (James M. Weersing)
  /s/ Rex J. Bates                                   Director                                    March 30, 1998
  -----------------------
 (Rex J. Bates)

</TABLE>



                                       47
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit No.                                    Description

<S>                  <C>
  10.19(c)            Amendment to Silicon Valley Bank Loan and Security Agreement dated August 15, 1997
    11.1              Statement regarding computation of Per Share Earnings.
    13.1              The Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997
    23.1              Consent of Ernst & Young LLP, Independent Auditors
    27.1              Financial Data Schedule
</TABLE>



                                       48

<PAGE>


                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.,  at  December  31, 1997 and 1996,  and the related  consolidated
statements  of   operations,   convertible   redeemable   preferred   stock  and
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the  period  ended  December  31,  1997.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, 1997 and 1996,  and the  consolidated
results of its  operations  and its cash flows for the three years in the period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles.


Tucson, Arizona
January 23, 1998




                                       F-1



<PAGE>


                          Ventana Medical Systems, Inc.

                           Consolidated Balance Sheets
                        (In thousands, except share data)



                                                                December 31,
                                                           --------------------
                                                             1997        1996
                                                           --------    --------
Assets
Current assets:
  Cash and cash equivalents                                $ 18,902    $  6,190
  Short-term investments                                         --       4,877
  Accounts receivable                                         8,047       5,145
  Inventories (Note 2)                                        5,134       3,272
  Prepaid expenses                                              846         799
  Other current assets                                        1,263         245
                                                           --------    --------
Total current assets                                         34,192      20,528
Property and equipment, net (Note 3)                          6,105       3,301
Intangibles, net (Note 4)                                     8,055       8,581
                                                           --------    --------
Total assets                                               $ 48,352    $ 32,410
                                                           ========    ========
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                         $  2,584    $  1,738
  Other current liabilities (Note 5)                          2,894       2,902
                                                           --------    --------
Total current liabilities                                     5,478       4,640
Long-term debt (Note 7)                                         471      12,500
Commitments and Contingencies  (Notes 8, 10 and 12)
Stockholders'  equity (Notes 8, 9 and 12):
  Common stock - $.001 par value;
   50,000,000 shares authorized,  13,247,226 and
   10,978,238 shares issued and outstanding
   at December 31, 1997 and 1996, respectively                   13          11
  Additional paid-in-capital                                 76,313      48,885
  Accumulated deficit                                       (33,782)    (33,410)
  Cumulative foreign currency translation adjustment           (141)       (216)
                                                           --------    --------
Total stockholders' equity                                   42,403      15,270
                                                           --------    --------
Total liabilities and stockholders' equity                 $ 48,352    $ 32,410
                                                           ========    ========

See accompanying notes.


                                      F-2

<PAGE>


                          Ventana Medical Systems, Inc.

                      Consolidated Statements of Operations
                      (In thousands, except per share data)



                                                         Years Ended
                                                         December 31,
                                               ---------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------
Sales:
     Instruments                               $  9,248    $  8,591    $  4,644
     Reagents and other                          22,905      15,538       5,969
                                               --------    --------    --------
                                                 32,153      24,129      10,613
Cost of goods sold                               11,138      10,632       4,282
                                               --------    --------    --------
Gross profit                                     21,015      13,497       6,331

Operating expenses:
    Selling, general and administrative          16,953      11,206       7,435
    Research and development                      3,050       2,749       2,239
    Nonrecurring expenses                         1,656      10,262        --
    Amortization of acquisition costs               509         424        --
                                               --------    --------    --------
Loss from operations                             (1,153)    (11,144)     (3,343)

Other income (expense)                              781        (137)         74
                                               --------    --------    --------
Net loss                                       $   (372)   $(11,281)   $ (3,269)
                                               ========    ========    ========
Net loss per share, as adjusted,
 basic and diluted                             $   (.03)   $  (1.22)   $  (0.43)
                                               ========    ========    ========
Shares used in computing net loss
 per share, as adjusted                          12,778       9,243       7,571
                                               ========    ========    ========



See accompanying notes.


