VENTANA MEDICAL SYSTEMS INC, 424B4, 1997-02-12

VENTANA MEDICAL SYSTEMS INC
424B4, 1997-02-12
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-18471

2,700,000 SHARES

LOGO

VENTANA MEDICAL SYSTEMS, INC.
COMMON STOCK

Of the 2,700,000 shares (the "Shares") of common stock, par value $.001 per
share (the "Common Stock"), offered hereby (the "Offering"), 1,850,000 Shares
are being sold by Ventana Medical Systems, Inc. ("Ventana" or the "Company") and
850,000 Shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of Shares by the Selling
Stockholders.

The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under
the symbol "VMSI." On February 11, 1997, the last reported bid and sales price
of the Common Stock on Nasdaq was $14 5/8 per share. See "Price Range of Common
Stock and Dividend Policy."

For a discussion of certain risks of an investment in the shares of Common
Stock offered hereby, see "Risk Factors" on pages 6 to 17.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS* COMPANY+ STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $15.00 $0.825 $14.175 $14.175
Total++....................... $40,500,000 $2,227,500 $26,223,750 $12,048,750
</TABLE>

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

* The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

+ Before deducting expenses of the Offering payable by the Company estimated to
be $525,000.

++ The Company and certain of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 405,000 additional shares of
Common Stock on the same terms per share solely to cover over-allotments, if
any. If such option is exercised in full, the total price to public will be
$46,575,000, the total underwriting discounts and commissions will be
$2,561,625, the total proceeds to the Company will be $26,664,111, and the
total proceeds to Selling Stockholders will be $17,349,264. See
"Underwriting" and "Principal and Selling Stockholders."

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

The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of certificates therefor
will be made through the offices of Dillon, Read & Co. Inc., New York, New York,
on or about February 18, 1997. The Underwriters include:

DILLON, READ & CO. INC.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY

The date of this Prospectus is February 12, 1997
<PAGE> 2

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

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting." The Shares of Common Stock offered hereby are subject to a high
degree of risk. See "Risk Factors." This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
and the timing of events could differ materially from those contemplated by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.

THE COMPANY

Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate immunohistochemistry ("IHC") and in situ hybridization
("ISH") tests for the analysis of cells and tissues on microscope slides. These
tests are important tools used in diagnosing and selecting appropriate treatment
for cancer. With a worldwide installed base of 801 instruments as of December
31, 1996, the Company believes that it is the worldwide leader in the automated
IHC testing market. The Company estimates that its installed base of instruments
is approximately four times as large as the combined installed base of all of
the Company's current competitors. Ventana has placed instruments with 35 of the
42 cancer centers identified as principal cancer research centers by the
National Cancer Institute including the Mayo Clinic, the Dana Farber Cancer
Institute, The Johns Hopkins University, the M.D. Anderson Cancer Center and the
Fred Hutchinson Cancer Center. Each Ventana proprietary system placed typically
provides a recurring revenue stream as customers consume reagents and supplies
with each test conducted.

Ventana's "patient priority" systems (the Ventana ES and gen II) perform
multiple tests rapidly on a single patient biopsy thereby providing a matrix of
diagnostic data to the pathologist. In February 1996, Ventana acquired BioTek
Solutions, Inc. ("BioTek") for several strategic reasons, including its
installed instrument base and complementary "batch processing" systems, which
perform single tests on multiple patient biopsies. These complementary systems
enable the Company to serve the full range of health care institutions that
conduct IHC tests. Ventana increased its installed base by 287 instruments as a
result of the acquisition, thereby increasing the corresponding aggregate
recurring reagent revenue stream and positioning the Company as the worldwide
leader in automated IHC testing. Ventana believes significant synergies and
margin improvements can continue to be realized from the further integration of
BioTek into Ventana's business model in which important, value-added activities
are performed internally, in contrast to BioTek's reliance on third parties.

Cancer is the second leading cause of death in the United States,
accounting for approximately 25% of deaths. Currently, approximately 10 million
people in the United States have a history of invasive cancer. It is estimated
that 1.4 million new cases of invasive cancer will be diagnosed each year.
Recent studies have indicated that the mortality rates of certain types of
cancer have decreased which may be attributed to, among other factors, earlier
detection and selection of appropriate therapies. The vast majority of IHC
testing associated with cancer diagnosis and treatment in the United States is
conducted in an aggregate of approximately 2,200 clinical institutions and
reference and research laboratories which the Company estimates create the
opportunity for the placement of as many as 2,500 automated IHC testing
instruments. The Company believes that less than 25% of such institutions and
laboratories currently conduct IHC testing on an automated basis. The
international market for instrument placements is estimated by the Company to be
approximately 1.2 times the size of the United States market, with Europe
accounting for the majority of the international market potential.

As compared to manual IHC testing, Ventana's automated systems provide
improved reliability, reproducibility and consistency of test results. The
systems' economic advantages include improved visualization quality and faster
turnaround time, increased test throughput, a reduced dependence on skilled
laboratory technicians and reduced cost per test. The Company believes it will
play a critical, expanding role in cancer science as researchers will use
Ventana systems to accelerate the identification and development of new tests
and that the Company's installed base of instruments will speed the
commercialization and clinical implementation of such new tests.

The main element of the Company's strategy to strengthen its leadership
position in automated IHC testing is to maximize instrument placements in order
to create a barrier that competitors will need to overcome. To achieve this
objective, the Company plans to introduce a lower cost instrument which targets
potential patient priority customers (the Ventana NexES) and has commenced
European sales of a lower cost instrument for potential batch processing
customers (the TechMate 250). The Company believes that the introduction of the
NexES will enable it to increase its emphasis on instrument placements through
reagent programs ("RPs"). In an RP, the Company provides the customer with the
use of an instrument with no capital investment with the objective of creating
recurring reagent revenue. The Company believes that it can accelerate the rate
of expansion of its installed base of instruments by using RPs because the
required capital investment associated with a purchase, a significant sales
hurdle for many potential customers, will be eliminated.

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THE OFFERING

Common Stock offered by the
Company............................ 1,850,000 shares

Common Stock offered by the Selling
Stockholders..................... 850,000 shares

Total............................ 2,700,000 shares

Common Stock to be outstanding
after the Offering................. 12,828,238 shares(1)

Use of proceeds.................... For general corporate purposes, which may
include expansion of sales and marketing
activities, research and development,
clinical trials, capital expenditures,
repayment of indebtedness and working
capital.

Nasdaq National Market symbol...... VMSI
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(1) Includes 10,978,238 outstanding shares of Common Stock and the 1,850,000
Shares of Common Stock offered by the Company hereby. Excludes 784,613
shares of Common Stock issuable upon exercise of outstanding warrants and
715,235 shares of Common Stock issuable upon the exercise of options
outstanding under the Company's stock option plans.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments.................................. $ 1,162 $ 2,588 $ 4,644 $ 8,591
Reagents and other........................... 1,519 3,339 5,969 15,538
------- ------- ------- --------
Total net sales........................... 2,681 5,927 10,613 24,129
Cost of goods sold............................. 1,722 2,531 4,282 10,632
------- ------- ------- --------
Gross profit................................... 959 3,396 6,331 13,497
Operating expenses:
Research and development..................... 2,100 1,926 2,239 2,749
Selling, general and administrative.......... 4,067 6,899 7,435 11,206
Nonrecurring expenses........................ -- -- -- 10,262
Amortization of intangibles.................. -- -- -- 424
------- ------- ------- --------
Loss from operations........................... (5,208) (5,429) (3,343) (11,144)
Other income (expense)......................... 229 59 74 (137)
------- ------- ------- --------
Net loss....................................... $(4,979) $(5,370) $(3,269) $(11,281)
======= ======= ======= ========
Net loss per share, as adjusted(1)............. $ (0.38) $ (1.16)
======= ========
Shares used in computing net loss per share, as
adjusted(1).................................. 8,664 9,687
======= ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................. $ 11,067 $ 36,766
Long-term debt.................................................... 12,500 12,500
Working capital................................................... 15,888 41,587
Total assets...................................................... 32,410 58,109
Accumulated deficit............................................... (33,410) (33,410)
Total stockholders' equity........................................ 15,270 40,969
</TABLE>

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(1) See Note 1 to the Consolidated Financial Statements for information
concerning the computation of net loss per share, as adjusted.

(2) Adjusted to give effect to the sale of the Shares of Common Stock offered by
the Company hereby and the receipt of the net proceeds thereof (at the
public offering price of $15.00 per share). See "Use of Proceeds,"
"Capitalization" and "Price Range of Common Stock and Dividend Policy."

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<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results and the timing of events could
differ materially from those contemplated by such forward-looking statements.
Factors that could cause such differences include, but are not limited to, those
discussed in Risk Factors and elsewhere in this Prospectus.

CONTINUING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

The Company has incurred cumulative losses of $33.4 million from its
inception in 1985 through December 31, 1996. In February 1996, the Company
acquired BioTek, which had sustained cumulative losses of $18.2 million since
its inception in October 1990. The Company's ability to achieve and sustain
profitability is dependent on a variety of factors including the extent to which
its instrument and reagent systems continue to achieve market acceptance, the
Company's ability to sell reagents to its customers, the Company's ability to
compete successfully, the Company's ability to develop, introduce, market and
distribute existing and new diagnostic systems, the level of expenditures
incurred by the Company in investing in product development and sales and
marketing, the Company's ability to expand manufacturing capacity as required
and the receipt of required regulatory approvals for products developed by the
Company. There can be no assurance that the Company will be successful in these
efforts. Moreover, although the Company achieved an operating profit in the
fourth quarter of 1996, the level of future profitability, if any, cannot be
accurately predicted and there can be no assurance that profitability will be
sustained on a quarterly or annual basis, or at all, or that the Company will
not incur operating losses in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."

FUTURE FLUCTUATIONS IN OPERATING RESULTS

The Company derives revenues from the sale of reagents and instruments. The
initial placement of an instrument is subject to a longer, less consistent sales
cycle than the sale of reagents, which begin and are typically recurring once an
instrument is placed. The Company's future operating results are likely to
fluctuate substantially from period to period because instrument sales are
likely to remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through RPs. The Company anticipates
that the percentage of instruments placed through RPs, in particular RP
placements without formal reagent purchase commitments, will increase in the
future which is likely to result in a decrease in instrument sales both in
absolute dollars and as a percentage of total revenues. In addition, average
daily reagent use by customers may fluctuate from period to period, which may
contribute to future fluctuations in revenues. In particular, customers who have
received instruments under RP arrangements that do not provide for specified
reagent purchase commitments are not contractually obligated to purchase
reagents from the Company, and there can be no assurance as to the timing or
volume of reagent purchases by such customers, if any. Furthermore, customers
that have entered into contractual RP agreements may also attempt to cancel all
or a portion of their reagent purchase commitments. Accordingly, there can be no
assurance as to the level of revenues that will be generated by customers
procuring instruments through RP arrangements, particularly from those customers
who obtain instruments without reagent purchase commitments. In the event that
RP customers do not purchase anticipated quantities of reagents, the Company
will have incurred substantial costs in supplying instruments to RP customers
without receipt of an adequate reagent revenue stream and the Company's
business, financial condition and results of operations would be materially and
adversely affected.

Sales of instruments may fluctuate from period to period because sales to
the Company's international distributors typically provide such distributors
with several months of instrument inventory, which the distributors will
subsequently seek to place with end-users. The Company's

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instrument installed base includes instruments shipped to DAKO A/S ("DAKO") and
recognized as sales. Furthermore, due both to the Company's increased sales
focus on smaller hospitals and laboratories and the relatively high reagent
sales growth rates in recent fiscal periods, the rate of growth in reagent sales
in future periods is likely to be below that experienced during the past several
fiscal periods. Other factors that may result in fluctuations in operating
results include the timing of new product announcements and the introduction of
new products and new technologies by the Company and its competitors, market
acceptance of the Company's current or new products, developments with respect
to regulatory matters, availability and cost of raw materials from its
suppliers, competitive pricing pressures, increased research and development
expenses, and increased marketing and sales expenses associated with the
implementation of the Company's market expansion strategies for its instrument
and reagent products. Future instrument and reagent sales could also be
adversely affected by the configuration of the Company's patient priority
systems, which require the use of the Company's detection chemistries,
particularly if and to the extent that competitors are successful in developing
and introducing new IHC instruments or if competitors offer reagent supply
arrangements having pricing or other terms more favorable than those offered by
the Company. Such increased competition in reagent supply could also adversely
affect sales of reagents to batch processing instrument customers since those
instruments do not require the use of the Company's reagents. In connection with
future introductions of new products, the Company may be required to incur
charges for inventory obsolescence in connection with unsold inventory of older
generations of products. To date, however, the Company has not incurred material
charges or expenses associated with inventory obsolescence in connection with
new product introductions. In addition, a significant portion of the Company's
expense levels is based on its expectation of a higher level of revenues in the
future and are relatively fixed in nature. Therefore, if revenue levels are
below expectations, operating results in a given period are likely to be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RATE OF MARKET ACCEPTANCE AND TECHNOLOGICAL CHANGE

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

RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS

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

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standpoint, may be difficult to manufacture in an efficient manner, may fail to
receive necessary regulatory clearances, may not achieve market acceptance or
may encounter other unanticipated difficulties. The failure of the Company to
develop, introduce and market new products on a timely basis or at all could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Research and Development."

COMPETITION

Competition in the diagnostic industry is intense and is expected to
increase. Competition in the diagnostic industry is based on, among other
things, product quality, performance, price and the breadth of a company's
product offerings. The Company's systems compete both with products manufactured
by competitors and with traditional manual diagnostic procedures. The Company's
competitors may succeed in developing products that are more reliable or
effective or less costly than those developed by the Company and may be more
successful than the Company in manufacturing and marketing their products. There
are other companies engaged in research and development of diagnostic devices or
reagents, and, notwithstanding the Company's product development efforts, the
introduction of such devices or alternative methods for diagnostic testing could
hinder the Company's ability to compete effectively and could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In the instrument market, several companies offer instruments that perform
IHC tests and can be used with any supplier's reagents, which may be attractive
to certain customers. In addition, any future growth in the market for automated
IHC instruments may result in additional market entrants and increased
competition, including more aggressive price competition. For example, DAKO
recently introduced a lower-priced semi-automated IHC instrument in the United
States. Many of the companies selling or developing diagnostic devices and
instruments and many potential entrants in the automated IHC market have
financial, manufacturing, marketing and distribution resources significantly
greater than those of Ventana. In addition, many of these current and potential
competitors have long-term supplier relationships with Ventana's existing and
potential customers. These competitors may be able to leverage existing customer
relationships to enhance their ability to place new IHC instruments. Competition
in the market for automated IHC instruments, including the advent of new market
entrants and increasing price competition, could have a material adverse effect
on the Company's business, financial condition and results of operations.

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

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<PAGE> 9

MANUFACTURING RISKS

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

DEPENDENCE UPON KEY SUPPLIERS

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

DEPENDENCE UPON THIRD-PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS

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

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RISKS ASSOCIATED WITH UNITED STATES DISTRIBUTION RELATIONSHIP

The Company's batch processing instruments and reagents are sold under
distribution agreements entered into by BioTek. In the United States, batch
processing instruments and reagents are sold through Curtin Matheson Scientific,
Inc., a subsidiary of Fisher Scientific, Inc. ("CMS"), under an exclusive
agreement that expires in April 1998. United States sales through CMS are
subject to several operating conditions and risks. In particular, it has
historically been necessary for BioTek to support, and the Company anticipates
that it will need to continue to support, the efforts of CMS with direct field
sales and support personnel. As a result, the Company generates lower gross
margins on sales through CMS than it would generate were it to sell directly to
end-users and incurs higher selling expenses than typically associated with
third-party distribution arrangements. In addition, the Company has notified CMS
that CMS has not fulfilled its obligations under the agreement, both with
respect to purchases of units and support and promotion of batch processing
instruments in the United States. CMS has responded to the Company's notice,
denied breach of the agreement, suggested that certain activities undertaken by
the Company may constitute a breach of the agreement by the Company or may
otherwise be actionable, and suggested that the Company and CMS attempt to reach
a negotiated settlement. There can be no assurance that the Company and CMS will
be able to reach a negotiated settlement or that the Company will not become
involved in litigation or other disputes with CMS which could involve
substantial costs and diversion of management time. As a result of these factors
and due to the presence of the Company's direct sales force in the United
States, the Company does not intend to renew the agreement with CMS upon its
April 1998 expiration. In the event that CMS does not adequately promote and
market batch processing instruments and reagents or manage customer
relationships during the remaining term of the agreement or in the event that
difficulties continue in the relationship between the Company and CMS, the
Company's sales of batch processing instruments and reagents in the United
States could be adversely affected and the Company could also experience
disruptions in the supply of batch processing instruments and reagents to
customers in the United States. These developments could have a material adverse
effect on the Company's business, financial condition and results of operations.

RISKS ASSOCIATED WITH EUROPEAN DISTRIBUTION RELATIONSHIP

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

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<PAGE> 11

currently in disagreement as to such pricing. Currently, DAKO is purchasing such
instruments at the price levels established by the Company. However, the parties
may, pursuant to the distribution agreement, initiate binding arbitration
proceedings to resolve such pricing. In the event such arbitration proceedings
are initiated and are determined adversely to the Company, the pricing of
TechMate 250 instruments to DAKO would be on terms less favorable to the Company
than the current pricing terms and the amount of secured loans and prepayments
recouped per instrument sale would also be reduced.

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

RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS

In February 1996 the Company acquired BioTek. Although the Company has no
pending agreements or commitments, the Company may make additional acquisitions
of complementary businesses, products or technologies in the future.
Acquisitions of companies, divisions of companies, or products entail numerous
risks, including (i) the potential inability to successfully integrate acquired
operations and products or to realize anticipated synergies, economies of scale
or other value, (ii) diversion of management's attention and (iii) loss of key
employees of acquired operations. No assurance can be given that the Company
will not incur problems in completing the integration of the BioTek operations
or with respect to any future acquisitions, and there can be no assurance that
the acquisition of BioTek or any future acquisitions will result in the Company
becoming profitable or, if the Company achieves profitability, that such
acquisition will increase the Company's profitability. Furthermore, there can be
no assurance that the Company will realize value from any such acquisition which
equals or exceeds the consideration paid. Any such problems could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, any future acquisitions by the Company may
result in dilutive issuances of equity securities, the incurrence of additional
debt, large one-time write-offs and the creation of goodwill or other intangible
assets that could result in amortization expense. These factors could have a
material adverse effect on the

11
<PAGE> 12

Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."

RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS

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

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

BioTek is a party to litigation initiated by BioGenex Laboratories, Inc.
("BioGenex") relating to certain alleged past infringements of patent rights of
BioGenex. The Company believes that the resolution of this matter will not have
a material adverse effect on the Company's business, financial condition and
results of operations. For additional detail regarding this litigation, see
"Business -- Legal Proceedings."

UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS

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

12
<PAGE> 13

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon the retention of principal members of its
management, Board of Directors, scientific, technical, marketing and sales staff
and the recruitment of additional personnel. With the exception of one
individual, the Company does not have an employment agreement with any of its
executive officers. The Company does not maintain "key person" life insurance on
any of its personnel. The Company competes with other companies, academic
institutions, government entities and other organizations for qualified
personnel in the areas of the Company's activities. The inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, in
November 1996, R. James Danehy, the Company's President and Chief Executive
Officer, notified the Company that he would not be able to relocate permanently
to Tucson for family and personal reasons and, as a result, the Company has
initiated a search for a new Chief Executive Officer. It is expected that Mr.
Danehy will remain as President and Chief Executive Officer until his
replacement joins the Company and that he will continue to serve as a member of
the Company's Board of Directors. See "Management."

UNCERTAINTIES RELATED TO GOVERNMENT FUNDING

A portion of the Company's products are sold to universities, research
laboratories, private foundations and other institutions where funding is
dependent upon grants from government agencies, such as the National Institutes
of Health. Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress or for other reasons. Any such reduction may materially affect the
ability of many of the Company's research customers to purchase the Company's
products.

FDA AND OTHER GOVERNMENT REGULATION

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

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

Medical devices generally require FDA approval or clearance prior to being
marketed in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve

13
<PAGE> 14

delays adversely affecting the marketing and sale of the Company's products.
Further, clearances or approvals may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that the FDA will not require additional
data, require that the Company conduct further clinical studies or obtain a PMA
causing the Company to incur further cost and delay.

With respect to automated IHC testing functions, the Company's instruments
have been categorized by the FDA as automated cell staining devices and have
been exempted from the 510(k) notification process. To date, ISH tests have not
received FDA approval or clearance and, therefore, use of the gen II for ISH
tests will be restricted to research applications. New instrument products that
the Company may introduce could require future 510(k) clearances. Certain
antibodies that the Company may wish to market with labeling indicating that
they can be used in the diagnosis of particular diseases may require PMA
approval. In addition, the FDA has proposed that some of the antibody products
that Ventana may wish to market be subjected to a pre-filing certification
process. Certain of the Company's products are currently sold for research use
and are labeled as such.

