<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K

                                 ANNUAL REPORT
                        PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 2000

                         Commission File No. 000-20931

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

                         VENTANA MEDICAL SYSTEMS, INC.
       (Exact name of small business issuer as specified in its charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       94-2976937
          (State of Incorporation)                             (IRS Employer
                                                            Identification No.)
      3865 North Business Center Drive
                 Tucson, AZ                                        85705
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

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

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

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

                                      None

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

                         Common Stock, $.001 par value

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

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

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

   The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $298,747,235 based upon the average of the high and low
prices of the Registrant's Common Stock reported for such date on the Nasdaq
National Market. Shares of Common Stock have been excluded in that such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of December 31,
2000, the Registrant had outstanding 15,444,122 shares of Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                 Not applicable

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<PAGE>

                                    PART I

Item 1. Description of Business

   This report on Form 10-K may contain projections, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
For a discussion of factors which may affect the outcome projected in such
statements, see "Cautionary Factors That May Affect Future Results," beginning
on page 14. While this outlook represents our current judgment on the future
direction of our business, such risks could cause actual results to differ
materially from our future performance listed below. We undertake no
obligation to release publicly the results of any revisions to these forward-
looking statements to reflect events and circumstances arising after the date
of this report on Form 10-K.

   For our current and historical financial positions, see "Selected Financial
Data," beginning on page 26.

Summary of Our Business

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

  .  Ventana Medical Systems GmbH

  .  Ventana Medical Systems Japan K.K.

  .  Ventana Medical Systems, Pty. Ltd.

  .  Ventana Medical Systems, S.A.

  .  BioTek Solutions, Inc.

  .  BioTechnology Tools, Inc.

   We develop, manufacture and market instruments and consumables that are
used to automate diagnostic and drug discovery procedures in clinical
histology laboratories and drug discovery laboratories worldwide. Our
instrument-reagent systems are designed to prepare and stain patient tissue or
cells mounted on a microscope slide for examination by a pathologist. The
consumable products we market that are required to operate our instruments
include reagents and other accessories. Our systems are designed to provide
users with high-quality and consistent results, high throughput and
significant labor savings. Our clinical products are used by histology labs,
which are labs that focus on the analysis of human tissue, to assist
anatomical pathologists in the diagnosis of cancer and infectious diseases.
Most histology labs are hospital based although some independent reference
labs offer histology services. Our drug discovery products are used by
research labs at large pharmaceutical and biotechnology companies and medical
research centers to assist in the discovery of new drugs. Our instruments have
been placed in the majority of the top fifty U.S. cancer centers, which are
recognized as leaders in cancer research and treatment as reported in the July
2000 issue of U.S. News and World Report. These include Johns Hopkins
Hospital, the Mayo Clinic, Memorial Sloan-Kettering Cancer Center and M.D.
Anderson Medical Center.

   Histology tests performed on our instruments are used by pathologists and
oncologists to assist in diagnosis of cancer and infectious diseases and to
select an appropriate therapy. According to the National Cancer Institute,
cancer is the second leading cause of death in the United States. Currently
8.4 million people in the U.S. have a history of invasive cancer. Mortality
rates are improved by early detection and the selection of appropriate
therapies. Based upon our modeling of the market, we estimate that histology
labs worldwide purchase in excess of $1.3 billion in instruments and
consumables on an annual basis. In addition, the pharmaceutical and
biotechnology companies who are analyzing the human genome and proteome to
accelerate new drug discovery also benefit from automating the analysis of
human and animal tissue and cells.

                                       1
<PAGE>

Industry Overview

   We target our instrument-reagent systems at two markets: the histology lab
and the drug discovery lab. We currently derive the majority of our revenues
and profits from ongoing sales of consumables to histology labs and the sale
of instrument systems, although we expect sales to research labs engaged in
drug discovery to grow over time.

 Histology

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

   Based upon a survey of hospitals, we estimate that there are about 6,000
histology labs worldwide. Of this total we estimate about 2,900 are in North
America, 2,000 in Europe and 1,100 in Japan and the remainder of the world.
Histology is principally a North American term. In many countries histology
(the analysis of tissue) and cytology (the analysis of cells) labs are
combined into a single anatomical pathology lab.

   All patient samples entering the histology lab move through seven basic
processing steps or work cells:

  .  Accessioning--Tissue is entered into the hospital information system for
     medical records and billing purposes.

  .  Grossing--Following accessioning, the gross patient tissue specimen is
     examined by a pathologist. Several tissue samples are then cut from the
     gross specimen for further examination and placed in small plastic
     cassettes.

  .  Tissue Processing--Cassettes from gross specimens are generated
     throughout the day and placed at the end of the day in an instrument
     called a tissue processor for overnight batch processing. Tissue
     processors preserve the tissue through the use of a fixative, usually
     formalin, and infusing the tissue with paraffin so it can be more
     readily sectioned or cut. An alternative to using a fixative is to
     freeze tissue and handle it in a frozen state although, we estimate that
     less than 5% of patient specimens entering histology labs are frozen.

  .  Embedding--The first activity that usually occurs in a histology
     laboratory each morning is to remove the processed tissue from each
     cassette and embed it in a paraffin block. This work is performed
     manually and is undertaken to produce a specimen of uniform size that
     can be cut on a microtome.

  .  Sectioning--Each tissue block is next transferred to the sectioning area
     of the lab where very thin sections are cut on a microtome and mounted
     on a microscope slide. The number of slides that are cut from each block
     varies according to the case and is usually determined by the
     pathologist who is performing the gross analysis.

  .  Hemotoxlyn and Eosin, or H&E, Staining--Each microscope slide is then
     stained with two basic stains, Hemotoxlyn and Eosin, that help the
     pathologist identify each cell's nucleus, cytoplasm and membrane.

  .  Microscopic Examination--Finally, each H&E stained slide is examined by
     a pathologist using a microscope to determine if the tissue or cells are
     healthy or diseased. In particular, the pathologist is looking for the
     presence of microorganisms that could indicate an infectious disease or
     deformed cells that could indicate the presence of cancer. In cases
     where an H&E stained slide appears to have abnormalities, the
     pathologist performing the initial examination of a patient specimen may
     request that the slide undergo additional testing. We estimate this
     happens in approximately 15% of cases.

                                       2
<PAGE>

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

  .  Immunohistochemistry, or IHC, stains are used primarily by pathologists
     and oncologists to assist in the diagnosis of cancer and to determine
     different treatment options. Pathologists use IHC stains to test for the
     presence or over expression of the proteins involved in cancer.

  .  Special Stains are used primarily to assist in the diagnosis of
     infectious diseases, although they can also be used to assist in cancer
     diagnosis. Special Stains are chemical dye stains that localize to
     microorganisms located in tissue and to specific tissue types.

  .  In situ hybridization, or ISH, stains can be used to assist in the
     diagnosis of infectious diseases or genetic mutations that are usually
     associated with the presence of cancer.

   We do not currently participate in all histology lab work cells. We
currently offer products that are used in tissue processing, IHC staining,
Special Stains and ISH staining.

   Tissue Processing. In developed nations, all histology labs have at least
one automated tissue processor instrument and most labs have two or more. In
less developed countries, tissue processing is still performed manually in
most labs. We estimate that the worldwide installed base of tissue processing
instruments is greater than 10,000 and, based upon our field experience, we
estimate annual shipments to be between 1,000 and 1,500 instruments. The size
of the annual market is driven primarily by replacements, although some
shipments reflect growth driven by an increase in surgical procedures. Tissue
processors consume a substantial quantity of reagents (fixatives, alcohol,
xylene, paraffin), however we do not participate in this reagent market.

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

  .  increasing acceptance of the value of the technology by pathologists and
     oncologists;

  .  the increasing incidence of cancer as the population ages;

  .  the emergence of new stains that may influence therapy choices; and

  .  the shifting of the market from manual to automated IHC slide
     processing.

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

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

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

   ISH Staining. The clinical market for ISH staining is currently very small
due to the difficulty of performing ISH stains manually and the small number
of stains accepted for clinical use. We expect automation to grow the clinical
market. Currently, the principal clinical tests are used to detect infectious
diseases, primarily

                                       3
<PAGE>

viruses, in tissue. However, ISH tests for genetic mutations may eventually
become important clinical tests. One of the few ISH genetic mutation tests
performed in the histology lab today is the test for Her-2/neu gene over-
amplification in cancerous breast tissue. This is currently a small market as
most laboratories prefer to measure Her-2/neu status using an IHC stain.

New Drug Research

   The research market for new drugs comprises over 500,000 researchers
worldwide located in labs operated by traditional pharmaceutical companies,
biopharmaceutical companies, governments and medical research centers. In
these labs, research is being conducted to determine the causes of disease and
the discovery of drugs to treat disease. Genomics, or the study of genes and
their function, is seeking to accelerate the drug discovery process by
understanding the molecular mechanisms of disease. The genomics revolution is
providing researchers with a dramatic increase in the number of potential drug
targets, such as a specific protein involved in a disease process, against
which to conduct screens of compound collections, or compound libraries.

   Genomics is the analysis of nucleic acids, which are the fundamental
regulatory molecules of life. Nucleic acids take two forms, DNA or RNA. These
molecules contain and convey the instructions that govern all cellular
activities, including protein manufacture and cell reproduction. DNA and RNA
consist of linear strands of nucleotide bases, the specific sequences of which
constitute the genetic information in the cell. The unique genetic blueprint
for all living organisms is encoded in the DNA. The entire DNA content of an
organism is known as its genome, which is organized into functional units
called genes. Any defect or mutation in the sequence of nucleotide bases in
the DNA or RNA can disrupt cell or protein function and lead to disease.

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

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

Business Strategy

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

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

  .  Provide high throughput, value-added testing systems for drug discovery
     applications. We intend to pursue the same broad strategies in the drug
     discovery market as we are pursuing in the histology market. We also
     intend to consider developing relationships with other organizations
     with complementary skills or technologies, which should allow us to
     quickly acquire capabilities we need in a rapidly changing market.

                                       4
<PAGE>

  .  Maximize placement of our automated systems in histology and drug
     discovery laboratories both domestically and worldwide. Rapidly
     automating manual work cells permits us to strengthen our competitive
     position by establishing a large base of instruments that current or
     future market entrants must overcome. We estimate that our worldwide
     installed base of IHC and Special Stains instruments is significantly
     larger than the combined installed bases of instruments of all of our
     current competitors. We believe that the size and quality of our direct
     sales coverage will permit us to maximize instrument placements and
     maximize revenue stream per placement.

  .  Ensure a steady sales stream of consumables for use in these
     instruments. Each IHC, Special Stain and ISH instrument placed typically
     provides us with a recurring revenue stream through the sale of reagents
     and other consumable supplies. Our strategy is to increase this revenue
     stream by converting all existing manual tests performed by the customer
     to full automation and by selling the customer all the required reagents
     for the automated tests. We intend to expand our menu of automated tests
     over time, which should increase the consumable revenue we receive from
     each instrument placement, as typically our systems are closed systems
     which can only be operated with consumables produced by us.

  .  Continue ongoing technological development and improvement of our
     instruments and reagents. We design all of our own products, unlike most
     of our competitors, who rely on outside design firms to create their
     instruments. We are developing new instruments and enhancing existing
     instruments and developing reagents for our installed base of
     instruments as well as for new products. Our engineering, marketing and
     reagent research and development organizations work closely with their
     manufacturing counterparts on all new products to ensure they can be
     produced cost effectively. We protect our designs with an aggressive
     intellectual property strategy.

History of the Company

   We were incorporated in California in 1985 by a pathologist practicing at
the University of Arizona Medical Center who was interested in automating IHC
staining. In 1989 we procured venture capital funding and launched our first
instrument-reagent system in 1991. In 1993 we were reincorporated in Delaware.
We have launched multiple new systems since then, some of which were developed
internally and some of which were acquired.

                                       5
<PAGE>

Our Products

   We market four product lines: tissue processors, IHC staining instruments,
Special Stains instruments and ISH staining instruments. All of these
instruments use consumables such as reagents, barcode labels, and wicking
pads, many of which we sell. Our product offerings are summarized in the table
below:

                               Product Offerings

<TABLE>
<CAPTION>
     Instrument          Targeted Customers            Uses               Consumables
     ----------          ------------------            ----               -----------
<S>                    <C>                    <C>                    <C>
Renaissance Tissue     Histology Labs         Fix tissue and embed   Yes--but largely
Processor                                     sample in paraffin.    supplied by third
                                                                     parties

TechMate 500 System    Histology Labs         Stain tissue with      10 accessory products
                       Reference Labs         antibodies and         2 detection systems
                                              detection chemistry    30 primary antibodies
                                              to identify proteins.

BenchMark IHC and ISH  Histology Labs         Prepare and stain      16 accessory products
System                 Reference Labs         issue with antibodies  6 detection systems
                                              and detection          30 primary antibodies
                                              chemistry to identify
                                              proteins. Prepare and
                                              stain tissue with
                                              probes and detection
                                              chemistry to help
                                              identify infectious
                                              diseases and genetic
                                              mutations.

NexES IHC System       Histology Labs         Stain tissue with      6 detection systems
                                              antibodies and         214 primary
                                              detection chemistry    antibodies
                                              to identify proteins.

NexES Special Stains   Histology Labs         Stain tissue with      14 accessory products
System                 Reference Labs         chemical dyes to       14 Special Stains
                                              identify
                                              microorganisms and
                                              specific types of
                                              tissue.

Discovery ISH and      Biotechnology          Hybridize nucleic      13 accessory products
IHC System             Companies,             acid microarrays with  2 detection systems
                       Pharmaceutical         ISH probes.
                       Companies, Government  Conduct mRNA studies
                       Labs, Medical          in tissue.
                       Research Labs          Prepare and stain
                                              tissue with
                                              antibodies and
                                              detection chemistry
                                              to identify proteins.
</TABLE>

 Tissue Processors

   We entered the tissue processing work cell when we acquired BioTechnology
Tools. BioTechnology Tools designed, manufactured and marketed through
distributors a tissue processor known as the PTP-1530 which we have
subsequently modified and now market as the Renaissance.

   Our Renaissance tissue processor is a batch instrument that can accommodate
up to 350 specimens at a time. This completely enclosed system can be
configured as a floor or bench top unit. It has easy-to-use software with
flexible programmability and a pulse magnetic stirrer that significantly
improves the quality of prepared

                                       6
<PAGE>

tissue. The Renaissance quality control system allows the customer to monitor
the quality of the reagents being used, and to extend the life of their
reagents using a paraffin cleaning system. We do not market a complementary
line of consumables with the Renaissance.

 Staining Systems and Associated Reagents

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

  .  improved reliability, reproducibility and consistency of test results;

  .  faster turnaround time for test results;

  .  increased test throughput for the testing;

  .  reduced dependence on skilled technicians;

  .  ability to obtain maximum clinical information from minimally-sized
     biopsies;

  .  ability to document processing protocols;

  .  enhanced cellular differentiation through multiple staining on a single
     slide; and

  .  standardization of slide preparation among institutions.

   In addition to these critical clinical and operational advantages, we have
determined that our automated approach has cost advantages as well.

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

   We currently market three IHC instrument systems with a full line of
complementary reagents and accessories. Our line of IHC products includes
batch-processing systems targeted to large hospital clinical labs and
reference labs and patient priority systems targeted to hospital clinical labs
and fast turn around time applications in reference labs. Although our
existing batch processing systems are "open," providing the customer with the
ability to purchase reagents from either us or other sources, the majority of
our United States customers with batch processing systems regularly purchase
reagents from us. Our patient priority systems are "closed" in that customers
must purchase detection chemistries from us in order to operate the
instruments.

   Our TechMate 500 batch processing instruments has a 120-slide capacity and
is 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. Our 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 500 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. In
North America, we directly manufacture and market reagents for use in our
TechMate systems. The TechMate 500 is applicable to both large and moderately
sized reference labs and large research labs.

   Our premier IHC system is the BenchMark which was launched in late 2000. We
believe this is a revolutionary instrument from two perspectives. First, it
automates all of the steps in the IHC workcell from "BTS" (baking through
staining), saving up to 90 minutes of manual preparatory work required prior
to an IHC run. Second, the BenchMark will perform both IHC and more complex
ISH stains. The BenchMark system is

                                       7
<PAGE>

barcode driven and is 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. Our 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 us. 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 BenchMark is based upon a modular design and an external personal
computer operating under a Windows 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 BenchMark and external personal
computer permits the linkage of up to eight BenchMark IHC/ISH or NexES Special
Stains modules together, creating the capacity to process up to 160 slides.
The BenchMark therefore offers users a significant degree of flexibility as
users can purchase from one to eight modules depending upon their test volume
requirements.

   Reagent products are composed of bulk reagents, for example, reagents that
remove paraffin from tissue samples and condition the cells, and dispenser
administered reagents such as primary antibodies and detection chemistries,
each of which is required for an IHC test. Customers that have patient
priority systems must use our detection chemistries on all tests. They have
the option of purchasing primary antibodies from us or other sources.
Customers who have our batch processing systems have the option of purchasing
both antibodies and detection chemistries from us or other sources. Users of a
majority of our United States installed batch processing systems regularly
purchase reagents from us.

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

   We sell a line of over 214 primary antibodies for use on our IHC systems.
These are used to detect antigens in combination with detection chemistry kits
on our instruments. The antibodies we market to perform IHC tests currently
account for more than 90% of total IHC test volume.

   We estimate that detection chemistries typically account for approximately
60% of the total expenditures for reagents required to perform IHC tests using
our instruments. This figure will decrease as we continue to place BenchMarks.
Reagents used to prepare tissue prior to applying a primary antibody will
become an important source of revenue to us. We produce 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
using proprietary formulations which, when combined with our primary
antibodies and other reagents, optimize the results of tests performed on our
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. We currently sell DAB and Alkaline Phosphatase
Red for use with our batch processing instruments. The detection kits are
designed to perform tests on a wide variety of specimens, so a lab can, for
example, perform tests on tissue preserved in paraffin and on frozen tissue
simultaneously. Our 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.