                                      F-3

<PAGE>


                          Ventana Medical Systems, Inc.

        Consolidated Statements of Convertible Redeemable Preferred Stock
                       and Stockholders' Equity (Deficit)

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                     Stockholders' Equity (Deficit)
                                                                  ------------------------------------------------------------------
                                                                                                              Cumulative
                                      Convertible Redeemable                                                   Foreign
                                         Preferred Stock              Common Stock    Additional               Currency
                             -----------------------------------     --------------    Paid-In   Accumulated  Translation
                             Series A  Series C  Series D  Total     Shares   Amount   Capital     Deficit     Adjustment     Total
                             -------------------------------------------------------------------------------------------------------
<S>                             <C>    <C>       <C>     <C>      <C>           <C>    <C>       <C>            <C>        <C>
Balance at January 1, 1995      $536   $10,041   $19,660 $30,237     875,005    $1     $  189    $(24,275)      $  (46)    $(24,131)
   Sale of Series D
    preferred stock               --        --     2,507   2,507          --    --         --          --           --           --

   Accretion of  preferred
    stock  redemption
    requirement                   --       655     1,781   2,436          --    --         --      (2,436)          --       (2,436)

   Sale of common stock           --        --        --      --     160,210    --         67          --           --           67

   Repurchase of common stock     --        --        --      --     (15,051)   --        (13)         --           --          (13)

   Translation adjustment         --        --        --      --          --    --         --          --          (74)         (74)

   Net loss                       --        --        --      --          --    --         --      (3,269)          --       (3,269)
                             -----------------------------------  ------------------------------------------------------------------

Balance at December 31, 1995     536    10,696    23,948  35,180   1,020,164     1        243     (29,980)        (120)     (29,856)

   Sale of Series D
    preferred stock               --        --       413     413          --    --         --          --           --           --

   Accretion of  preferred
    stock  redemption
    requirement                   --       328     1,027   1,355          --    --         --      (1,355)          --       (1,355)

   Conversion of preferred
    stock upon completion of
    initial public offering     (536)  (11,024)  (25,388)(36,948)  6,716,997     7     27,735       9,206           --       36,948

   Proceeds of initial
    public offering, net of
    expenses $1,221               --        --        --      --   1,963,975     2     17,042          --           --       17,044

   Conversion of debt into
    common stock                  --        --        --      --     222,973    --      3,016          --           --        3,016

   Sale of common stock-
    other                         --        --        --      --   1,054,129     1        849          --           --          850

   Translation adjustment         --        --        --      --          --    --         --          --          (96)         (96)

   Net loss                       --        --        --      --          --    --         --     (11,281)          --      (11,281)
                             -----------------------------------  ------------------------------------------------------------------

Balance at December 31, 1996      --        --        --      --  10,978,238    11     48,885     (33,410)        (216)      15,270

   Proceeds from public
    offering, net of
    expenses $530                 --        --        --      --   1,881,066     2     26,132          --           --       26,134

   Sale of common stock-
    other                         --        --        --      --     387,922    --      1,296          --           --        1,296

   Translation adjustment         --        --        --      --          --    --         --          --           75           75

   Net loss                       --        --        --      --          --    --         --        (372)          --         (372)
                             -----------------------------------  ------------------------------------------------------------------

Balance at December 31, 1997  $   --    $   --    $   --  $   --  13,247,226 $  13    $76,313    $(33,782)    $   (141)     $42,403
                             =======================================================================================================

</TABLE>


See accompanying notes.


                                      F-4

<PAGE>


                          Ventana Medical Systems, Inc.