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

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

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

RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL
ADVERSE EFFECTS OF HEALTH CARE REFORM

The Company's ability to sustain revenue growth and profitability may
depend on the ability of the Company's customers to obtain adequate levels of
third-party reimbursement for use of certain diagnostic tests in the United
States, Europe and other countries. Currently, the availability of third-party
reimbursement is limited and uncertain for some IHC tests.

In the United States, the Company's products are purchased primarily by
medical institutions and laboratories which bill various third-party payors,
such as Medicare, Medicaid, other government programs and private insurance
plans, for the health care services provided to their patients. Third-party
payors may deny reimbursement to the Company's customers if they determine that
a prescribed device or diagnostic test has not received appropriate FDA or other
governmental regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate. The success of the Company's products may depend
on the extent to which appropriate reimbursement levels for the costs of such
products and related treatment are obtained by the Company's customers from
government authorities, private health insurers and other organizations, such as
health maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. The

14
<PAGE> 15

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. See
"Business -- Third-Party Reimbursement."

PRODUCT LIABILITY AND RECALLS; PRODUCT LIABILITY INSURANCE

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

ENVIRONMENTAL MATTERS

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

RISKS ASSOCIATED WITH LEVERAGE

The Company currently has outstanding $10.3 million in principal amount of
indebtedness incurred in connection with the acquisition of BioTek (the
"Acquisition Debt"). The Company may use a portion of the net proceeds of this
Offering to repay all or a portion of the Acquisition Debt. However, the
Company's management will have broad discretion to allocate the net proceeds of
this Offering and may elect to defer repayment of the Acquisition Debt until its
maturity in February 1998. The Acquisition Debt bears interest at 7% per annum;
however, accrued interest will be forgiven if the entire remaining principal
balance is repaid prior to February 26, 1997. In the event the Company does not
repay the Acquisition Debt with the proceeds of this Offering, the Company will
continue to be subject to the risks associated with leverage, which risks
include (i) principal and interest repayment obligations which require the
expenditure of substantial amounts of cash, the availability of which will be
dependent on the Company's future performance, (ii) inability to repay principal
at maturity, which could result in default on the Acquisition Debt and legal
action against the Company by the holders of the Acquisition Debt and (iii)
adverse effects of interest expense on the Company's results of operations.
Leverage could also limit the Company's ability to obtain additional financing
in the future, to withstand competitive pressure and adverse economic conditions
(including a downturn in its business) or to take advantage of significant
business opportunities, such as opportunities to acquire complementary
businesses, products and technologies.

15
<PAGE> 16

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS

The Company anticipates that the net proceeds of this Offering will be used
for general corporate purposes, which may include expansion of sales and
marketing activities, research and development, clinical trials, capital
expenditures, repayment of all or a portion of the remaining outstanding
Acquisition Debt and working capital. Accordingly, the amounts actually expended
for each such purpose and the timing of such expenditures may vary depending
upon numerous factors. The Company's management will have broad discretion in
determining the amount and timing of expenditures and in allocating the net
proceeds of this Offering. See "Use of Proceeds."

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS

After this Offering, the Company's officers, directors and principal
stockholders will beneficially own approximately 47.3% of the Company's
outstanding Common Stock. These stockholders will be able to exercise
significant influence over the election of members of the Company's Board of
Directors and corporate actions requiring stockholder approval. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. In addition, the Board of Directors has the
authority, without action by the stockholders, to fix the rights and preferences
of, and issue shares of, one or more series of preferred stock, which may have
the effect of delaying or preventing a change in control of the Company, and to
issue additional Common Stock which would be dilutive to existing stockholders.
In addition, provisions in the Company's Certificate of Incorporation and Bylaws
(i) prohibit the stockholders from acting by written consent without a meeting
or calling a special meeting of stockholders, (ii) require advance notice of
business proposed to be brought before an annual or special meeting of
stockholders and (iii) provide for a classified Board of Directors. The
amendment or modification of these provisions will require the affirmative vote
of the holders of 66 2/3% of the outstanding shares of Common Stock. See
"Principal and Selling Stockholders," "Management" and "Description of Capital
Stock."

VOLATILITY OF STOCK PRICE

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

SHARES ELIGIBLE FOR FUTURE SALE

Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this Offering could impair the
Company's ability to raise capital through an offering of securities and could
materially adversely affect the market price of the Common Stock. Such sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate or at all. Upon consummation of this Offering, the Company
will have 12,828,238 shares of Common Stock outstanding, of which 5,172,440
shares will be freely tradable (unless held by affiliates of the Company) and
the remaining 7,655,798 shares will be restricted securities within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"). Approximately
1,252,537 of the restricted securities will be available

16
<PAGE> 17

for immediate public resale on the date of this Offering. An additional 54
shares of Common Stock will be saleable between the date of this Offering and
120 days after this Offering. The Selling Stockholders, the Company's directors
and executive officers and certain other stockholders, who will in the aggregate
hold 6,120,871 shares of Common Stock of the Company upon the completion of this
Offering, have entered into lock-up agreements under which they have agreed not
to sell, directly or indirectly, any shares owned by them for a period of 120
days after the date of this Prospectus without the prior written consent of
Dillon, Read & Co. Inc. Upon expiration of the 120-day lock-up agreements,
approximately 6,383,612 shares of Common Stock (including approximately 262,741
shares subject to outstanding vested options) will become eligible for immediate
public resale, subject in some cases to vesting provisions and volume
limitations pursuant to Rule 144. The remaining approximately 282,336 shares
held by existing stockholders will become eligible for public resale at various
times over a period of less than two years following the completion of this
Offering, subject in some cases to vesting provisions and volume limitations.
Approximately 4,044,177 of the shares outstanding immediately following the
completion of this Offering, excluding all of the Company's outstanding warrants
which may be converted on a cash basis into 784,613 shares of the Company's
Common Stock, will be entitled to registration rights with respect to such
shares upon termination of lock-up agreements, if applicable. The number of
shares sold in the public market could increase if registration rights are
exercised. See "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."

LEGAL DISPUTE

In January 1997, four individuals who are former BioTek noteholders who
held in the aggregate approximately $1.1 million in principal amount of BioTek
notes filed an action, Tse, et al. v. Ventana Medical Systems, Inc. et al. No.
97-37, against the Company and certain of its directors and stockholders in the
United States District Court for the District of Delaware. The complaint
alleges, among other things, that the Company violated federal and California
securities laws and engaged in common law fraud in connection with the BioTek
shareholders' consent to the February 1996 merger of BioTek into Ventana and the
related conversion of BioTek notes into Ventana notes. Plaintiffs seek
substantial compensatory damages several times in excess of the principal amount
of their BioTek notes, as well as substantial punitive damages, and fees and
costs. Should plaintiffs prevail on such claims, the Company's business,
financial condition and results of operations could be materially adversely
affected. However, after consideration of the nature of the claims and the facts
relating to the merger and the BioTek note exchange, the Company believes that
it has meritorious defenses to the claims and that resolution of this matter
will not have a material adverse effect on the Company's business, financial
condition and results of operations; however, the results of the proceedings are
uncertain and there can be no assurance to that effect. See "Business -- Legal
Proceedings."

DILUTION

The public offering price is substantially higher than the net tangible
book value per share of Common Stock. Investors purchasing shares of Common
Stock in this Offering will therefore incur immediate and substantial dilution.
See "Dilution."

ABSENCE OF DIVIDENDS

The Company has not declared or paid any cash dividends since its inception
and does not anticipate paying any dividends in the foreseeable future. In
addition, the Company's bank credit agreement currently prohibits the Company
from paying dividends. See "Price Range of Common Stock and Dividend Policy."

17
<PAGE> 18

THE COMPANY

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

Ventana(TM), the Ventana logo, ES(TM), gen II(TM), TechMate(TM), Liquid
Coverslip(TM) and ChemMate(TM) are trademarks of the Company. Trademarks of
others are also referred to in this Prospectus.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Shares of Common Stock
offered hereby are estimated to be approximately $25.7 million ($26.1 million if
the Underwriters' over-allotment option is exercised) after deducting the
estimated underwriting discounts and commissions and expenses of the Offering.

The Company intends to use the net proceeds of this Offering for general
corporate purposes, which may include expansion of sales and marketing
activities, research and development, clinical trials, capital expenditures,
repayment of all or a portion of the remaining outstanding Acquisition Debt and
working capital. The Acquisition Debt bears interest at 7% per annum and matures
in February 1998; however, accrued interest will be forgiven if the entire
remaining principal is repaid prior to February 26, 1997. Although the Company
may use a portion of the net proceeds for the acquisition of complementary
businesses, products or technologies, the Company currently has no agreements or
commitments in this regard. The Company's management will have broad discretion
in determining the amount and timing of expenditures and in allocating the net
proceeds of this Offering. Pending the foregoing uses, the Company intends to
invest the net proceeds of the Offering in short-term, interest-bearing,
investment-grade securities.

The Company will not receive any proceeds from the sale of Shares by the
Selling Stockholders.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Since July 26, 1996, the Common Stock has traded on the Nasdaq National
Market under the symbol "VMSI." The following table sets forth the periods
indicated the high and low bid prices of the Common Stock as reported by the
Nasdaq National Market.

<TABLE>
<CAPTION>
1996 HIGH LOW
-------------------------------------------------------------------- ----- -----
<S> <C> <C>
3rd Quarter....................................................... $ 19 $9 1/4
4th Quarter....................................................... 18 1/2 14 1/2
</TABLE>

<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
<S> <C> <C>
1st Quarter (through February 11, 1997)........................... 16 12 3/4
</TABLE>

On February 11, 1997, the last reported bid and sales price of the Common
Stock on the Nasdaq National Market was $14 5/8 per share. As of December 31,
1996, there were 477 holders of record of the Common Stock. The Company has
never declared or paid any cash dividends on its Common Stock. The Company
presently intends to retain any future earnings for use in its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Covenants in the Company's bank credit agreement prohibit the payment of
dividends.

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<PAGE> 19

DILUTION

The net tangible book value of the Company at December 31, 1996 was $6.7
million or $0.61 per share. The net tangible book value per share represents the
Company's total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. Dilution per share represents the difference
between the amount per share paid by investors in this Offering and the net
tangible book value per share after the Offering. After giving effect to the
sale of Shares offered by the Company hereby at the public offering price of
$15.00 per share, the net proceeds to the Company will be approximately $25.7
million and the net tangible book value of the Company at December 31, 1996
would be $32.4 million or $2.52 per share. This represents an immediate increase
in net tangible book value of $1.91 per share to existing stockholders and an
immediate dilution in net tangible book value of $12.48 per share to new
investors purchasing Shares at the public offering price. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share.................................... $15.00
Net tangible book value per share before the Offering............ $0.61
Increase per share attributable to new investors................. 1.91
-----
Net tangible book value per share after the Offering............... 2.52
------
Immediate dilution per share to new investors...................... $12.48
======
</TABLE>

The following table summarizes, as of December 31, 1996, the difference
between the existing stockholders and new investors purchasing Shares in this
Offering with respect to the number of Shares of Common Stock purchased, the
total consideration paid and the average price per share paid (at the public
offering price of $15.00 per share):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 10,978,238 86% $48,896,000 64% $ 4.45
New investors.................. 1,850,000 14% 27,750,000 36% 15.00
---------- --- ----------- --- ------
Total................ 12,828,238 100% $76,646,000 100% 5.97
========== === =========== === ======
</TABLE>

The computations in the above table (i) are determined before deducting the
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company, (ii) assume no exercise of outstanding stock options or
warrants, and (iii) do not give effect to stock issuance activity subsequent to
December 31, 1996. At December 31, 1996 there were options outstanding to
purchase 715,235 shares of Common Stock at a weighted average exercise price of
$3.89 per share and warrants outstanding to purchase 784,613 shares of Common
Stock at an exercise price of $5.82 per share. To the extent outstanding options
and warrants are exercised, there will be further dilution to new investors. See
"Management -- Incentive Stock Plans," "Description of Capital Stock" and Note 8
to the Consolidated Financial Statements.

19
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted for the receipt of the estimated net proceeds
from the sale of Common Stock offered by the Company hereby:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AS
ACTUAL ADJUSTED(1)
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................... $ 12,500 $ 12,500
Stockholders' equity:
Preferred Stock: $.001 par value, 5,000,000 shares
authorized; none outstanding............................ -- --
Common Stock: $.001 par value, 50,000,000 shares
authorized; 10,978,238 shares issued and outstanding
and; 12,828,238 shares issued and outstanding, as
adjusted -- amount paid in(2)(3)........................ 48,896 74,595
Accumulated deficit........................................ (33,410) (33,410)
Cumulative foreign currency translation adjustment......... (216) (216)
-------- --------
Total stockholders' equity(3)........................... 15,270 40,969
-------- --------
Total capitalization............................... $ 27,770 $ 53,469
======== ========
</TABLE>

- ---------------
(1) As adjusted shares outstanding excludes 31,066 shares issuable by the
Company upon exercise of the Underwriters' over-allotment option, 715,235
shares issuable upon exercise of stock options outstanding under the
Company's 1988 and 1996 Incentive Stock Option Plans as of December 31, 1996
and outstanding warrants to purchase 784,613 shares of Common Stock at an
exercise price of $5.82 per share. See "Management -- Incentive Stock
Plans," "Description of Capital Stock" and Note 8 to the Consolidated
Financial Statements.

(2) Assumes net proceeds of $25.7 million from this Offering based on the public
offering price of $15.00 per share.

(3) See Note 8 to the Consolidated Financial Statements.

20
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data set forth below for
the years ended December 31, 1996, 1995 and 1994, except for the components of
net sales, are derived from the Company's audited Consolidated Financial
Statements included elsewhere in this Prospectus. The selected consolidated
statement of operations data set forth below for the years ended December 31,
1993 and 1992, except for the components of net sales, are derived from audited
financial statements of the Company not included in this Prospectus. The
historical financial information for the periods presented are not necessarily
indicative of the results which may be realized in the future. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The Company has not paid any cash dividends since
its inception.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments............................... $ 717 $ 1,162 $ 2,588 $ 4,644 $ 8,591
Reagents and other........................ 452 1,519 3,339 5,969 15,538
------- ------- ------- ------- -------
Total net sales........................ 1,169 2,681 5,927 10,613 24,129
Cost of goods sold.......................... 832 1,722 2,531 4,282 10,632
------- ------- ------- ------- -------
Gross profit................................ 337 959 3,396 6,331 13,497
Operating expenses:
Research and development.................. 1,194 2,100 1,926 2,239 2,749
Selling, general and administrative....... 2,465 4,067 6,899 7,435 11,206
Nonrecurring expenses..................... -- -- -- -- 10,262
Amortization of intangibles............... -- -- -- -- 424
------- ------- ------- ------- -------
Loss from operations........................ (3,322) (5,208) (5,429) (3,343) (11,144)
Other income (expense)...................... 48 229 59 74 (137)
------- ------- ------- ------- -------
Net loss.................................... $(3,274) $(4,979) $(5,370) $(3,269) $ (11,281)
======= ======= ======= ======= =======
Per share data(1):
Net loss per share, as adjusted........... $ (0.38) $ (1.16)
======= =======
Shares used in computing net loss per
share, as adjusted..................... 8,664 9,687
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AS
ACTUAL ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.............. $ 11,067 $ 36,766
Long-term debt................................................. 12,500 12,500
Working capital................................................ 15,888 41,587
Total assets................................................... 32,410 58,109
Accumulated deficit............................................ (33,410) (33,410)
Total stockholders' equity..................................... 15,270 40,969
</TABLE>

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

(2) Adjusted to give effect to the receipt of the net proceeds from the sale of
the Shares of Common Stock offered by the Company hereby at the offering
price of $15.00 per share. See "Use of Proceeds," and "Capitalization" and
"Price Range of Common Stock and Dividend Policy."

21
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and historical results
of operations of the Company should be read in conjunction with the Financial
Statements and related Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results and the timing of events could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors, including those set forth in Risk Factors and
elsewhere in this Prospectus.

OVERVIEW

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

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

Ventana's strategy regarding BioTek is to continue to integrate the
operations of BioTek into the Ventana business model, in which manufacturing,
sales and marketing activities are performed by Company employees. In May 1996,
the Company completed the integration of the BioTek and Ventana direct field
sales and technical personnel. The Company does not intend to renew the United
States distribution agreement with CMS which expires in April 1998. The
international distribution agreement with DAKO expires in December 1999. The
Company is engaged in negotiations with DAKO regarding a proposed broader
international distribution arrangement, however, there can be no assurance as to
when or whether the Company will enter into any such arrangement. The Company
completed the consolidation of BioTek's reagent manufacturing into Ventana's
Tucson facilities in September 1996. The Company is currently in the process of
converting BioTek's reagent manufacturing to the process used by Ventana in
which basic raw materials are used and important value-added steps are performed
internally. The Company believes that in the near term it will be more cost
effective

22
<PAGE> 23

to continue sourcing batch processing instruments from third-party
manufacturers. The Company has entered into manufacturing agreements with
Kollsman for production of the TechMate 500 instrument and with LJL for
production of the Company's next generation batch processing instrument, the
TechMate 250.

The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and the Company's reagent programs ("RPs"). In an RP,
the Company provides the customer with the use of an instrument with no capital
investment with the objective of creating recurring reagent revenue. The terms
and conditions of RP instrument placements can vary from formal agreements
specifying minimum volumes and unit pricing for reagent purchases to short-term,
informal arrangements where customers purchase reagents on a month-to-month
basis. For RP placements, the Company incurs the cost of manufacturing or
procuring instruments and recognizes revenues only as customers purchase
reagents rather than at the time of instrument placement. The manufacturing cost
of instruments placed through RPs is charged to cost of goods sold by
depreciating standard costs over a period of three or four years. As a result,
gross profit for instruments placed through RPs is recognized over a three or
four year period rather than at the time of placement, as is the case in direct
sales. Revenue associated with instruments placed through RPs is based on a
volume pricing matrix which is designed to enable the Company to recover the
sales value of the instrument through an increased price on the reagents
purchased by the user. The Company typically recovers the cash costs associated
with the placement of instruments through RPs in less than two years, although
the Company's ability to recover such costs may be affected by the volume and
pricing of reagents purchased by customers. Due to the working capital
requirements associated with RPs, the Company has historically sought to limit
the amount of instruments placed through RPs. However, the Company anticipates
that the percentage of instruments placed through RPs, in particular RP
placements without formal reagent purchase commitments, will increase with the
introduction of the NexES and as the Company obtains the additional working
capital required to support additional RP placements. This is likely in the
future to result in a decrease in instrument sales both in absolute dollars and
as a percentage of total revenues. Instruments provided to customers under RPs
without formal reagent purchase commitments are only considered placements if
and when certain reagent purchase criteria are met by the customer. The Company
typically only provides an instrument under an RP without a formal reagent
purchase commitment if the Company believes that the customer performs a minimum
number of IHC tests annually. As of December 31, 1996, the Company had placed
113 instruments through RPs.

From its inception in 1985 through December 31, 1996, Ventana incurred
aggregate net losses of $33.4 million, including $10.3 million related to the
expensing of in-process research and development and restructuring costs
associated with the acquisition of BioTek. Similarly, BioTek incurred $18.2
million in losses from operations from its inception in October 1990 until its
acquisition by the Company in February 1996. Although the Company achieved an
operating profit in the fourth quarter of 1996, the level of future
profitability, if any, cannot be accurately predicted and there can be no
assurance that profitability will be sustained on a quarterly or annual basis,
or at all, or that the Company will not incur operating losses in the future.

The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sale of
reagents which begin and typically are recurring once an instrument is placed.
The Company's operating results in the future are likely to fluctuate
substantially from period to period because instrument sales are likely to
remain an important part of revenues in the near future. The degree of
fluctuation will depend on the timing, level and mix of instruments placed
through direct sales and instruments placed through RPs. In addition, average
daily reagent use by customers may fluctuate from period to period, which may
contribute to future fluctuations in revenues. Sales of instruments may also
fluctuate from period to period because sales to the Company's international
distributors typically provide such distributors with several months of
instrument inventory, which the distributors will subsequently seek to place
with end-users. The Company's instrument installed base includes

23
<PAGE> 24

instruments shipped to DAKO and recognized as sales. Furthermore, due both to
the Company's increased sales focus on smaller hospitals and laboratories and
the relatively high reagent sales growth rates in recent fiscal periods, the
rate of growth in reagent sales in future periods is likely to be below that
experienced during the past several fiscal periods. Other factors that may
result in fluctuations in operating results include the timing of new product
announcements and the introduction of new products and new technologies by the
Company and its competitors, market acceptance of the Company's current or new
products, developments with respect to regulatory matters, availability and cost
of raw materials purchased from suppliers, competitive pricing pressures,
increased sales and marketing expenses associated with the implementation of the
Company's market expansion strategies for its instruments and reagent products,
and increased research and development expenditures. Future instrument and
reagent sales could also be adversely affected by the configuration of the
Company's patient priority systems, which require the use of the Company's
detection chemistries, particularly if and to the extent that competitors are
successful in developing and introducing new IHC instruments or if competitors
offer reagent supply arrangements having pricing or other terms more favorable
than those offered by the Company. Such increased competition in reagent supply
could also adversely affect sales of reagents to batch processing instrument
customers since those instruments do not require the use of the Company's
reagents. In connection with future introductions of new products the Company
may be required to incur charges for inventory obsolescence in connection with
unsold inventory of older generations of products. To date, however, the Company
has not incurred material charges or expenses associated with inventory
obsolescence in connection with new product introductions. In addition, a
significant portion of the Company's expense levels is based on its expectation
of a higher level of revenues in the future and is relatively fixed in nature.
Therefore, if revenue levels are below expectations, operating results in a
given period are likely to be adversely affected.