   We offer a line of consumable ancillary products that are necessary for
processing slides on our 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

                                       8
<PAGE>

instruments, we also supply 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, we also provide 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.

   Special Stains. In late 1998, we launched our second instrument-reagent
system which handles Special Stains testing. It was the first automated
Special Stains system offered to histology labs. We believe that we have
established ourselves as the clear market leader in this product segment. We
supply both an automated instrument for Special Staining and all the reagents
needed to operate the instrument. Two competitors have entered the automated
Special Staining market since we launched our system.

   The Special Stains module can be operated by the same control computer that
operates our NexES IHC modules. Any combination of up to eight Special Stains
and IHC modules may be operated by a single control computer. This flexibility
enables customers to design a combination Special Stains/IHC system that meets
the specific needs of their lab. It also provides future flexibility for
handling lab growth.

   The Special Stains module uses a different approach for dispensing reagents
than the IHC system. The Special Stains aspiration and dispense system permits
us to use a low cost container for our reagents.

   We currently market fourteen different Special Stains kits that we estimate
account for approximately 90% of all types of Special Stains performed in
histology labs. We plan to expand this test menu in the future so that our
Special Stain system can meet more than 95% of most laboratories Special
Staining needs. All of our Special Stain kits were developed using proprietary
protocols.

   ISH Staining. We entered the ISH staining market with the launch of our
GenII system in 1995. The GenII was primarily sold into the drug discovery
market although some instruments were placed in histology labs for clinical
use. We have not aggressively marketed the GenII in recent years due to high
field support requirements and low consumption of reagents and accessories.
Our recently launched BenchMark instrument has ISH capability. We plan to
leverage this capability with a broad menu of clinical ISH tests. ISH tests to
identify Epstein Barr Virus and Cytomegalovirus were launched in late 2000.
This menu will be supplemented with the launch of Human Papilloma Virus and
Her-2/neu gene amplification tests in early 2001.

   We launched an ISH and IHC staining system for drug discovery labs in
December 1999 called the Discovery. The Discovery system can function as a
high throughput processor of DNA and RNA microarrays. It can also be used as a
high throughput processor of tissue stains used to validate gene drug leads.
We anticipate that this system will primarily be sold to companies involved in
drug research.

   The Discovery staining system consists of a staining module and a full line
of complementary reagents and accessories. The "front-end" of the system is
open, permitting researchers to use their own molecular probes in searching
for genetic mutations or antibodies in searching for proteins. The "back-end"
of the system, consisting of detection chemistry that attaches to the
molecular probe or protein and permits the researcher to visualize the target,
is closed and must be purchased from us. The only exception to this is where
the detection chemistry is mounted on the target probe. This is the case when
a fluorescent in situ hybridization, or FISH, stain is performed.

   Like the BenchMark system, the Discovery system incorporates a number of
important technological advances over our earlier NexES IHC and Special
Staining systems. The principal advantage is the ability to accurately control
the reaction temperature. In contrast, the NexES IHC and Special Stain modules
heat the entire reaction chamber to a pre-set temperature and maintain that
temperature during the entire processing cycle. Individual slide heaters in
the Discovery permit an optimal protocol to be developed for each test. It
also permits the unwinding or denaturing step that is critical to detecting
DNA abnormalities. We have filed a number of patents to protect inventions
incorporated into the Discovery system. Many of these inventions are also
incorporated in our BenchMark system.

                                       9
<PAGE>

   Our Discovery system is currently being used, or tested for use, in the
following drug discovery applications:

  .  Processing Nucleic Acid Microarrays. These assays are used to identify
     genes that are possible targets for drug therapy. Our Discovery
     instrument can be used to process DNA and RNA assays.

  .  Processing Tissue Samples. Companies engaged in drug discovery are
     confirming gene and protein in traditional tissue slides. Our Discovery
     instrument can be used to detect gene expression levels in tissue and to
     identify protein levels in tissue.

Research & Development

   Our research and development group is divided into two teams: one that is
responsible for instrument development and a second which develops staining
protocol and reagents. We have focused our efforts on the development of
innovative combined instrument-reagent systems. We are developing new
instruments and enhancing existing instruments. In addition, we are developing
reagents for our installed base of instruments as well as for new products.

   Our research and development activities are performed primarily by our
staff of 76 employees. These efforts are supplemented by consulting services
and assistance from scientific advisors. We spent $11.1 million in 2000,
$7.1 million in 1999 and $5.1 million in 1998 on research and development.

 Instrumentation Development Projects

   Our instrumentation development is focused on continuous product
improvement and new product development. We believe that the modular platform
used by our NexES IHC system has enabled us to develop new products more
rapidly. We implemented this strategy with the launch of the NexES Special
Stains system in 1998, our Discovery System launched in late 1999 and the
BenchMark launched in late 2000. We expect to continue this modular
development strategy in the future. We continue to explore new opportunities
in instrument systems that add value to our customer, including automating
other manual processes in the histology lab.

 Reagent Development Projects

   Our reagent development is divided into five principal areas:

  .  new antibody development;

  .  detection chemistries;

  .  Special Stain chemistries;

  .  ISH clinical chemistries for BenchMark; and

  .  ISH and IHC applications for the Discovery.

   We continue to monitor third-party development of new primary antibodies
and will license or purchase these as appropriate. Primary antibodies are used
to identify abnormal levels of patient expression which assists pathologists
in recommending treatment protocols for cancer patients. We also continue to
improve the sensitivity and specificity of our detection chemistries. New
detection chemistries with higher signal strength and lower background noise
were introduced in early 1999.

   Reagent development also supports the development of new instrument
systems. A complete reagent product line was introduced in conjunction with
the October 1998 launch of the Special Stain module. Development of reagents
to support our Discovery ISH instrument is ongoing. These include applications
to hybridize microarrays and to conduct message expression studies in tissue.

                                      10
<PAGE>

Customers

   Our customers consist of clinical histology labs and the drug discovery
labs of large pharmaceutical companies, biotechnology companies, government
labs and medical research centers. None of our customers accounted for more
than 5% of our consolidated revenues in 2000, 1999 or 1998.

Patents and Proprietary Rights

   We have pursued a strategy of patenting key technologies that relate to
both the automation and chemistry of analyzing cells and tissues on microscope
slides. We presently own 32 United States patents and numerous corresponding
foreign patents. We have also filed patent applications in the U.S. and abroad
that cover research and development as it relates to existing and future
products. In 2000, three of our U.S. patents issued. We also have access to
some key technology through exclusive and nonexclusive licenses, such as
patented Human Papilloma Virus sequences.

   Our patent portfolio is divided roughly into two segments: instruments and
reagents. Patents and applications related to instruments include:

  .  three U.S. patents directed to the Liquid Cover Slip(TM) technology;

  .  the suite of patents related to the TechMate instrument that covers all
     aspects of the instrument including the algorithm for the interleaving
     of steps of a run;

  .  two separate U.S. patents on reagent dispenser designs;

  .  apparatus for automated IHC tissue staining; and

  .  independently heatable slide staining apparatus.

   Reagent patents and applications include:

  .  tissue fixatives;

  .  hybridization methods and compositions;

  .  IHC staining methods and reagents;

  .  biotin/avidin formulations and methods; and

  .  compositions for manual and automated assessment of various types of
     cancer including breast, leukemia and prostate.

Sales and Marketing

   Our histology lab strategy involves providing customers with superior
levels of customer service. We believe this can only be achieved by selling
our products directly to customers, rather than through distributors, in our
major markets and by controlling our own telephone and field service forces.

   Based on our experience in the industry, we believe we have the world's
largest direct sales force covering histology labs. We believe that the size
and quality of our direct sales coverage will permit us to maximize instrument
placements and maximize revenue stream per placement. This sales force is
organized geographically by region in North America and by country
internationally. In North America we also have a separate sales organization
focused solely on national and key accounts. In North America, Japan and in
most major European markets we sell all of our products on a direct basis. In
most other countries, we rely on distributors to sell and service our
products.

   We also have a dedicated Worldwide Marketing team responsible for
identifying new product opportunity, working with R&D on product development
and driving revenues worldwide through tactical marketing support.


                                      11
<PAGE>

   We are in the process of building separate tactical marketing and sales
organizations in North America, Western Europe and Japan to cover the drug
discovery labs of biotechnology and pharmaceutical companies and medical
research labs. These sales forces will primarily promote our Discovery
instruments and related consumables.

   In addition to maintaining direct sales organizations in our major markets,
we also maintain direct customer telephone and field service operations. This
permits us to maintain a close relationship with our customers which we hope
to leverage from instrument placement, through reagent and consumable sales to
instrument replacement. This relationship will also allow us to provide high
quality and rapid service in response to customer feedback.

   We also have a comprehensive customer education program, which includes on-
site technical training in instrument use, user group meetings and sponsored
national teleconferences with leading medical experts who regularly update our
customers on diagnostic and testing developments.

Competition

   We face a wide array of different competitors in the histology lab and drug
discovery markets. In many product segments our competitors have substantially
greater experience than us and far greater name recognition by our customers.
In most product segments competition is intense and is based on product
performance and price, the breadth of a company's product line, and after-
sales service.

 Histology

   Our competitors in histology vary by product category. Our principal
competitor in tissue processing is Sakura Fine Technical Co., Ltd., a
privately held Japanese company with far greater market share, experience and
name recognition than we have. Additional competitors in tissue processing
include Leica Microsystems Group, a German based competitor, and Thermo
BioAnalysis Group, a U.S. public company that owns Shandon Lipshaw, a
formidable competitor worldwide in histology lab equipment. Despite the strong
entrenched competition in this segment we believe we are increasing our market
share through strong sales increases of our Renaissance tissue processor.

   We are the market share leader in automated IHC staining. We have a
worldwide installed base of instruments that exceeds all of our competitors
combined. Historically, we have also placed more new instruments each year
than all of our competitors combined. Nevertheless, we face strong competition
on two fronts. Indirect competition comes from the manual method of performing
IHC tests. A number of histology labs in the U.S. and the majority of
histology labs outside the U.S. still perform their IHC slide staining
manually. Significant barriers to automation of this process exists in some
countries where reimbursement for IHC tests by insurance companies and
government health care plans is low. Further, significant barriers to
automation exist in a number of labs where pathologists prefer manually
stained slides which were created using their own staining protocols.

   Direct competition currently comes from four competitors who market
instrument-reagent IHC staining systems. The competitors are Dako, a privately
held Danish company that dominates the market for manual IHC reagents;
BioGenex Laboratories, Inc., a privately held U.S. company that markets its
own instrument and line of reagents; LabVision Corporation, a subsidiary of
publicly traded Sybron Corporation, supplies Dako with instruments and also
markets its own instruments both on a direct basis and through distributors in
most major markets and Diagnostics Products Corp., which markets a high volume
IHC slide stainer, principally in Europe.

   Two automated Special Staining systems compete with our Special Staining
module. CytoLogix Corp., a venture-backed, U.S.-based, early-stage company
markets the Artisan Staining System. The CytoLogix system has expanded its
menu of reagents to include IHC stains and potentially ISH stains. BioGenex
also markets a line of Special Stains instruments called Optimax which was
originally designed for IHC staining. We believe

                                      12
<PAGE>

that the initial success we have enjoyed in automating the Special Stains
market will attract additional competitors.

 Drug Discovery

   The two principle drug discovery applications we are focusing on are
hybridizing nucleic acid microarrays and conducting messenger RNA expression
studies in tissue. Other companies providing nucleic acid microarray
hybridizers include Genomic Solutions, Inc. and Molecular Dynamics, subsidiary
of publicly traded Amersham Pharmacia Biotech. We do not currently face any
other competitors that provide automated systems for conducting messenger RNA
studies in tissue. We also sell Discovery IHC staining capabilities to drug
discovery labs. Other competitors providing this capability include our
clinical IHC competitors Dako and BioGenex, among others.

Manufacturing

   We manufacture all of our own instruments except the TechMate 500 system.
This product is produced by a third-party manufacturer and accounts for only a
small portion of our total sales. We maintain three manufacturing facilities--
an instrument manufacturing facility located in Tucson, Arizona, a separate
reagent manufacturing facility also located in Tucson, Arizona and a second
reagent manufacturing facility located in Gaithersburg, Maryland. We have
announced plans to relocate our Gaithersburg, Maryland facility and
consolidate our manufacturing operations in the third quarter of 2001 into our
new facility under construction near Tucson, Arizona.

   Our manufacturing operations are required to follow the FDA Quality Systems
Regulations. These regulations require us to maintain documentation and
process control in a prescribed manner with respect to manufacturing, testing
and quality control. We are also subject to FDA inspections to verify
compliance with FDA requirements. We also intend to implement manufacturing
policies and procedures that will enable us to receive ISO 9001 certification.
ISO 9001 standards are global standards for design and manufacturing process
control and quality assurance. Finally, we are required to obtain the CE mark
for sale of our 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.

Contracts

   We place instruments through direct sales, including nonrecourse leases,
instrument rentals and our Performance Evaluation Period program. The program
is intended to permit a customer to use an instrument, generally for a period
of up to three months, provided that the customer purchases all the
consumables needed to operate the instrument from us. At the end of the three-
month period, the customer elects to purchase, rent or return the system. For
placement of instruments under this program, we incur the cost of
manufacturing instruments and we recognize revenue only at the time the
instrument is either sold or rented rather than at the time of instrument
placement.

Employees

   As of December 31, 2000 we had approximately 515 full-time employees,
including our 12 officers.

                                      13
<PAGE>

Cautionary Factors That May Affect Future Results

Risks Relating to              Our ability to sustain revenue growth and
Availability of Third-Party    profitability may depend on the ability of our
Reimbursement and Potential    customers to obtain adequate levels of third-
Adverse Effects of Health      party reimbursement for use of certain
Care Reform                    diagnostic tests in the United States, Europe
                               and other countries. Currently, the
                               availability of third-party reimbursement is
                               limited and uncertain for some IHC tests.

                               In the United States, our products are
                               purchased primarily by medical institutions and
                               laboratories 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 our customers if they
                               determine that a prescribed device or
                               diagnostic test has not received appropriate
                               FDA or other governmental regulatory clearances
                               or approvals, is not used in accordance with
                               cost-effective treatment methods as determined
                               by the payor, or is experimental, unnecessary
                               or inappropriate. The success of our products
                               may depend on the extent to which appropriate
                               reimbursement levels for the costs of such
                               products and related treatment are obtained by
                               our customers from government authorities,
                               private health insurers and other
                               organizations, such as health maintenance
                               organizations, or HMOs.

                               Third-party payors are increasingly challenging
                               the prices charged for medical products and
                               services. The trend towards managed health care
                               in the United States and the concurrent growth
                               of organizations such as HMOs could
                               significantly influence the purchase of health
                               care services and products.

                               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.

A reduction in government      A portion of our products are sold to
funding to research centers    universities, research laboratories, private
will reduce their ability to   foundations and other institutions where
purchase our products          funding is dependent upon grants from
                               government agencies, such as the National
                               Institutes of Health. Research funding by the
                               government could be significantly reduced. Any
                               such reduction may materially affect the
                               ability of many of our research customers to
                               purchase our products.

                                      14
<PAGE>

Future operating results may   Our operating results may fluctuate depending
fluctuate depending on:        on sales of instruments and sales of reagents.
                               If our actual earnings in a given quarter under
                               perform analyst estimates, our stock price
                               could be adversely affected.

 --how many instruments we     The initial placement of an instrument is
   sell and under what terms   subject to a longer, less consistent sales
   they are sold               cycle than the sale of reagents, which begin
                               and are typically recurring once an instrument
                               is placed. Instruments are typically sold in
                               the latter part of a quarter and in the fourth
                               quarter of the year due to capital expenditure
                               buying patterns of our customers. The degree of
                               fluctuation will depend on the timing, level
                               and mix of instruments placed through direct
                               sales and instruments placed through
                               Performance Evaluation Period programs and
                               rentals. Our 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.

 --changes in our sales        Historically we have experienced turnover in
   force                       our sales force. A portion of our sales force
                               is new and we have recently restructured our
                               sales program. If we fail to replace members of
                               our sales force in a timely manner or if our
                               training programs are not successful, it may
                               adversely affect our ability to sell
                               instruments and reagents.

 --how much reagent our        In addition, average daily reagent use by
   customers use               customers may fluctuate from period to period,
                               which may contribute to future fluctuations in
                               revenues.

 --our operating results may   Other factors that may result in fluctuations
   be effected by other        in operating results include:
   factors

                               .  the timing of new product announcements and
                                  the introduction of new products and new
                                  technologies by us and our competitors;

                               .  our ability to collect receivables and
                                  maximize payables;

                               .  market acceptance of our current or new
                                  products;

                               .  quarter-to-quarter buying patterns of our
                                  customers;

                               .  developments with respect to regulatory
                                  matters;

                               .  availability and cost of raw materials from
                                  our suppliers;

                               .  competitive pricing pressures;

                               .  increased research and development expenses;
                                  and

                               .  increased marketing and sales expenses
                                  associated with the implementation of our
                                  market expansion strategy for our instrument
                                  and reagent products.

                                      15
<PAGE>

Our inability to protect our   Our inability to protect our patents and other
patents and other              proprietary rights could adversely affect our
proprietary rights could       business. We currently hold 32 United States
adversely affect our           patents and numerous corresponding foreign
business                       patents and we have filed additional United
                               States and foreign patent applications. The
                               expiration dates of our issued United States
                               patents range from September 2005 to November
                               2013.