                      Consolidated Statements of Cash Flows
                                 (In thousands)


                                                  Years Ended December 31,
                                               --------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------

Operating activities:
Net loss                                       $   (372)   $(11,281)   $ (3,269)
Adjustments to reconcile net loss to net
 cash used in operating activities:
   Depreciation and amortization                  2,029       1,052         911
   Purchased in-process research and
    development                                      --       7,900          --
   Gain on early extinguishment of debt              --         300          --
Changes in operating assets and liabilities
   net of effects from acquisition of
   BioTek Solutions, Inc. in 1996:
     Accounts receivable                         (4,017)     (2,598)       (474)
     Inventories                                 (1,862)     (1,377)       (874)
     Other assets                                (1,065)       (288)       (114)
     Accounts payable                               846         181         422
     Other current liabilities                     (643)     (1,626)        459
                                               --------    --------    --------
Net cash used in operating activities            (5,084)     (7,737)     (2,939)
Investing activities:
Purchase of property and equipment               (4,263)       (815)       (956)
Purchase of intangible assets                       (44)       (192)         --

Acquisition of BioTek Solutions, Inc.                --      (2,500)         --
Sales (purchases) of short-term investments
 available for sale                               4,877      (4,877)         --
                                               --------    --------    --------
Net cash provided by (used in) investing
 activities                                         570      (8,384)       (956)
Financing activities:
Repayments of notes payable                     (10,279)         --          --
Net proceeds from public offering                26,134      17,044          --
Issuance of debt (including amounts from
 related parties) and stock                       1,296       7,624       2,561
Repayment of debt, net of gain on
 extinguishment                                      --      (3,364)         --
                                               --------    --------    --------
Net cash provided by financing activities        17,151      21,304       2,561
Effect of exchange rate changes on cash              75         (96)        (74)
                                               --------    --------    --------
Net increase (decrease) in cash and cash
 equivalents                                     12,712       5,087      (1,408)
Cash and cash equivalents, beginning of year
                                                  6,190       1,103       2,511
                                               --------    --------    --------
Cash and cash equivalents, end of year         $ 18,902    $  6,190    $  1,103
                                               ========    ========    ========

See accompanying notes


                                      F-5

<PAGE>


                          Ventana Medical Systems, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 1997


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, and Japan.

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.,
and BioTek Solutions,  Inc. (BioTek). All significant intercompany accounts have
been eliminated.

Reclassifications:  The consolidated financial statements for 1995 and 1996 have
been reclassified to conform with the 1997 presentation.

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.

Short-term  Investments:  Short-term  investments  are carried at fair value and
include highly liquid  investments  with maturities of one year or less from the
date of purchase.  These investments,  classified as available for sale, consist
of U.S. Treasury Bills for which cost approximates market value.

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

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 ten years.  Amortization  of leasehold  improvements  is  calculated  using a
straight-line  method  over the term of the lease.  Maintenance  and repairs are
charged to operations as incurred.

Property  and  equipment   includes   diagnostic   instruments  used  for  sales
demonstrations  or placed with  customers  under several types of  arrangements,
including  cancelable  reagent plans (RPs),  qualified  reagent  installed bases
(QRIBs) and rentals.  New  instruments are no longer placed into the RP program.
However,  certain  longstanding  agreements continue on a month-to-month  basis,
wherein the  customer is required to purchase a minimum  quantity of reagents in
order to keep the  instrument.  QRIB  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


                                      F-6

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


period must purchase,  rent or return the instrument.  The manufacturing cost of
demonstration,  RP, QRIB and rental instruments is amortized over a period of 36
to 48 months to cost of goods sold.

Intangibles:  Intangible  assets consist  primarily of goodwill,  customer base,
developed  technology  acquired  in the BioTek  acquisition  (see Note 12),  and
patents.  Such assets are  amortized  over  estimated  useful  lives of 15 to 20
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 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.

Revenue Recognition:  Sales of instruments and reagents are generally recognized
upon  shipment.  Revenues  from  reagents  sold  under RPs and  similar  leasing
arrangements  are  recognized  when  reagents  are shipped.  Service  revenue is
recognized as service is rendered.

For the year ended December 31, 1997, sales to DAKO A/S, a European  distributor
for the Company,  represented  approximately  20% of consolidated net sales. For
the  year  ended  December  31,  1996,  sales to DAKO  A/S and  Curtin  Matheson
Scientific,  a subsidiary of Fischer Scienific,  Inc. represented 17% and 16% of
consolidated net sales, respectively.