Total net sales grew from $2.7 million in 1993 to $24.1 million in 1996, a
compound annual growth rate of 107%. Instrument sales grew from $1.2 million in
1993 to $8.6 million in 1996, a compound annual growth rate of 93%. Reagent
sales grew from $1.5 million in 1993 to $15.5 million in 1996, a compound annual
growth rate of 118%. The growth in revenues is primarily attributable to the
growth in (i) instrument placements and (ii) the instrument installed base and
the associated corresponding increase in the aggregate recurring reagent revenue
stream. The Company's installed base of instruments increased from 74 at
December 31, 1993 to 801 at December 31, 1996. Instrument placements have
increased in every year, from 56 in 1993 to 265 in 1996. The Company's installed
base of instruments was significantly enhanced by the BioTek acquisition in the
first quarter of 1996.

Gross margin increased from 36% in 1993 to 56% in 1996 as both instrument
and reagent gross margins increased. Gross margin increased primarily due to a
higher level of revenues available to cover fixed costs, economies of scale and
efficiencies in purchasing and manufacturing activities. Gross margin decreased
from 60% in 1995 to 56% in 1996 primarily due to the inclusion of 10 months of
BioTek operations which had lower overall margins. Research and development and
selling, general and administrative expenses in the period were maintained at
levels that anticipated a higher level of revenues in the future, which resulted
in operating losses in each year between 1993 and 1996.

24
<PAGE> 25

RESULTS OF OPERATIONS

Years Ended December 31, 1996, 1995 and 1994

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

Net Sales. Presented below is a summary of net sales for the three years
ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
-------------------- --------------------- ---------------------
$ % OF SALES $ % OF SALES $ % OF SALES
------ ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SALES SUMMARY:
Instruments................. $2,588 44% $ 4,644 44% $ 8,591 36%
Reagents and other.......... 3,339 56% 5,969 56% 15,538 64%
------ ---- ------ ---- ------- ----
Total net sales... $5,927 100% $10,613 100% $24,129 100%
====== ==== ====== ==== ======= ====
</TABLE>

Net sales for the year ended December 31, 1996 increased by 127% to $24.1
million from $10.6 million for the year ended December 31, 1995. Net sales for
the year ended December 31, 1995 increased by 79% to $10.6 million from $5.9
million for the year ended December 31, 1994. The increases in net sales were
attributable to increases in instrument sales as well as increases in reagent
sales. Instrument sales increased over the prior year by 85% in 1996 and 79% in
1995, respectively. Reagent sales increased over the prior year by 160% in 1996
and 79% in 1995, respectively.

Instrument sales in 1996 increased due to increased instrument placements,
higher selling prices, the introduction of the gen II ISH instrument and $3.2
million of instrument sales resulting from the acquisition of BioTek partially
offset by instrument placements through RPs, which resulted in lower instrument
revenues than if the placements had been made on a direct sale basis. Instrument
sales in 1995 were positively impacted by the higher selling prices associated
with gen II instrument placements. Instrument sales in 1995 and 1994 were
impacted by the placement of a significant number of instruments through RPs.

Reagent and other sales in 1996 increased due to sales of reagents to new
customers, higher selling prices, increased sales to existing customers and $5.3
million of reagent sales and reagent royalties generated from customers acquired
with the acquisition of BioTek. In 1994 and 1995, reagent sales grew primarily
because of the growth in the installed base of instruments, as well as increased
sales to existing customers. Despite the growth in the Company's installed base
of instruments in 1994 and 1995, reagent sales as a percentage of net sales did
not increase significantly. This was due primarily to (i) the high percentage of
new instrument placements in each year relative to the existing installed base
of instruments, (ii) the recognition of revenues on direct instrument sales at
the time of sale and (iii) the receipt of reagent revenue for only that portion
of the year during which an instrument was in place.

Gross Margin. Gross profit for the year ended December 31, 1996 increased
to $13.4 million from $6.3 million in the year ended December 31, 1995 and $3.4
million in the year ended December 31, 1994. Gross margin was 56% in 1996 as
compared to 60% in 1995 and 57% in 1994. The decline in gross margin from 1995
to 1996 was primarily due to the inclusion of 10 months of BioTek's operations
which had lower overall margins. BioTek experienced lower gross margins than
Ventana on a stand-alone basis because of BioTek's (i) use of contract
manufacturers and third-party distributors, (ii) lower value-added reagent
manufacturing strategy and (iii) lower reagent volumes and pricing due to the
open configuration of BioTek's instruments. The decline in gross margin caused
by these factors was partially offset by increased economies of scale and
manufacturing efficiencies brought about by the integration of batch processing
and reagent manufacturing into Ventana's Tucson, Arizona manufacturing
operations. The improvement in gross margin from 1994 to 1995 resulted primarily
from a

25
<PAGE> 26

higher volume of revenues available to cover the Company's fixed costs,
economies of scale and efficiencies in manufacturing operations. Instrument
gross margins in 1995 were approximately equivalent to 1994 and declined
slightly during 1996 as a result of the addition of the lower gross margin sales
of TechMate instruments. Reagent gross margins in 1995 increased compared to
1994 because the Company (i) discontinued its primary antibody promotional
programs, (ii) obtained lower material prices from higher purchasing volumes and
(iii) achieved improvements in manufacturing efficiencies. Reagent gross margins
for 1996 improved slightly when compared to 1995 due to manufacturing
efficiencies, purchasing economies and the addition of higher margin antibody
markers.

Research and Development. Research and development expense in the year
ended December 31, 1996 increased to $2.7 million from $2.2 million in the year
ended December 31, 1995 and $1.9 million in the year ended December 31, 1994.
Research and development expenses for 1996 related primarily to the development
of new reagents and instruments, including the NexES patient priority instrument
and new prognostic markers. Research and development expense in 1994 and 1995
primarily reflects gen II and NexES development and development of additional
primary antibodies.

Selling, General and Administrative. Presented below is a summary of the
components of SG&A expense and their respective percentages of net sales during
the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- ---------------------
$ % OF SALES $ % OF SALES $ % OF SALES
------ ---------- ------ ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SG&A SUMMARY:
Sales and marketing.......... $4,843 82% $5,674 53% $ 8,387 35%
Administration............... 2,056 34% 1,761 17% 2,819 11%
------ ---- ------ ---- ------ ---
Total SG&A......... $6,899 116% $7,435 70% $11,206 46%
====== ==== ====== ==== ====== ===
</TABLE>

SG&A expense in the year ended December 31, 1996 increased to $11.2 million
from $7.4 million in the year ended December 31, 1995 and $6.9 million in the
year ended December 31, 1994. SG&A expense as a percentage of net sales declined
to 46% of net sales in 1996 from 70% of net sales in 1995 and 116% of net sales
in 1994. The fluctuation in SG&A expense from period to period reflects the
growth of Ventana's internal sales and marketing organization to facilitate its
market expansion strategy and a corresponding increase in infrastructure
expenses to support a larger business base and ongoing clinical practice
standardization programs. The growth in sales and marketing expense is the
result of the decision by the Company to service the market through its own
sales and marketing staff, expenses necessary to support the growth of the
Company and in 1996 expenses associated with ongoing support activities
resulting from the BioTek acquisition. The increase in administrative expense is
associated with the Company's regulatory strategy and costs associated with
supporting an expanding business base.

Nonrecurring Expenses. In accordance with Statement of Financial
Accounting Standards No. 2 "Accounting for Research and Development Costs" ("FAS
2"), the Company charged in 1996 to nonrecurring expenses at the date of the
acquisition of BioTek, $7.9 million relating to the portion of the purchase
price allocated to those in-process research and development projects where
technological feasibility had not yet been established and for which there are
no alternative future uses. The remaining nonrecurring expenses of $2.3 million
consist of integration and other indirect acquisition costs.

Amortization of Intangibles. As a result of the acquisition of BioTek, the
Company has recorded certain intangible assets. These intangible assets include
developed technology, customer list, goodwill and other intangible assets which
are amortized to expense over a period of 15 to 20 years based upon the
Company's estimate of the economic utility of these assets. As a result, each
quarter the Company will charge to expense approximately $0.1 million for the
amortization of these intangible assets. Additionally, the Company will review
the utility of these assets each quarter to ensure their continued

26
<PAGE> 27

value. Should the Company determine that any of these assets are impaired it
will revalue them to their estimated fair market value.

INCOME TAXES

Ventana and BioTek have neither provided for nor paid any federal income
taxes since their respective inceptions because neither company generated
taxable income in any fiscal year. At December 31, 1996, Ventana had net
operating loss carryforwards for federal and state purposes of approximately
$12.7 million. These federal and state carryforwards will begin to expire in
2000 and 1997 respectively, if not previously utilized. The Company also has
research and development tax credit carryforwards of approximately $0.9 million
which will begin to expire in 2005, if not previously utilized. Utilization of
Ventana's net operating loss carryforwards will be subject to limitations due to
the "change in ownership" provisions of the Internal Revenue Code of 1986, as
amended (the "Code") as a result of the Company's prior issuances of equity
securities. These carryforwards, therefore, may expire prior to being fully
utilized. Future financings may cause additional changes in ownership and
further limitations on the use of federal net operating loss carryforwards. Due
to the losses incurred by Ventana since inception, deferred tax assets of
approximately $9.7 million at December 31, 1996, related to these carryforwards,
credits and temporary differences, have been fully reserved in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109").

ALLOCATION OF BIOTEK PURCHASE PRICE

The Company acquired BioTek for $19.1 million on February 26, 1996. The
acquisition has been accounted for as a purchase. The composition of the
consideration paid for BioTek and the allocation of the purchase price is
presented below:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
The purchase price for BioTek consisted of:
Cash consideration................................................... $ 2,500
Stock issued to BioTek noteholders................................... 3,016
Exchange Notes issued................................................ 8,968
Note payable -- escrow for contingencies............................. 234
Net historical liabilities assumed................................... 4,389
-------
Total purchase price......................................... $ 19,107
=======
The purchase price was allocated as follows:
Tangible net assets.................................................. $ 2,252
In-process research & development.................................... 7,900
Goodwill and other intangibles....................................... 2,055
Developed technology................................................. 2,800
Customer base........................................................ 4,100
-------
Total purchase price......................................... $ 19,107
=======
</TABLE>

In accordance with FAS 2, the Company charged to expense at the date of the
acquisition $7.9 million relating to the portion of the purchase price allocated
to those in-process research and development projects where technological
feasibility had not yet been established and where there are no alternative
future uses.

27
<PAGE> 28

QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS

The following table contains summary unaudited quarterly consolidated
statements of operations data for the four quarters ended December 31, 1996.
Management has prepared the quarterly consolidated statements of operations data
on the same basis as the Consolidated Statements of Operations contained in this
Prospectus. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period.

SUMMARY QUARTERLY
CONDENSED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
Instruments..................................... $ 1,593 $ 1,706 $ 1,554 $ 3,738
Reagents and other.............................. 2,553 3,835 4,654 4,496
-------- ------ ------ ------
Total net sales......................... 4,146 5,541 6,208 8,234
Cost of goods sold................................ 1,541 2,317 2,685 4,089
-------- ------ ------ ------
Gross profit...................................... 2,605 3,224 3,523 4,145
Operating expenses:
Research and development..................... 613 754 809 573
Selling, general and administrative.......... 2,265 2,806 3,036 3,099
Nonrecurring expenses........................... 9,983 212 67 0
Amortization of intangibles..................... 46 135 134 109
-------- ------ ------ ------
Income (loss) from operations..................... (10,302) (683) (523) 364
Interest income (expense)......................... (4) (60) 38 (111)
-------- ------ ------ ------
Net income (loss)................................. $(10,306) $ (743) $ (485) $ 253
======== ====== ====== ======
Net income (loss) per share, as adjusted(1)....... $ (1.16) $ (0.08) $ (0.05) $ 0.02
======== ====== ====== ======
Weighted average shares used in computing net
income (loss) per share, as adjusted(1)......... 8,895 9,137 10,196 11,917
======== ====== ====== ======
</TABLE>

(1) See Note 1 to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share, as adjusted.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated losses of $33.4 million as of December 31,
1996. The Company has funded its operations primarily through the private
placement of approximately $31.6 million in equity and debt securities and its
July 1996 initial public offering which resulted in net proceeds to the Company
of $18.3 million (after giving effect to the partial exercise of the
underwriter's over-allotment option). As of December 31, 1996 the Company's
principal source of liquidity consisted of cash and cash equivalents of $11.1
million and borrowing capacity under its bank term credit facility and revolving
line of credit. The bank term loan facility of $2.0 million was repaid in full
on July 30, 1996 from the proceeds of the Company's initial public offering. The
Company also has a $2.8 million revolving bank credit facility. As of December
31, 1996, approximately $0.5 million of this revolving line of credit had been
utilized for letters of credit to facilitate certain contract manufacturing
arrangements for the production of TechMate 250 instruments leaving an available
revolving credit facility of approximately $2.3 million. Borrowings under the
Company's bank credit facility are secured by a pledge of substantially all of
the Company's assets and bear interest at the bank's prime rate plus 2.0% per
annum.

During the period from March through May 1996, the Company raised $5.1
million through the private placement of subordinated notes ("Ventana Notes").
In connection with the issuance of the Ventana Notes, the Company issued
warrants to purchase an aggregate of 887,740 shares of Common Stock of the
Company at an exercise price of $5.82 per share. The proceeds of the Ventana
Notes were

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used to fund the cash portion of the BioTek acquisition consideration and to
provide working capital. The Ventana Notes bear interest at 7% per annum, which
will be forgiven if the notes are repaid in full prior to February 26, 1997.
Should the Exchange Notes be repaid prior to February 26, 1997, $0.6 million in
interest expense accrued at December 31, 1996 will be offset against acquisition
goodwill. Additionally, in connection with the acquisition of BioTek, Ventana
issued an aggregate of $12.0 million in exchange notes (collectively, the
"Exchange Notes") to the holders of outstanding indebtedness of BioTek. The
Exchange Notes bear interest at the rate of 7% per annum which will be forgiven
if the Exchange Notes are repaid in full prior to February 26, 1997. The
Exchange Notes provided each holder with the opportunity, during a 30-day
period, to convert Exchange Notes into shares of Ventana Common Stock at a
conversion price of $13.53 per share. Upon expiration of the conversion period,
an aggregate of $3.0 million in principal amount of Exchange Notes were
converted into 222,973 shares of Common Stock and an aggregate of $9.0 million
of Exchange Notes remained outstanding. In September 1996, the Company offered
to pay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5%
of the principal amount of such notes. On October 18, 1996, the Company repaid
$3.7 million of Exchange Notes and Ventana Notes at a discounted amount of $3.4
million. All notes tendered for repayment were repaid on the foregoing terms.
Following such repayment, the aggregate outstanding principal amount of Exchange
Notes and Ventana Notes was $10.3 million. See "Use of Proceeds."

The Company expects to use approximately $2.8 million of the proceeds of
this Offering during the next twelve months for capital expenditures for
manufacturing capacity expansion and enhancements to its business application
computer hardware and software resources.

During the year ended December 31, 1996 the Company used for operations and
investing activities approximately $16.1 million in cash versus $3.9 million for
the year ended December 31, 1995 due primarily to the acquisition of BioTek and
increased emphasis on the Company's RP program.

In connection with BioTek's agreement with DAKO, DAKO made two loans
secured by a pledge of substantially all of BioTek's assets. DAKO also made
prepayments on future instrument sales and reagent royalties to BioTek. These
loans and prepayments were used to fund TechMate 250 instrument development and
working capital requirements. On September 25, 1996, BioTek and DAKO entered
into the Amendment Agreement for the purpose of addressing several matters,
including repayment of the secured loans and prepayments. The aggregate balance
of the secured loans and prepayments was $1.4 million and $0.9 million,
respectively, at the time of the Amendment Agreement. Of the secured loans, $0.3
million bears interest at 5% per annum and the remaining $1.1 million does not
bear interest. The prepayments do not bear interest. The secured loans and
prepayments are recorded as long term debt in the Company's Consolidated
Financial Statements. Pursuant to the Amendment Agreement, DAKO paid the Company
a royalty of $0.5 million and the Company paid DAKO $0.5 million as a reduction
of the balance of the prepayments. Under the Amendment Agreement, the remaining
secured loans and prepayments will be repaid through discounts on DAKO purchases
of TechMate instruments from BioTek at recoupment rates specified in the
Amendment Agreement. At December 31, 1996, the outstanding balance of the
secured loans and prepayments was $1.2 million and $0.4 million, respectively.
Upon termination of the distribution agreement or in the event of a default by
BioTek under the distribution agreement, these loans may be converted to fixed
term loans that will be due and payable in 12 equal quarterly installments
commencing upon such event. See "Business -- Sales, Marketing and Customer
Support."

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

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BUSINESS

OVERVIEW

Ventana develops, manufactures and markets proprietary instrument/reagent
systems that automate IHC and ISH tests for the analysis of cells and tissues on
microscope slides. These tests are important tools used in diagnosing and
selecting appropriate treatment for cancer. The Company believes that it is the
worldwide leader in the automated IHC testing market, as the Company estimates
that its worldwide installed base of 801 instruments as of December 31, 1996 is
approximately four times as large as the combined installed base of all of the
Company's current competitors. Ventana has placed instruments with 36 of the 42
leading cancer centers according to U.S. News & World Report and 35 of the 42
cancer centers identified as principal cancer research centers by the National
Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute,
The Johns Hopkins University, the M.D. Anderson Cancer Center and the Fred
Hutchinson Cancer Center. Each Ventana proprietary system placed typically
provides a recurring revenue stream as customers consume reagents and supplies
with each test conducted. Consequently, two key elements of the Company's
strategy are to increase the number of instrument placements and to maximize the
recurring revenue stream per placement through increased sales of reagents and
supplies.

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

Cancer is the second leading cause of death in the United States,
accounting for approximately 25% of deaths (approximately 555,000 deaths per
year). Currently, approximately 10 million people in the United States have a
history of invasive cancer, and it is estimated that 1.4 million new cases of
invasive cancer will be diagnosed each year. Recent studies have indicated that
the mortality rates of certain types of cancer have decreased which may be
attributed to, among other factors, earlier detection and selection of
appropriate therapies. The vast majority of IHC testing associated with cancer
diagnosis and treatment in the United States is conducted in an aggregate of
approximately 2,200 clinical institutions and reference and research
laboratories which the Company estimates creates the opportunity for the
placement of as many as 2,500 automated IHC testing instruments. The Company
believes that less than 25% of such institutions and laboratories currently
conduct IHC testing on an automated basis. The international market for
automated IHC and ISH testing is estimated by the Company to be approximately
1.2 times the size of the United States market, with Europe accounting for the
majority of the international market potential.

Currently most IHC testing is performed manually which often yields
inconsistency of test results. As compared to manual IHC testing, Ventana's
automated systems provide improved reliability, reproducibility and consistency
of test results. The systems' economic advantages include improved visualization
quality and faster turnaround time, increased test throughput, a reduced
dependence on skilled laboratory technicians and reduced cost per test.
Additional benefits include the ability to perform new and emerging diagnostic
tests, improved visual clarity which aids the interpretation of test results and
the ability to obtain maximum clinical information from minimally sized
biopsies. The Company believes it will play a critical, expanding role in cancer
science as researchers will use

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Ventana systems to accelerate the identification and development of new tests
and that its installed base of instruments will speed the commercialization and
clinical implementation of such new tests. The Company anticipates that its
reagent test menu will expand due to the major emphasis of cancer research on
the identification of new prognostic IHC and ISH indicators.

ACQUISITION OF BIOTEK

Ventana acquired BioTek in February 1996 for total consideration of $19.1
million. The acquisition of BioTek enhanced Ventana's competitive position and
enabled the Company to become the worldwide leader in the automated IHC and ISH
testing market. Ventana's installed base increased by 287 instruments as a
result of the acquisition which also increased the aggregate recurring revenue
stream from reagents and supplies sold to customers. The acquisition also
enabled Ventana to add a number of prestigious cancer centers to its list of
customers. BioTek's product line complements Ventana's and enables the Company
to meet the differing needs of customers requiring patient priority or batch
processing systems, or both. The acquisition also created the opportunity for
operational synergies including the change to higher value-added activities and
consolidation of reagent manufacturing, the rationalization of sales and
marketing forces and the elimination of redundant regulatory, general and
administration functions and personnel.