 --we now own a number of      We cannot assure you that our patent
   U.S. patents and we have    applications will result in patents being
   applied for others but we   issued or that any issued patents will provide
   cannot assure you that we   adequate protection against competitive
   will be issued new          technologies or will be held valid if
   patents                     challenged. Others may independently develop
                               products or processes similar to ours or design
                               around or otherwise circumvent our patents.

 --we cannot be sure that we   We cannot be certain that we were the first
   were the first to create    creator of inventions covered by our patents or
   any of our inventions       pending patent applications or that we were the
   because of the way the      first to file patent applications for such
   U.S. patent system works    inventions. Patent applications in the United
                               States are maintained in secrecy until patents
                               are issued and publication of discoveries in
                               scientific literature tends to lag behind
                               actual discoveries by several months.
                               Therefore, we cannot be certain that we were
                               the first creator of inventions covered by our
                               patents or pending patent applications or that
                               we were the first to file patent applications
                               for such inventions.

 --if we are using             We may have to participate in "interference"
   inventions that have been   proceedings declared by the United States
   patented by others we       Patent and Trademark Office to determine the
   would have to stop using    priority of inventions. This could result in
   the invention, obtain a     substantial costs for us. If any of the claims
   license for it or           of third-party patents that purport to
   redesign our product to     interfere with one of our patents or patents
   get around the relevant     pending are upheld as valid and enforceable, we
   patent                      could be prevented from using the subject
                               matter claimed in those patents. Alternatively,
                               we would be required to obtain licenses from
                               the patent owners of each of those patents or
                               to redesign our products or processes to avoid
                               infringement. We cannot assure you that we
                               would be able to obtain a license or, if we
                               could, that the terms available would be
                               acceptable to us or that we would be successful
                               in any attempt to redesign our products or
                               processes to avoid infringement.

 --if we cannot get a          If we do not obtain the necessary licenses, we
   license from the owner of   could be subject to litigation and we could
   a patent and we cannot      encounter delays in product introductions while
   design around the patent    we attempt to design around such patents.
   we may be subject to        Alternatively, the development, manufacture or
   litigation                  sale of such products could be prevented.
                               Litigation would result in significant cost to
                               us as well as diversion of management time. We
                               cannot predict the outcome of this type of
                               litigation. If litigation is decided against
                               us, our results of operations would suffer.

                                      16
<PAGE>

 --we also rely on trade       We also rely upon trade secret protection for
   secret protection for our   our confidential and proprietary information.
   confidential and            We cannot assure you that others will not
   proprietary information     independently develop proprietary information
                               or techniques similar to ours, gain access to
                               our trade secrets or disclose our technology,
                               or that we can effectively protect our trade
                               secrets. If we are forced to litigate to
                               protect our trade secrets we would have to
                               absorb significant costs as well as diversion
                               of our management. If any of the litigation we
                               undertake is unsuccessful and results in the
                               disclosure of our trade secrets our results of
                               operations would suffer.

 --we cannot assure you that   Our policy is to require our employees,
   confidentiality             consultants and significant scientific
   agreements with our         collaborators to sign confidentiality
   employees, consultants      agreements when they begin work with us. These
   and collaborators will      agreements generally provide that all
   serve their intended        confidential information developed or made
   purpose                     known to the individual during the course of
                               the individual's relationship with us is to be
                               kept confidential and not disclosed to third
                               parties except in specific circumstances.
                               Agreements with employees provide that all
                               inventions conceived by the individual while
                               working for us are our exclusive property.
                               However, we cannot assure you that these
                               agreements will not be broken or that they will
                               provide meaningful protection or adequate
                               remedies for unauthorized use or disclosure of
                               our trade secrets.

Effectively managing our       We have grown and continue to grow rapidly both
growth may be difficult        by adding new products and hiring new
                               employees. This growth is likely to place a
                               significant strain on our managerial,
                               accounting, operational and financial resources
                               and systems. To manage our growth, we must
                               implement systems and train and manage our
                               employees. If we are not successful in managing
                               our expanding operations effectively, we may
                               experience operating problems such as customer
                               service issues, reduced sales, and internal
                               operating issues.

                               Some of our senior management have only
                               recently joined us. Of the 12 employees listed
                               in the management section of this prospectus, 3
                               have worked for us less than one year. We
                               cannot assure you that our management will be
                               able to effectively or successfully manage our
                               growth.

Our ability to develop new     Our future growth and profitability will be
products will be important     dependent, in large part, on our ability to
to our success:                develop, introduce and market new instruments
                               and reagents used in diagnosing and selecting
                               appropriate treatment for cancer and additional
                               disease states. Our products could also be
                               rendered obsolete or noncompetitive by virtue
                               of technological innovations in the fields of
                               cellular or molecular diagnostics.

 --our ability to develop      We depend in part on the success of medical
   new products is partly      research done by others in developing new
   dependent on the work of    antibodies, nucleic acid probes and clinical
   others and our ability to   diagnostic procedures that can be adapted for
   license their work          use in the our systems. We will then need to
                               license certain of these technologies. We may
                               not be able to get these licenses on terms that
                               would allow us to economically develop and
                               market new instruments. If this were to occur
                               our operating results would suffer.

                                      17
<PAGE>

 --if any of our products      We have products that are currently under
   under development or        development, initial testing or preclinical or
   those planned for           clinical evaluation and we have other products
   development are not         that are scheduled for future development.
   successful our operating    These products:
   results would suffer

                               .  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.

                               If any of these things were to occur our
                               operating results would suffer.

A large portion of our         A significant portion of our expense levels are
expenses are fixed so if our   based on our expectation of a higher level of
revenues are below             revenues in the future and are relatively fixed
expectations we may not        in nature. Therefore, if revenue levels are
perform as expected            below expectations, operating results in a
                               given period are likely to be adversely
                               affected because we will not be able to spread
                               these expenses over a larger revenue base.

We need to persuade the        The use of automated systems to perform
medical community of the       diagnostic tests is relatively new.
benefits of our products in    Historically, the diagnostic tests performed by
order to be successful         our systems have been performed manually by
                               laboratory personnel. Our ability to sell our
                               products will be largely dependent on our
                               ability to persuade the medical community of
                               the benefits of automated diagnostic testing
                               using our products. The quality and price of
                               our products as compared to manual testing and
                               as to our competitor's products will affect
                               acceptance and sales of our products.

Our products are subject to    The manufacturing, marketing and sale of our
extensive government           products are subject to extensive government
regulation in the U.S. and     regulation in the U.S. and in other countries.
abroad                         The process of obtaining and maintaining
                               regulatory approval can be lengthy, expensive
                               and uncertain.

 --in the U.S. our products    In the U.S. the FDA regulates, as medical
   are regulated as medical    devices, instruments, diagnostic tests and
   devices by the FDA          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.
                               The FDA has recently promulgated a rule that
                               regulates the reagents sold to clinical
                               laboratories as analyte specific reagents. The
                               rule restricts sales of these reagents to
                               clinical laboratories certified under the
                               Clinical Laboratory Improvement Amendments of
                               1988, or CLIA, as high complexity testing
                               laboratories. We intend to market some
                               diagnostic products as finished test kits or
                               equipment and others as individual reagents;
                               consequently, some of these products are
                               regulated as analyte specific reagents.

                                      18
<PAGE>

 --the specific requirements   The Federal Food, Drug, and Cosmetic Act
   that we must follow are     governs the design, testing, manufacture,
   contained in the Federal    safety, efficacy, labeling, storage, record
   Food, Drug, and             keeping, approval, advertising and promotion of
   Cosmetic Act                our products. There are two principal FDA
                               regulatory review paths for medical devices:
                               the 510(k) pre-market notification process and
                               the pre-market approval, or 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.

 --Medical devices require     Medical devices generally require FDA approval
   FDA approval prior to       or clearance prior to being marketed in the
   being marketed in the       United States. The process of obtaining FDA
   U.S.                        clearances or approvals necessary to market
                               medical devices can be time-consuming,
                               expensive and uncertain, and we cannot assure
                               you that any clearance or approval we seek will
                               be granted or that FDA review will not involve
                               delays which would harm our ability to market
                               and sell our products.

                               Further, clearances or approvals may be
                               conditional in that they place substantial
                               restrictions on the indications for which the
                               product may be marketed or to whom it may be
                               marketed. We can also not assure you that the
                               FDA will not require additional data, require
                               us to conduct further clinical studies or
                               obtain a PMA causing us to incur further cost
                               and delay.

 --although our IHC and ISH    With respect to automated IHC testing
   products have not needed    functions, our instruments have been
   510(k) approval to date     categorized by the FDA as automated cell
   some of our future          staining devices and have been exempted from
   products may                the 510(k) notification process. To date, ISH
                               tests have not received FDA approval or
                               clearance and, therefore, use of the Discovery
                               for ISH tests will be restricted to research
                               applications. New instrument products that we
                               may introduce could require future 510(k)
                               clearances.

 --some of our antibody        Certain antibodies that we may wish to market
   products may require PMA    with labeling indicating that they can be used
   approval if we market       in the diagnosis of particular diseases may
   them in a certain way       require PMA approval. In addition, the FDA has
                               proposed that some of the antibody products
                               that we may wish to market be subjected to a
                               pre-filing certification process. Certain of
                               our products are currently sold for research
                               use and are labeled accordingly.

 --if we do not comply with    If we do not comply with applicable regulatory
   regulatory requirements,    requirements we could be subject to, among
   or we fail to get           other consequences, fines, injunctions, civil
   approval for our            penalties, suspensions or loss of regulatory
   products, our results of    approvals, recalls or seizures of products,
   operations would suffer     operating restrictions and criminal
                               prosecutions. In particular, the FDA enforces
                               regulations prohibiting the marketing of
                               products for non-indicated uses. In addition,
                               governmental regulations may be established
                               that could prevent or delay regulatory approval
                               of our products. Delays in or failure to
                               receive approval of products we plan to
                               introduce, loss of or additional restrictions
                               or limitations relating to previously received
                               approvals, other regulatory action against us
                               or changes in the applicable regulatory climate
                               could individually or in the aggregate cause
                               our results of operations to suffer.

                                      19
<PAGE>

 --we and our customers are    We are also required to register as a medical
   inspected for compliance    device manufacturer with the FDA and are
   with FDA regulations        inspected on a routine basis by the FDA for
                               compliance with their regulations. Our clinical
                               laboratory customers are subject to CLIA, which
                               is intended to ensure the quality and
                               reliability of medical testing.

 --other laws and              In addition to these regulations, we are
   regulations may adversely   subject to numerous federal, state and local
   affect our operations       laws and regulations relating to such matters
                               as safe working conditions and environmental
                               matters. We cannot assure you that these laws
                               will not adversely affect our results of
                               operations in the future.

There are risks associated     We may make additional acquisitions of
with the acquisition of        complementary businesses, products or
businesses, products or        technologies in the future. Acquisitions of
technologies                   companies, divisions of companies, or products
                               entail numerous risks, including:

                               .  the potential inability to successfully
                                  integrate acquired operations and products
                                  or to realize anticipated synergies,
                                  economies of scale or other value;

                               .  diversion of management's attention; and

                               .  loss of key employees of acquired
                                  operations.

 --acquisitions may not be     We cannot assure you that we will not incur
   profitable and returns      problems with respect to any future
   may not justify the price   acquisitions, or that any future acquisitions
   we paid                     will increase our profitability. We can also
                               not assure you that we will realize value from
                               any acquisitions which would justify the
                               consideration paid. Any problems like these
                               could cause our results of operations to
                               suffer.

 --we may issue more stock,    Any future acquisitions may also result in the
   borrow more money, incur    issuance of shares of our equity securities,
   one-time expenses or        including our common stock. The issuance of
   create goodwill             additional shares of our common stock could
                               affect the market price. We might also borrow
                               more money, have large one-time write-offs and
                               create goodwill or other intangible assets that
                               could result in amortization expense. These
                               factors may cause our results of operations to
                               suffer.

We might be affected if a      In the future, our ability to sell instruments
competitor develops and        and reagents might be affected by the design of
markets a new instrument       our systems, which require that customers buy
that uses cheaper reagents     their reagents from us. This would be
                               especially true if and to the extent that
                               competitors are successful in developing and
                               introducing new IHC instruments or if they
                               offer reagent supply arrangements having
                               pricing or other terms more favorable than
                               those offered by us. Increased competition in
                               reagent supply could also affect sales of
                               reagents to batch processing instrument
                               customers since those instruments do not
                               require the use of our reagents.

                                      20
<PAGE>

We depend on key personnel     We are dependent upon the retention of
with whom we have no           principal members of our management, Board of
employment contracts           Directors, scientific, technical, marketing and
                               sales staff and the recruitment of additional
                               personnel. We do not have employment agreements
                               with any of our executive officers and we do
                               not maintain "key person" life insurance on any
                               of our personnel. We compete with other
                               companies, academic institutions, government
                               entities and other organizations for qualified
                               personnel. If we could not hire or retain
                               qualified personnel it would cause our results
                               of operations to suffer.

Manufacturing Risks

 --as we increase production   We have only manufactured patient priority
   of our products we may      instruments and reagents for commercial sale
   experience problems in      since late 1991, and manufacturing of our
   production                  Techmate 500 instrument is performed by third
                               parties. As we continue to increase production
                               of such instruments and reagents and develop
                               and introduce new products, we may from time to
                               time experience difficulties in manufacturing.
                               We must continue to increase production volumes
                               of instruments and reagents in a cost-effective
                               manner in order to be profitable.

 --we must stay in             To increase production levels, we will need to
   compliance with the rules   scale-up our manufacturing facilities, increase
   and regulations of          our automated manufacturing capabilities and
   various agencies as we      continue to comply with FDA Quality Systems
   increase production         Regulations and other standards prescribed by
                               various federal, state and local regulatory
                               agencies in the United States and other
                               countries, including the ISO 9000 Series
                               certifications.

 --our operating results       We cannot assure you that manufacturing and
   would suffer if we          quality problems will not arise as we increase
   experienced either          our manufacturing operations or that such
   production or quality       scale-up can be achieved in a timely manner or
   problems                    at a commercially reasonable cost.
                               Manufacturing or quality problems or
                               difficulties or delays in manufacturing scale-
                               up would affect our operating results.

We depend on key suppliers     Our reagent products are formulated from both
to provide some of the         chemical and biological materials using
components and raw materials   proprietary technology as well as standard
for our reagents; if that      processing techniques. We currently purchase
supply is interrupted our      some components and raw materials, primarily
results of operations could    antibodies, that we use to make our reagent
suffer                         products from single-source vendors. We cannot
                               assure you that the materials or reagents we
                               need will be available in commercial quantities
                               or at acceptable prices. Any supply
                               interruption or yield problems encountered in
                               the use of materials from these vendors could
                               have a material adverse effect on our ability
                               to manufacture our products until a new source
                               of supply is obtained. Finding and using
                               alternative or additional suppliers could be
                               time consuming and expensive.

                                      21
<PAGE>

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

Some of our manufacturing      Certain of our manufacturing processes,
processes involve the use of   primarily those involved in manufacturing
environmentally hazardous      certain of our reagent products, require the
materials                      use of potentially hazardous and carcinogenic
                               chemicals. We are required to comply with
                               applicable federal, state and local laws
                               regarding the use, storage and disposal of
                               these materials.

 --we could incur              We currently use third-party disposal services
   substantial liability if    to remove and dispose of the hazardous
   it is found that either     materials we use. We could in the future
   we or the third party       encounter claims from individuals, governmental
   disposal service we use     authorities or other persons or entities in
   has violated any            connection with exposure to or disposal or
   environmental laws          handling of these hazardous materials or
                               violations of environmental laws by our
                               contractors or us. We could also be required to
                               incur additional expenditures for hazardous
                               materials management or environmental
                               compliance. The costs associated with
                               environmental claims, violations of
                               environmental laws or regulations, hazardous
                               materials management and compliance with
                               environmental laws could cause our results of
                               operations to suffer.

We cannot assure you that we   We anticipate that our existing capital
will be able to fund our       resources and available borrowing capacity
future capital requirements    under our revolving credit line will be
through internal sources,      adequate to satisfy our capital requirements
our existing line of credit    for the next 12 months. Our future capital
or from other sources          requirements will depend on many factors
                               including:

                               .  the extent to which our products gain market
                                  acceptance;

                               .  the mix of instruments placed through direct
                                  sales or through our performance evaluation
                                  period;

                               .  progress of our product development
                                  programs;

                               .  competing technological and market
                                  developments;

                               .  expansion of our sales and marketing
                                  activities;

                               .  the cost of manufacturing scale-up
                                  activities;

                               .  possible acquisitions of complementary
                                  businesses, products or technologies; and

                               .  our ability to sustain profitability and
                                  timing of regulatory approvals.

                               We may require additional capital resources and
                               we cannot assure you that capital will be
                               available to the extent required, on terms
                               acceptable to us or at all. Any such future
                               capital requirements could result in the
                               issuance of our equity securities, which may
                               affect the market price of our common stock and
                               would dilute our existing stockholders.

                                      22
<PAGE>

Item 2. Properties

   Currently, our U.S. research laboratories, instrument and reagent
manufacturing facilities and administrative offices are located in
approximately 90,000 square feet of leased space in Tucson, Arizona and
Gaithersburg, Maryland. The leases for these facilities expire at various
times between January 2002 and November 2004, subject to renewal terms. In May
2000, we purchased vacant land in Tucson and initiated construction of a
182,400 square foot mixed-use facility to house all of our operations that are
now resident in various locations around Tucson. Our expected completion date
is the third and fourth quarters of 2001. Manufacturing will move into the new
facility in the third quarter of 2001. R&D and administration will move in the
fourth quarter of 2001. In cases where leases on current facilities expire
prior to the completion of this facility, we plan to negotiate month-to-month
lease arrangements.