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.

Nonrecurring  Expenses:  The 1997  non-recurring  expenses relate primarily to a
legal judgment  against BioTek.  Nonrecurring  expenses in 1996 consisted of the
estimated costs of integrating  BioTek's  operations into Ventana's and the cost
of research and development in process acquired from BioTek (see Note 12).


                                      F-7

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


Foreign  Currency  Translations:  Foreign currency  financial  statements of the
Company's  foreign  subsidiaries  are converted  into United  States  dollars by
translating  balance sheet accounts at the current exchange rate at year end and
statement of operations  account at the average exchange rate for the year, with
resulting   translations   adjustments  reported  as  a  separate  component  of
stockholders' equity.

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.

Use of Estimates:  The  preparation of financial  statements in accordance  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments:  The Company's cash, short-term investments
and accounts receivable 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 maturites.

Stock-Based   Compensation:   The  Company   accounts  for  its  employee  stock
compensation  arrangements  under the  provisions of APB No. 25,  Accounting for
Stock Issued to Employees, and intends to continue to do so.

Impact of Recently  Issued  Accounting  Standards:  In June 1997,  the Financial
Accounting Standards Board issued SFAS No. 130, Reporting  Comprehensive Income.
SFAS No. 130  establishes  standards for reporting and display of  comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for  fiscal  years  beginning  after  December  15,  1997.  Reclassification  of
financial  statements for earlier periods  provided for comparative  purposes is
required. The Company is in the process of determining its preferred format. The
adoption  of SFAS No.  130 will  have no impact  on the  Company's  consolidated
results of operations, financial position or cash flows.

In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 131,
Disclosures  about Segments of an Enterprise and Related  Information,  which is
effective for years  beginning after December 15, 1997. SFAS No. 131 establishes
standards for the


                                      F-8

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


way that public business enterprises report information about operating segments
in annual  financial  statements  and  requires  that those  enterprises  report
selected  information about operating segments in interim financial reports.  It
also establishes  standards for related disclosures about products and services,
geographic  areas, and major customers.  SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
company will adopt the new requirements  retroactively  in 1998.  Management has
not  completed  its review of SFAS No.  131,  but does not  anticipate  that the
adoption  of this  statement  will  have  significant  effect  on the  Company's
reported segments.

Loss per Share:  In February  1997,  the Financial  Accounting  Standards  Board
issued SFAS No. 128,  Earnings per Share.  SFAS No. 128 replaced the calculation
of primary and fully diluted  earnings per share with basic and diluted earnings
per share.  Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options,  warrants and convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share.  Loss per share amounts for all periods have been presented,
and where appropriate,  restated to conform to the requirements of SFAS No. 128,
as well as Staff  Accounting  Bulletin  No. 98  (issued  by the  Securities  and
Exchange  Commission in February 1998),  which amends the  determination  of and
accounting for "cheap stock" in periods prior to an initial public offering. The
effect of dilutive securities is computed using the treasury stock method.

Loss per share 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 as their effect is antidilutive.

Net loss per share, historical basis, was as follows:

                                                              Years Ended
                                                              December 31,
                                                         ---------------------
                                                           1996          1995
                                                         --------      --------
                                                          (In Thousands, except
                                                           for per share data)
Net loss                                                 $(11,281)     $ (3,269)
Less accretion of preferred stock dividends                (1,355)       (2,436)
                                                         --------      --------
Net loss applicable to common stock                      $(12,636)     $ (5,705)
                                                         ========      ========
Net loss per common share                                $  (2.14)     $  (5.96)
                                                         ========      ========
Weighted average shares outstanding                         5,907           957
                                                         ========      ========


                                      F-9

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


The as adjusted  calculation of net loss per share presented in the consolidated
statements of operations  has been computed as described  above,  but also gives
effect to the conversion of all  outstanding  shares of  convertible  redeemable
preferred  stock into common stock upon closing of the Company's  initial public
offering (determined using the if-converted method) and the exercise of warrants
to purchase  Series D preferred  stock which would  otherwise  have expired upon
completion of the Offering.