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

Ventana is continuing to integrate the operations of BioTek into the
Ventana business model, in which manufacturing, sales and marketing activities
are performed by Company employees. In May 1996, the Company completed the
integration of the BioTek and Ventana direct field sales and technical
personnel. The Company does not intend to renew the United States distribution
agreement with CMS which expires in April 1998. The Company has entered into an
Amendment Agreement with DAKO relating to certain provisions of the distribution
agreement between BioTek and DAKO, which agreement expires in December 1999. In
September 1996, the Company completed the consolidation of BioTek's reagent
manufacturing into Ventana's Tucson facilities. The Company believes that in the
near term it will be more cost effective to continue sourcing batch processing
instruments from third-party manufacturers. The Company has entered into
manufacturing agreements with Kollsman for production of the TechMate 500
instrument and with LJL for production of the TechMate 250 instrument.

INDUSTRY BACKGROUND

Immunohistochemistry

Cancer is the second leading cause of death in the United States accounting
for approximately 25% of deaths (approximately 555,000 deaths per year).
Currently, approximately 10 million people in the United States have a history
of invasive cancer, and it is estimated that 1.4 million new cases will be
diagnosed each year. In the United States, the lifetime risk of developing
invasive cancer is 47% for males and 38% for females. The risk of developing
cancer increases with age. Among the principal

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forms of cancer are prostate, lung, breast, colon, rectal, urinary, ovarian and
cervical cancer, along with leukemia and lymphoma.

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

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

IHC tests are performed on cells and tumor tissue to:

- determine the type of cancer

- determine the site of the primary tumor

- determine the degree of malignancy

- determine if the cancer has metastasized

- assist in the selection of the most appropriate therapy

- monitor patient progress

- develop a prognosis

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

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

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

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enabling technologies that overcome major obstacles, including the inherent
limitations of manual processing, which have historically prevented both the
broader use and growth of IHC.

In Situ Hybridization

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

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

VENTANA STRATEGY

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

Maximize Instrument Placements. The Company's strategy is to strengthen
its competitive position in the automation of IHC testing by establishing a
larger installed base of instruments that current or future market entrants must
overcome. The Company estimates that its worldwide installed base of 801
instruments is approximately four times as large as the combined installed base
of instruments of all of the Company's current competitors. The Company believes
that its placement of instruments in 35 of the 42 cancer centers identified as
principal cancer research centers by the National Cancer Institute provides a
powerful reference tool for potential new customers. To facilitate instrument
placements, the Company offers customers a wide selection of instruments which
address the patient priority needs of hospital clinical laboratories and the
batch processing needs of large hospitals and reference and research
laboratories. In order to satisfy the broad spectrum of customers' operational
and financial criteria, the Company intends to continue to offer several
instrument procurement options, including RPs, and to expand the range and price
points of its instrument offerings. In an RP, the Company provides the customer
with the use of an instrument with no capital investment with the objective of
creating recurring reagent revenue. The Company believes it can accelerate the
rate of expansion of its installed base by increasing its emphasis on the
placement of instruments through RPs because the required capital investment
associated with a purchase, a significant sales hurdle for many customers, will
be eliminated. In addition, the Company has commenced international commercial
shipments of a lower cost batch processing instrument, the TechMate 250.

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

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Develop New and Enhanced Products. Since 1991, the Company has
successfully introduced and commercialized the Ventana ES, the Ventana gen II
and the TechMate 500, as well as 76 new reagents. The Company commenced
commercial shipments of its lower cost batch processing instrument, the TechMate
250, in international markets in the fourth quarter of 1996 and intends to
introduce a lower cost patient priority instrument which it expects will be
placed through RPs in order to provide greater financial flexibility for its
customers in instrument procurement. Ventana recently initiated broad-scale
commercialization of its gen II ISH system and has placed 31 systems in leading
research sites in the United States and Europe. Ventana has also developed a
second generation estrogen receptor ("ER") assay for use in breast cancer
diagnosis. The assay incorporates an improved primary antibody clone which
significantly increases the assay's sensitivity. The Company commenced sales of
the improved ER assay for research use only in the fourth quarter of 1996. The
Company intends to continue to innovate in the field of automated cellular
diagnostics through the development and introduction of new instruments,
software and reagents.

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

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

PRODUCTS

The Company offers proprietary systems composed of instrumentation,
reagents and consumable products which are designed to enable clinical and
research laboratories to perform standardized IHC and ISH testing. The
proprietary nature of the Company's systems is based upon the interrelationship
among the electronics and mechanical and software control of the instrument and
the stabilization, composition, packaging and delivery of reagents. The
Company's broad line of products includes patient priority systems targeted to
hospital clinical laboratories and batch processing systems targeted to large
hospital clinical laboratories and reference and research laboratories. The
Company's patient priority systems are "closed" in that customers must purchase
detection chemistries from Ventana in order to operate the instruments. Although
the Company's existing batch processing systems are "open," providing the
customer with the ability to purchase reagents from either the Company or other
sources, users of more than 85% of the Company's United States installed batch
processing systems regularly purchase reagents from the Company. The following
are the principal benefits of automated cellular and tissue analysis using the
Company's integrated systems as compared with manual methods:

- improved reliability, reproducibility and consistency of test results

- faster turnaround time for test results

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- increased test throughput for the testing laboratory

- ability to perform new and emerging molecular tests

- reduced dependence on skilled laboratory technicians

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

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

- ability to document processing protocols (patient priority instruments)

- enhanced cellular differentiation through multiple staining on a single
slide

- standardization of slide preparation among institutions

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

Instrument Products

Patient Priority Instruments. Ventana currently offers two patient
priority systems, the Ventana ES and the Ventana gen II. The Ventana patient
priority systems provide a complete automated approach, requiring users to only
prepare specimens and place them on microscope slides. The patient priority
systems are barcode driven and are designed for multiple tests on a single
patient biopsy with rapid turnaround time and walk-away convenience. A barcode
label affixed to each slide positively identifies the slide and the test
procedures to be performed. Up to 40 slides can be processed at one time in the
reaction chamber of the instrument utilizing as many as 25 individual reagents,
providing the user with significant flexibility. The instrument scans the
barcodes on the slides and the reagent dispensers and processes each slide with
the unique steps necessary to perform each test. The Company's proprietary
software controls all aspects of the test procedures. The steps of dispensing,
incubating (i.e. temperature and time control) and washing are performed by the
instrument using a series of proprietary chemical/mechanical methods developed
by Ventana. These methods are critical to obtaining precise, sensitive and rapid
test results and make the system reliable and easy to use. Typically, the
processing of slides on the instrument requires less than two hours.

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

The Company is currently in the process of developing a new IHC instrument,
the NexES, a patient priority system having IHC capabilities similar to the
Ventana ES. Unlike the Ventana ES, the NexES is based upon a modular design and
an external personal computer with a Windows 95 operating environment for
software control. Each module holds up to 20 slides in the reaction chamber and
25 reagents in its reagent carousel. The modular design of the NexES and
external personal computer will permit the linkage of up to eight NexES modules
together, creating the capacity to process up to 160 slides. The NexES will
therefore offer users a significant degree of flexibility as users can purchase
from one to eight modules depending upon their test volume requirements. Initial

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prototypes of the NexES are currently at the in-house testing stage with beta
site testing scheduled for early 1997. Commercial introduction of the NexES is
currently scheduled for the first half of 1997.

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

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

Reagent and Consumable Products

Reagent Products

Reagent products are composed of primary antibodies and detection
chemistries, each of which is required for an IHC test. Customers that have
patient priority systems must use Ventana detection chemistries on all tests;
such customers have the option of purchasing primary antibodies from Ventana or
other sources. Customers who have the Company's batch processing systems have
the option of purchasing both antibodies and detection chemistries from Ventana
or other sources. Users of more than 85% of the Company's United States
installed batch processing systems regularly purchase reagents from the Company.

Primary Antibodies. Ventana sells a line of in excess of 30 primary
antibodies used to detect antigens in combination with detection chemistry kits
on the Company's instruments. Ventana markets all of the antibodies used to
perform the IHC tests that currently account for approximately 85% of total IHC
test volume.

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

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Consumable Products

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

MARKETS AND CUSTOMERS

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

The Company estimates there are as many as 2,500 instrument placement
opportunities in the 2,200 potential instrument site locations in the United
States. The international market for instrument placements is estimated by the
Company to be approximately 1.2 times the size of the United States market.
Europe is estimated to account for the majority of the international market
potential, and Japan, the Pacific Rim and Latin American markets constitute the
balance of the international market opportunity.

As of December 31, 1996, the Company had 557 instrument placements in
approximately 515 of the 2,200 potential United States instrument sites. The
Company believes that less than 25% of such United States potential instrument
sites currently conduct IHC testing on an automated basis. The Company believes
that its worldwide installed base of 801 instruments as of December 31, 1996 is
approximately four times as large as the combined installed base of instruments
of all of the Company's current competitors.

Ventana has placed instruments with 36 of the top 42 cancer centers
according to U.S. News & World Report and 35 of the 42 cancer centers identified
as principal cancer research centers by the National Cancer Institute, including
the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University,
the M.D. Anderson Cancer Center and the Fred Hutchinson Cancer Center.

The Company plans to introduce a lower cost instrument for patient priority
customers (the NexES) and has recently introduced a lower cost instrument in
Europe for potential batch processing customers (the TechMate 250). The Company
believes that lower cost systems and RP placements will have particular appeal
to those hospitals which are currently losing reimbursement revenue as a result
of not performing IHC tests internally. The Company's RP placement program may
enhance smaller hospitals' ability to compete with larger hospitals by providing
on-site IHC testing and consultation without an initial capital expenditure.

SALES, MARKETING AND CUSTOMER SUPPORT

Ventana markets and sells its instruments and reagents in North America
through a direct sales force and CMS. The Company markets and sells its
instruments and reagents in Europe through a direct sales organization
headquartered in Strasbourg, France, distribution relationships in certain

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countries and a distribution arrangement with DAKO, a manufacturer and supplier
of reagents used in manual IHC testing. The distribution arrangements with CMS
in the United States and DAKO in Europe were inherited with the BioTek
acquisition and only relate to batch processing systems. The Company plans to
seek a strategic partner for the Japanese market and is in the early stages of
evaluating distributors for other geographic markets.

Although BioTek used third parties for sales and distribution, BioTek
maintained a small field sales organization in the United States in order to
support the efforts of CMS. Ventana completed the integration of BioTek's field
based personnel in May 1996. Ventana's direct sales force in North America now
consists of 24 direct representatives, 4 regional managers, a national managed
care accounts manager, a national sales manager, 7 field based technical
marketing representatives and 4 field service engineers. Ventana's patient
priority systems are sold through its direct sales force. The sales force is
organized around geographic territories which have been designed to provide each
sales representative with an approximately equal number of sales opportunities.
The Company's sales representatives typically have technical backgrounds or
prior medical capital equipment sales experience. The Company's sales
representatives are incentivized to both increase instrument placements and
maximize recurring reagent sales.

BioTek entered into its distribution agreement with CMS in January 1993.
Under the agreement, CMS has exclusive United States distribution rights for
TechMate instruments and related reagents. The agreement requires CMS to make
good-faith commercial efforts to purchase certain specified quantities of
instruments and to maintain a sufficient inventory of reagents to meet customer
requests. Under the terms of the agreement, CMS is guaranteed specified gross
profit margins on instruments and reagents, subject to BioTek's prior approval
of sales below prices prescribed by the agreement. Repairs, customer service and
provision of spare parts are the responsibility of BioTek. BioTek is obligated
to repurchase at cost all unsalable instruments and any slow-moving reagents.
Unless earlier amended, replaced or terminated, the agreement with CMS expires
in April 1998.

United States sales through CMS are subject to several operating
conditions. In particular, it has historically been necessary for BioTek to
support, and the Company anticipates that it will need to continue to support,
the efforts of CMS with direct field sales and support personnel. As a result,
the Company generates lower gross margins on sales through CMS than it would
generate were it to sell directly to end-users and incurs higher selling
expenses than typically associated with third-party distribution arrangements.
In addition, the Company believes that CMS has not fulfilled its obligations
under the agreement, both with respect to purchases of units and support and
promotion of batch processing instruments in the United States. The Company has
formally notified CMS that it believes CMS is in default under the agreement.
CMS has responded to the Company's notice, denied breach of the agreement,
suggested that certain activities undertaken by the Company may represent a
breach of the agreement by the Company and suggested that the Company and CMS
attempt to reach a negotiated settlement. There can be no assurance that the
Company and CMS will be able to reach a negotiated settlement or that the
Company will not become involved in litigation or other disputes with CMS. The
Company believes that the resolution of the situation with CMS will not have a
material adverse effect on the business, financial condition or results of
operations of the Company. As a result of these factors and due to the presence
of the Company's direct sales force in the United States, the Company does not
intend to renew the agreement with CMS upon its April 1998 expiration.

Ventana's sales force in Europe consists of nine sales and support
personnel located in France and Germany. This sales force markets and sells
Ventana's patient priority systems direct in France, Germany and the Benelux
countries and markets and sells through distribution relationships in Italy,
Spain and Scandinavia. This sales force is geographically organized and is
compensated in a manner similar to the United States sales force. Ventana
expects to significantly expand its direct sales and marketing activities in
Europe in 1997.

BioTek entered into its agreement with DAKO in September 1994. DAKO is a
market leader in Europe in supplying reagents for use in manual IHC tests. DAKO
has exclusive rights to distribute TechMate instruments and related accessories
in Europe and several other territories. The agreement

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also permits DAKO to supply customers with its own reagents for the instruments
in return for paying BioTek a fixed dollar royalty amount over a five-year
royalty term for each instrument installed at a customer site. As of December
31, 1996, there were 95 instruments included in the royalty base. Under the
agreement, DAKO is subject to certain minimum purchase requirements for
instruments.

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

In connection with the negotiations for the Amendment Agreement, DAKO and
the Company have also discussed a possible broader marketing arrangement for
international sales of both batch processing instruments and patient priority
instruments. These negotiations are currently ongoing. There can, however, be no
assurance that negotiations for this arrangement will be successfully concluded
and that the Company will enter into a broader marketing arrangement with DAKO.
Furthermore, during the course of ongoing discussions with DAKO since the
acquisition of BioTek, DAKO has, among other things, asserted that BioTek has
not fulfilled its obligations with respect to the development and commercial
introduction of the TechMate 250 instrument. The Company denies this assertion
and believes that it is in substantial compliance with its obligations under
these development milestones. In particular, the Company believes that its
contract manufacturing agreement with LJL will enable it to satisfy DAKO's
requirements for TechMate 250 instruments. Nevertheless, the negotiations with
DAKO could result in an attempt by DAKO to exercise contractual remedies
available to it under the distribution agreement and the terms of the secured
loans, which remedies include (i) requiring repayment of the secured loans in 12
equal quarterly installments commencing upon a default by BioTek and (ii) an
irrevocable license to manufacture TechMate instruments for resale
internationally and a related reduction in the fixed dollar royalty rate paid by
DAKO to BioTek for each instrument included in the royalty base. The Company
could also experience an interruption in the distribution of batch processing
instruments outside the United States or become involved in litigation with DAKO
with respect to the current distribution agreement, which would involve
significant costs as well as diversion of management time. There can be no
assurance that the Company would prevail in any litigation involving the
agreement. Furthermore, there can be no assurance as to the future course or
outcome of the Company's negotiations with DAKO or as to the Company's future
relationship with DAKO. If DAKO were successful in obtaining a manufacturing
license for TechMate instruments, the Company could experience a loss of
instrument revenue which

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could have a material adverse effect on the Company's business, financial
condition and results of operations.

Ventana's sales and marketing strategy for its systems is focused on
increasing its penetration of the hospital and laboratory market through several
instrument placement options. The Company places instruments through direct
sales including nonrecourse leases, instrument rentals and the Company's RPs. In
an RP, the Company provides the customer with the use of an instrument with no
capital investment which creates an opportunity for the Company to generate
recurring reagent revenue. The terms and conditions of RP instrument placements
can vary from formal agreements specifying minimum volumes and unit pricing for
reagent purchases to short-term, informal arrangements where customers purchase
reagents on a month-to-month basis. Due to the working capital requirements
associated with RPs, the Company has historically sought to limit the amount of
instruments placed through RPs. However, the Company anticipates that the
percentage of instruments placed through RPs, in particular RP placements
without formal reagent purchase commitments, will increase with the introduction
of the NexES and as the Company obtains the additional working capital required
to support additional RP placements, which is likely in the future to result in
a decrease in instrument sales both in absolute dollars and as a percentage of
total revenues. As of December 31, 1996, the Company had placed 113 instruments
through RPs.

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

MANUFACTURING

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

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

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

Reagents sold for use with the Company's patient priority instruments are
manufactured by Ventana, which purchases basic raw materials and performs
value-added manufacturing processes, such as formulation and packaging, at its
facilities. Certain components and raw materials, primarily

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antibodies, used in the manufacturing of the Company's reagent products are
currently provided by single source vendors. To date, the Company has not
experienced any material disruptions in supply from these vendors and has
experienced levels of manufacturing waste in the reagent manufacturing process
that it believes to be below industry averages. Reagents sold for use with the
Company's batch processing instruments have historically been manufactured by
third parties, with only a few final steps in the manufacturing process being
performed internally.

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

The Company's reagent manufacturing process at its Tucson, Arizona facility
is currently semi-automated. The Company anticipates that as production volumes
increase it will increase the level of automation. The Company currently has
sufficient reagent manufacturing capacity to meet its anticipated needs for
approximately the next two years. The Company's long-term plans are to build a
separate reagent manufacturing facility in the Tucson area to increase its
reagent manufacturing capacity and increase the level of automation of the
manufacturing process. The Company anticipates commencing construction of this
facility in 1998.

The Company's manufacturing operations are required to be conducted in
accordance with GMP requirements. GMP requires the Company to maintain
documentation and process control in a prescribed manner with respect to
manufacturing, testing and quality control. In addition, the Company is subject
to FDA inspections to verify compliance with FDA requirements. The Company also
intends to implement manufacturing policies and procedures which will enable the
Company to receive ISO 9000 certification. ISO 9000 standards are global
standards for manufacturing process control and quality assurance. After
mid-1998, the Company will be required to obtain the CE mark for continued sale
of its products in the countries comprising the European Union. The CE mark is
an international symbol of quality assurance and compliance with applicable
European Union medical device directives.

RESEARCH AND DEVELOPMENT

The Company's research and development projects are generally divided
between reagent development and instrumentation development. Reagent development
emphasizes existing instrumentation, and with the recent acquisition of BioTek,
is divided into consolidation and integration, patient priority, IHC and ISH
projects. Instrument development emphasizes the development of new instruments
and enhancements to existing instruments.

Reagent Development Projects

Ventana's principal focus in the area of new reagent product development is
the introduction of new prognostic indicators. Ventana closely monitors
third-party development of new primary antibodies with prognostic potential.
When such prognostic markers appear, Ventana will seek to incorporate the marker
into its product line or will use its licensed fusion protein technology to
develop similar markers. Ventana is also improving its detection chemistry
sensitivity by developing a first generation amplification kit. This
amplification kit will be compatible with existing patient priority detection
chemistries marketed by the Company as well as the first generation of ISH
detection chemistries currently under development. Through the use of monoclonal
antibodies that recognize each of the molecules used to label nucleic acid
probes in ISH tests, Ventana is developing a line of ISH detection chemistries
for research use. The Company's ISH detection chemistries are currently
undergoing beta testing with availability for commercial sale for research use
expected in 1997. The Company is currently in discussions with a number of
universities, hospitals and commercial organizations regarding potential
collaborations for the development of standardized probes for use in ISH tests.

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Instrumentation Development Projects

In addition to completion of development of the NexES instrument, Ventana
has two major instrument development projects underway. The first, the COSMIC,
is a microscope system which is aimed at the emerging field of telepathology and
information transfer. This system uses rastering of focused light and
conventional optics to provide high resolution digital images in real time. The
images generated by the microscope are digitized and stored or sent to remote
sites. Ventana is also conducting market research with respect to the potential
for a barcode label printing system.

At December 31, 1996, Ventana's research and development group consisted of
20 persons, many of whom have graduate degrees. Ventana's research and
development activities are performed primarily in-house by Ventana employees.
These efforts are supplemented by consulting services and assistance from
Ventana's scientific advisors.

In addition to these projects, the Company inherited with the acquisition
of BioTek a development program for an ISH oven designed for use with TechMate
1000 and TechMate 500 instruments. This instrument will require substantial
additional development work and will also require the development of detection
chemistries for use with the instrument.

The Company has engaged in discussions with several parties regarding
strategic alliances for certain ISH probes and antibody markers. These alliances
could include co-marketing rights, supply and distribution arrangements and/or
licensing of products or technology by the Company. There can, however, be no
assurance that the Company will enter into definitive agreements for any such
alliances. In the event the Company does enter into one or more of these
alliances, the Company may be required to make initial payments to obtain
licensing, marketing, distribution or similar rights under such agreements.

During the years ended December 31, 1996, 1995 and 1994, Ventana spent $2.7
million, $2.2 million and $1.9 million, respectively, on research and
development.