   Currently, our European headquarters operations are located in an office
building we own that consists of 39,000 square feet in Strasbourg, France.
This building was acquired in June 2000 and financed through a sale/leaseback.
We have leased approximately half of the building square footage to a third
party.

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

   Once we complete the construction of the new Tucson facility we believe
that we will have sufficient space for the foreseeable future.

Item 3. Legal Proceedings

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

   On April 25, 1997, plaintiffs filed an Amended Complaint. The Amended
Complaint made the same allegations as the original Complaint and added a
claim under North Carolina securities laws. On December 16, 1997, we filed a
motion to dismiss plaintiffs' Amended Complaint. On September 23, 1998, the
Court issued its Order granting in part and denying in part our motion to
dismiss. The Court dismissed plaintiffs' claims based upon the North Carolina
securities laws and California's insider-trading statute. Plaintiffs'
surviving claims included violations of federal and California securities
laws, common law fraud and breach of fiduciary duty. On June 5, 2000, we filed
a motion for summary judgment on all of plaintiffs' remaining claims. On
November 22, 2000, the Court issued an Order granting our motion for summary
judgment in its entirety. Plaintiffs filed a notice of appeal on December 8,
2000 and will file their appellate brief in May 2001. Based on the facts known
to date, we believe that the claims are without merit and we will vigorously
defend this suit.

   On April 1, 1999, a shareholder derivative and class action suit was filed
in the Court of Chancery for the State of Delaware entitled Leung v. Ventana
Medical Systems, Inc., et al., C.A. No. 17089. Plaintiff, who is related to
the plaintiffs in the above federal securities action, alleges breach of
fiduciary duty and breach of contract relating to our merger with BioTek and
the related conversion of BioTek notes into Ventana notes, as well as our
decision to compensate two of our directors by selling Ventana stock to them
at a fixed price. On May 6, 1999, we filed a motion to dismiss, or in the
alternative, to stay this action in favor of the federal securities action.
These motions were heard on October 18, 1999, and on February 29, 2000, the
Court granted our motion, dismissing the action in its entirety. Plaintiff
filed his notice of appeal on October 24, 2000, and all appellate briefing was
completed in March 2001. The hearing of this appeal is not specifically
scheduled but the

                                      23
<PAGE>

Delaware Supreme Court has indicated that the hearing will take place in May
2001. Based on the facts known to date, we believe that the claims are without
merit and we intend to vigorously defend this suit.

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

   On December 9, 1999 we filed an action, Ventana Medical Systems, Inc. v.
CytoLogix Corp., No. CIV99-606 TUC FRZ, alleging patent infringement seeking
monetary damages and injunctive relief in the United States District Court in
Tucson. The original complaint was amended March 21, 2000 by the addition of
another patent to the litigation. We believe our claims are meritorious and
that we will prevail, however, because little discovery has been completed,
results of the proceedings are uncertain and there can be no assurance to that
effect.

   CytoLogix Corp. has filed three separate actions against us in various
courts. The first action is CytoLogix v. Ventana, Case No. CV 12231 REK, filed
Oct. 27, 2000 in federal district court in Boston. The complaint claims, under
state-law based unfair competition law, that Ventana misappropriated
CytoLogix's trade secrets related to individual slide heating and incorporated
such secrets into our Discovery and BenchMark instruments. CytoLogix seeks
assignment of our patent applications relating to individual slide heating
claiming the idea, treble damages (unspecified amount) and an injunction
against our further sales of Discovery and BenchMark instruments. We believe
that we have meritorious defenses to the claims in this action and that
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operation; however, this
litigation is in an early stage and the results of the proceeding are
uncertain and there can be no assurance to that effect.

   The second is CytoLogix v. Ventana, Case No. 4 Ni 54/00 (EU) (Nullity
suit), filed November 9, 2000 in the German Federal Patent Court, Munich,
Germany. CytoLogix seeks to invalidate our German patent (no. DE 69117052.5)
which covers various aspects of our automated slide staining system. We
believe we can defend this patent through the Nullity proceeding, however
because this action is relatively new, results of the proceeding are uncertain
and there can be no assurance to that effect. We have responded to this action
and now await further orders from the German Federal Patent Court.

   The third action is CytoLogix v. Ventana, Case No. 01-10178 REK, filed
January 30, 2001 in the U.S. District Court, Eastern District of
Massachusetts. This complaint claims that we infringed on CytoLogix's patent
No. 6,180,061, entitled "Moving Platform Slide Stainer with Heating Elements,"
and was later amended to add U.S. Patent No. 6,183,693, issued Feb. 7, 2001,
entitled "Random Access Slide Stainer with Independent Slide Heating
Regulation," both assigned to CytoLogix Corporation. CytoLogix seeks
assignment of our patent applications claiming the independent slide heater
idea, treble damages (unspecified amount) and an injunction against our
further sales of Discovery and BenchMark instruments. We believe that we have
meritorious defenses to the claims in this action and that resolution of this
matter will not have a material adverse effect on our business, financial
condition or results of operation; however, this litigation is in an early
stage and the results of the proceeding are uncertain and there can be no
assurance to that effect.

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

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

                                      24
<PAGE>

                                    PART II

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

   Our common stock is listed on the NASDAQ National Market. The closing price
of our common stock on December 29, 2000 was $18.50. The following table shows
the high and low bid prices in dollars per share for the last two years as
reported by NASDAQ. These prices may not be the prices that you would pay to
purchase a share of our common stock during the periods shown.

<TABLE>
<CAPTION>
                                                                   Low    High
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Year Ended December 31, 1999
     First Quarter............................................... $16.75 $23.88
     Second Quarter.............................................. $17.13 $28.63
     Third Quarter............................................... $13.75 $22.25
     Fourth Quarter.............................................. $15.69 $34.75

     Year Ended December 31, 2000
     First Quarter............................................... $21.63 $69.50
     Second Quarter.............................................. $23.00 $49.25
     Third Quarter............................................... $20.00 $28.63
     Fourth Quarter.............................................. $17.06 $33.00
</TABLE>

   As of December 31, 2000, there were approximately 3,600 beneficial holders
of our common stock.

Dividend Policy

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

                                       25
<PAGE>

Item 6. Selected Financial Data

                      Selected Consolidated Financial Data

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                              ------------------------------------------------
                                1996      1997      1998      1999      2000
                              --------  --------  --------  --------  --------
                                 (in thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Statement of Operations
 Data:
Sales:
  Reagents and other........  $ 15,538  $ 22,905  $ 31,967  $ 45,340  $ 49,682
  Instruments...............     8,591     9,248    15,737    24,069    21,467
                              --------  --------  --------  --------  --------
    Total net sales.........    24,129    32,153    47,704    69,409    71,149
Cost of goods sold..........    10,632    11,138    14,542    21,218    36,377
                              --------  --------  --------  --------  --------
Gross Profit................    13,497    21,015    33,162    48,191    34,772
Operating expenses:
  Selling, general and
   administrative...........    11,206    16,953    23,805    32,381    43,800
  Research and development..     2,749     3,050     5,057     7,078    11,116
  Nonrecurring expenses.....    10,262     1,656     3,160       --      4,519
  Amortization of
   acquisition costs........       424       509       599     1,051     1,474
                              --------  --------  --------  --------  --------
(Loss) income from
 operations.................   (11,144)   (1,153)      541     7,681   (26,137)
Other (expense) income......      (137)      781     1,089      (370)    1,346
                              --------  --------  --------  --------  --------
(Loss) income before taxes
 and cumulative effect of
 accounting change..........   (11,281)     (372)    1,630     7,311   (24,791)
Benefit from (provision for)
 income taxes...............       --        --        --      5,500      (350)
                              --------  --------  --------  --------  --------
(Loss) income before
 cumulative effect of
 accounting change..........   (11,281)     (372)    1,630    12,811   (25,141)
Cumulative effect of
 accounting change, net of
 tax(1).....................       --        --        --        --     (2,154)
                              --------  --------  --------  --------  --------
    Net (loss) income.......  $(11,281) $   (372) $  1,630  $ 12,811  $(27,295)
                              ========  ========  ========  ========  ========
Amounts per common share,
 diluted:
  (Loss) income before
   cumulative effect of
   accounting change........  $  (1.22) $   (.03) $    .11  $    .88  $  (1.70)
  Cumulative effect of
   accounting change........       --        --        --        --      (0.15)
                              --------  --------  --------  --------  --------
    Net (loss) income per
     share, diluted.........  $  (1.22) $   (.03) $    .11  $    .88  $  (1.85)
                              ========  ========  ========  ========  ========
Pro forma (loss) income
 assuming the accounting
 change is applied
 retroactively:
  Net (loss) income.........  $(11,793) $   (523) $  1,282  $ 11,668  $(25,141)
  Net (loss) income per
   common share, diluted....  $  (1.28) $  (0.04) $   0.09  $   0.80  $  (1.70)

Balance Sheet Data:
Cash, cash equivalents and
 short-term investments.....  $ 11,067  $ 18,902  $  2,424  $  1,787  $ 38,512
Long-term debt and
 redeemable preferred
 stock......................    12,500       471     1,907     2,044     3,408
Working capital.............    15,888    28,524    22,277    28,408    49,977
Total assets................    32,410    48,352    56,280    73,161   109,582
Accumulated deficit.........   (33,410)  (33,782)  (32,152)  (19,341)  (46,636)
Total stockholders' equity..    15,270    42,403    45,784    60,500    87,088
</TABLE>
--------
(1) During the fourth quarter of 2000, the Company changed its method of
    accounting for revenue recognition in accordance with Staff Accounting
    Bulletin No. 101, Revenue Recognition in Financial Statements, effective
    January 1, 2000. The cumulative effect of adopting this new accounting
    principle amounted to a charge of $2,154, net of tax.

                                       26
<PAGE>

   The following table contains summary unaudited quarterly consolidated
statements of operations for the four quarters ended December 31, 2000 and the
four quarters ended December 31, 1999. We have prepared the quarterly
consolidated statements of operations data on the same basis as the
Consolidated Statements of Operations beginning on page F-3. Our results of
operations have varied and may continue to fluctuate significantly from
quarter to quarter. Results of operations in any period should not be
considered indicative of the results to be expected for any future period.

                               Summary Quarterly
                     Condensed Consolidated Financial Data

<TABLE>
<CAPTION>
                                         Year Ended December 31, 2000
                          -----------------------------------------------------------------
                                   Restated            Restated           Restated
                           First    First     Second    Second    Third    Third    Fourth
                          Quarter  Quarter   Quarter   Quarter   Quarter  Quarter   Quarter
                          -------  --------  --------  --------  -------  --------  -------
                                     (in thousands, except per share data)
<S>                       <C>      <C>       <C>       <C>       <C>      <C>       <C>
Statement of Operations
 Data:
Sales:
  Reagents and other....  $12,001  $12,001   $ 12,304  $ 12,304  $12,703  $12,703   $12,674
  Instruments...........    5,828    5,125      5,436     6,419    4,899    5,196     4,727
                          -------  -------   --------  --------  -------  -------   -------
   Total net sales......   17,829   17,126     17,740    18,723   17,602   17,899    17,401
Cost of goods sold......    6,134    5,970     18,464    18,782    5,733    5,786     5,839
                          -------  -------   --------  --------  -------  -------   -------
Gross profit (loss).....   11,695   11,156       (724)      (59)  11,869   12,113    11,562
Operating expenses:
  Selling, general and
   administrative.......    1,984    1,984      3,461     3,461    2,665    2,665     3,006
  Research and
   development..........    7,960    7,960     14,930    14,930    9,816    9,816    11,094
  Nonrecurring
   expenses.............      --       --       4,519     4,519      --       --        --
  Amortization of
   acquisition costs....      278      278        391       391      381      381       424
                          -------  -------   --------  --------  -------  -------   -------
Income (loss) from
 operations.............    1,473      934    (24,025)  (23,360)    (993)    (749)   (2,962)
Other (expense) income..      (48)     (48)       452       452      508      508       434
                          -------  -------   --------  --------  -------  -------   -------
Income (loss) before
 taxes and cumulative
 effect of accounting
 change.................    1,425      886    (23,573)  (22,908)    (485)    (241)   (2,528)
(Provision for) benefit
 from income taxes......     (456)    (350)       106       --       --       --        --
                          -------  -------   --------  --------  -------  -------   -------
Income (loss) before
 cumulative effect of
 accounting change......      969      536    (23,467)  (22,908)    (485)    (241)   (2,528)
                          -------  -------   --------  --------  -------  -------   -------
Cumulative effect of
 accounting change, net
 of tax(1)..............      --    (2,154)       --        --       --       --        --
                          -------  -------   --------  --------  -------  -------   -------
     Net income (loss)..  $   969  $(1,618)  $(23,467) $(22,908) $  (485) $  (241)  $(2,528)
                          =======  =======   ========  ========  =======  =======   =======
Per Share Data:
  Income (loss) before
   cumulative effect of
   accounting change:
   --Basic..............  $   .07  $   .04   $  (1.55) $  (1.52) $  (.03) $  (.02)  $  (.17)
   --Diluted............  $   .06  $   .03   $  (1.55) $  (1.52) $  (.03) $  (.02)  $  (.17)
Net Income:
   --Basic..............  $   .07  $  (.11)  $  (1.55) $  (1.52) $  (.03) $  (.02)  $  (.17)
   --Diluted............  $   .06  $  (.11)  $  (1.55) $  (1.52) $  (.03) $  (.02)  $  (.17)
Shares used in computing
 net income (loss) per
 share, basic...........   14,305   14,305     15,097    15,097   15,186   15,186    15,307
                          =======  =======   ========  ========  =======  =======   =======
Shares used in computing
 net income (loss) per
 share, diluted.........   16,467   16,467     15,097    15,097   15,186   15,186    15,307
                          =======  =======   ========  ========  =======  =======   =======
</TABLE>
--------
(1) During the fourth quarter of 2000, the Company changed its method of
    accounting for revenue recognition in accordance with Staff Accounting
    Bulletin No. 101, Revenue Recognition in Financial Statements. Pursuant to
    Financial Accounting Statement No. 3, Reporting Financial Changes in
    Interim Financial Statements, effective January 1, 2000, the Company
    recorded the cumulative effect of the accounting change and accordingly,
    the quarterly information for the first three quarters of 2000 which had
    been previously reported have been restated. No restatement of 1999 is
    required under the implementation guidance of Staff Accounting Bulletin
    No. 101.

                                      27
<PAGE>

                               Summary Quarterly
                     Condensed Consolidated Financial Data
                                  (Continued)

<TABLE>
<CAPTION>
                                             Year Ended December 31, 1999
                                            ---------------------------------
                                             First   Second    Third  Fourth
                                            Quarter  Quarter  Quarter Quarter
                                            -------  -------  ------- -------
                                            (in thousands, except per share
                                                         data)
<S>                                         <C>      <C>      <C>     <C>
Statement of Operations Data:
Sales:
  Reagents and other....................... $10,512  $11,589  $11,679 $11,560
  Instruments..............................   5,120    4,726    4,733   9,490
                                            -------  -------  ------- -------
    Total net sales........................  15,632   16,315   16,412  21,050
Cost of goods sold.........................   4,988    4,765    5,148   6,317
                                            -------  -------  ------- -------
Gross profit...............................  10,644   11,550   11,264  14,733
Operating expenses:
  Selling, general and administrative......   7,399    7,875    7,829   9,278
  Research and development.................   1,629    1,908    1,696   1,845
  Nonrecurring expenses....................     253      258      256     284
                                            -------  -------  ------- -------
  Amortization of acquisition costs........   1,363    1,509    1,483   3,326
  Other (expense) income...................      24      (22)      44    (416)
                                            -------  -------  ------- -------
  Income before income taxes...............   1,387    1,487    1,527   2,910
  (Provision for) benefit from income
   taxes...................................    (138)     138      --    5,500
                                            -------  -------  ------- -------
      Net income........................... $ 1,249  $ 1,625  $ 1,527 $ 8,410
                                            =======  =======  ======= =======
Net income per common share:
  --Basic.................................. $   .09  $   .12  $   .11 $   .62
                                            =======  =======  ======= =======
  --Diluted................................ $   .09  $   .11  $   .11 $   .56
                                            =======  =======  ======= =======
Pro forma amounts assuming the accounting
 changes are applied retroactively:
  Net income............................... $   925  $ 1,844  $ 1,724 $ 7,175
                                            =======  =======  ======= =======
Net Income per common share:
  --Basic.................................. $   .07  $   .14  $   .13 $   .53
                                            =======  =======  ======= =======
  --Diluted................................ $   .06  $   .12  $   .12 $   .48
                                            =======  =======  ======= =======
Shares used in computing net income per
 share, basic..............................  13,404   13,462   13,520  13,551
                                            =======  =======  ======= =======
Shares used in computing net income per
 share, diluted............................  14,578   14,766   14,465  14,908
                                            =======  =======  ======= =======
</TABLE>

                                       28
<PAGE>

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

Introduction

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

  . what factors affect our business;

  . what our earnings and costs were in 2000 and 1999;

  . why those earnings and costs were different from the year before;

  . where our earnings came from;

  . how all of this affects our overall financial condition; and

  . what our research and development expenditures were in 2000 and 1999 and
    what we expect to spend in the near future.

Forward-Looking Statements

  Some statements contained in this Annual Report, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-
looking statements." You should not place undue reliance on these forward-
looking statements. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including
the risks faced by us described in the Cautionary Factors section beginning on
page 14, among others, and those included in other documents we file with the
SEC.