2.   Inventories

Inventories consist of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                        -------------------
                                                           (In Thousands)
     Raw materials and work-in-process                  $4,033       $2,379
     Finished goods                                      1,101          893
                                                        -------------------
                                                        $5,134       $3,272
                                                        ===================

3.   Property and Equipment

Property and equipment consist of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                        -------------------
                                                           (In Thousands)
     Diagnostic instruments                             $4,830       $2,762
     Machinery and equipment                             2,684        2,193
     Computers and related equipment                     1,970          945
     Leasehold improvements                                472          253
     Furniture and fixtures                                177          292
                                                        -------------------
                                                        10,133        6,445
     Less accumulated depreciation and amortization      4,028        3,144
                                                        -------------------
                                                        $6,105       $3,301
                                                        ===================


                                      F-10

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


4.   Intangible Assets

Intangible assets consist of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                        -------------------
                                                           (In Thousands)
     Customer base                                      $4,100       $4,100
     Developed technology                                2,800        2,800
     Goodwill, patents and other                         2,244        2,200
                                                        -------------------
                                                         9,144        9,100
     Less amortization                                   1,089          519
                                                        -------------------
                                                        $8,055       $8,581
                                                        ===================

5.   Other Current Liabilities

Other current liabilities consist of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                        -------------------
                                                           (In Thousands)
     Accrued payroll and payroll taxes                  $  421       $  435
     Accrued commissions                                   146          150
     Deferred revenue                                      334          816
     Accrued legal reserves                                946          432
     Sales tax payable                                     410          281
     Other accrued expenses                                637          788
                                                        -------------------
                                                        $2,894       $2,902
                                                        ===================

6.   Line of Credit

During  1997,  the  Company  had  $2,750,000  available  under a line of  credit
arrangement with a bank which is subject to renewal in February 1998. Borrowings
under the line are collateralized by the Company's  receivables and intellectual
property.  The line contains certain financial  covenants with which the Company
must comply and prohibits the payment of dividends on the  Company's  stock.  No
borrowings  were  outstanding  under the line at  December  31,  1997.  However,
$1,415,000  of the line of credit is not  available to the Company at this time,
as it supports irrevocable letters of credit issued by the bank.


                                      F-11

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


7.   Long-term Debt

Long-term debt consists of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                        -------------------
                                                           (In Thousands)
     Exchange Notes, repaid in 1997                     $   --       $6,067
     Notes payable to stockholders,
        repaid in 1997                                      --        4,846
     Notes payable to a customer, interest
        imputed at approximately 10%,
        repaid  through  discounts
        on future purchases                                471        1,587
                                                        -------------------
                                                        $  471      $12,500
                                                        ===================

The Exchange Notes were issued in connection  with the BioTek  acquisition  (See
Note 12). On March 25, 1996, approximately $3,016,000 of the Exchange Notes were
converted into common stock.

On October 18, 1996, the Company redeemed for $3.4 million Exchange Notes with a
face value of $3.7 million.  The resulting  gain on  extinguishment  of debt was
reflected in operating results in the fourth quarter of 1996.

The remaining  Exchange Notes were repaid in February  1997. In accordance  with
the note terms,  all interest was  forgiven,  as the Exchange  notes were repaid
prior to February 26, 1997.  The reversal of the $603,000 of previously  accrued
interest expense is included in operating results in the first quarter of 1997.

8.   Stockholders' Equity

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

On February  26, 1996,  the Company  sold 646,664  shares of common stock to two
directors of the Company and a related partnership at a price of $1.62 per share
for their  efforts and  assistance  in  completing  the BioTek  acquisition  and
assisting  management  with its  integration  of the  companies.  Receivables of
$901,000  due from the  directors  have  been  netted  against  Common  Stock at
December 31, 1997 and 1996. These loans,  including  interest at the rate of 6%,
were repaid on February 26, 1998.