PATENTS AND PROPRIETARY RIGHTS

Ventana has pursued a strategy of patenting key technology as it relates to
both the automation and the chemistry of analyzing cells and tissues on
microscope slides. Ventana holds 11 United States patents and eight foreign
patents, including two European patents, and has filed additional United States
and foreign patent applications. Three of Ventana's United States patent
applications have been allowed. Several of Ventana's issued United States
patents relate to reagent formulations and methods, including a reagent
formulation characterized by long-term stability and a method of inhibiting
evaporation of reagents during processing. Other issued United States patents
relate to a reagent dispenser, a tissue fixative and various aspects of the
capillary gap technology and methods and devices for batch processing of slides.
Pending applications relate to mechanical aspects of automated instruments for
performing reactions on slides and processing methods used in these instruments.
In addition, a patent application filed by the Company covers an evaporation
inhibitor liquid that is effective for high temperature applications. The
expiration dates of the Company's issued United States patents range from
September 2005 to November 2013.

There can be no assurance that the Company's patent applications will
result in patents being issued or that any issued patents will provide adequate
protection against competitive technologies or will be held valid if challenged.
Others may independently develop products or processes similar to those of the
Company or design around or otherwise circumvent patents issued to the Company.

Because patent applications in the United States are maintained in secrecy
until patents are issued and since publication of discoveries in scientific
literature tends to lag behind actual discoveries by several months, Ventana
cannot be certain that it was the first creator of inventions covered by its
patents or pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office to determine the priority of inventions, which could result in
substantial cost to the Company. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter

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claimed in such patents, or would be required to obtain licenses from the patent
owners of each of such patents or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be available on terms acceptable to the Company or that
the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. If the Company does not obtain necessary
licenses, it could be subject to litigation and encounter delays in product
introductions while it attempts to design around such patents. Alternatively,
the development, manufacture or sale of such products could be prevented.
Litigation would result in significant cost to the Company as well as diversion
of management time. The outcome of any such litigation cannot be predicted with
any assurance. Adverse determinations in any such proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations.

BioTek is a party to litigation initiated by BioGenex relating to past
infringements of patent rights of BioGenex. For a discussion of these
proceedings, see "Legal Proceedings."

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

COMPETITION

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

In the instrument market, several companies, including Leica (a division of
Leitz Microscope GmbH), Shandon Scientific Limited (a division of Life Sciences
International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC
tests and can be used with any supplier's reagents, which may be attractive to
certain customers. As of December 31, 1996, the Company had an installed base of
801 instruments which the Company estimates is more than four times the combined
installed base of instruments of all of the Company's current competitors. The
Company has included semi-automated instruments manufactured by its competitors
in arriving at its estimates of its market share.

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In addition, any future growth in the market for automated IHC instruments may
result in additional market entrants and increased competition, including more
aggressive price competition. For example, DAKO recently introduced a
lower-priced semi-automated IHC instrument in the United States. Many of the
companies selling or developing diagnostic devices and instruments and many
potential entrants in the automated IHC market have financial, manufacturing,
marketing and distribution resources significantly greater than those of
Ventana. In addition, many of these current and potential competitors have
long-term supplier relationships with Ventana's existing and potential
customers. These competitors may be able to leverage existing customer
relationships to enhance their ability to place new IHC instruments. Competition
in the market for automated IHC instruments, including the advent of new market
entrants and increasing price competition, could have a material adverse effect
on the Company's business, financial condition and results of operations.

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

GOVERNMENT REGULATION

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

The FDA regulates, as medical devices, instruments, diagnostic tests and
reagents that are traditionally manufactured and commercially marketed as
finished test kits or equipment. Some clinical laboratories, however, choose to
purchase individual reagents intended for specific analytes and develop and
prepare their own finished diagnostic tests. Although neither the individual
reagents nor the finished tests prepared from them by the clinical laboratories
have traditionally been regulated by the FDA, the FDA has recently proposed a
rule that, if adopted, would regulate the reagents sold to clinical laboratories
as medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under CLIA as high complexity
testing laboratories. The Company intends to

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market some diagnostic products as finished test kits or equipment and others as
individual reagents; consequently, some or all of these products will be
regulated as medical devices.

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

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

After products have been cleared for marketing by the FDA, the Company will
be subject to continuing FDA obligations. Clearances may be withdrawn or
products may be recalled if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. The FDA
may require surveillance programs to monitor the effect of products which have
been commercialized, and has the power to prevent or limit further marketing of
the product based on the results of these post-marketing programs. The FDA
enforces regulations prohibiting the marketing of products for unapproved uses.
Further, if the Company wanted to make changes on a product after FDA clearance
or approval, including changes in indications or intended use or other
significant

45
<PAGE> 46

modifications to labeling or manufacturing, additional clearances or approvals
would be required. The FDA has broad regulatory and enforcement powers including
the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, withdraw clearances or approvals, restrict
or enjoin the marketing of products, and impose civil and criminal penalties,
any one or more of which could have a material adverse effect upon the Company.

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

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

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

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

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

46
<PAGE> 47

THIRD-PARTY REIMBURSEMENT

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

FACILITIES

Ventana's research laboratories, instrument and reagent manufacturing
facilities and administrative offices are located in approximately 36,000 square
feet of leased space in Tucson, Arizona. The leases for these facilities expire
at various times between November 1999 and March 2001, subject to renewal terms.
The Company believes its facilities are adequate to meet its current
requirements and facilities for anticipated future requirements will be
available on commercially reasonable terms.

EMPLOYEES

As of December 31, 1996, Ventana employed 135 persons full time. Of these
employees, 62 were engaged in sales and marketing, 20 in research and
development, 37 in manufacturing and 16 in general and administrative functions.
None of Ventana's employees are covered by a collective bargaining agreement.
Ventana considers its relations with its employees to be satisfactory.

BACKLOG

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

LEGAL PROCEEDINGS

In March 1995, BioGenex sued BioTek in the U.S. District Court for the
Northern District of California for infringement of certain patent rights held
by BioGenex relating to an antigen retrieval method used in IHC tests.
BioGenex's claims include claims of both direct, indirect and contributory
infringement. BioTek has denied infringement and has asserted several defenses,
including invalidity of the patent that is the subject of the litigation. In
April 1995, BioTek ceased offering the products that were the subject of the
alleged infringements. BioTek's total sales of these products during the period
were approximately $0.6 million. A court-mandated judicial settlement conference
was held in January 1997 and no settlement was reached. A trial is currently
scheduled for March 18, 1997. The parties have, from time to time, engaged in
settlement negotiations. There can, however, be no assurance that a pre-trial
settlement will be reached. Although there can be no assurance as to the
ultimate resolution of this matter, based on currently available information,
the Company does not believe that the resolution of this matter will have a
material adverse effect on the Company's business, financial condition or
results of operations.

The Company has received notices of various claims from certain current and
former employees of BioTek. Two of such former employees have filed lawsuits
against the Company, a director, and certain former BioTek employees alleging
that certain commitments made to them in connection with their employment by
BioTek were breached. Based on its review of these matters, the Company does not
believe that their resolution will have a material adverse effect on the
Company's business, financial condition or results of operations.

47
<PAGE> 48

in the United States District Court for the District of Delaware. The complaint
alleges, among other things, that the Company violated federal and California
securities laws and engaged in common law fraud in connection with the BioTek
shareholders' consent to the February 1996 merger of BioTek into Ventana and the
related conversion of BioTek notes into Ventana notes. Plaintiffs seek
substantial compensatory damages several times in excess of the principal amount
of their BioTek notes, as well as substantial punitive damages, and fees and
costs. Based on the facts known to date, the Company believes that the claims
are without merit and intends to vigorously contest this suit. After
consideration of the nature of the claims and the facts relating to the merger
and the BioTek note exchange, the Company believes that it has meritorious
defenses to the claims and that resolution of this matter will not have a
material adverse effect on the Company's business, financial condition and
results of operations; however, the results of the proceedings are uncertain and
there can be no assurance to that effect.

Other than the foregoing litigation, the Company is not a party to any
material pending litigation.

48
<PAGE> 49

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 31, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- ---------------------------------------------------------
<S> <C> <C>
Jack W. Schuler(1)(III)........ 56 Chairman of the Board of Directors
R. James Danehy(III)........... 51 President, Chief Executive Officer and Director
Stephen A. Tillson, Ph.D. ..... 56 Vice President, Scientific Affairs and Quality Assurance
R. Michael Rodgers............. 51 Vice President, Finance, Chief Financial Officer
and Secretary
Carl W. Hull................... 39 Vice President, Marketing and Business Development
Michael K. Cusack.............. 39 Vice President, International
Anthony L. Hartman............. 46 Vice President, Research and Development
Brian J. McGraw................ 36 Director of Engineering
David P. Pauluzzi.............. 35 National Sales Manager
Johnny D. Powers, Ph.D. ....... 35 Vice President, Operations
Bernard O. C. Questier......... 43 Vice President, European Operations
Rex J. Bates(II)............... 73 Director
Michael R. Danzi(II)........... 37 Director
Edward M. Giles(1)(II)......... 61 Director
Thomas M. Grogan, M.D.(III).... 51 Director
John Patience(2)(III).......... 49 Director
C. Anthony Stellar, M.D.(I).... 66 Director
James M. Strickland(2)(I)...... 53 Director
James R. Weersing(2)(I)........ 57 Director
</TABLE>

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

(2) Member of the Audit Committee.

(I) Class I director.

(II) Class II director.

(III) Class III director.

MR. SCHULER has served as a director of Ventana since April 1991 and as
Chairman of the Board of Directors since November 1995. Mr. Schuler has been
Chairman of the Board of Directors of Stericycle, Inc., a specialized medical
waste management company, since March 1990. Mr. Schuler is also a partner in
Crabtree Partners, a Chicago based venture capital firm. Prior to joining
Stericycle, Mr. Schuler held various executive positions at Abbott from December
1972 through August 1989, serving most recently as President and Chief Operating
Officer. He is currently a director of Medtronic, Inc., Somatogen, Inc. and
Chiron Corporation. Mr. Schuler received a B.S. in Mechanical Engineering from
Tufts University and an M.B.A. from Stanford University.

MR. DANEHY has served as President and Chief Executive Officer and a
director of Ventana since September 1994. From June 1994 to September 1994, Mr.
Danehy served as a consultant to the Company. From November 1993 to June 1994,
Mr. Danehy served as an interim Chief Executive Officer and consultant for
BioStar Diagnostics, where he also served as a director from January 1994 to
March 1995. From 1972 to 1993, Mr. Danehy worked in a variety of capacities for
Abbott. From 1977

49
<PAGE> 50

through 1989, Mr. Danehy held marketing and general management responsibilities
in Abbott's Diagnostics Division that included Product Manager for hepatitis
products, Marketing Manager for Clinical Chemistry Systems, Group Marketing
Manager for TDx Systems, Director of Marketing for North America and General
Manager for Transfusion Diagnostics which included the AIDS test. Mr. Danehy
received a B.S. in Chemistry from St. Joseph's College and an M.B.A. from Loyola
University of Chicago.

In November 1996, Mr. Danehy notified the Company that he would not be able
to relocate permanently to Tucson for family and personal reasons and, as
result, the Company has initiated a search for a new Chief Executive Officer. It
is expected that Mr. Danehy will remain as President and Chief Executive Officer
until his replacement joins the Company and that he will continue to serve as a
member of the Company's Board of Directors.

DR. TILLSON has served as Vice President of Scientific Affairs and Quality
Assurance since August 1995. From the time of his joining Ventana in May 1992
until July 1995, Dr. Tillson served as Director of Scientific Affairs and
Quality Assurance. From January 1990 to May 1992, Dr. Tillson served as a
principal of Ticon Company Consulting. He has 25 years experience in the
diagnostic and pharmaceutical industry. Dr. Tillson holds a Ph.D. from Purdue
University and received a B.S. from California State Polytechnic University and
an M.B.A. from St. Mary's College of California.

MR. RODGERS joined Ventana in February 1994 as Chief Financial Officer and
was appointed Vice President, Finance and Secretary in May 1994. From June 1992
until October 1993, Mr. Rodgers was Vice President and Chief Financial Officer
with BioMedical Waste Systems, Inc., a medical waste management firm. From
December 1988 to December 1991, Mr. Rodgers served as Executive Vice President
of Friedkin Investments, Inc., a merchant banking firm. Mr. Rodgers received a
B.S. in Business and Accounting from Menlo College and an M.B.A. from the
University of Houston. Mr. Rodgers is a Certified Public Accountant.

MR. HULL joined Ventana in June 1996 as Vice President of Marketing and
Business Development. From 1989 until joining Ventana, Mr. Hull held various
marketing and management positions with several divisions of Abbott. He served
most recently as Vice President and General Manager of Abbott Puerto Rico from
February 1995 to June 1996, and as Marketing Manager at Sequoia-Turner Corp., a
subsidiary of Abbott, from October 1993 to February 1995. From June 1982 to
September 1992, Mr. Hull held various marketing and management positions in
Abbott's Diagnostic Division. Mr. Hull received a B.A. in Political Science and
International Relations from The Johns Hopkins University and an M.B.A. from the
University of Chicago.

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

MR. HARTMAN has served as Vice President of Research and Development since
April 1996. Mr. Hartman joined Ventana in August 1990 as Senior Research and
Development Scientist, and he has also served as Director of Product Development
and Customer Support. Prior to joining Ventana, Mr. Hartman was a Research
Assistant Professor of Pathology at the University of Cincinnati College of
Medicine where he supervised the departmental service laboratory for IHC and
ISH. Mr. Hartman received a B.S. in General Science from the University of
Portland and an M.S. in Biophysics and Genetics from the University of Colorado.

MR. MCGRAW joined Ventana in September 1991 and has been the Director of
Engineering since December 1994. Prior to Mr. McGraw's promotion to Director of
Engineering, he was a Senior

50
<PAGE> 51

Engineer. From July 1987 until August 1991, Mr. McGraw held various management
and system design positions in Abbott's Diagnostics Division. Mr. McGraw
received a B.S. in Mechanical Engineering from West Virginia University.

MR. PAULUZZI has served as National Sales Manager of Ventana since June
1995. He had previously served in various sales positions since joining Ventana
in March 1993. From January 1985 until joining Ventana, Mr. Pauluzzi worked for
Abbott's Diagnostics Division in a variety of marketing and sales and product
management positions. Mr. Pauluzzi received a B.B.A. in Public Accounting from
Loyola University of Chicago.

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

MR. QUESTIER has served as Vice President of European Operations of Ventana
since February 1996. From October 1990 until joining Ventana in October 1995,
Mr. Questier held a number of management positions in E.I. DuPont de Nemours,
most recently as Business Manager for New Products in Europe. Mr. Questier
received a degree in Chemical Engineering from the Technical Institute in
Oostende, Belgium.

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

MR. DANZI has served as a director of Ventana since April 1996. Prior to
the acquisition of BioTek, Mr. Danzi served as the President and Chairman of
BioTek and was associated with BioTek as a director and investor since 1992. Mr.
Danzi is the founder and has been the Managing Director of Danzi Capital Group,
a securities firm, since 1992. Mr. Danzi received a B.S. in Materials Science
and Engineering from Cornell University, is a graduate of the United States
Naval Nuclear Power School graduate level engineering program and received an
M.B.A. from Harvard University.

MR. GILES has served as a director of Ventana since September 1992. Mr.
Giles has served as Chairman and President of The Vertical Group, Inc., a
venture capital investment firm, since January 1989. Mr. Giles was previously
President of F. Eberstadt & Co., Inc., a securities firm, and Vice Chairman of
Peter B. Cannell & Co., Inc., an investment management firm. He is currently a
director of McWhorter Technologies, Inc. Mr. Giles received a B.S.E.E. in
Chemical Engineering from Princeton University and an M.S. in Industrial
Management from the Massachusetts Institute of Technology.

DR. GROGAN is a founder, a director and Chairman Emeritus of Ventana. He
has served as a director since the founding of the Company in June 1985 and as
Chairman of the Board of Ventana from June 1985 to November 1995. He is
currently a professor of pathology at the University of Arizona, College of
Medicine, where he has taught since 1979. He received a B.A. in Biology from the
University of Virginia and an M.D. from George Washington School of Medicine.
Dr. Grogan completed a post-doctorate fellowship at Stanford University.

MR. PATIENCE has served as a director of Ventana since July 1989. Mr.
Patience was a co-founder and served as a General Partner of Marquette Venture
Partners, a venture capital investment firm, from January 1988 until March 1995.
Since April 1995, Mr. Patience has been a partner in Crabtree Partners, a
Chicago-based venture capital firm. Mr. Patience was previously a partner in the
consulting

51
<PAGE> 52

firm of McKinsey & Co., specializing in health care. He is currently a director
of TRO Learning, Inc. and Stericycle, Inc. Mr. Patience received a B.A. in
Liberal Arts and an L.L.B. from the University of Sydney, Australia and an
M.B.A. from the University of Pennsylvania Wharton School of Business.

DR. STELLAR has served as a director of Ventana since April 1996. Since
1964, he has been in private practice as a surgeon in Laguna Hills, California.
Dr. Stellar is certified by the American Board of Surgery and the Board of
Thoracic Surgery and is a Fellow of the American College of Surgeons and the
College of Chest Physicians. Dr. Stellar received a B.S. and an M.D. from
Stanford University.

MR. STRICKLAND has served as a director of Ventana since December 1987. Mr.
Strickland is a founder and has been the General Partner of Coronado Venture
Management L.P., a venture capital investment firm, since October 1986. Since
July of 1996, Mr. Strickland has been the Chief Financial Officer of PID, Inc.,
a software company. Mr. Strickland was previously Vice President of Burr-Brown
Corporation, a semiconductor manufacturer. Mr. Strickland received a B.S. and an
M.S. in Electrical Engineering from the University of New Mexico and an M.S. in
Industrial Administration from the Carnegie Institute of Technology.

MR. WEERSING has served as a director of Ventana since October 1994. Since
1984, Mr. Weersing has been a Managing Director of MBW Venture Partners, a
venture capital investment firm. Mr. Weersing has also served as President of
JRW Technology, Inc., a consulting firm. Mr. Weersing served as a director of
Circadian, Inc., an asthma dosage management company, from December 1993 until
January 1996. Circadian filed a petition under Chapter 7 of the federal
bankruptcy laws in January 1996. Mr. Weersing received an B.S.M.E. and an M.B.A.
from Stanford University.

BOARD OF DIRECTORS

The Company's Bylaws authorize and the Company currently has a board of 10
directors. All directors hold office until the next annual meeting of
stockholders or until their successors have been elected. The Company's
certificate of incorporation and Bylaws, however, provide that the Board of
Directors is divided into three classes. Each class consists of three or four
directors. The terms of office of class I, class II and class III directors
expire at the Company's 1997, 1998 and 1999 annual meetings of stockholders,
respectively. At each annual meeting of stockholders at which the term of office
of a particular class of directors first expires, the persons elected to the
board positions represented by such class of directors will be elected to serve
from the time of election until the third annual meeting following election. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes of directors so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company. Officers serve at
the discretion of the Board of Directors. There are no family relationships
among any of the directors or executive officers of the Company. The Company
does not pay cash compensation to directors for serving in that capacity,
although the Company does reimburse directors for expenses incurred in attending
Board of Directors meetings. The Board of Directors has, among other committees,
a Compensation Committee that makes recommendations concerning salaries and
incentive compensation for employees of and consultants to the Company and an
Audit Committee that reviews the results and scope of the audit and other
services provided by the Company's independent auditors. From and after the
closing date of the acquisition of BioTek and until the repayment of the
principal amount of the Exchange Notes by Ventana, Ventana is obligated to
nominate at its annual meetings of stockholders two representatives of BioTek
(the "BioTek Representatives") for election to Ventana's Board of Directors. The
BioTek Representatives who are currently serving on the Board of Directors
pursuant to this right are Michael R. Danzi and C. Anthony Stellar, M.D.

52
<PAGE> 53

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS
-----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
---------------------- STOCK UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS COMPENSATION($)
- ---------------------------------- ---- --------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy................... 1996 200,130 -- -- 28,975 --
President and Chief Executive 1995 200,000 -- -- -- --
Officer

Bernard O. C. Questier(1)......... 1996 137,500 7,500(2) -- -- 8,067(5)
Vice President, European 1995 -- -- -- 36,956 63,800(3)
Operations

R. Michael Rodgers................ 1996 100,830 -- -- -- --
Vice President, Finance and
Chief 1995 97,030 -- -- 15,152 --
Financial Officer and Secretary

Michael K. Cusack................. 1996 100,130 -- -- -- --
Vice President, International 1995 100,054 -- -- -- --

David P. Pauluzzi................. 1996 92,630 -- -- 3,696 6,960(5)
National Sales Manager 1995 84,855 48,207(4) -- 23,098 --
</TABLE>

- ---------------
(1) Mr. Questier signed an employment contract with the Company in October of
1995 and began working at the Company in February 1996. His annual
compensation is set at $150,000 and his salary is fixed to the French Franc
to protect against currency fluctuations should the United States Dollar
depreciate relative to the French Franc; however, if the United States
Dollar appreciates relative to the French Franc, Mr. Questier's salary shall
remain unchanged.

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

(3) Consists of relocation expenses of $55,000 associated with Mr. Questier's
move from Germany to France, which have been accrued but not yet fully paid,
and a scheduled $8,800 annual automobile allowance.

(4) Consists entirely of commissions earned through employment as the Company's
Northern Regional Sales Manager prior to his promotion to National Sales
Manager in June of 1995.

(5) Automobile allowance.