Results of Operations

 Comparison of 2000 and 1999

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

  Gross margin of 49% in 2000 was impacted by second quarter 2000 charges
totaling $11.8 million associated with reagent dispenser quality issues,
planned relocation of our Gaithersburg, Maryland production facility, exiting
the electron microscopy product line and write-down of older generation
staining instruments in anticipation of the launch of the BenchMark advanced
staining system in the fourth quarter of 2000. The charges, in conjunction
with the additional investment in manufacturing management and quality systems
infrastructure, accounted for the decrease from the 69% gross margin achieved
in 1999.

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

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

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

                                      29
<PAGE>

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

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

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

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

   Research and development expenses increased by $4 million in 2000 versus
1999, to 15.6% of net sales from 10.2% in 1999. The spending increase reflects
our ongoing research and development efforts in a variety of areas such as the
launch of the BenchMark advanced IHC and ISH Staining System, the US launch of
our Discovery system, the December 2000 launch of our Pathway test for breast
cancer patients and further expansion of our Special Stains reagent menu. For
the near future, research and development costs are anticipated to increase at
a rate similar to or slightly greater than the sales growth rate, as we
continue to invest in technology to address potential market opportunities.

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

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

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

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

   Although the Company experienced a significant loss during the year as
discussed above, management believes that the Company will return to
profitability in 2001 as the events that gave rise to the loss were considered
discreet and isolated and unlikely to recur. No additional income tax benefit
was recognized in 2000 related to the deferred tax asset that arose relative
to the increase in the net operating loss carry forward and other future tax
deductible items as it cannot be readily determined whether such assets will
be recoverable in the near term. Management will continue to closely monitor
operating results and analyze its ability to recover these deferred tax assets
in the very near term. As a result, the Company's valuation allowance
increased by $8.3 million in 2000 to $10.7 million at December 31, 2000. In
the meantime, the Company does not anticipate recording any income tax benefit
or expense of any material amount in 2001, unless a change, positively or
negatively, in the valuation allowance for deferred tax assets is warranted
based upon the outlook of future earnings.

                                      30
<PAGE>

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

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

 Comparison of 1999 and 1998

   Net sales increased to $69.4 million in 1999 from $47.7 million in 1998.
This 45% increase was primarily a result of a full year's product availability
of our Special Stains instrument system and tissue processor line (both
introduced commercially in late 1998), successful entrance into the genomics
market with the launch of the Discovery ISH system in late 1999 and strong
performance from our core IHC business. Sales in 1999 grew 29% in North
America and 152% internationally from 1998. The strong growth in North America
is primarily being driven by market demand as well as the overall economic
health within this region. The growth in international sales is attributed to
strong commercial operations driving a clear leadership position.

   Gross margin in 1999 of 69% was consistent with 1998 performance.
Improvement in the overall margin structure of our instruments and reagents
was offset by a slight mix shift towards instrument sales in 1999 as a percent
of total revenue (35%) versus 1998 (33%).

   Research and development expenses increased by $2 million in 1999 compared
with 1998 expenditures, to 10.2% of net sales from 10.6% in 1998. The spending
increase reflects our ongoing research and development efforts in a variety of
areas such as the introduction of our Discovery ISH instrument, expansion of
our Special Stains reagent menu and in situ hybridization prognostic markers.
For the near future, research and development expenses are expected to
increase at a rate similar to or slightly greater than the sales growth rate,
as we continue to invest in technology to address potential market
opportunities.

   Selling, general and administrative expenses increased by $8.6 million in
fiscal 1999 over fiscal 1998, but decreased as a percent of net sales to 47%
in 1999 from 50% in fiscal 1998. The spending increase is due principally to
the growth in the size of our direct sales force and its commissions, and the
expansion of our geographic distribution channels. The increase also reflects
our efforts to invest in key areas such as product strategy and customer
support coverage in order to be positioned to take advantage of future market
opportunities. We anticipate selling, general and administrative costs
increasing at a rate similar to or slightly less than our sales growth rate in
the near future.

   Amortization expense increased to $1.1 million in 1999 from $0.6 million in
1998, reflecting a full years' amortization of intangibles acquired in the
fourth quarter of 1998.

   Interest and other income, net, was an expenditure of $0.4 million in 1999
versus income of $1.1 million in 1998. Interest income in 1999 was reduced as
a result of decreased investment balances attributed to the acquisitions of
the assets of Oncor, Inc. and the stock of Biotechnology Tools, Inc. in late
1998. The Company also settled some litigation in 1999.

   In the fourth quarter of 1999, we deemed it "more likely than not" that our
deferred tax assets would be realized in the future. This judgment reflects
the fact that 1999 marked the third consecutive year of profitable North
American operations, and the fact we expect to operate profitably on a
worldwide basis in 2000. This resulted in an income tax benefit of $5.5
million.

   As a result of the above, our net income increased to a record $12.8
million, a 686% improvement over 1998 results.

                                      31
<PAGE>

Liquidity and Capital Resources

   Cash and equivalents were $38.5 million at December 31, 2000, an increase
of $36.7 million from December 31, 1999. In March 2000 we completed a private
placement of 1,250,000 shares of our common stock, raising $50 million in
gross proceeds before deducting commission and expenses of the offering.
Spending against cash reserves was attributable to our ongoing investment in
the growth of the business including working capital, and the Tucson operating
facility currently under construction and partially offset by cash generated
from the exercise of employee stock options. We believe that our current cash
and equivalents, line of credit and cash generated from operations will
satisfy funding requirements including working capital, capital expenditure,
and the $15.3 million in purchase commitments for the construction of a new
corporate headquarters and manufacturing facility in suburban Tucson, Arizona
through fiscal 2001.

Foreign Currency Risk

   We do not currently hedge against foreign currency fluctuations, because we
do not believe that we run a serious risk of experiencing permanent impairment
to any material assets denominated in foreign currency, but we intend to re-
evaluate this situation from time to time. As a result, to the extent local
currency revenues and expenses in our foreign subsidiaries are translated into
U.S. dollars at differing rates over time, we may experience fluctuations in
our operating results. We conduct a relatively small but growing portion of
our business in the Euro, the Japanese Yen and the Australian dollar.

New Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
(FAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment to FASB Statement No 133." This statement amended
certain provisions of FAS 133. Accordingly, the Company will adopt FAS 133, as
amended by FAS 138, effective the first quarter of fiscal 2001. Management
believes this statement will not have an impact on the Company's financial
statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. Nevertheless, the fair
value of the Company's investment portfolio and related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates, due primarily to the short-term nature of the major portion of
the Company's investment portfolio. At December 31, 2000, the Company's only
investments are in money market accounts and overnight reverse repurchase
agreements ($38.5 million) that are reflected as cash equivalents because all
maturities are within 90 days. The Company's interest rate risk with respect
to existing investments is limited due to the short-term duration of these
arrangements and the yield's earned which approximate current interest rates.

   At present, the Company has only $4.2 million in long-term debt and there
are no borrowings under our line of credit facility at December 31, 2000. As
such, our interest rate risk is limited with respect to existing debt. A
substantial portion of the Company's revenue and capital spending is
transacted in U.S. dollars. However, the Company does at times enter into
these transactions in other currencies, such as the Euro, the Japanese Yen and
the Australian dollar. No hedging transactions were entered into to limit this
exposure.

                                      32
<PAGE>

Item 8. Financial Statement and Supplementary Data

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

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

   Not applicable.

                                       33
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers

   Pursuant to our Certificate of Incorporation, as amended, our Board of
Directors currently consists of eight persons, divided into three classes
serving staggered terms of three years. Currently there are two Class I
directors, three Class II directors and three Class III directors. The terms of
the Class II directors will expire at the 2001 Annual Meeting of Shareholders.
The terms of the Class III and Class I directors will expire in 2002 and 2003
respectively.

<TABLE>
 <C>                            <S>
 Jack W. Schuler                Mr. Schuler has served as a director of Ventana
 (Age 60)                       since April 1991 and as Chairman of the Board
                                of Directors since November 1995. Mr. Schuler
 Class III Director             has been Chairman of the Board of Directors of
                                Stericycle, Inc. since March 1990. Mr. Schuler
 Member of the Compensation     is also a partner in Crabtree Partners. Prior
 and Nominating Committees      to joining Stericycle, Mr. Schuler held various
                                executive positions at Abbott from December
                                1972 through August 1989, serving most recently
                                as President and Chief Operating Officer. He is
                                currently a director of Medtronic, Inc. and
                                Chiron Corporation. Mr. Schuler received a B.S.
                                in Mechanical Engineering from Tufts University
                                and an M.B.A. from Stanford University.

 John Patience                  Mr. Patience has served as a director of
 (Age 53)                       Ventana since July 1989 and as Vice Chairman
                                since January 1999. Since April 1995,
 Class III Director             Mr. Patience has been a partner in Crabtree
                                Partners. Mr. Patience was a co-founder and
 Member of the Nominating       served as a General Partner of Marquette
 Committee                      Venture Partners from January 1988 until March
                                1995. Marquette was one of our initial
                                investors. Mr. Patience was previously a
                                partner in the consulting firm of McKinsey &
                                Co., specializing in health care. He is
                                currently a director of Stericycle, Inc. Mr.
                                Patience received a B.A. in Liberal Arts and an
                                L.L.B. from the University of Sydney, Australia
                                and an M.B.A. from the University of
                                Pennsylvania Wharton School of Business.

 Christopher M. Gleeson         Mr. Gleeson became President and Chief
 (Age 51)                       Executive Officer and a director in May 1999.
                                He joined Ventana in March 1999 as Executive
 Class II Director              Vice President and Chief Operating Officer.
                                Prior to joining the Company, Mr. Gleeson was
                                Senior Vice President of Bayer Diagnostics and
                                General Manager of the U. S. Commercial
                                Operations for Chiron Diagnostics, and prior to
                                that, the founder, owner and Managing Director
                                of Australian Diagnostics Corporation, a
                                leading diagnostics distributor in Australia.
                                He is a director of Pharmanetics, Inc. Mr.
                                Gleeson attended Monash University in
                                Melbourne, Australia.

 Kendall B. Hendrick            Mr. Hendrick joined Ventana in August 1998 and
 (Age 41)                       has served as Vice President and General
                                Manager of Research & Development since May
                                1999. From April 1990 to August 1998, Mr.
                                Hendrick held various product development
                                management positions with Abbott Laboratories,
                                Diagnostics Division, most recently as the
                                Director of the Architect Research &
                                Development Program. Mr. Hendrick holds a B.S.
                                in Mechanical Engineering from Virginia
                                Polytechnic Institute.
</TABLE>


                                       34
<PAGE>

<TABLE>
 <C>                            <S>
 Kirk M. Kimler                 Mr. Kimler joined the Company in 1999 and is
 (Age 38)                       currently the Vice President of Worldwide
                                Marketing. From August 1988 to October 1999,
                                Mr. Kimler held various sales and marketing
                                positions with Abbott Laboratories, Diagnostics
                                Division to include Marketing Manager,
                                Architect and South East Commercial Operations.
                                Prior to Abbott, Mr. Kimler was an officer in
                                the United States Army. Mr. Kimler holds a B.A.
                                in Economics from the University of Notre Dame
                                and an M.B.A. from the University of Chicago.

 Nicholas Malden                Mr. Malden joined Ventana as Chief Financial
 (Age 43)                       Officer in October 2000. From 1985 until
                                joining Ventana, Mr. Malden held various
                                financial management positions with The
                                Gillette Company, most recently as
                                vice president-finance for the Duracell Global
                                Business Management Group. Mr. Malden has a
                                B.A. in Political Science from Grinnell College
                                and an M.B.A. from Emory University.

 Hany Massarany                 Mr. Massarany joined Ventana in July 1999 and
 (Age 39)                       is currently Vice President and General Manager
                                of Molecular Discovery Systems. Prior to
                                joining Ventana Mr. Massarany held management
                                positions with Bayer Diagnostics and Chiron
                                Diagnostics. Mr. Massarany holds a B.S. from
                                Monash University in Australia and an M.B.A.
                                from the University of Melbourne.

 Mark Nechita                   Mr. Nechita joined Ventana in June 2000, as
 (Age 41)                       Vice President, Human Resources, Environmental
                                Health and Safety. Prior to joining Ventana,
                                Mr. Nechita worked in Human Resources in the
                                United States and internationally for RJR
                                Nabisco, FMC and most recently, Cordant
                                Technologies where he was Vice President, Human
                                Resources for their Huck Fasteners unit. Mr.
                                Nechita has a B.S. in Industrial and Labor
                                Relations from Cornell University.

 Johnny D. Powers, Ph.D.        Dr. Powers joined Ventana in February 1996 and
 (Age 39)                       is currently Vice President, Operations. From
                                June 1990 until joining Ventana, Dr. Powers
                                held various management positions with Organon
                                Teknika Corporation serving most recently as
                                Director of Manufacturing Technologies. Dr.
                                Powers holds a B.A. in Chemistry from Wake
                                Forest University, a Ph.D. in Chemical
                                Engineering from North Carolina State
                                University, an M.S. in Chemical Engineering
                                from Clemson University, and an M.B.A. from
                                Duke University.

 Bernard O.C. Questier          Mr. Questier has served as Vice President and
 (Age 47)                       General Manager of Europe, Middle East & Africa
                                since May 1999. He joined the Company as Vice
                                President of European Operations in 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.
</TABLE>


                                       35
<PAGE>

<TABLE>
 <C>                            <S>
 Tamaki Tateiwa                 Mr. Tateiwa has served as President of
 (Age 61)                       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.

 Stephen A. Tillson, Ph.D.      Dr. Tillson joined Ventana in May 1992 and has
 (Age 60)                       served as Vice President of Scientific Affairs
                                since August 1995. 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.

 Urs Wiederkehr                 Mr. Wiederkehr joined Ventana in June 2000 and
 (Age 39)                       is currently General Manager of North American
                                Commercial Operations. Mr. Wiederkehr held
                                various US and Internationally based sales and
                                marketing positions with Abbot Laboratories
                                from 1988 to 1998 and was most recently an
                                independent consultant in the diagnostics
                                field. Mr. Wiederkehr holds a B.S. in Chemistry
                                from the Basel Technical Institute, in
                                Switzerland and an M.B.A. from the Basel
                                Management Institute.

 Rex J. Bates                   Mr. Bates has served as a director of Ventana
 (Age 77)                       since April of 1996. From August 1991 to May
                                1995, Mr. Bates served on the Board of
 Class II Director              Directors of Twentieth Century Industries and
                                was a member of its compensation committee.
 Member of the Audit and        Prior to Twentieth Century Industries,
 Nominating Committee           Mr. Bates served as the Vice-Chairman of the
                                Board of Directors of the State Farm Mutual
                                Automobile Insurance Company. Mr. Bates also
                                served as State Farm's Chief Investment
                                Officer. In March of 1991, Mr. Bates retired
                                from State Farm. Prior to Mr. Bates' employment
                                with State Farm, he was a partner in the
                                investment firm of Stein, Roe & Farnham in
                                Chicago. Mr. Bates received a B.S. and an
                                M.B.A. from the University of Chicago.

 Edward M. Giles                Mr. Giles has served as a director of Ventana
 (Age 65)                       since September 1992. Mr. Giles has served as
                                Chairman of The Vertical Group, Inc., a venture
 Class II Director              capital investment firm, since January 1989.
                                Mr. Giles was previously President of F.
 Member of the Compensation     Eberstadt & Co., Inc., a securities firm, and
 and Nominating Committees      Vice Chairman of Peter B. Cannell & Co., Inc.,
                                an investment management firm. He is currently
                                a director of Synthetech, Inc. Mr. Giles
                                received a B.S.Ch.E. in Chemical Engineering
                                from Princeton University and an M.S. in
                                Industrial Management from the Massachusetts
                                Institute of Technology.

 Thomas M. Grogan, M.D.         Dr. Grogan is a founder, a director, Chairman
 (Age 55)                       Emeritus, Chief Scientific Officer and Medical
                                Director of Ventana. He has served as a
 Class III Director             director since the founding of the Company in
                                June 1985 and as Chairman of the Board of
 Member of the Nominating       Ventana from June 1985 to November 1995. He is
 Committee                      also currently a professor of pathology at the
                                University of Arizona, College of Medicine,
                                where he has taught since 1979. He received a
                                B.A. in Biology from the University of Virginia
                                and an M.D. from George Washington School of
                                Medicine. Dr. Grogan completed a post-doctorate
                                fellowship at Stanford University.

</TABLE>

                                       36
<PAGE>

<TABLE>
 <C>                            <S>
 Mark C. Miller                 Mr. Miller has served as a director of Ventana
 (Age 45)                       since January 2001. Mr. Miller has also been
                                President and Chief Executive Officer and a
 Class I Director               director of Stericycle, Inc. since May 1992.
                                Prior to joining Stericycle Mr. Miller served
                                as Vice President Pacific/Asia/Africa for the
                                International Division of Abbott Laboratories,
                                which he joined in 1977 and where he held a
                                number of management and marketing positions.
                                Mr. Miller also serves on the board of
                                directors of AmericasDoctor.com, Inc. and Lake
                                Forest Hospital. Mr. Miller received a B.S. in
                                Computer Science from Purdue University.

 James R. Weersing              Mr. Weersing has served as a director of
 (Age 61)                       Ventana since October 1994. Since 1984, Mr.
                                Weersing has been a Managing Director of MBW
 Class I Director               Venture Partners, a venture capital investment
 Member of the Audit and        firm. Mr. Weersing has also served as President
 Compensation Committees        of JRW Technology, Inc., a consulting firm and,
                                since January 2000, President and CEO of Iomed,
                                Inc. Mr. Weersing received a B.S.M.E. and an
                                M.B.A. from Stanford University.
</TABLE>

Section 16(a) Beneficial Ownership Reporting Compliance

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

                                       37
<PAGE>

Item 11. Executive Compensation

   The following table sets forth all compensation paid by us to the chief
executive officer and the most highly compensated executive officers and key
employees whose total remuneration exceeded $100,000 for services rendered in
all capacities to us during the last three completed fiscal years.