                                      F-12

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


Upon closing of the  Company's  initial  public  offering on July 26, 1996,  all
outstanding  shares of its Series A, C and D  redeemable  Convertible  Preferred
stock were converted into 6,716,997 shares of Common Stock.

Warrants for the purchase of 727,884 shares of Common Stock were outstanding and
fully exercisable at December 31, 1997, at an exercise price of $5.82 per share.
These  warrants  may be  exercised  on a net basis  and will  begin to expire in
February 2001, to the extent not previously exercised.

Under the  Company's  1988 Stock Option Plan ("the 1988 Plan"),  up to 1,339,663
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  1,000,000  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 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 200,000  shares of common
stock have been reserved for issuance  under the 1996 Purchase  Plan. A total of
54,236 shares of common stock have been issued under the 1996 Purchase Plan at a
prices  ranging from $8.18 per share to $11.05.  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 fair market  value of the common  stock on
the lower of the first day of each 24 month  offering  period or the last day of
each subsequent purchase period.

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 is granted a  nonstatutory  option to
purchase an amount of shares of the Company's common stock equal to 5,000 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


                                      F-13

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


share of the  Company's  common  stock on the dates of grant.  A total of 40,200
shares have been issued under the Plan at $10.125 per share. 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 will  terminate in June 2001,
unless terminated earlier.

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.

Pro forma information regarding net 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  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 for 1997, 1996, and 1995:  risk-free  interest rate of 6.0%,  6.28%,
and 6.28% dividend yield of 0%,  volatility  factor of the expected market price
of the Company's common stock of .726 and .755 and .755, and an expected life of
the options of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which 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.


                                      F-14

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


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
                             --------------------------------------------
                                1997               1996            1995
                             --------------------------------------------
                               (In Thousands, except for per share data)
As reported                  $  (372)           $(11,281)         $(3,269)
Pro forma compensation
expense for stock options:
  1995 Grants                    (83)                (34)             (82)
  1996 Grants                   (281)               (268)              --
  1997 Grants                 (1,639)                 --               --
                             --------------------------------------------
Pro forma net loss                              $(11,583)          $3,351
                             $(2,375)
                             ============================================
Pro forma net loss per share $ (0.19)           $  (1.25)          $(0.44)
                             ============================================

Pro forma compensation expense presented may not be representative of future pro
forma expense, when amortization of multiple years of awards may be reflected.

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

                                       Outstanding Stock Options
                                 ---------------------------------------
                                                      Weighted Average
                                    Number of            Exercise
                                     Options           Price Per Share
                                 ---------------------------------------

Balance at January 1, 1995           612,777               $0.74
   Granted                           324,505                0.84
   Exercised                        (160,210)               0.36
   Canceled                         (126,618)               0.36
                                 ---------------------------------------
Balance at December 31, 1995         650,454                0.95
   Granted                           271,396                9.65
   Exercised                        (183,351)               0.89
   Canceled                          (23,264)               0.84
                                 ---------------------------------------
Balance at December 31, 1996         715,235                3.89
   Granted                         1,436,460               11.89
   Exercised                        (224,978)               1.71
   Canceled                         (299,596)               5.92
                                 ---------------------------------------
Balance at December 31, 1997       1,627,121              $10.88
                                 =======================================


                                      F-15

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


The weighted average fair values of stock options granted during 1997, 1996, and
1995 for which the  exercise  price  was equal to the fair  market  value of the
stock were $7.55, $7.42, and $0.63 per share, respectively. The weighted average
fair values of stock options granted during 1996 and 1995 for which the exercise
price  exceeded  the fair  market  value of the stock  were  $0.89 and $0.03 per
share.