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<PAGE> 54

STOCK OPTION INFORMATION

The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1996.

OPTION GRANTS IN LAST YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED(1) IN 1996(2) ($/SH)(3) DATE 5%($) 10%($)
- --------------------------- ---------- ---------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy............ 28,975 10.67% $1.62 1/6/06 $76,625 $122,012
Bernard O. C. Questier..... -- -- -- -- -- --
R. Michael Rodgers......... -- -- -- -- -- --
Michael K. Cusack.......... -- -- -- -- -- --
David P. Pauluzzi.......... 3,696 1.36 1.62 1/6/06 9,774 15,564
</TABLE>

- ---------------
(1) Options were granted under the Company's 1988 Stock Option Plan. These
generally vest over four years from the date of grant.

(2) Based on an aggregate of 271,396 options granted by the Company in the year
ended December 31, 1996 under the Company's stock option plans to all
employees of and consultants to the Company, including the Named Executive
Officers.

(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the
Company's Board of Directors.

(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.

AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES

The following table sets forth, for each of the Named Executive Officers,
the shares acquired and the value realized on exercises of stock options during
the year ended December 31, 1996 and the year-end number and value of
exercisable and unexercisable options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. James Danehy.......... 42,337 $ 578,050 58,064 142,957 $ 776,659 $ 1,952,960
Bernard O.C. Questier.... -- -- 10,780 26,177 147,268 357,609
R. Michael Rodgers....... 12,120 164,923 5,744 17,616 78,170 239,955
Michael K. Cusack........ 12,935 176,708 3,080 13,550 42,076 185,109
David P. Pauluzzi........ 8,131 110,727 3,620 17,765 49,073 240,378
</TABLE>

- ---------------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, which ranges from $0.60 per
share to $1.62 per share, and the fair market value for the Company's Common
Stock of $14.50 per share as of December 31, 1996, which was the closing
price of the Company's Common Stock on December 31, 1996.

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<PAGE> 55

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with Bernard O.C. Questier, its
Vice President of European Operations. The agreement provides for annual
compensation of $150,000, which is fixed to the French Franc to protect against
currency fluctuations should the United States Dollar depreciate relative to the
French Franc; however, if the United States Dollar appreciates relative to the
French Franc, Mr. Questier's salary shall remain unchanged. The agreement also
provides for, in the event of Mr. Questier's termination, continued compensation
through the quarter in which notice of termination is given plus one additional
full quarter. The agreement does not provide for any specified term of
employment. The Company currently has no employment contracts or agreements with
any of the other Named Executive Officers or with any other person.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors consists of Jack W.
Schuler and Edward M. Giles. The Compensation Committee makes recommendations to
the Board of Directors concerning salaries and incentive compensation for
employees of and consultants to the Company, except that the Compensation
Committee has full power and authority to grant stock options to the Company's
executive officers under the Company's 1996 Stock Option Plan. Mr. Weersing and
Mr. Danehy served as members of the Compensation Committee until March 1996 and
April 1996, respectively.

STOCK PLANS

1996 Stock Option Plan

The Company's 1996 Stock Option Plan (the "1996 Stock Plan") was adopted by
the Board of Directors in April 1996 and approved by the Company's stockholders
in July 1996. A total of 1,000,000 shares of Common Stock are reserved for
issuance under the 1996 Stock Plan. As of December 31, 1996, no shares of Common
Stock had been issued pursuant to stock option exercises, options to purchase
81,830 shares of Common Stock were outstanding at a weighted average exercise
price of $15.71 per share, and 918,170 shares remained available for future
issuance under the 1996 Stock Plan. In the event of a change in control of the
Company, including a merger of the Company with or into another corporation or
the sale of substantially all of the assets of the Company, then all shares
subject to options granted under the 1996 Stock Plan will become fully vested
and exercisable unless such options are assumed by the successor or acquiring
company. The 1996 Stock Plan will terminate in April 2006, unless earlier
terminated in accordance with the terms of the 1996 Stock Plan.

1996 Director Option Plan

In June 1996, the Company's Board of Directors adopted, and in July 1996
the Company's stockholders approved, a 1996 Director Option Plan (the "Director
Plan") and reserved a total of 250,000 shares of Common Stock for issuance
thereunder. Commencing with the Company's 1997 annual meeting of stockholders,
each nonemployee director will be granted a nonstatutory option to purchase an
amount of shares of Common Stock of the Company equal to 5,000 shares multiplied
by a fraction, the numerator of which shall be $15.00 and the denominator of
which shall be the fair market value of one share of the Company's Common Stock
on the date of grant. The exercise price of options granted under the Director
Plan will be equal to the fair market value of one share of the Company's Common
Stock on the date of grant. Each option granted under the Director Plan will
vest on a cumulative monthly basis over a one-year period and will have a
10-year term. In the event of a change in control of the Company, including a
merger of the Company with or into another corporation or the sale of
substantially all of the assets of the Company, then all shares subject to
options granted under the Director Plan will become fully vested and exercisable
unless such options are assumed by the successor or acquiring company. The
Director Plan will terminate in June 2001, unless earlier terminated in
accordance with the terms of the Director Plan.

55
<PAGE> 56

1988 Stock Option Plan

The Company's 1988 Stock Option Plan (the "1988 Stock Plan") was adopted by
the Board of Directors in March 1988 and approved by the stockholders in
February 1989. A total of 1,339,663 shares of Common Stock are reserved for
issuance under the 1988 Stock Plan. As of December 31, 1996, 432,312 shares of
Common Stock had been issued upon exercise of stock options, options to purchase
an aggregate of 633,405 shares were outstanding at a weighted average exercise
price of $2.36 per share, and 273,946 shares remained available for future
issuance under the 1988 Stock Plan.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors in April 1996 and was approved by the
Company's stockholders in July 1996. A total of 200,000 shares of Common Stock
are reserved for issuance under the 1996 Purchase Plan of which 17,321 shares
have been issued as of December 31, 1996. Under the 1996 Purchase Plan, the
Company withholds a specified percentage of each salary payment to participating
employees over certain offering periods. Any employee who is currently employed
for at least 20 hours per week and more than five months in a calendar year by
the Company or any majority owned subsidiary designated by the Board of
Directors from time to time, and who does not own 5% or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any subsidiary of the Company, is eligible to participate in the
1996 Purchase Plan. Unless the Board of Directors determines otherwise, each
offering period will run for 24 months and will be divided into four consecutive
periods of approximately six months. The first offering period and first
purchase period commenced on August 1, 1996. New offering periods will commence
every six months. The price at which stock is purchased under the 1996 Purchase
Plan is equal to 85% of the fair market value of the Common Stock on the first
day of the applicable offering period or the last day of the applicable purchase
period, whichever is lower.

1991 Employee Stock Purchase Plan

The Company's 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan")
was adopted by the Board of Directors in 1991 and approved by the stockholders
in 1991. Shares of Preferred Stock convertible into an aggregate of 92,391
shares of Common Stock had been authorized for issuance under the 1991 Purchase
Plan as of March 31, 1996 of which 82,403 shares have been issued as of such
date. In June 1996, shares of Preferred Stock convertible into an additional
12,627 shares of Common Stock were reserved for issuance under the 1991 Purchase
Plan to enable the Company to complete the issuance of shares of Preferred Stock
in the purchase period that ended on June 30, 1996. All outstanding Preferred
Stock automatically converted to Common Stock in connection with the Company's
initial public offering. The 1991 Purchase Plan, which is intended to qualify
under Section 423 of the Code, is administered by the Board of Directors of the
Company or by a committee appointed by the Board of Directors. The 1991 Purchase
Plan terminated on June 30, 1996.

SECTION 401(K) PLAN

In September 1993, the Company adopted a Retirement Savings and Investment
Plan that is intended to qualify under Section 401(k) of the Code (the "401(k)
Plan") covering the Company's full-time employees located in the United States.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($9,500 in 1996)
and have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan permits, but does not require, additional matching contributions to the
401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. To
date, the Company has not made any contributions to the 401(k) Plan.

56
<PAGE> 57

LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION

The Company has adopted provisions in its Restated Certificate of
Incorporation that eliminate the personal liability of its directors for
monetary damages arising from breach of their fiduciary duties in certain
circumstances to the fullest extent permitted by law, and authorize the Company
to indemnify its directors and officers to the fullest extent permitted by law.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has entered into indemnification agreements providing for the
foregoing with its directors and executive officers. The indemnification
agreements may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as officers or directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

At present, except as disclosed in "Business-Legal Proceedings" there is no
pending litigation or proceeding involving a director or officer of the Company
where indemnification is required or permitted, nor is the Company aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.

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<PAGE> 58

CERTAIN TRANSACTIONS

Since January 1, 1993, the Company has sold shares of Series D Preferred
Stock convertible into shares of Common Stock in private financings. In
connection with such sales, the Company has also issued warrants to acquire
shares of Series D Preferred Stock at an exercise price of $5.82 which are
convertible into shares of Common Stock. The purchasers of the Series D
Preferred Stock and warrants included the following 5% stockholders, directors
and entities affiliated with directors.

<TABLE>
<CAPTION>
SHARES OF
SERIES D
SHARES OF SERIES D PREFERRED STOCK
NAME PREFERRED STOCK UNDERLYING WARRANTS
- -------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH DIRECTORS
Entities affiliated with Coronado Venture Fund
(James M. Strickland)................................. 103,136 860
Edward M. Giles IRA..................................... 1,211 61
MBW Venture Partners, L.P. (James R. Weersing).......... 90,466 4,524
Jack W. Schuler......................................... 12,200 611
Entities affiliated with The Vertical Group
(Edward M. Giles)..................................... 10,624 533
Rex J. Bates............................................ 5,090 255
OTHER 5% STOCKHOLDERS
State Farm Mutual Automobile Insurance Company.......... 171,890 8,595
Entities affiliated with Marquette Venture Partners..... 475,123 6,568
</TABLE>

In April and May 1996, the Company sold an aggregate of 646,664 shares of
Common Stock to Jack Schuler, the Company's Chairman, John Patience, a director
of the Company, and venture capital funds affiliated with Marquette Venture
Partners ("Marquette"), a principal stockholder of the Company, at a purchase
price of $1.62 per share. Messrs. Schuler and Patience paid the purchase price
for their shares 10% in cash and 90% through a full recourse promissory note
secured by the underlying shares of Common Stock. The promissory notes bear
interest of 6% per annum and are due and payable in full on February 26, 1998.
Marquette paid the purchase price for their shares in cash. These stock
purchases were approved by the Company's Board of Directors in principle in
January 1996 and the specific terms of the stock purchases were approved by the
Board of Directors on February 23, 1996. The purchase price of $1.62 per share
was determined by the Board of Directors of the Company in January 1996 and
equals the fair market value of Company's Common Stock as of such date, as
determined by the board. Messrs. Schuler and Patience were provided with the
opportunity to purchase these shares in connection with (i) their efforts and
assistance in completing the BioTek acquisition and assisting management with
the integration of the companies, (ii) Mr. Schuler's decision to serve as
Chairman of the Board of Directors and (iii) Mr. Schuler's and Mr. Patience's
devotion of a significant portion of their work time to the Company's business.

In 1994 the Company hired R. James Danehy to serve as President, Chief
Executive Officer and a director of the Company. In connection therewith, the
Company issued Mr. Danehy a stock option (the "Option") covering 295,650 shares
of Common Stock at an exercise price of $0.84 per share. In addition, the
Company provided Mr. Danehy the opportunity to purchase up to $200,000 of Series
D Preferred Stock at $5.82 per share. As an incentive to purchase such shares,
the Company also provided Mr. Danehy the opportunity to purchase approximately
0.37 additional shares of Common Stock at $0.84 per share for each two shares of
Series D Preferred Stock purchased. Mr. Danehy acquired 34,378 shares of Series
D Preferred Stock and 17,189 shares of Common Stock pursuant to this right in
January 1996. In order to facilitate the transfer of shares to Mr. Danehy's
individual retirement account ("IRA"), the Company in November 1995 canceled
81,263 shares subject to the Option which had vested and allowed Mr. Danehy to
purchase 81,263 shares of Common Stock at a purchase price of $0.84 per share
through his self-directed IRA. In January 1996 the Company granted Mr. Danehy
options to acquire 28,975 shares of Common Stock at $1.62 per share.

In February 1996 the Company acquired BioTek for aggregate consideration of
$19.1 million including the issuance of approximately $12.0 million in Exchange
Notes in exchange for notes held by the holders of BioTek. In addition, $0.2
million in Exchange Notes were held back from the amounts

58
<PAGE> 59

payable at the closing of the acquisition and placed in escrow to indemnify
Ventana from losses incurred in connection with certain matters related to the
acquisition. Until the Exchange Notes have been repaid, the Company is obligated
to nominate at its annual meeting of stockholders two BioTek Representatives for
election to Ventana's Board of Directors. The BioTek Representatives currently
serving on the Ventana Board are Michael R. Danzi and C. Anthony Stellar, M.D.
In connection with the acquisition, Mr. Danzi and Dr. Stellar exchanged BioTek
notes for Exchange Notes in aggregate principal amounts of $352,496 and
$1,196,511, respectively.

The Exchange Notes provided each holder, during a 30-day period, the
opportunity to convert Exchange Notes into shares of Ventana Common Stock at a
conversion price of $13.53 per share. Holders of Exchange Notes who did not make
an election to convert all or any portion of such holders' Exchange Notes were
deemed to have automatically converted one-half of the principal amount of such
holders' Exchange Notes. No interest was deemed to accrue on the balance of
Exchange Notes which were converted. Upon expiration of the conversion period,
an aggregate of $3.0 million in principal amount of Exchange Notes were
converted into 222,973 shares of Common Stock and an aggregate of $9.0 million
of Exchange Notes remained outstanding.

In connection with the acquisition of BioTek in February 1996, the Company
issued (the "BioTek Financing") $4.6 million of convertible subordinated notes
(the "Ventana Notes") together with warrants to purchase 800,356 shares of
Series D Preferred Stock at an exercise price of $5.82 per share (the
"Warrants") to certain current stockholders of the Company. The proceeds from
the issuance of the Ventana Notes were used to fund all of the cash portion of
the consideration paid by Ventana to acquire BioTek plus related working capital
requirements. In May 1996, the Company provided all holders of Preferred Stock
who did not participate in the BioTek Financing the opportunity to purchase
identical securities as were issued in the BioTek Financing and pursuant to the
election by such holders, $0.5 million in principal amount of Ventana Notes and
Warrants to acquire 87,384 shares of Series D Preferred Stock were issued. The
Ventana Notes were convertible into Common Stock at a conversion price of $13.53
per share for a period of 30 days from issuance. No holders elected to convert
their Ventana Notes into Common Stock. The following table sets forth the
aggregate principal amount of the Ventana Notes and the number of shares of
Series D Preferred Stock underlying the Warrants held by executive officers,
directors and 5% stockholders:

<TABLE>
<CAPTION>
PREFERRED
ORIGINAL SHARES
LOAN UNDERLYING
NAME PRINCIPAL WARRANTS
- --------------------------------------------------------------------- --------- ----------
<S> <C> <C>
MBW Venture Partners, L.P............................................ $ 938,424 162,059
Jack W. Schuler...................................................... 688,601 118,917
Entities affiliated with Edward M. Giles............................. 653,944 112,933
State Farm Mutual Automobile Insurance Company....................... 630,555 108,893
John Patience........................................................ 559,884 96,689
Rex J. Bates......................................................... 64,698 11,728
James R. Weersing.................................................... 24,884 4,298
James M. Strickland.................................................. 5,000 860
Thomas M. Grogan, M.D.(1)............................................ 2,667 459
</TABLE>

- ---------------
(1) Represents shares beneficially owned by C. Ovens, Inc.

Each share of Preferred Stock was converted into 0.37 shares of Common
Stock upon the closing of the Company's initial public offering.

In September 1996, the Company offered to repay an aggregate of $4.0
million of Exchange Notes and Ventana Notes at 90.5% of the principal amount of
such notes. On October 18, 1996, the Company repaid $3.7 million of Exchange
Notes and Ventana Notes at a discounted amount of $3.4 million. As part of such
repayments, the Company repaid $62,500, $168,000 and $50,000 in original
principal amount of Exchange Notes and Ventana Notes held by directors Jack
Schuler, Anthony Stellar and John Patience for payments of $56,562, $152,040 and
$45,250, respectively.

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<PAGE> 60

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to the Company with
respect to the beneficial ownership of its Common Stock as of December 31, 1996,
as adjusted to reflect the sale of Common Stock offered by the Company and by
each of the Selling Stockholders hereby, for (i) each Selling Stockholder, (ii)
each person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (iii) each of the Company's directors, (iv) each Named
Executive Officer and (v) all directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1)(2) NUMBER OF OFFERING(3)
NAMED EXECUTIVE OFFICERS, DIRECTORS --------------------- SHARES BEING ---------------------
OR 5% STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Marquette
Venture Partners(3)(4)
520 Lake Cook Rd., Suite 450
Deerfield, IL 60015............... 1,918,650 17.5% 416,100 1,502,550 11.7%
MBW Venture Partners, L.P.(5)
James R. Weersing
365 South Street
Morristown, NJ 07960.............. 1,442,350 12.9% -- 1,442,350 11.1%
State Farm Mutual Automobile
Insurance Company(6)
One State Farm Plaza
Bloomington, IL 61701............. 887,173 8.0% -- 887,173 6.9%
Jack W. Schuler(7)
1419 Lake Cook Road, Suite 415
Deerfield, IL 60015............... 965,607 8.7% -- 965,607 7.5%
R. James Danehy(8).................. 245,550 2.2% -- 245,550 1.9%
R. Michael Rodgers(9)............... 41,086 * -- 41,086 *
Michael K. Cusack(10)............... 20,221 * -- 20,221 *
David P. Pauluzzi(11)............... 16,170 * -- 16,170 *
Bernard O.C. Questier(12)........... 12,319 * -- 12,319 *
Rex J. Bates(13).................... 31,152 * -- 31,152 *
Michael R. Danzi(14)................ 9,566 * -- 9,566 *
Edward M. Giles(15)................. 279,333 2.5% -- 279,333 2.2%
Thomas M. Grogan, M.D.(16).......... 174,055 1.6% -- 174,055 1.4%
John Patience(17)................... 292,789 2.6% -- 292,789 2.3%
C. Anthony Stellar, M.D.(18)........ 19,959 * -- 19,959 *
James M. Strickland(19)............. 402,547 3.7% -- 402,547 3.1%
James R. Weersing(5)(20)............ 1,452,857 13.0% -- 1,452,857 11.2%
All directors and executive officers
as a group (19 persons)........... 4,036,614 34.8% -- 4,036,614 30.0%
OTHER SELLING STOCKHOLDERS
Interwest Partners IV, L.P.(3)...... 370,900 3.4% 220,875 150,025 1.2%
The CIT Group/Venture Capital,
Inc.(3)........................... 346,386 3.2% 206,377 140,009 1.1%
Lease Management Services, Inc. .... 8,896 * 4,448 4,448 *
Lawrence A. Brown................... 3,107 * 1,600 1,507 *
James L. Bennington and Josephine K.
Bennington Living Trust........... 1,233 * 600 633 *
</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.

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<PAGE> 61

(2) Applicable percentage of ownership is based on 10,978,238 shares of Common
Stock outstanding as of December 31, 1996 together with shares issuable
pursuant to applicable options and warrants of such stockholder which may
be exercised within 60 days after December 31, 1996. Shares of Common Stock
subject to options and/or warrants currently exercisable or exercisable
within 60 days after December 31, 1996 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) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." Applicable percentage ownership is based upon 12,828,238
shares of Common Stock outstanding as of December 31, 1996 (after giving
effect to the shares offered by the Company hereby) together with shares
issuable pursuant to applicable options and warrants for each stockholder
currently exercisable or exercisable within 60 days after December 31,
1996.

In the event that the over-allotment option is exercised in full, The CIT
Group/Venture Capital, Inc., Interwest Partners IV, L.P. and the entities
affiliated with Marquette Venture Partners will sell to the Underwriters
140,009, 150,025 and 83,900 shares, respectively. If less than the entire
over-allotment option is exercised, the CIT Group/Venture Capital, Inc.,
Interwest Partners IV, L.P. and the entities affiliated with Marquette
Venture Partners will each sell to the Underwriters a percentage of their
shares subject to the over-allotment option on a pro rata basis.

(4) Includes 1,464,153 shares beneficially owned by Marquette Venture Partners,
L.P.; 441,871 shares beneficially owned by Marquette Venture Partners II,
L.P.; and 12,626 shares beneficially owned by MVP II Affiliate Fund, L.P.

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

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

(7) Includes 118,917 shares issuable upon the exercise of warrants held by Mr.
Schuler; 73,512 shares beneficially owned by Mr. Schuler, as custodian for
Tanya Eva Schuler; 73,513 shares beneficially owned by Mr. Schuler, as
custodian for Tess Heidi Schuler; and 73,512 shares beneficially owned by
Mr. Schuler, as custodian for Tino Hans Schuler.

(8) Includes 70,382 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 held by Mr. Danehy.

(9) Includes 7,608 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 held by Mr. Rodgers.

(10) Includes 4,312 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 held by Mr. Cusack.