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                           Long-Term
                                                      Compensation Awards
                                                    -------------------------
                               Annual Compensation  Restricted    Securities
   Name and Principal          --------------------   Stock       Underlying     All Other
        Position          Year Salary ($) Bonus ($) Awards ($)   Options/SARs Compensation ($)
   ------------------     ---- ---------- --------- ----------   ------------ ----------------
<S>                       <C>  <C>        <C>       <C>          <C>          <C>
Christopher M. Gleeson..  2000  226,719       --         --         20,625        105,359(1)
 President, Chief         1999  163,846    10,000        --        200,000         20,625(1)
 Executive Officer
 and Director             1998      --        --         --            --             --

Tamaki Tateiwa..........  2000  173,258       --         --         15,025          4,928(2)
 Vice President, General  1999  170,604       --         --         10,800          4,438(2)
 Manager
 of Japanese Operations   1998  145,340       --         --          4,683          3,865(2)

Kendall B. Hendrick.....  2000  173,200    13,000    263,750(3)     14,481            --
 Vice President, General  1999  156,914     5,000        --         10,502          7,212(1)
 Manager
 of Research &            1998   65,403       --         --         35,000         46,932(1)
 Development

Johnny D. Powers,         2000  163,877    10,000        --          9,897            --
 Ph.D...................
 Vice President,          1999  150,683       --         --         21,549            --
 Operations
                          1998  144,107       --         --         14,213            --

Bernard O.C. Questier...  2000  161,629       --         --         13,107          8,800(2)
 Vice President, General  1999  153,375       --         --         12,670          8,800(2)
 Manager
 of Europe, Middle East   1998  150,000       --         --         16,836          8,800(2)
 & Africa
</TABLE>
--------
(1) Relocation expenses inclusive of tax reimbursement on non-deductible
    portion.

(2) Automobile allowance.

(3) Grant of 10,000 shares of restricted stock on October 31, 2000. For the
    purposes of this table, the shares are valued at $26.375 (the market price
    on October 30, 2000). The shares will vest five years from the date of
    grant.

(4) Please see "Employment Agreements" on Page 39 for information with respect
    to currency fluctuations.

                                      38
<PAGE>

   Aggregate Option Exercises in the Last Fiscal Year and Year-End Values. The
following table sets forth, for each of the executives named in the summary
compensation table below, information with respect to each exercise of stock
options during the fiscal year ended December 31, 2000, and the value of
unexercised options at December 31, 2000.

         Aggregate Option Exercises in Fiscal 2000 and Year-End Values

<TABLE>
<CAPTION>
                                                     Number of Securities
                                                    Underlying Unexercised     Value of Unexercised
                            Shares                        Options at           In-the-Money Options
                          Acquired on                  December 31, 2000      at December 31, 2000(1)
                           Exercise      Value     ------------------------- -------------------------
          Name                (#)     Realized ($) Exercisable Unexercisable Exercisable Unexercisable
          ----            ----------- ------------ ----------- ------------- ----------- -------------
<S>                       <C>         <C>          <C>         <C>           <C>         <C>
Christopher M. Gleeson..       --          --        57,434       163,191       38,988      123,512
Tamaki Tateiwa..........       --          --        62,202        13,506      350,135       42,240
Kendall B. Hendrick.....       --          --        29,166        30,817        5,502        4,188
Johnny D. Powers,
 Ph.D. .................       --          --        80,492        15,167      158,136       18,626
Bernard O.C. Questier...       --          --        77,080        12,490      744,720       12,623
</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 $27.375 per share, and the fair market value for our common stock
    of $18.50 per share as of December 31, 2000, which was the closing price
    of our Common Stock on December 31, 2000.

Employment Agreements

   We have an employment agreement with Bernard O.C. Questier, our Vice
President of European Operations. The agreement provides for annual
compensation of $164,500, which is fixed to the French Franc to protect
against currency fluctuations should the United States Dollar depreciate
relative to the French Franc; however, if the United States dollar appreciates
relative to the French Franc, Mr. Questier's salary shall remain unchanged.
The agreement states that if Mr. Questier is terminated, he will continue to
be paid through the quarter in which notice of termination is given plus one
additional full quarter. The agreement does not provide for any specified term
of employment. We currently have no employment contracts or agreements with
any other officers named in the Summary Compensation Table or with any other
person.

Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

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

                                      39
<PAGE>

Option Grants in the Last Fiscal Year

   The following table sets forth information with respect to each grant of
stock options made during the fiscal year ended December 31, 2000 to each
executive officer named in the Summary Compensation Table above:

                               Individual Grants
<TABLE>
<CAPTION>
                                                                           Potential
                                                                          Realizable
                                                                           Value at
                                                                        Assumed Annual
                                                                        Rates of Stock
                                                                             Price
                          Number of                                      Appreciation
                          Securities  % of Total                          for Option
                          Underlying   Options   Exercise or                Term(4)
                           Options    Granted in Base Price  Expiration ---------------
          Name            Granted(1)   2000(2)    ($/Sh)(3)     Date    5% ($)  10% ($)
          ----            ----------  ---------- ----------- ---------- ------- -------
<S>                       <C>         <C>        <C>         <C>        <C>     <C>
Christopher M. Gleeson..    16,000(a)    1.8%      $23.500   12/31/2009 236,464 599,247
                             4,625(b)    0.5%      $23.500    1/23/2010  68,353 173,220
Tamaki Tateiwa..........     7,750(a)    0.9%      $23.500   12/31/2009 114,537 290,260
                             7,275(b)    0.8%      $23.500    1/23/2010 107,517 272,470
Kendall B. Hendrick.....    10,000(a)    1.1%      $23.500   12/31/2009 147,790 374,529
                             4,481(b)    0.5%      $23.500    1/23/2010  66,225 167,827
Johnny D. Powers,
 Ph.D. .................     6,000(a)    0.7%      $23.500   12/31/2009  88,674 224,718
                             3,897(b)    0.4%      $23.500    1/23/2010  57,594 145,954
Bernard O.C. Questier...     7,500(a)    0.9%      $23.500   12/31/2009 110,843 280,897
                             5,607(b)    0.6%      $23.500    1/23/2010  82,866 209,999
</TABLE>
--------
(1) The above options were granted under the Company's 1996 Stock Option Plan.
    Vesting periods are as follows: (a) five years and (b) immediate.

(2) Based on an aggregate of 876,337 options granted by the Company during the
    year ended December 31, 2000.

(3) The option exercise price per share 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>

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The following table sets forth information, as of February 28, 2001 with
respect to the number of shares of our common stock beneficially owned by
individual directors, by all of our directors and officers as a group, and by
persons known by us to own more than 5% of our common stock. We have no other
class of voting stock outstanding.

<TABLE>
<CAPTION>
                                                                     Percent of
                                                                       Common
                                                           Number of   Stock
           Name and Address of Beneficial Owner             Shares     Owned
           ------------------------------------            --------- ----------
<S>                                                        <C>       <C>
Kopp Investment Advisors, Inc. ........................... 2,657,923    14.6
 7701 France Avenue South
 Suite 500
 Edina, MN 55435
Wellington Management Co. LLP............................. 1,955,300    10.8
 75 State Street
 Boston, MA 02109
MBW Venture Partners. L.P................................. 1,442,350     7.9
 365 South Street
 Morristown, NJ 07960
Berger, LLC............................................... 1,254,630     6.9
 210 University Blvd, Ste 900
 Denver, CO 80206
Franklin Resources Asset Management....................... 1,142,600     6.3
 777 Mariners Island Blvd.
 San Mateo, CA 94404
US Trust Company of New York.............................. 1,126,573     6.2
 114 West 47th Street
 New York, NY 10036
Jack W. Schuler(3)........................................ 1,343,957     7.4
John Patience(4)..........................................   652,449     3.6
Edward M. Giles(5)........................................   578,749     3.2
Thomas M. Grogan, M.D.(6).................................   186,509     1.0
Rex J. Bates(7)...........................................    85,151      *
Johnny D. Powers, Ph.D.(8)................................    85,071      *
Bernard O.C. Questier(9)..................................    82,824      *
Christopher M. Gleeson(10)................................    79,246      *
Tamaki Tateiwa(11)........................................    66,766      *
Stephen A. Tillson(12)....................................    37,895      *
James R. Weersing(13).....................................    37,007      *
Kendall B. Hendrick(14)...................................    34,395      *
Kirk M. Kimler(15)........................................    18,298      *
Hany Massarany(16)........................................     9,902      *
Urs Wiederkehr............................................       511      *
Mark Nechita..............................................       222      *
Nicholas Malden...........................................         0      *
Mark C. Miller............................................         0      *
All Directors and Officers as a group (18 persons)........ 3,298,952    18.2
</TABLE>
--------
 *  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.

                                      41
<PAGE>

 2. Applicable percentage of ownership is based on 15,444,122 shares of common
    stock outstanding as of December 31, 2000, together with shares issuable
    pursuant to applicable options and warrants of such stockholder which may
    be exercised within 60 days after February 28, 2001. Share of common stock
    subject to options and/or warrants currently exercisable or exercisable
    within 60 days after February 28, 2001, 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 265,250 shares issuable upon the exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Schuler; 73,512 shares
    beneficially owned by Mr. Schuler, as custodian for Tanya Eva Schuler;
    73,512 shares beneficially owned by Mr. Schuler, as custodian for Therese
    Heidi Schuler; and 73,512 shares beneficially owned by Mr. Schuler, as
    custodian for Tino Hans Schuler; and 20,000 shares beneficially owned by
    the Schuler Family Foundation, and 1,250 shares owned by Mrs. Schuler.

 4. Includes 258,375 shares issuable upon the exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Patience, as well as
    4,800 shares held in the name of Mrs. Patience.

 5. Includes 478,501 shares beneficially owned by Vertical Fund Associates,
    L.P. Also includes 26,500 shares issuable upon the exercise of options
    exercisable within 60 days of February 28, 2001, held by Edward M. Giles.
    Also includes 37,462 beneficially owned by Edward M. Giles IRA. Mr. Giles,
    one of our directors, is chairman of the Vertical Group, Inc. Mr. Giles
    disclaims beneficial ownership of the shares beneficially owned by such
    entities affiliated with the Vertical Group, Inc., except to the extent of
    his partnership interest therein.

 6. Includes 9,612 shares beneficially owned by Andrew Grogan. Includes 10,612
    shares beneficially owned by Emily Grogan. Includes 7,710 shares
    beneficially owned by C. Ovens, Inc. Includes 47,454 shares issuable upon
    exercise of options exercisable within 60 days of February 28, 2001, held
    by Dr. Grogan.

 7. Includes 26,500 shares issuable upon the exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Bates.

 8. Includes 83,134 shares issuable upon the exercise of options exercisable
    within 60 days of February 28, 2001, held by Dr. Powers.

 9. Includes 79,068 shares issuable upon the exercise of options exercisable
    within 60 days of February 28, 2001, held, held by Mr. Questier.

10. Includes 66,768 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Gleeson.

11. Includes 66,766 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Tateiwa.

12. Includes 17,738 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Tillson.

13. Includes 26,500 shares issuable upon the exercise of options exercisable
    within 60 days of February 2001, held by Mr. Weersing. Includes 6,209
    shares beneficially owned by James R. Weersing and Mary H. Weersing,
    Trustees of the Weersing Family Trust U/D/T dated April 24, 1991.

14. Includes 32,592 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Hendrick.

15. Includes 16,934 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 2001, held by Mr. Kimler.

16. Includes 9,902 shares issuable upon exercise of options exercisable within
    60 days of February 28, 2001, held by Mr. Massarany.

                                      42
<PAGE>

Item 13. Certain Relationships and Related Transactions

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

                                       43
<PAGE>

                                    PART IV

Item 14. Exhibits and Reports on Form 8-K.

   1. Financial Statements

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

<TABLE>
<S>                                                                         <C>
  Report of Ernst & Young LLP, Independent Auditors........................ F-1

  Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-2

  Consolidated Statements of Operations for the Years Ended December 31,
   2000, 1999 and 1998..................................................... F-3

  Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 2000, 1999 and 1998........................................ F-4

  Consolidated Statements of Cash Flow for the Years Ended December 31,
   2000, 1999 and 1998..................................................... F-5

  Notes to Consolidated Financial Statements............................... F-6
</TABLE>

   2. Financial Statement and Schedules for the Years ended December 31, 2000,
1999 and 1998

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

   3. Exhibits

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

<TABLE>
<CAPTION>
 Exhibit
 Number                           Description                            Notes
 -------                          -----------                            -----
 <C>     <S>                                                             <C>
  3.1    Restated Certificate of Incorporation or Registrant               (1)

  3.2    Bylaws of Registrant                                              (1)

  4.1    Specimen Common Stock Certificate                                 (1)

 10.1    Form of Indemnification Agreement for directors and officers      (1)

 10.2    1988 Stock Option Plan and forms of agreements thereunder         (1)

 10.3    1996 Stock Option Plan and forms of agreements thereunder         (1)

 10.4    1996 Employee Stock Purchase Plan                                 (1)

 10.5    1996 Directors Option Plan                                        (1)

 10.6    1998 Nonstatutory Stock Option Plan and forms of agreements
         thereunder                                                        (2)

 10.7    Form of Stock Purchase Warrant to Purchase shares of Series D
         Preferred Stock                                                   (1)

 10.8    Bank of America Business Loan Agreement dated June 9, 1998        (3)

 10.9    Amendment to Bank of America Business Loan Agreement dated
         October 1, 1998                                                   (3)

 10.10   Amendment to Bank of America Business Loan Agreement dated
         March 17, 1999                                                    (3)

 21.1    Subsidiaries of Registrant

 23.1    Consent of Ernst & Young LLP, Independent Auditors
</TABLE>

                                      44
<PAGE>

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

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

(3) Filed with the report on Form 10-K filed March 31, 2000 (Commission File
    No. 000-20931). (b) Current Reports on Form 8-K

   We did not file any reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 2000.

                                      45
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized, in the City of
Tucson, State of Arizona, on this 29th day of March 2001.

                                          VENTANA MEDICAL SYSTEMS, INC.

                                                   /s/ Nicholas Malden
                                          By: _________________________________
                                            Nicholas Malden, Vice President,
                                                          Chief
                                             Financial Officer and Secretary

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

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----

<S>                                  <C>                           <C>
 /s/ Christopher M. Gleeson          President, Chief Executive    March 29, 2001
____________________________________  Officer and Director
Christopher M. Gleeson                (Principal Executive
                                      Officer)

 /s/ Nicholas Malden                 Vice President, Chief         March 29, 2001
____________________________________  Financial Officer and
Nicholas Malden                       Secretary (Principal
                                      Financial and Accounting
                                      Officer)

 /s/ Rex J. Bates                    Director                      March 29, 2001
____________________________________
Rex J. Bates

 /s/ Edward M. Giles                 Director                      March 29, 2001
____________________________________
Edward M. Giles

 /s/ Thomas M. Grogan                Director                      March 29, 2001
____________________________________
Thomas M. Grogan

 /s/ Mark C. Miller                  Director                      March 29, 2001
____________________________________
Mark C. Miller

 /s/ John Patience                   Director                      March 29, 2001
____________________________________
John Patience

 /s/ Jack W. Schuler                 Director                      March 29, 2001
____________________________________
Jack W. Schuler

 /s/ James R. Weersing               Director                      March 29, 2001
____________________________________
James R. Weersing
</TABLE>

                                      46
<PAGE>

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

                         VENTANA MEDICAL SYSTEMS, INC.
                                 (in thousands)

<TABLE>
<CAPTION>
                                         Additions
                                    -------------------
                         Balance at Charged to Charged                Balance at
                         Beginning  Costs and  to Other                 End of
       Description       of Period   Expenses  Accounts   Deductions    Period
       -----------       ---------- ---------- --------   ----------  ----------
<S>                      <C>        <C>        <C>        <C>         <C>
Year Ended December 31,
 2000
  Deducted from asset
   accounts:
    Allowance for
     doubtful accounts..    $883      $1,895    $  30(1)    $  169(2)   $2,639
                            ====      ======    =====       ======      ======
    Allowance for
     obsolete
     inventory..........    $476      $4,310    $ --        $2,429(3)   $2,357
                            ====      ======    =====       ======      ======
Year Ended December 31,
 1999
  Deducted from asset
   accounts:
    Allowance for
     doubtful accounts..    $694      $  196    $ 152(1)    $  159(2)   $  883
                            ====      ======    =====       ======      ======
    Allowance for
     obsolete
     inventory..........    $104      $  408    $ --        $   36(3)   $  476
                            ====      ======    =====       ======      ======
Year Ended December 31,
 1998
  Deducted from asset
   accounts:
    Allowance for
     doubtful accounts..    $300      $  392    $  41(1)    $   39(2)   $  694
                            ====      ======    =====       ======      ======
    Allowance for
     obsolete
     inventory..........    $104      $  --     $ --        $  --       $  104
                            ====      ======    =====       ======      ======
</TABLE>
--------
(1) Charged to revenue

(2) Uncollectible accounts written off, net of recoveries

(3) Inventories written off, net of recoveries

                                       47
<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., as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ventana Medical Systems, Inc., at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

   As discussed in Note 1 to the consolidated financial statements, in 2000
the Company changed its method of accounting for revenue recognition.