<TABLE>
<CAPTION>
                                                       Stock Options at December 31, 1997
                                        ----------------------------------------------------------------
                                                                Weighted Average      Weighted Average
                                             Number of Options   Exercise Price    Remaining Contractual
  Range of Exercise Prices                      Outstanding        Outstanding              Life
--------------------------------------- ----------------------------------------------------------------
<S>                                               <C>                 <C>                     <C>
     $0.24 - $1.62                                199,252             $  0.90                 6.9
     $10.00 - $10.15                              323,434              $10.02                 9.3
     $12.25 - $13.50                              942,985              $12.41                 8.4
     $14.63 - $17.00                              161,450              $16.00                 7.9
                                        ----------------------------------------------------------------
        Totals                                  1,627,121              $10.88                 8.3
                                        ================================================================
</TABLE>

Options for the  purchase  of 164,042  shares were  immediately  exercisable  at
December 31, 1997. The weighted average  exercise price for exercisable  options
was $5.20 at December 31, 1997.

9.   Income Taxes

The Company's deferred tax assets consist of the following:

                                                            December 31,
                                                        -------------------
                                                         1997         1996
                                                       --------------------
                                                           (In Thousands)
     Non-current:
        Net operating loss carryforwards               $ 5,206      $ 5,396
        Capitalized research and development             2,755        2,650
        General business credit carryforwards              968          929
        Other                                              360          217
     Current:
        Miscellaneous                                    1,002          525
                                                       --------------------
     Total deferred tax assets                          10,291        9,717
     Valuation reserve                                 (10,291)     (9,717)
                                                       --------------------
     Net deferred tax assets                           $    --      $    --
                                                       ====================


                                      F-16

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


The valuation  allowance for deferred tax assets was increased by $574,000,  and
$1,135,000 in the years ended December 31, 1997 and 1996,  respectively to fully
offset deferred tax assets.

Temporary  differences  between the net operating losses for financial reporting
and income  tax  purposes  primarily  relate to the  deferral  of  research  and
development expenses for tax purposes.

At December 31,  1997,  the Company has net  operating  loss  carryforwards  for
federal and state income tax purposes of  approximately  $13.6 and $9.8 million,
respectively. These federal and state carryforwards will begin to expire in 1998
if not previously  utilized.  The Company also has research and  development tax
credit  carryforwards of approximately  $1,000,000 which will begin to expire in
2005, if not  previously  utilized.  Utilization  of the Company's net operating
loss  carryforwards  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
carryforwards,  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 carryforwards.

10.  Commitments and Contingencies

The  Company  conducts  its  corporate  operations  from leased  facilities.  In
addition to monthly  rental  payments,  the Company is  responsible  for certain
monthly operating and maintenance expenses of such facilities. The lease expires
in 2001. The future minimum rental payments under this and other operating lease
arrangements at December 31, 1997 are as follows:

                                                           (In Thousands)
                                                           --------------
                   1998                                         $  495
                   1999                                            396
                   2000                                            375
                   2001                                            147
                   2002                                             71
                   Thereafter                                        6
                                                           ------------
                                                                $1,490
                                                           ============

Rent  expense  totaled  $580,000,  $448,000  and  $188,000  for the years  ended
December 31, 1997, 1996 and 1995, respectively.


                                      F-17

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


In July 1997, the U.S. District Court in San Jose, California awarded a judgment
of approximately  $850,000 to a competitor based on alleged patent  infringement
by a  subsidiary  of the Company.  This amount was fully  expensed by the second
quarter of 1997. This matter is currently being appealed by the Company.

DAKO has initiated binding arbitration with the Company regarding the pricing of
the  Company's  TechMate  250  product.   Currently,  DAKO  is  purchasing  such
instruments at the price level  established by the Company.  The  arbitration is
scheduled for October 1998.

Four  former  BioTek  noteholders  have filed an action  against the Company and
certain of its directors and stockholders  alleging the Company violated federal
and California securities law and engaged in common law fraud in connection with
the BioTek  acquisition and conversion of BioTek notes. This matter does not yet
have a trial date.

The Company is also  involved  in various  other  actions  arising in the normal
course  of  business.   Management,   in  conjunction   with  outside   counsel,
periodically  reviews  such  matters and makes any  accruals  deemed  necessary.
Management is of the opinion that the  disposition of these claims will not have
a material effect on the Company's financial position or results of operations.