(11) Includes 4,929 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 held by Mr. Pauluzzi.

(12) Includes 12,319 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 held by Mr. Questier.

(13) Includes 11,173 shares issuable upon the exercise of warrants held by Mr.
Bates.

(14) Includes 1,087 shares beneficially owned by Barbara A. Danzi.

(15) Includes 122,814 shares beneficially owned by Vertical Fund, L.P. (of which
85,945 shares are issuable upon the exercise of warrants held by Vertical
Fund, L.P.); 36,869 shares beneficially owned by Vertical Medical Partners,
L.P.; 68,542 shares beneficially owned by Vertical Fund Associates, L.P.;
and 27,679 shares beneficially owned by Vertical Partners, L.P. (of which
21,831 shares are issuable upon the exercise of warrants held by Vertical
Partners, L.P.). Also

61
<PAGE> 62

includes 23,429 shares beneficially owned by Edward M. Giles IRA (of which
5,157 shares are issuable upon the exercise of warrants held by Edward M.
Giles IRA). Mr. Giles, a director of the Company, is Chairman and President
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 proportionate partnership interest
therein.

(16) Includes 3,696 shares beneficially owned by Andrew Grogan; 7,710 shares
beneficially owned by C. Ovens, Inc. (of which 459 shares are issuable upon
the exercise of warrants held by C. Ovens, Inc.); and 14,077 shares
issuable upon exercise of options exercisable within 60 days of December
31, 1996 held by Dr. Grogan.

(17) Includes 96,689 shares issuable upon the exercise of warrants held by Mr.
Patience.

(18) Includes 740 shares beneficially owned by Diane Stellar, and 740 shares
beneficially owned by Andrew Stellar.

(19) Includes 860 shares issuable upon the exercise of warrants held by Mr.
Strickland. Also includes 120,670 shares beneficially owned by Coronado
Venture Fund; 163,059 shares beneficially owned by Coronado Venture Fund
II, L.P.; 103,996 shares beneficially owned by Coronado Venture Fund III,
L.P.; and 13,962 shares beneficially owned by Coronado Venture Co-Investors
Limited Partnership. Mr. Strickland, a director of the Company, is a
general partner of Coronado Venture Management. Mr. Strickland disclaims
beneficial ownership of the shares beneficially owned by such entities
except to the extent of his proportionate partnership interest therein.

(20) Includes 6,209 shares beneficially owned by James R. Weersing and Mary H.
Weersing, Trustees of the Weersing Family Trust U/D/T dated April 24, 1991.
Also includes 4,298 shares issuable upon the exercise of warrants held by
Mr. Weersing.

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<PAGE> 63

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 5,000,000 shares of preferred stock. The following summary
of certain provisions of the Common Stock and preferred stock does not purport
to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Restated Certificate of Incorporation which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part and by the provisions of applicable law.

COMMON STOCK

As of December 31, 1996, there were 10,978,238 shares of Common Stock
outstanding which were held of record by 477 stockholders.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after the payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the Shares of Common Stock to be issued upon the closing of
this Offering will be fully paid and non-assessable.

Provisions in the Company's Restated Certificate of Incorporation and
Bylaws (i) prohibit the stockholders from acting by written consent without a
meeting or calling a special meeting of stockholders and (ii) require advance
notice of business proposed to be brought before an annual or special meeting of
stockholders. The amendment or modification of these provisions will require the
affirmative vote of the holders of 66 2/3% of the outstanding shares of Common
Stock.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. The Board of Directors will have the authority, without further
action by the stockholders, to issue the undesignated preferred stock in one or
more series, to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued shares of undesignated preferred stock
and to fix the number of shares constituting any series and the designation of
such series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders, may discourage bids for the Company's Common Stock
at a premium over the market price of the Common Stock and may adversely affect
the market price of and the voting and other rights of the holders of Common
Stock. At present, none of the preferred stock is outstanding and the Company
has no plans to issue any of the preferred stock.

WARRANTS

At December 31, 1996, the Company had outstanding warrants to purchase
784,613 shares of Common Stock at an exercise price of $5.82 per share. These
warrants are currently exercisable, will terminate in February 2001 and may be
exercised on a net basis.

CERTAIN PROVISIONS OF DELAWARE LAW

Ventana is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an antitakeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the

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<PAGE> 64

"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an antitakeover effect with respect to transactions not approved in advance
by the Board of Directors, including discouraging attempts that might result in
a premium over the market price for the shares of Common Stock held by
stockholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A. Its telephone number is (800) 468-9716.

64
<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.

Upon the completion of this Offering, the Company will have 12,828,238
shares of Common Stock outstanding, assuming no exercise of options or warrants
after December 31, 1996. Of these 12,828,238 shares, 5,172,440 shares will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 7,655,798 shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act ("restricted securities").
These shares may be sold in the public market only if registered, or pursuant to
an exemption from registration such as Rule 144, 144(k) or 701 under the
Securities Act. The Company's directors and executive officers, the Selling
Stockholders and certain other stockholders, who will in the aggregate hold
6,120,871 shares of Common Stock upon the completion of this Offering, have
entered into lock-up agreements under which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, or agree
to dispose of, directly or indirectly, any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into Common Stock owned by them for a period of 120 days after the
date of this Prospectus, without the prior written consent of Dillon, Read & Co.
Inc. The Company has entered into a similar agreement, except that the Company
may grant options and issue stock under its current stock option and stock
purchase plans and pursuant to other currently outstanding options and warrants.

Of the 7,655,798 outstanding shares of the Company's Common Stock that
represent restricted securities, approximately 1,252,537 shares will be
available for immediate public resale on the date of this Offering. An
additional 54 shares of Common Stock will be saleable between the effective date
of this Offering and 120 days after the Offering. Upon expiration of the lock-up
agreements, approximately 6,383,612 shares of Common Stock (including
approximately 262,741 shares subject to outstanding vested options) will become
eligible for immediate public resale, subject in some cases to vesting
provisions and volume limitations pursuant to Rule 144. The remaining
approximately 282,336 shares comprising restricted securities will become
eligible for public resale at various times over a period of less than two years
following the completion of this Offering, subject in some cases to vesting
provisions and volume limitations. Approximately 4,044,177 of the shares
outstanding immediately following the completion of this Offering, excluding all
of the Company's outstanding warrants which may be converted on a cash basis
into 784,613 shares of the Company's Common Stock will be entitled to
registration rights with respect to such shares upon the release of lock-up
agreements. The number of shares sold in the public market could increase if
such rights are exercised.

As of December 31, 1996, 715,235 shares were subject to outstanding
options. Certain of these shares are subject to the lock-up agreements described
above. The Company has filed a Registration Statement on Form S-8 covering
shares issuable under the Company's 1988 Stock Plan (including shares subject to
then outstanding options under such plans), the Company's 1996 Stock Plan, the
Company's 1996 Director Option Plan and 1996 Employee Stock Purchase Plan, thus
permitting the resale of such shares in the public market without restriction
under the Securities Act, subject, in certain cases, to expiration of applicable
lock-up agreements.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of the Company's initial
public offering, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding (approximately
128,282 shares immediately after this Offering) or

65
<PAGE> 66

(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Under Rule 701 under the Securities Act, persons who purchase shares
upon exercise of options granted prior to the effective date of the Company's
initial public offering are entitled to sell such shares 90 days after the
effective date of the Company's initial public offering in reliance on Rule 144,
without having to comply with the holding period requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.

The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modifications will have a material effect on
the times when shares of the Company's Common Stock become eligible for resale.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 4,828,790 shares of Common Stock (including shares issuable
upon exercise of warrants) (the "Registrable Securities") or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"). These
rights are provided under the terms of an agreement between the Company and the
holders of Registrable Securities. Subject to certain limitations in the
agreement, if the holders of at least 25% of the Registrable Securities request,
the Company must on two occasions after six months from the effective date of
the Company's initial public offering, use its best efforts to register the
Registrable Securities for public resale. If the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the Offering. The holders
of Registrable Securities may also require the Company (but not more than once
during any 12-month period) to register all or a portion of their Registrable
Securities on Form S-3 when use of such form becomes available to the Company,
provided, among other limitations, that the proposed aggregate selling price is
at least $1.0 million. All registration expenses must be borne by the Company
and all selling expenses relating to Registrable Securities must be borne by the
holders of the securities being registered.

66
<PAGE> 67

CERTAIN UNITED STATES TAX CONSIDERATIONS

The following is a discussion of certain United States federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders of such Common Stock. In general, a "Non-U.S.
Holder" is any owner of Common Stock other than (i) a citizen or resident of the
United States, or certain United States expatriates, (ii) a corporation,
partnership or other entity created or organized in the United States or under
the laws of the United States or of any state, or (iii) an estate or trust whose
income is includible in gross income for United States federal income tax
purposes regardless of its source. The discussion pertains only to Common Stock
held as a "capital asset" as defined in the Internal Revenue Code of 1986, as
amended (the "Code"). The discussion is based on laws, regulations, rulings and
decisions in effect on the date hereof, all of which are subject to change. The
discussion does not address aspects of taxation other than federal income and
estate taxation and does not address all aspects of federal income and estate
taxation. The discussion is for general information only and does not consider
any specific facts or circumstances that may apply to a particular Non-U.S.
Holder. Accordingly, prospective investors are urged to consult their own tax
advisors regarding the United States federal, state, local and non-U.S. tax
consequences of acquiring, holding and disposing of shares of Common Stock.

DIVIDENDS

In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or such lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States, or (ii) if a tax treaty applies, attributable to a United States
permanent establishment maintained by the Non-U.S. Holder. Dividends effectively
connected with such trade or business or attributable to such permanent
establishment (provided a tax treaty applies) generally will not be subject to
withholding (if the Non-U.S. Holder files certain forms with the payor of the
dividend) and generally will be subject to United States federal income tax on a
net income basis at the applicable graduated rates. In addition, in the case of
a Non-U.S. Holder that is a corporation, a U.S. branch profits tax may be
imposed on such corporation's effectively connected earnings and profits (as
determined under the Code). The branch profits tax is imposed at a rate of 30%
(or such lower rate prescribed by an applicable tax treaty). To determine the
applicability of a tax treaty providing for a lower rate of withholding,
dividends paid to an address in a foreign country are presumed under the current
interpretation of existing Treasury regulations to be paid to a resident of that
country. Treasury regulations proposed in 1984 which have not been finally
adopted, however, would require Non-U.S. Holders to file certain new forms to
obtain the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. Such forms would contain the holder's name and
address and an official statement by the competent authority in the foreign
country (as designated in the applicable tax treaty) attesting to the holder's
status as a resident thereof.

SALE OF COMMON STOCK

Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain upon the disposition of his Common Stock unless (i) the
Company is or has been a "U.S. real property holding corporation" for federal
income tax purposes (which the Company does not believe that it is or is likely
to become), (ii) the gain is effectively connected with a trade or business
carried on by the Non-U.S. Holder within the United States or, if a tax treaty
applies, attributable to a permanent establishment maintained by the Non-U.S.
Holder in the United States, or (iii) the Non-U.S. Holder is an individual who
is present in the United States for 183 days or more in the taxable year of the
disposition, and either (a) the Non-U.S. Holder has a tax home (as specially
defined for U.S. federal income tax purposes) in the United States and the gain
from the disposition is not attributable to an office or other fixed place of
business maintained by the Non-U.S. Holder in a foreign country or (b) the gain
from the disposition is attributable to an office or other fixed place of
business maintained in the United States by the Non-U.S. Holder.

67
<PAGE> 68

ESTATE TAX

In general, Common Stock owned or treated as owned by an individual
Non-U.S. Holder will be includible in the individual's gross estate for United
States federal estate tax purposes, unless an applicable tax treaty provides
otherwise.

BACKUP WITHHOLDING AND INFORMATION REPORTING

The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable tax
treaty. Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the Non-U.S. Holder resides. United States backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish the information required under the
United States information reporting or backup withholding requirements) will
generally not apply to dividends paid on Common Stock to a Non-U.S. Holder at an
address outside the United States.

The payment of proceeds from the disposition of Common Stock by or through
a foreign office of a foreign broker generally will not be subject to backup
withholding or information reporting. Information reporting (but not backup
withholding) will apply, however, to the payment of proceeds from the
disposition of Common Stock by or through the foreign office of (i) a United
States broker, (ii) a broker that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States, or
(iii) a broker that is a "controlled foreign corporation" for United States
federal income tax purposes, unless the broker has documentary evidence in its
records that the owner is a Non-U.S. Holder and certain other conditions are met
or the owner otherwise establishes an exemption. The payment of proceeds from
the disposition of Common Stock by or through a United States office of a broker
will be subject to both backup withholding and information reporting unless the
owner certifies under penalty of perjury that, among other things, it is a
Non-U.S. Holder or otherwise establishes an exemption.

68
<PAGE> 69

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom Dillon, Read &
Co. Inc., Bear, Stearns & Co. Inc. and Cowen & Company are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company and the Selling Stockholders, the number of Shares of Common Stock
set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Dillon, Read & Co. Inc................................................... 507,000
Bear, Stearns & Co. Inc.................................................. 506,500
Cowen & Company.......................................................... 506,500
William Blair & Company, L.L.C........................................... 30,000
Alex. Brown & Sons Incorporated.......................................... 50,000
Brean Murray & Co., Inc.................................................. 20,000
Cleary Gull Reiland & McDevitt Inc....................................... 30,000
Crowell, Weedon & Co..................................................... 30,000
Donaldson, Lufkin & Jenrette Securities Corporation...................... 50,000
Furman Selz LLC.......................................................... 30,000
Hambrecht & Quist LLC.................................................... 50,000
Jefferies & Company...................................................... 30,000
Lazard Freres & Co. LLC.................................................. 50,000
Lehman Brothers.......................................................... 50,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................... 50,000
Montgomery Securities.................................................... 50,000
J.P. Morgan Securities Inc............................................... 50,000
Morgan Stanley & Co. Incorporated........................................ 50,000
Needham & Company, Inc................................................... 30,000
David A. Noyes & Company................................................. 20,000
Oppenheimer & Co., Inc. ................................................. 50,000
PaineWebber Incorporated................................................. 50,000
Pennsylvania Merchant Group Ltd.......................................... 20,000
Piper Jaffray Inc........................................................ 30,000
Rauscher Pierce Refsnes, Inc............................................. 30,000
Raymond James & Associates, Inc.......................................... 30,000
Robert W. Baird & Co. Incorporated....................................... 30,000
Robertson, Stephens & Company LLC........................................ 50,000
Salomon Brothers Inc..................................................... 50,000
Sands Brothers & Co., Ltd. .............................................. 20,000
Scott & Stringfellow, Inc. .............................................. 20,000
Smith Barney Inc......................................................... 50,000
Vector Securities International, Inc. ................................... 30,000
H.G. Wellington & Co. Inc................................................ 20,000
Wessels, Arnold & Henderson, L.L.C....................................... 30,000
---------
Total Underwriters............................................. 2,700,000
=========
</TABLE>

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Shares of Common Stock being
sold pursuant to the Underwriting Agreement if any are purchased (excluding
Shares covered by the over-allotment option).

69
<PAGE> 70

The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus and to selected dealers (who may
include Underwriters) at such price less a concession of not more than $0.49 per
share. Additionally, the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. After the
public offering, the public offering price and other selling terms may be
changed by the Representatives.

The Company and certain Selling Stockholders have granted to the
Underwriters an option to purchase up to 31,066 and 373,934 additional Shares of
Common Stock, respectively, at the public offering price, less the underwriting
discount, set forth on the cover page of this Prospectus, solely to cover
over-allotments, if any. This option may be exercised in whole or in part at any
time within 30 days from the date of this Prospectus. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of Shares of Common Stock to be purchased by it shown in the above table
bears to the total number of Shares of Common Stock offered hereby.

The Offering of the Shares is made for delivery, when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of Shares in whole or in part.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act and to contribute to payments the Underwriters may be required to
make in respect thereof.

The executive officers and directors of the Company, the Selling
Stockholders and certain other stockholders, who will in the aggregate own
6,120,871 shares of Common Stock upon the completion of this Offering, have
agreed that they will not, without the prior written consent of Dillon, Read &
Co. Inc., offer, sell, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock owned by them during the 120 day
period following the date of this Prospectus. The Company has agreed that it
will not, without the prior written consent of Dillon, Read & Co. Inc., offer,
sell or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the 120 days following the date of this
Prospectus, except that the Company may issue shares of Common Stock and options
to purchase Common Stock under its 1996 Stock Plan and its 1996 Employee Stock
Purchase Plan.

In connection with this Offering, certain Underwriters and selling group
members or their affiliates may engage in passive marketing making transactions
in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
during the two business day period before the commencement of sales in this
Offering. Passive market making consists of, among other things, displaying bids
on the Nasdaq National Market limited by the bid prices of independent market
makers and purchases limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and all possible market
making activity must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.

The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.

In February 1996, Bear, Stearns & Co. Inc. rendered a fairness opinion to
the Company in connection with the acquisition of BioTek for which Bear, Stearns
& Co. Inc. received a fee of $200,000, consisting of $50,000 in cash and 69,767
shares of Series D Preferred Stock which converted into

70
<PAGE> 71

25,784 shares of Common Stock upon the completion of the Company's initial
public offering. Bear, Stearns & Co. Inc. is not selling any of its shares of
Common Stock in the Offering.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this Prospectus, certain members of Wilson
Sonsini Goodrich & Rosati, Professional Corporation and investment partnerships
of which such persons are partners beneficially own 6,660 shares of the
Company's Common Stock. Christopher D. Mitchell, Assistant Secretary of the
Company, is a member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.

EXPERTS

The consolidated financial statements of Ventana Medical Systems, Inc. at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
document to which reference is made are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal offices, and copies of
all or any part of the Registration Statement may be obtained from such office
upon the payment of the fees prescribed by the Commission.

71
<PAGE> 72

(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 73

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VENTANA MEDICAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995 and 1996........................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996......................................................................... F-4
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996............ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996......................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>

F-1
<PAGE> 74

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, 1996 and 1995, and the related
consolidated statements of operations, convertible redeemable preferred stock
and stockholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ventana Medical Systems, Inc., as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP
Tucson, Arizona
January 8, 1997

F-2
<PAGE> 75

VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,103 $ 6,190
Short-term investments........................................... -- 4,877
Accounts receivable.............................................. 1,925 5,145
Inventories (Note 2)............................................. 1,767 3,272
Prepaid expenses and other....................................... 24 1,044
-------- --------
Total current assets............................................... 4,819 20,528
Property and equipment, net (Note 3)............................... 2,258 3,301
Intangibles, net (Note 12)......................................... 301 8,581
-------- --------
Total assets............................................. $ 7,378 $ 32,410
======== ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 1,061 $ 1,738
Other current liabilities (Note 4)............................... 993 2,902
-------- --------
Total current liabilities.......................................... 2,054 4,640
Long-term debt (Note 6)............................................ -- 12,500
Commitments (Notes 7, 10 and 12)
Convertible redeemable preferred stock at aggregate mandatory
redemption value (Note 7):....................................... 35,180 --
Stockholders' equity (deficit) (Notes 7, 8 and 12):
Preferred stock -- $.001 par value; 5,000,000 shares authorized,
no shares issued or outstanding............................... -- --
Common stock -- $.001 par value; 50,000,000 shares authorized,
1,020,164, and 10,978,238 shares issued and outstanding at
December 31, 1995 and 1996, respectively...................... 244 48,896
Accumulated deficit.............................................. (29,980) (33,410)
Cumulative foreign currency translation adjustment............... (120) (216)
-------- --------
Total stockholders' equity (deficit)............................... (29,856) 15,270
-------- --------
Total liabilities, convertible redeemable preferred stock, and
stockholders' equity (deficit)................................... $ 7,378 $ 32,410
======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE> 76

VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Net sales................................................. $ 5,927 $ 10,613 $ 24,129
Cost of goods sold........................................ 2,531 4,282 10,632
------- -------- --------
3,396 6,331 13,497
Operating expenses:
Research and development................................ 1,926 2,239 2,749
Selling, general and administrative..................... 6,899 7,435 11,206
Nonrecurring expenses (Note 12)......................... -- -- 10,262
Amortization of intangibles............................. -- -- 424
------- -------- --------
Loss from operations...................................... (5,429) (3,343) (11,144)
Other income (expense).................................... 59 74 (137)
------- -------- --------
Net loss.................................................. $(5,370) $ (3,269) $(11,281)
======= ======== ========
Net loss per share, as adjusted........................... $ (0.38) $ (1.16)
======== ========
Shares used in computing net loss per share, as
adjusted................................................ 8,664 9,687
======== ========
</TABLE>

See accompanying notes.