                                          /s/ Ernst & Young LLP

Phoenix, Arizona
January 25, 2001

                                      F-1
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------

Current assets:
  Cash and cash equivalents................................ $ 38,512  $  1,787
  Trade accounts receivable, net of allowance for doubtful
   accounts of $2,639 and $883, respectively...............   16,682    20,776
  Inventories..............................................    8,100    13,474
  Prepaid expenses.........................................      460       574
  Deferred tax assets......................................    4,817     1,692
  Other current assets.....................................      492       722
                                                            --------  --------
    Total current assets...................................   69,063    39,025
Property and equipment, net................................   22,329    14,441
Intangibles, net...........................................   11,887    14,178
Capitalized software development costs, net................    1,190     1,084
Deferred tax assets, net of current portion................    3,985     4,433
Other assets...............................................    1,128       --
                                                            --------  --------
    Total assets........................................... $109,582  $ 73,161
                                                            ========  ========

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------

Current liabilities:
  Accounts payable......................................... $  5,943  $  4,017
  Other current liabilities................................   13,143     6,600
                                                            --------  --------
    Total current liabilities..............................   19,086    10,617
Long-term debt.............................................    3,408     2,044

Commitments and Contingencies

Stockholders' equity:
  Common stock--$.001 par value; 50,000,000 shares
   authorized, 15,444,122 and 13,593,640 shares issued and
   outstanding at December 31, 2000 and 1999,
   respectively............................................       15        14
  Additional paid-in-capital...............................  134,862    80,542
  Accumulated deficit......................................  (46,636)  (19,341)
  Accumulated other comprehensive income...................     (553)     (115)
  Treasury stock--40,000 shares, at cost...................     (600)     (600)
                                                            --------  --------
    Total stockholders' equity.............................   87,088    60,500
                                                            --------  --------
    Total liabilities and stockholders' equity............. $109,582  $ 73,161
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                      F-2
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                     --------------------------
                                                       2000     1999     1998
                                                     --------  -------  -------
<S>                                                  <C>       <C>      <C>
Sales:
  Reagents and other...............................  $ 49,682  $45,340  $31,967
  Instruments......................................    21,467   24,069   15,737
                                                     --------  -------  -------
                                                       71,149   69,409   47,704
Cost of goods sold.................................    36,377   21,218   14,542
                                                     --------  -------  -------
Gross profit.......................................    34,772   48,191   33,162
Operating expenses:
  Selling, general and administrative..............    43,800   32,381   23,805
  Research and development.........................    11,116    7,078    5,057
  Non-recurring expenses...........................     4,519      --     3,160
  Amortization of acquisition costs................     1,474    1,051      599
                                                     --------  -------  -------
(Loss) income from operations......................   (26,137)   7,681      541
Interest and other income (expense)................     1,346     (370)   1,089
                                                     --------  -------  -------
(Loss) income before taxes and cumulative effect of
 accounting change.................................   (24,791)   7,311    1,630
(Provision for) benefit from income taxes..........      (350)   5,500      --
                                                     --------  -------  -------
(Loss) income before cumulative effect of
 accounting change.................................   (25,141)  12,811    1,630
Cumulative effect of accounting change, net of
 applicable income tax benefit of $1,436...........    (2,154)     --       --
                                                     --------  -------  -------
    Net (loss) income..............................  $(27,295) $12,811  $ 1,630
                                                     ========  =======  =======
Basic earnings per common share:
  Before cumulative effect of accounting change....  $  (1.70) $   .95  $   .12
  Cumulative effect of accounting change...........      (.15)     --       --
                                                     --------  -------  -------
    Net (loss) income..............................  $  (1.85) $   .95  $   .12
                                                     ========  =======  =======
Diluted earnings per common share:
  Before cumulative effect of accounting change....  $  (1.70) $   .88  $   .11
  Cumulative effect of accounting change...........      (.15)     --       --
                                                     --------  -------  -------
    Net (loss) income..............................  $  (1.85) $   .88  $   .11
                                                     ========  =======  =======
Pro forma amounts assuming the accounting changes
 are applied retroactively:
  Net (loss) income................................  $(25,141) $11,668  $ 1,282
  Net (loss) income per common share:
    --Basic........................................    $(1.70) $   .88  $   .10
    --Diluted......................................    $(1.70) $   .80  $   .09
Shares used in computing earnings per common share:
  --Basic..........................................    14,770   13,478   13,320
                                                     ========  =======  =======
  --Diluted........................................    14,770   14,636   14,627
                                                     ========  =======  =======
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                    Accumulated
                            Common Stock    Additional                 Other
                          -----------------  Paid-In   Accumulated Comprehensive Treasury
                            Shares   Amount  Capital     Deficit      Income      Stock    Total
                          ---------- ------ ---------- ----------- ------------- -------- --------
<S>                       <C>        <C>    <C>        <C>         <C>           <C>      <C>
Balance at January 1,
 1998...................  13,247,226  $13    $ 76,313   $(33,782)      $(141)     $ --    $ 42,403
Net income..............         --    --         --       1,630         --         --       1,630
Translation adjustment..         --    --         --         --          (52)       --         (52)
Comprehensive income....         --    --         --         --          --         --       1,578
Sale of common stock--
 other..................     174,593   --       1,502        --          --         --       1,502
Repayment of director's
 loans..................         --    --         901        --          --         --         901
Purchase of common
 stock..................         --    --         --         --          --        (600)      (600)
                          ----------  ---    --------   --------       -----      -----   --------
Balance at December 31,
 1998...................  13,421,819   13      78,716    (32,152)       (193)      (600)    45,784
Net income..............         --    --         --      12,811         --         --      12,811
Translation adjustment..         --    --         --         --           78        --          78
Comprehensive income....         --    --         --         --          --         --      12,889
Sale of common stock--
 other..................     171,821    1       1,826        --          --         --       1,827
                          ----------  ---    --------   --------       -----      -----   --------
Balance at December 31,
 1999...................  13,593,640   14      80,542    (19,341)       (115)      (600)    60,500
Net (loss) income.......         --    --         --     (27,295)        --         --     (27,295)
Translation adjustment..         --    --         --         --         (438)       --        (438)
Comprehensive (loss)
 income.................         --    --         --         --          --         --     (27,733)
Sale of common stock,
 net of issuance costs
 of $3,154..............   1,250,000    1      46,846        --          --         --      46,847
Exercise of stock
 options................     600,482  --        6,052        --          --         --       6,052
Tax benefit from stock
 options................         --   --        1,422        --          --         --       1,422
                          ----------  ---    --------   --------       -----      -----   --------
Balance at December 31,
 2000...................  15,444,122  $15    $134,862   $(46,636)      $(553)     $(600)  $ 87,088
                          ==========  ===    ========   ========       =====      =====   ========
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   ---------------------------
                                                     2000     1999      1998
                                                   --------  -------  --------
<S>                                                <C>       <C>      <C>
Operating activities:
Net (loss) income................................  $(27,295) $12,811  $  1,630
Adjustments to reconcile net (loss) income to net
 cash used in operating activities:
  Depreciation and amortization..................     5,497    3,689     2,850
  Cumulative effect of accounting change.........     2,154      --        --
  Non-cash intangibles and property and equipment
   charges.......................................     7,914      --        --
  Purchased in-process research and development..       --       --      2,900
  Benefit from deferred taxes....................    (1,255)  (5,980)     (145)
Changes in operating assets and liabilities net
 of effects from acquisitions:
  Accounts receivable............................     4,094   (4,245)   (6,340)
  Inventories....................................     5,374   (2,465)   (4,160)
  Other assets...................................    (1,040)  (1,002)      198
  Accounts payable...............................     1,926      481       (63)
  Other current liabilities......................     4,389      815       586
                                                   --------  -------  --------
    Net cash provided by (used in) operating
     activities..................................     1,758    4,104    (2,544)

Investing activities:
Purchase of property and equipment...............   (15,150)  (6,843)   (5,377)
Purchase of intangible assets....................    (1,208)     (78)       (5)
Acquisition of certain Oncor, Inc. assets........       --       --     (5,000)
Acquisition of Biotechnology Tools, Inc..........       --      (358)   (5,257)
Acquisition of Quantitative Diagnostic
 Laboratories....................................    (2,500)     --        --
                                                   --------  -------  --------
    Net cash used in investing activities........   (18,858)  (7,279)  (15,639)

Financing activities:
Net proceeds from private placement..............    46,847      --        --
Issuance of common stock.........................     6,052    2,460     2,403
Net change in long term debt.....................     1,364      --        --
Purchase of common stock.........................       --       --       (600)
Repayment of debt, net of gain on
 extinguishment..................................       --       --        (46)
                                                   --------  -------  --------
Net cash provided by financing activities........    54,263    2,460     1,757
Effect of exchange rate changes on cash..........      (438)      78       (52)
                                                   --------  -------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................    36,725     (637)  (16,478)
Cash and cash equivalents, beginning of year.....     1,787    2,424    18,902
                                                   --------  -------  --------
    Cash and cash equivalents, end of year.......  $ 38,512  $ 1,787  $  2,424
                                                   ========  =======  ========

Supplemental cash flow information:
  Income taxes paid..............................  $    350  $   104  $    240
  Interest paid..................................  $    278  $   145  $    260
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     (In thousands, except per share data)

1. Organization and Significant Accounting Policies

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

   Revenue Recognition: The Company recognizes revenue upon shipment of its
products that do not require installation at the customer's site. During the
year ended December 31, 2000, the Company changed its methods of revenue
recognition for its products which do require installation at the customer's
site in accordance with Staff Accounting Bulletin (SAB) No. 101 Revenue
Recognition in Financial Statements. Previously, the Company had recognized
revenue for products upon shipment to the customer, but prior to installation
at the customer's site. The Company had routinely completed such installation
services in the past, but a substantive effort is required and the Company is
the only one who can perform the service. Under the new accounting method
adopted retroactive to January 1, 2000, the Company now recognizes revenue
upon the completion of installation of the product at the customer's site. The
cumulative effect of the accounting change resulted in a charge to operations
of $2,154 (net of an income tax benefit of $1,436), which is included in
operations for the year ended December 31, 2000. The effect of the change on
the year-ended 2000 was to decrease income before cumulative effect of
accounting change by $539 ($.04 per basic and diluted shares, respectively).

   For the year ended December 31, 2000, the Company recognized $2,392 in
revenue that is included in the cumulative effect adjustment as of January 1,
2000. The effect of that revenue was to increase income by $1,064 (after
reduction for income taxes of $710) during that period.

   Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Ventana Medical
Systems, S.A., Ventana Medical Systems GmbH, Ventana Medical Systems Japan
K.K., Ventana Medical Systems Australia Pty. Ltd., BioTek Solutions, Inc.
(BioTek) and BioTechnology Tools, Inc. (BTTI). All significant intercompany
accounts and transactions have been eliminated.

   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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

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

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

   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
generally 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 (RAPs), qualified reagent installed bases
(QRIBs) and rentals. New instruments are no longer placed into RAP programs.
However, certain long-standing 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

                                      F-6
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Organization and Significant Accounting Policies (continued)

at the end of the evaluation period must purchase, rent or return the
instrument. The manufacturing cost of demonstration, RAP, QRIB and rental
instruments is amortized over a period of 3 to 4 years to cost of goods sold
(RAPs and rentals) and selling, general and administrative expenses (QRIBs and
demonstrations).

   Intangibles: Intangible assets consist primarily of goodwill, customer
base, developed technology, workforce in place and supply agreements acquired
in the acquisitions of BioTek, BTTI, certain assets and technology from Oncor,
Inc., QDL and patents (see Note 12). Such assets are amortized on a straight-
line basis over estimated useful lives ranging from 5 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 undiscounted cash flows generated by
those assets to their carrying values. The Company periodically evaluates the
useful lives assigned to the various categories of intangible assets
considering such factors as: (i) demand, obsolescence, competition, market
share, and other economic factors; (ii) legal and regulatory provisions; and
(iii) the periods expected to be benefited.

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

<TABLE>
<CAPTION>
                                                                   2000   1999
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Capitalized costs........................................... $1,764 $1,508
     Less accumulated amortization...............................    574    424
                                                                  ------ ------
                                                                  $1,190 $1,084
                                                                  ====== ======
</TABLE>

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

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

   No single customer accounted for 5% or more of the Company's 2000, 1999 or
1998 net sales.

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

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

                                      F-7
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Organization and Significant Accounting Policies (continued)


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

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

   Recently Issued Accounting Standards: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities." This statement provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. In
June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, (FAS 138), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment to FASB
Statement No 133." This statement amended certain provisions of FAS 133.
Accordingly, the Company will adopt FAS 133, as amended by FAS 138, effective
the first quarter of fiscal 2001. Management believes this statement will not
have an impact on the Company's financial statements.

2. Inventories

   Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  2000   1999
                                                                 ------ -------
<S>                                                              <C>    <C>
Raw materials and work-in-process............................... $3,603 $ 5,729
Finished goods..................................................  4,497   7,745
                                                                 ------ -------
                                                                 $8,100 $13,474
                                                                 ====== =======
</TABLE>

3. Property and Equipment

   Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 2000    1999
                                                                ------- -------
<S>                                                             <C>     <C>
Diagnostic instruments......................................... $ 8,402 $10,471
Computers and related equipment................................   6,995   5,215
Machinery and equipment........................................   6,985   5,703
Land...........................................................   2,987     --
Fixed assets under capital lease...............................   2,250     --
Leasehold improvements.........................................     867     730
Furniture and fixtures.........................................     616     295
                                                                ------- -------
                                                                 29,102  22,414
Less accumulated depreciation and amortization.................  10,458   8,098
Projects in progress...........................................   3,685     125
                                                                ------- -------
                                                                $22,329 $14,441
                                                                ======= =======
</TABLE>

                                      F-8
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Intangible Assets

   Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  2000    1999
                                                                 ------- -------
     <S>                                                         <C>     <C>
     Goodwill................................................... $ 7,637 $ 8,231
     Customer base..............................................   4,100   4,100
     Patents....................................................   1,778     570
     Supply contract............................................   1,200   1,200
     Developed technology.......................................   1,027   2,800
     Workforce in place.........................................     100     100
                                                                 ------- -------
                                                                  15,842  17,001
     Less amortization..........................................   3,955   2,823
                                                                 ------- -------
                                                                 $11,887 $14,178
                                                                 ======= =======
</TABLE>

5. Other Current Liabilities

   Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  2000    1999
                                                                 ------- ------
     <S>                                                         <C>     <C>
     Deferred revenue........................................... $ 4,868 $1,152
     Employee compensation and benefits.........................   3,147  2,050
     Contingent purchase consideration..........................   1,377    500
     Facility relocation........................................   1,117    --
     Long-term debt, current portion............................     836    555
     Product warranty...........................................     545    255
     Sales tax payable..........................................     315    193
     Other accrued liabilities..................................     938  1,895
                                                                 ------- ------
                                                                 $13,143 $6,600
                                                                 ======= ======
</TABLE>

6. Line of Credit

   The Company has a $10,000 line of credit arrangement with a bank which is
subject to renewal in March 2001. Borrowings under the line are collateralized
by the Company's receivables, inventories, machinery and equipment, and
intellectual property. The line of credit contains certain financial covenants
(measured quarterly) with which the Company must comply, prohibits the payment
of dividends on the Company's stock and limits the number of treasury shares
the Company may purchase. In addition, borrowings are limited based on
outstanding accounts receivable of the Company, which as of December 31, 2000
resulted in available borrowing of $10,000, of which, $6,436 has been
committed in support of various standby letters of credit. At December 31,
2000, the Company was not in compliance with certain covenants; however,
subsequent to year-end, the Company was granted a waiver through May 31, 2001
while the line of credit is being renegotiated with the bank.

                                      F-9
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Long-term Debt

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                    2000   1999
                                                                   ------ ------
     <S>                                                           <C>    <C>
     Notes payable for European facility, various interest
      rates......................................................  $2,090 $  --
     Note payable to a customer, installment payments over 16
      quarters beginning January 1, 2000, interest accruing at 7%
      beginning January 1, 2000..................................   1,135  1,652
     Capital lease and other obligations, various terms and
      interest rates.............................................   1,019    947
                                                                   ------ ------
                                                                    4,244  2,599
     Less current portion........................................     836    555
                                                                   ------ ------
                                                                   $3,408 $2,044
                                                                   ====== ======
</TABLE>

   Future payments under the above obligations are as follows at December 31,
2000:

<TABLE>
     <S>                                                                  <C>
     2001................................................................ $  836
     2002................................................................    871
     2003................................................................    631
     2004................................................................    316
     2005................................................................    170
     Thereafter..........................................................  1,420
                                                                          ------
                                                                          $4,244
                                                                          ======
</TABLE>

8. Stockholders' Equity

   On February 26, 1996, the Company sold 647 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 acquired company.
Receivables of $901 due from the directors were repaid on February 26, 1998.

   Warrants for the purchase of 440 shares of Common Stock were outstanding
and fully exercisable at December 31, 2000, 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 1,340
shares of common stock have been reserved for grant to employees and
directors. In order to be incentive stock options (ISOs), options must be
granted at not less than 100% of fair market value of the Company's stock on
the date of grant. Options generally vest over a four-year period and expire
five to ten years after the date of grant. However, the Board of Directors, at
its discretion, may decide the period over which options become exercisable
and their expiration dates.

   In April 1996, the Company's Board of Directors authorized the 1996 Stock
Option Plan ("the 1996 Plan"). A total of 2,475 shares of common stock have
been reserved for issuance under the 1996 Plan. In order to be ISOs, options
must be granted at not less than 100% of the fair market value of the
Company's stock on the dates of grant. Options generally vest over four years
(grants made prior to 1998) or five years (1998 and subsequent grants) and
expire in ten years.