11.  Foreign Operations, Geographic, and Segment Data

The Company  operates  predominantly  in one  segment,  the  medical  diagnostic
devices  industry.  Inventory  transfers  to  foreign  subsidiaries  are made at
standard cost.  The following  summary  includes both net sales to  unaffiliated
customers and transfers between  geographic areas. The North America  operations
include  corporate  activity  that  benefits  the Company as a whole.  The North
America  geographic  area represents  primarily the United States.  The European
geographic area represents primarily France and Germany.


                                      F-18

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


                                               Year Ended December 31,
                                          --------------------------------
                                             1997        1996        1995
                                          --------------------------------
                                                   (In Thousands)
     Net Sales
        North America                     $ 28,808    $ 22,257    $  9,657
        Europe                               3,345       1,872         956
        Consolidated subsidiaries            2,691       1,896         521
                                          --------------------------------
                                            34,844      26,025      11,134
        Eliminations                        (2,691)     (1,896)       (521)
                                          --------------------------------
                                          $ 32,153    $ 24,129    $ 10,613
                                          ================================
     Net Income (Loss):
        North America                     $    198    $(10,130)   $ (2,654)
        Europe                                (221)       (869)       (363)
        Japan                                 (244)         --          --
                                          --------------------------------
                                              (267)    (10,999)     (3,017)
        Eliminations                          (105)       (282)       (252)
                                          --------------------------------
                                          $   (372)   $(11,281)   $ (3,269)
                                          ================================
     Identifiable Assets:
        North America                     $ 52,831    $ 49,589    $  8,823
        Europe                               3,842       1,526       1,099
        Japan                                  177          --          --
                                          --------------------------------
                                            56,850      51,115       9,922
     Eliminations                           (8,498)    (18,705)     (2,544)
                                          --------------------------------
                                          $ 48,352    $ 32,410    $  7,378
                                          ================================

12.  BioTek Acquisition

The  Company  acquired  BioTek  for $19.1  million on  February  26,  1996.  The
acquisition  has been  accounted  for as a  purchase.  The results of BioTek are
included in the accompanying  consolidated financial statements from the date of
acquisition.

The purchase price for BioTek consisted of:

                                                           (In thousands)
     Cash consideration                                        $ 2,500
     Stock issued to BioTek noteholders                          3,016
     Exchange Notes issued                                       8,968
     Note payable - escrow for contingencies                       234
     Net historical liabilities assumed                          4,389
                                                               -------
                                                               $19,107
                                                               =======


                                      F-19

<PAGE>


                          Ventana Medical Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


The purchase price was allocated as follows:

                                                           (In thousands)
     Tangible net assets                                       $ 2,252
     In-process research and development                         7,900
     Goodwill and other intangibles                              2,055
     Developed technology                                        2,800
     Customer base                                               4,100
                                                               -------
     Total purchase price                                      $19,107
                                                               =======

The  Company  charged  to expense at the date of the  acquisition  $7.9  million
relating to the portion of the  purchase  price  allocated  to those  in-process
research and development  projects where  technological  feasibility had not yet
been established and where there are no alternative  future uses. This amount in
included  as  a  component  of   nonrecurring   expenses  in  the   accompanying
consolidated  statements of operations.  The remaining  nonrecurring expenses of
$2.4 million consist of integration and other indirect acquisition costs.

Pro forma results of operations  for the years ended December 31, 1996 and 1995,
assuming  consummation  of the purchase as of January 1, 1995 and as adjusted to
reflect the sale of common stock by the Company and the  application  of the net
proceeds therefrom, are as follows:

                                                Year ended December 31,
                                            -------------------------------
                                                   1996        1995
                                            -------------------------------
                                            (Unaudited, in Thousands except
                                                  for per share data)
     Net sales                                  $ 25,211     $ 19,475
     Net loss                                   $ (2,353)    $(15,792)
     Net loss per share                         $  (0.22)    $  (1.74)



                                      F-20