                                     F-10
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Stockholders' Equity (continued)

   In April 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan ("the 1996 Purchase Plan"). A total of 400 shares of common
stock have been reserved for issuance under the 1996 Purchase Plan. A total of
201 shares of common stock have been issued under the 1996 Purchase Plan at a
prices ranging from $8.18 to $19.98 per share. The 1996 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions,
subject to certain limitations. The price at which stock may be purchased
under the 1996 Purchase Plan is equal to 85% of the 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 shares of common stock for
issuance thereunder. Commencing with the Company's 1997 annual meeting of
stockholders, each nonemployee director was to be granted a nonstatutory
option to purchase an amount of shares of the Company's common stock equal to
5 shares multiplied by a fraction, the numerator of which shall be $15.00 and
the denominator of which shall be the fair market value of one share of the
Company's common stock on the dates of grant. The exercise price of options
granted under the Director Plan are equal to the fair market value of one
share of the Company's common stock on the dates of grant. A total of 60
shares were issued under the Plan at $10.125-$26.37 per share. Effective
November 1998, the Director Plan was modified such that options are granted on
a discretionary basis at fair value on the date of grant. 99 shares were
issued under this version of the Plan in 1998, bringing the total shares
issued under the prior and current version of the Director Plan to 159. 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.

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

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

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

                                     F-11
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Stockholders' Equity (continued)

Rights at a discounted price and prior to the acquisition by the acquiring
person of 50% or more of the outstanding Common Stock, the Board of Directors
of the Company may exchange the Rights (other than those owned by the
acquiring person or its affiliates) for Common Stock of the Company at an
exchange ratio of one share of Common Stock per Right.

   In January 1999, the Company's Board of Directors authorized the 1998
Nonstatutory Stock Option Plan ("the 1998 NSO Plan"). Under this plan, a total
of 1,000 shares of common stock have been reserved for issuance to employees
and consultants of the Company, but under no circumstances to officers or
directors. Options generally vest over five years and expire ten years after
the date of grant, however, the Board of Directors, at its discretion, may
decide the period over which options become exercisable and their expiration
dates.

   In March 2000 the Company completed a private placement of 1,250,000 shares
of its common stock, raising $50 million in gross proceeds before deducting
commissions and expenses of the offering of $3,154. The shares were not
registered with the SEC in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended, as well
as similar exemptions contained in the securities laws, rules and regulations
of the applicable states. The shares may not be re-offered or resold in the
United States absent registration, or an applicable exemption from
registration requirements of the 1933 Act. The Company has earmarked the
proceeds for general corporate purposes, including the financing of product
and technology acquisitions, and consolidation of its Tucson-based operations
into a single site.

   Pro forma information regarding net income (loss) and earnings per share is
required by SFAS No. 123, and such information has been determined as if the
Company had accounted for its employee stock options and employee stock
purchase plan under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 2000,
1999 and 1998: risk-free interest rate of 6.0% and dividend yield of 0% for
all years, volatility factor of the expected market price of the Company's
common stock of .835 and .507 and .619, 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.

   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:

<TABLE>
<CAPTION>
                                                      Year Ended December 31
                                                      ------------------------
                                                        2000     1999   1998
                                                      --------  ------ -------
     <S>                                              <C>       <C>    <C>
     Pro forma net (loss) income..................... $(35,254) $9,804 $(2,010)
                                                      ========  ====== =======
     Pro forma net (loss) income per share:
       Basic......................................... $  (2.39) $  .77 $  (.14)
       Diluted....................................... $  (2.39) $  .67 $  (.14)
</TABLE>

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

                                     F-12
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Stockholders' Equity (continued)

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

<TABLE>
<CAPTION>
                                                      Outstanding Stock Options
                                                      --------------------------
                                                                Weighted Average
                                                      Number of  Exercise Price
                                                       Options     Per Share
                                                      --------- ----------------
   <S>                                                <C>       <C>
   Balance at January 1, 1998........................   1,627        $10.88
     Granted.........................................     540         19.68
     Exercised.......................................    (121)         7.52
     Canceled........................................    (126)        11.76
                                                        -----        ------
   Balance at December 31, 1998......................   1,920        $13.52
     Granted.........................................   1,035         18.23
     Exercised.......................................    (133)        10.43
     Canceled........................................    (343)        12.24
                                                        -----        ------
   Balance at December 31, 1999......................   2,479        $15.47
     Granted.........................................     876         23.15
     Exercised.......................................    (377)        13.07
     Canceled........................................    (475)        13.90
                                                        -----        ------
   Balance at December 31, 2000......................   2,503        $18.14
                                                        =====        ======
</TABLE>

   The weighted average fair values of stock options granted during 2000,
1999, and 1998, for which the exercise price was equal to the fair market
value of the stock were $19.53, $9.03, and $10.12 per share, respectively.

<TABLE>
<CAPTION>
                                     Stock Options at December 31, 2000
                          --------------------------------------------------------
                                  Options Outstanding         Options Exercisable
                          ----------------------------------- --------------------
                                                   Weighted
                                       Weighted     Average
                                        Average    Remaining              Weighted
                           Number of   Exercise   Contractual             Average
                            Options      Price       Life       Number    Exercise
Range of Exercise Prices  Outstanding Outstanding   (Years)   Exercisable  Price
------------------------  ----------- ----------- ----------- ----------- --------
<S>                       <C>         <C>         <C>         <C>         <C>
$ 0.60-$ 1.62...........        62      $  .96        4.5           62     $  .96
$10.00-$10.15...........       136       10.04        6.4          124      10.04
$12.25-$14.63...........       396       12.72        7.1          271      12.66
$15.00-$17.88...........       869       17.35        7.9          429      17.31
$20.13-$27.38...........     1,040       22.95        9.2          226      22.51
                             -----      ------        ---        -----     ------
                             2,503      $18.14        8.1        1,112     $15.51
                             =====      ======        ===        =====     ======
</TABLE>

9. Income Taxes

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

<TABLE>
<CAPTION>
                                                        Years Ended December
                                                                 31,
                                                         2000     1999   1998
                                                       --------  ------ -------
     <S>                                               <C>       <C>    <C>
     Domestic......................................... $(22,137) $5,764 $ 3,261
     Foreign..........................................   (2,654)  1,547  (1,631)
                                                       --------  ------ -------
                                                       $(24,791) $7,311 $ 1,630
                                                       ========  ====== =======
</TABLE>

                                     F-13
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Income Taxes (continued)

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

<TABLE>
<CAPTION>
                                               Years Ended December 31,
                                                2000       1999       1998
                                               --------  ---------   --------
     <S>                                       <C>       <C>         <C>
     Current:
       U.S. Federal........................... $   --    $     150   $   145
       State..................................     350         250       --
       Foreign................................     --           80       --
                                               -------   ---------   -------
                                                   350         480       145
     Deferred:
       U.S. Federal...........................     --       (5,083)     (145)
       State..................................     --         (897)      --
       Foreign................................     --          --        --
                                               -------   ---------   -------
                                                   350      (5,980)     (145)
                                               -------   ---------   -------
                                               $   350   $  (5,500)  $   --
                                               =======   =========   =======

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

<CAPTION>
                                                  % of Pre-tax Income
                                               Years Ended December 31,
                                                2000       1999       1998
                                               --------  ---------   --------
     <S>                                       <C>       <C>         <C>
     U.S. Federal Statutory Rate..............     (35)%        35 %      35 %
     State taxes..............................    (6.5)          8         8
     Domestic differences not previously
      benefitted..............................     --           (8)       (34)
     Change in valuation allowance............      43        (110)       (9)
                                               -------   ---------   -------
     Effective tax rate.......................     1.5 %       (75)%     -- %
                                               =======   =========   =======
</TABLE>

                                     F-14
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Income Taxes (continued)

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

<TABLE>
<CAPTION>
                                                                December 31,
                                                                2000     1999
                                                              --------  -------
   <S>                                                        <C>       <C>
   Non-current:
     Net operating loss carry forwards....................... $  8,264  $ 1,336
     Foreign loss carry forwards.............................    3,105    1,125
     Depreciation expense....................................    1,242    1,001
     General business credit carry forwards..................    1,033    1,033
     Capitalized software development costs..................   (1,015)     --
     In-process R&D write-off................................      999    1,077
     Capitalized research and development....................      630    1,264
     AMT credit carry forward................................      242      --
     Other...................................................      144      --
                                                              --------  -------
                                                                14,644    6,836
   Current:
     Deferred revenue........................................    1,889      456
     Allowance for bad debts.................................    1,124      292
     Facility shutdown accruals..............................      447      --
     AMT credit carry forward................................      --       237
     Miscellaneous...........................................    1,357      707
                                                              --------  -------
                                                                 4,817    1,692
   Total deferred tax assets.................................   19,461    8,528
   Valuation reserve.........................................  (10,659)  (2,403)
                                                              --------  -------
       Net deferred tax assets............................... $  8,802  $ 6,125
                                                              ========  =======
</TABLE>

   During the fourth quarter of 1999, the Company reevaluated the estimated
amount of valuation allowance required in light of the profitability achieved
in 1998 and 1999 as well as the expected profits in 2000 to reduce the
valuation allowance on deferred tax assets in accordance with SFAS No. 109,
Accounting for Income Taxes ("SFAS No. 109") to an amount the Company believes
is more likely than not of being recovered. Accordingly, a credit to income
tax benefit of $5,980 was reflected in the fourth quarter of 1999's
consolidated statement of operations and the corresponding deferred tax asset
was recorded on the Company's consolidated balance sheet. The amount of net
deferred tax assets estimated to be recoverable was based upon the Company's
assessment of the likelihood of near term operating income, coupled with
uncertainties with respect to the impact of future competitive and market
conditions.

   The valuation allowance decreased by $1,007 in 1998 and $8,006 in 1999. The
1999 decrease relates to the assessment described in the previous paragraph.
The 1998 deferred tax benefit of $145 exactly offset the 1998 current expense
of $145, and thus no 1998 tax provision is reflected in the accompanying
consolidated statement of operations.

   No additional valuation allowance was considered necessary for the deferred
tax assets of $8,802 that are reflected on the consolidated balance sheets at
December 31, 2000 as management believes that such assets will be recovered in
the next several years. The deferred tax assets reflected on the consolidated
balance sheets increased during 2000 by $2,677 which was directly attributable
to the cumulative effect of the accounting change relating to the new revenue
recognition policy adopted January 1, 2000, and the income tax benefit
relating to stock option exercises by employees in the first quarter of 2000
reflected in the Company's equity

                                     F-15
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Income Taxes (continued)

accounts. The Company did not recognize any additional deferred tax assets
that arose in 2000 relative to the increases in the net operating loss carry
forwards as it cannot be readily determined with certainty to what extent such
assets will be recoverable in the future. As a result, the Company's valuation
allowance increased by $8,256 during 2000. The Company does not anticipate
recording any income tax benefit or expense of any material amount in 2001
unless a change, positively or negatively, in the valuation allowance for the
deferred tax assets is warranted based upon the trends in the Company's future
earnings.

   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, 2000, the Company has net operating loss carry forwards for
federal and state income tax purposes of approximately $21,103 and $18,152,
respectively. These federal and state carry forwards will begin to expire in
2007 and 2005, respectively, if not previously utilized. Approximately $1,400
of state net operating loss carry forwards expired unused in 2000. The Company
also has research and development tax credit carry forwards of approximately
$1,033 which will begin to expire in 2005, if not previously utilized.
Utilization of the Company's net operating loss carry forwards will be subject
to limitations due to the "change in ownership" provisions of the Internal
Revenue Code of 1996, as amended, as a result of the Company's prior issuances
of equity securities. These carry forwards, therefore, may expire prior to
being fully utilized. Future financings may cause additional changes in
ownership and further limitations on the use of federal net operating loss
carry forwards. In addition, the Company has certain foreign net operating
loss carry forwards approximating $6,900 which begin to expire in 2001.

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, 2000 are as follows:

<TABLE>
     <S>                                                                  <C>
     2001................................................................ $1,119
     2002................................................................    800
     2003................................................................    566
     2004................................................................    345
     2005................................................................    190
                                                                          ------
                                                                          $3,020
                                                                          ======
</TABLE>

   Rent expense totaled $1,653, $1,259 and $548 for the years ended December
31, 2000, 1999 and 1998, respectively.

   In 2000, the Company entered into purchase commitments totaling $15,328 for
the construction of a new corporate headquarters and manufacturing facility in
suburban Tucson, Arizona.

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

   The Company filed legal actions against CytoLogix Corp. in 1999 and 2000
alleging patent infringement. Management believes the Company will prevail on
its claims, however, there can be no assurance of the final

                                     F-16
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Commitments and Contingencies (continued)

resolution. CytoLogix Corp. has filed three separate legal actions against the
Company in various courts. One complaint claims that Ventana misappropriated
CytoLogix's trade secrets and seeks assignment of a specific Company patent,
treble damages (unspecified) and an injunction against further sales of the
Company's Discovery and BenchMark instruments. In another action in Germany,
CytoLogix seeks to invalidate a specific German patent that the Company owns.
Lastly, CytoLogix claims that the Company infringed on two of CytoLogix's
patents and seeks assignment of the Company's patent applications, treble
damages (unspecified) and an injunction against further sales of the Company's
Discovery and BenchMark instruments. Management believes that the Company has
meritorious defenses to these claims and that resolution of these matters will
not have a material impact on the Company's financial statements.

   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 all claims outstanding
will not have a material effect on the Company's financial position, cash
flows or results of operations.

11. Operating Segment and Enterprise Data

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

                                     F-17
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. Operating Segment and Enterprise Data (continued)

   The Company's Chief Operating Decision Maker evaluates performance and
allocates resources based on profit or loss from operations. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Inventory transfers to foreign
subsidiaries are made at standard cost. The North America operations include
corporate activity (including all interest income) that benefits the Company
as a whole. The following summary includes net sales only to unaffiliated
customers. Net sales are attributed to segments based on the location from
which the shipment to the customer was made; reagents and instruments are sold
in each segment.

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

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

<CAPTION>
                                       Year ended December 31, 1998
                             -------------------------------------------------
                             North America International Eliminations  Totals
                             ------------- ------------- ------------ --------
<S>                          <C>           <C>           <C>          <C>
Sales to external
 customers.................    $ 41,469       $ 6,235      $    --    $ 47,704
Nonrecurring expenses......       3,160           --            --       3,160
Depreciation and
 amortization expense......       2,565           285           --       2,850
Segment profit (loss)......       3,147        (1,631)          114      1,630
Segment assets.............      74,724         8,257       (26,701)    56,280
Expenditures for long-lived
 assets....................      12,154           404           --      12,558
</TABLE>

12. Acquisitions

 Bio Technology Tools, Inc.

   The Company acquired Bio Technology Tools, Inc. (BTTI) on October 14, 1998
for $6,457. The acquisition has been accounted for as a purchase, which
resulted in $6,196 allocated to goodwill. The results of operations of BTTI
are included in the accompanying consolidated financial statements from the
date of acquisition. BTTI manufactures and markets a wide range of microtome
products, tissue processors, cryogenic hardware and peripheral equipment,
primarily for research and educational institutions in the United States,
Europe and Japan. Goodwill recorded in the connection with this transaction is
being amortized on a straight-line basis over a 15-year period (see Note 13).

 Acquisition of Certain Technology from Oncor, Inc.

   The Company acquired certain oncology diagnostic technology and assets from
Oncor, Inc. on November 23, 1998 for $5,000 in cash. The Company plans to
incorporate certain aspects of the acquired

                                     F-18
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Acquisitions (continued)

technology in future products. The Company charged to expense at the date of
the acquisition $2,900 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 is included as non-recurring expense in the
accompanying consolidated statements of operations.

   The purchase price for the technology was allocated as follows:

<TABLE>
     <S>                                                                 <C>
     Tangible net assets................................................ $  521
     In-process research and development expense........................  2,900
     Goodwill...........................................................    279
     Supply agreement...................................................  1,200
     Workforce in place.................................................    100
                                                                         ------
                                                                         $5,000
                                                                         ======
</TABLE>

   The Company is amortizing goodwill on a straight-line basis over 15 years.
The value assigned to an existing supply agreement assumed by the Company is
being amortized on a straight-line basis over the life of the patent
underlying the key technology involved in the supply agreement. The workforce
in place costs are being amortized on a straight-line basis over 5 years.

 Quantitative Diagnostic Laboratories, Inc.

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

13. Charges and Non-Recurring Expenses

   Fiscal 2000 results were negatively impacted by $22,524 in write-offs and
accruals relating to several different issues. The following table summarizes
details of the charges and non-recurring expenses:

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

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

                                     F-19
<PAGE>

                         VENTANA MEDICAL SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. Charges and Non-Recurring Expenses (continued)


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

   Charges of $8,615 were recorded in recognition of the decreased value of
certain instrument inventory, fixed assets and intangible assets given the
launch of the Company's new BenchMark advanced staining system in 2000. In
addition, intangible assets associated with the Company's 1996 acquisition of
BioTek Solutions, Inc. were written down $3,074 to reflect the impact of
discontinuing certain products. The Techmate IHC staining system product line
acquired in the BioTek transaction was among those whose value was impacted by
the launch of BenchMark.

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

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

14. Earnings (loss) Per Share

   The following tables sets forth the components of the computation of 2000,
1999 and 1998 basic and diluted earnings (loss) per share:

<TABLE>
<CAPTION>
                                                         2000     1999    1998
                                                       --------  ------- ------
   <S>                                                 <C>       <C>     <C>
   Numerator:
     Net (loss) income................................ $(27,295) $12,811 $1,630
                                                       ========  ======= ======
   Denominator:
     Basic:
       Weighted average shares........................   14,770   13,478 13,320
     Effect of dilutive securities:
       Employee stock options.........................      --       656    776
       Warrants.......................................      --       502    531
                                                       --------  ------- ------
                                                         14,770   14,636 14,627
                                                       ========  ======= ======
</TABLE>

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

                                     F-20