F-4
<PAGE> 77

VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
CUMULATIVE
CONVERTIBLE REDEEMABLE FOREIGN
PREFERRED STOCK COMMON STOCK ACCUMU- CURRENCY
----------------------------------------- -------------------- LATED TRANSITION
SERIES A SERIES C SERIES D TOTAL SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
-------- -------- -------- -------- ---------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994..................... $ 536 $ 9,385 $ 15,291 $ 25,212 908,170 $ 197 $(16,922) $ -- $(16,725)
Sale of Series D
preferred stock........ -- -- 3,042 3,042 -- -- -- -- --
Accretion of preferred
stock redemption
requirement............ -- 656 1,327 1,983 -- -- (1,983) -- (1,983)
Sale of common stock..... -- -- -- -- 29,199 8 -- -- 8
Repurchase of common
stock.................. -- -- -- -- (62,364) (15) -- -- (15)
Translation adjustment... -- -- -- -- -- -- -- (46) (46)
Net loss................. -- -- -- -- -- -- (5,370) -- (5,370)
---- -------- --------- --------- ---------- ------- --------- ------ -------
Balance at December 31,
1994..................... 536.... 10,041 19,660 30,237 875,005 190 (24,275) (46) (24,131)
Sale of Series D
preferred stock........ -- -- 2,507 2,507 -- -- -- -- --
Accretion of preferred
stock redemption
requirement............ -- 655 1,781 2,436 -- -- (2,436) -- (2,436)
Sale of common stock..... -- -- -- -- 160,210 67 -- -- 67
Repurchase of common
stock.................. -- -- -- -- (15,051) (13) -- -- (13)
Translation adjustment... -- -- -- -- -- -- -- (74) (74)
Net loss................. -- -- -- -- -- -- (3,269) -- (3,269)
---- -------- --------- --------- ---------- ------- --------- ------ -------
Balance at December 31,
1995..................... 536.... 10,696 23,948 35,180 1,020,164 244 (29,980) (120) (29,856)
Sale of Series D
preferred stock........ -- -- 413 413 -- -- -- -- --
Accretion of preferred
stock redemption
requirement............ -- 328 1,027 1,355 -- -- (1,355) -- (1,355)
Conversion of preferred
stock upon completion
of initial public
offering............... (536) ..... (11,024) (25,388) (36,948) 6,716,997 27,742 9,206 -- 36,948
Proceeds of initial
public offering, net of
expenses $1,221........ -- -- -- -- 1,963,975 17,044 -- -- 17,044
Conversion of debt into
common stock........... -- -- -- -- 222,973 3,016 -- -- 3,016
Sale of common
stock -- other......... -- -- -- -- 1,054,129 850 -- -- 850
Translation adjustment... -- -- -- -- -- -- -- (96) (96)
Net loss................. -- -- -- -- -- -- (11,281) -- (11,281)
---- -------- --------- --------- ---------- ------- --------- ------ -------
Balance at December 31,
1996..................... $ -- $ -- $ -- $ -- 10,978,238 $48,896 $(33,410) $ (216) $ 15,270
==== ======== ========= ========= ========== ======= ========= ====== =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 78

VENTANA MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(5,370) $(3,269) $(11,281)
Adjustments to reconcile net loss to net cash used in
operating activities:
Purchased in-process research and development............. -- -- 7,900
Depreciation and amortization............................. 477 911 1,052
Gain on early extinguishment of debt...................... -- -- 300
Changes in operating assets and liabilities net of effects
from acquisition of BioTek Solutions, Inc.:
Accounts receivable....................................... (941) (474) (2,598)
Inventories............................................... (24) (874) (1,377)
Other assets.............................................. 37 (114) (288)
Accounts payable.......................................... 321 422 181
Other current liabilities................................. 224 459 (1,626)
------- ------- --------
Net cash used in operating activities....................... (5,276) (2,939) (7,737)
INVESTING ACTIVITIES:
Purchase of property and equipment, net..................... (604) (956) (815)
Purchase of intangible assets............................... -- -- (192)
Acquisition of BioTek Solutions, Inc........................ -- -- (2,500)
Sales (purchases) of short-term investments available for
sale...................................................... 4,063 -- (4,877)
------- ------- --------
Net cash provided by (used in) investing activities......... 3,459 (956) (8,384)
FINANCING ACTIVITIES:
Repayments of notes payable................................. (36) -- --
Net proceeds from initial public offering................... -- -- 17,044
Issuance of debt (including amounts from related parties)
and stock................................................. 3,035 2,561 7,624
Repayment of debt, net of gain on extinguishment............ -- -- (3,364)
------- ------- --------
Net cash provided by financing activities................... 2,999 2,561 21,304
Effect of exchange rate changes on cash..................... (46) (74) (96)
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 1,136 (1,408) 5,087
Cash and cash equivalents, beginning of year................ 1,375 2,511 1,103
------- ------- --------
Cash and cash equivalents, end of year...................... $ 2,511 $ 1,103 $ 6,190
======= ======= ========
</TABLE>

See accompanying notes.

F-6
<PAGE> 79

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

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 and Europe.

Principles of Consolidation: The consolidated financial statements include
the accounts of the Company's wholly-owned subsidiaries, BioTek Solutions, Inc.
(BioTek), Ventana Medical Systems, S.A. and Ventana Medical Systems GmbH. All
significant intercompany transactions have been eliminated.

Reclassifications The consolidated financial statements for 1994 and 1995
have been reclassified to conform with the 1996 presentation.

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

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

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

Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over estimated useful
lives of three to ten years. Amortization of leasehold improvements is
calculated using a straight-line method over the term of the lease. Maintenance
and repairs are charged to operations as incurred.

Diagnostic instruments include automated instruments used by customers
under cancelable reagent plans ("RPs"), which generally are cancelable upon 90
days written notice. These agreements also require the customer to purchase a
specified amount of reagents for tests from the Company over the term of the
agreement. The manufacturing cost of the related instruments is amortized over a
period of 36 to 48 months and charged to cost of goods sold. Diagnostic
instruments also include instruments placed with customers for evaluation or
demonstration as part of the Company's sales process.

Intangibles: Intangible assets consist primarily of goodwill, customer
base, and developed technology acquired in the BioTek acquisition (see Note 12).
Such assets are amortized over estimated useful lives of 15 years for developed
technology and goodwill, and 20 years for customer base. Intangibles are
presented net of amortization of $519,000 at December 31, 1996.

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

Revenue Recognition: Sales of instruments and reagents are generally
recognized upon shipment. Sales through domestic distributors are recognized
upon shipment of products by the distributors to

F-7
<PAGE> 80

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

end users. Revenues from reagents sold under RPs and similar leasing
arrangements are recognized when reagents are shipped.

For the year ended December 31, 1996, sales to DAKO A/S and Curtin Matheson
Scientific, Inc., a subsidiary of Fisher Scientific, Inc. represented 17% and
16% of consolidated net sales, respectively. No customer represented greater
than 10% of consolidated net sales for the years ended December 31, 1994 or
1995.

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 has
an established policy relating to diversification and maturities that is
designed to maintain safety and liquidity. The Company has not experienced any
material losses on its cash equivalents or short-term investments.

Nonrecurring Expenses: Nonrecurring expenses consist of the estimated
costs of integrating BioTek's operations into Ventana's and the cost of research
and development in process acquired from BioTek (see Note 12).

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

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

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

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

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

Loss Per Common Share: Loss per common share is computed using the
weighted average number of shares of common stock outstanding, except as noted
below. Common equivalent shares from stock options and warrants are excluded
from the computation when the effect is antidilutive, except that, for periods
prior to the effective date of the Company's initial public offering, pursuant
to the Securities and Exchange Commission Staff Accounting Bulletins and Staff
policy, common and preferred shares,

F-8
<PAGE> 81

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

options, and warrants issued during the period commencing 12 months prior to the
initial filing of the registration statement at prices below the public offering
price are presumed to have been in contemplation of the public offering and have
been included in the calculation as if they were outstanding for all periods
presented, determined using the treasury stock method and the price from the
initial public offering.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss............................................ $(5,370) $(3,269) $(11,281)
Less accretion of preferred stock redemption (1,983) (2,436) (1,355)
requirement.......................................
------- ------- --------
Net loss applicable to common stock................. $(7,353) $(5,705) $(12,636)
======= ======= ========
Net loss per common share........................... $ (3.66) $ (2.78) $ (2.15)
======= ======= ========
Weighted average shares outstanding................. 2,010 2,050 5,866
======= ======= ========
</TABLE>

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

2. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work-in-process................................. $1,265 $2,379
Finished goods.................................................... 502 893
------ ------
$1,767 $3,272
====== ======
</TABLE>

F-9
<PAGE> 82

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Diagnostic instruments............................................ $2,008 $2,762
Machinery and equipment........................................... 1,501 2,193
Computers and related equipment................................... 284 945
Furniture and fixtures............................................ 272 292
Leasehold improvements............................................ 133 253
------ ------
4,198 6,445
Less accumulated depreciation and amortization.................... 1,940 3,144
------ ------
$2,258 $3,301
====== ======
</TABLE>

4. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
---- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and payroll taxes.................................. $289 $ 435
Accrued commissions................................................ 198 150
Deferred revenue................................................... 127 816
Accrued legal reserves............................................. -- 432
Sales tax payable.................................................. 167 281
Other accrued expenses............................................. 212 788
---- ------
$993 $2,902
==== ======
</TABLE>

5. LINE OF CREDIT

During 1996, the Company had $2.7 million available under a line of credit
arrangement with a bank which is subject to renewal in March 1997. Borrowings
under the line are collateralized by the Company's receivables and intellectual
property. The line contains certain financial covenants with which the Company
must comply and prohibits the Company from paying dividends. No borrowings were
outstanding under the line at December 31, 1996. However, $500,000 of the line
of credit is not available to the Company at this time, as it supports an
irrevocable letter of credit issued by the bank in favor of a vendor.

The Company has obtained a lending commitment for $2.0 million under a term
loan with interest at the bank's prime rate plus 2.0%. The Company will make
monthly interest payments on amounts borrowed through March 1997, at which time
any amount borrowed plus accrued interest must be repaid in 24 equal monthly
installments. No amounts were outstanding under this credit facility at December
31, 1996.

F-10
<PAGE> 83

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

6. LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1996:

<TABLE>
<S> <C>
Exchange Notes.................................................... $ 5,464
Notes payable to stockholders, terms identical to Exchange
Notes........................................................... 4,846
Notes payable to a customer, interest imputed at approximately
10%, repaid through discounts on future purchases............... 1,587
Other............................................................. 603
--------
$ 12,500
=======
</TABLE>

The Exchange Notes are payable in February 1998. The Exchange Notes bear
interest at 7% payable on February 26, 1997 and 1998. The February 26, 1997
interest payment may be made in cash or common stock at the Company's option. If
the Exchange Notes are redeemed prior to February 26, 1997, no interest is
payable. At December 31, 1996, the Company has accrued $603,000 in interest
expense related to the Notes. Should the Exchange Notes be redeemed prior to
February 26, 1997, the Company will reverse this accrual with an offsetting
reduction of acquisition goodwill. The Exchange Notes were convertible into the
Company's common stock for 30 days subsequent to the acquisition. On March 25,
1996, approximately $3,016,000 of the Exchange Notes were converted into the
Company's common stock.

On September 9, 1996, the Company offered to redeem up to $4.0 million of
Exchange Notes at an early payment discount of 9.5% of the face value of the
notes. On October 18, 1996, the Company redeemed for $3.4 million Exchange Notes
with a face value of $3.7 million. The resulting gain on extinguishment of debt
was reflected in operating results in the fourth quarter of 1996.

7. CONVERTIBLE REDEEMABLE PREFERRED STOCK

All shares of Series A, C, and D preferred stock were converted to common
stock upon completion of the Company's initial public offering. As a result of
the conversion of convertible redeemable preferred stock into common stock, all
accumulated unpaid dividends on the preferred stock were canceled.

F-11
<PAGE> 84

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

The following is a summary of mandatory redemption value, accumulated
unpaid dividends and authorized, issued, and outstanding shares:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Series A (non-cumulative):
Mandatory redemption.................................. $ 536 $ 536
Authorized, issued and outstanding shares............. 750,000 750,000
Series C (9% cumulative):
Mandatory redemption, including accumulated
dividends.......................................... $ 10,041 $ 10,696
Accumulated dividends................................. $ 2,765 $ 3,420
Authorized shares..................................... 8,300,000 8,300,000
Issued and outstanding shares......................... 8,084,543 8,084,543
Series D (9% cumulative):
Mandatory redemption, including accumulated
dividends.......................................... $ 19,660 $ 23,948
Accumulated dividends................................. $ 2,650 $ 4,431
Authorized shares..................................... 10,250,000 10,250,000
Issued and outstanding shares......................... 7,911,836 9,098,741
Totals
Mandatory redemption, including accumulated
dividends.......................................... $ 30,237 $ 35,180
Accumulated dividends................................. $ 5,415 $ 7,851
Authorized shares..................................... 19,300,000 19,300,000
Issued and outstanding shares......................... 16,746,379 17,933,284
</TABLE>

8. COMMON STOCK

On February 26, 1996, the Company sold 646,664 shares of common stock to
two directors of the Company and a related partnership at a price of $1.62 per
share for their efforts and assistance in completing the BioTek acquisition and
assisting management with its integration of the companies. Receivables of
$910,000 due from the directors have been netted against Common Stock at
December 31, 1996.

On July 26, 1996, the Company sold, through an underwritten public
offering, 1,890,907 shares of its Common Stock at $10.00 per share. Immediately
prior to the public offering, the Company completed a 1 for 2.7059046 reverse
stock split. All share and per share amounts in the consolidated financial
statements have been retroactively adjusted to reflect the effect of this
reverse stock split.

Upon closing of the Company's initial public offering, all outstanding
shares of its Series A, C and D redeemable convertible preferred stock were
converted into 6,716,997 shares of Common Stock. On August 25, 1996, the
Company's underwriters exercised a portion of their overallotment option. The
underwriters purchased an additional 73,068 shares of Common Stock from the
Company, resulting in net proceeds of $679,532 to the Company. All share and per
share amounts have been retroactively adjusted to reflect the reverse stock
split.

In December 1996, the Company's Board of Directors authorized the Company
to file a Registration Statement with the Securities and Exchange Commission to
sell an additional 1,850,000 shares of common stock in an underwritten public
offering.

F-12
<PAGE> 85

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

Warrants for the purchase of 784,613 shares of Common Stock were
outstanding and fully exercisable at December 31, 1996 at an exercise price of
$5.82 per share. These warrants may be exercised on a net basis and will expire
in February 2001, to the extent not previously exercised.

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 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.

Under the Company's 1988 Stock Option Plan ("the 1988 Plan"), up to
1,339,663 shares of common stock have been reserved for grant to employees and
directors. Options must be granted at not less than 100% of fair market value
(as determined by the Board of Directors) at the date of grant. Options
generally vest over a four year period and expire five to ten years after the
date of grant. However, the Board of Directors, at its discretion, may decide
the period over which options become exercisable and their expiration dates.

In April 1996, the Company's Board of Directors authorized the 1996 Stock
Option Plan ("the 1996 Plan"). A total of 1,000,000 shares of common stock have
been reserved for issuance under the 1996 Plan. Options must be granted at not
less than 100% of the fair market value of the Company's stock on the dates of
grant. Options generally vest over four years and expire in ten years.

In April 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan ("the 1996 Purchase Plan"). A total of 200,000 shares of common
stock are reserved for issuance under the 1996 Purchase Plan. A total of 17,321
shares of common stock have been issued under the 1996 Purchase Plan at a price
of $8.18 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 or last day of the applicable offering period.

In June 1996, the Company adopted the 1996 Director Stock Option Plan (the
"Director Plan") and reserved a total of 250,000 shares of common stock for
issuance thereunder. Commencing with the Company's 1997 annual meeting of
stockholders, each nonemployee director will be granted a nonstatutory option to
purchase an amount of shares of the Company's common stock equal to 5,000 shares
multiplied by a fraction, the numerator of which shall be $15.00 and the
denominator of which shall be the fair market value of one share of the
Company's common stock on the dates of grant. The exercise price of options
granted under the Director Plan will be equal to the fair market value of one
share of the Company's common stock on the dates of grant. Each option granted
under the Director Plan will vest on a cumulative monthly basis over a one-year
period and will have a 10-year term. The Director Plan will terminate in June
2001, unless terminated earlier.

Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and such information has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996: risk-free interest rate of 6.28%, dividend yield
of 0%, volatility factor of the expected market price of the Company's common
stock of .755, and a weighted-average expected life of the options of 5 years.

F-13
<PAGE> 86

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

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 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,
--------------------
1995 1996
------- --------
(IN THOUSANDS,
EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Net loss, as reported.......................................... $(3,269) $(11,281)
Pro forma compensation expense for stock options
1995 grants.................................................. (82) (34)
1996 grants.................................................. -- (268)
------- --------
Pro forma net loss............................................. $(3,351) $(11,583)
======= ========
Pro forma loss per share....................................... $ (0.39) $ (1.20)
======= ========
</TABLE>

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
OPTIONS PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Balance at January 1, 1994.............................. 272,986 $ 0.23
Granted............................................... 564,836 0.84
Exercised............................................. (28,090) 0.23
Canceled.............................................. (196,955) 0.23
-------- -----
Balance at December 31, 1994............................ 612,777 0.74
Granted............................................... 324,505 0.84
Exercised............................................. (160,210) 0.36
Canceled.............................................. (126,618) 0.36
-------- -----
Balance at December 31, 1995............................ 650,454 0.95
Granted............................................... 271,396 9.65
Exercised............................................. (183,351) 0.89
Canceled.............................................. (23,264) 0.84
-------- -----
Balance at December 31, 1996............................ 715,235 $ 3.89
======== =====
</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.

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

F-14
<PAGE> 87

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

the exercise price exceeded the fair market value of the stock were $0.03 per
share and $0.89 per share, respectively.

Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.24 per share to $17.00 per share, with substantially all options having an
exercise price of less than $2.00 per share. The remaining contractual life of
such options ranged from two to ten years. Options for the purchase of 153,199
shares were immediately exercisable at December 31, 1996.

9. INCOME TAXES

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Non-current:
Net operating loss carryforwards............................. $ 5,004 $ 5,396
Capitalized research and development......................... 2,471 2,650
General business credit carryforwards........................ 767 929
Other........................................................ 186 217
Current:
Miscellaneous................................................ 154 525
------- --------
Total deferred tax assets...................................... 8,582 9,717
Valuation reserve.............................................. (8,582) (9,717)
------- --------
Net deferred tax assets........................................ $ -- $ --
======= ========
</TABLE>

The valuation allowance for deferred tax assets was increased by
$1,843,000, $1,319,000, and $1,135,000 in the years ended December 31, 1994,
1995, and 1996, respectively to fully offset deferred tax balances.

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, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $12.7 million. These
federal and state carryforwards will begin to expire in 2000 and 1997,
respectively, if not previously utilized. The Company also has research and
development tax credit carryforwards of approximately $900,000 which will begin
to expire in 2005, if not previously utilized. Utilization of the Company's net
operating loss carryforwards will be subject to limitations due to the "change
in ownership" provisions of the Internal Revenue Code of 1996, as amended, as a
result of the Company's prior issuances of equity securities. These
carryforwards, therefore, may expire prior to being fully utilized. Future
financings may cause additional changes in ownership and further limitations on
the use of federal net operating loss carryforwards.

10. COMMITMENTS

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

F-15
<PAGE> 88

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

of such facilities. The lease expires in 2001. The future minimum rental
payments under this and other operating lease arrangements are as follows:

<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997................................................................ $ 453
1998................................................................ 392
1999................................................................ 289
2000................................................................ 304
2001................................................................ 76
---------
-
$1,514
==========
</TABLE>

Rent expense totaled $157,000, $188,000, and $426,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.

A competitor has filed suit against a subsidiary of the Company alleging
infringement of certain patent rights. 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
accruals when deemed necessary. Management is of the opinion that the
disposition of these claims will not have a material effect on the Company's
financial position or results of operations.

11. FOREIGN OPERATIONS, GEOGRAPHIC, AND SEGMENT DATA

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

F-16
<PAGE> 89

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales
North America unaffiliated customers.............. $ 5,627 $ 9,657 $ 22,257
Europe unaffiliated customers..................... 300 956 1,872
Consolidated subsidiaries......................... 903 521 1,896
------- ------- -------
6,830 11,134 26,025
Eliminations...................................... (903) (521) (1,896)
------- ------- -------
$ 5,927 $10,613 $ 24,129
======= ======= =======
Net Loss:
North America..................................... $(3,974) $(2,654) $(10,130)
Europe............................................ (1,164) (363) (869)
------- ------- -------
(5,138) (3,017) (10,999)
Eliminations...................................... (232) (252) (282)
------- ------- -------
$(5,370) $(3,269) $(11,281)
======= ======= =======
Identifiable Assets:
North America..................................... $ 8,506 $ 8,823 $ 49,589
Europe............................................ 952 1,099 1,526
------- ------- -------
9,458 9,922 51,115
Eliminations...................................... (2,179) (2,544) (18,705)
------- ------- -------
$ 7,279 $ 7,378 $ 32,410
======= ======= =======
</TABLE>

12. BIOTEK ACQUISITION

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

The purchase price for BioTek consisted of:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash consideration.......................................... $ 2,500
Stock issued to BioTek noteholders.......................... 3,016
Exchange Notes issued....................................... 8,968
Note payable -- escrow for contingencies.................... 234
Net historical liabilities assumed.......................... 4,389
-------
$ 19,107
=======
</TABLE>

F-17
<PAGE> 90

VENTANA MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1996

The purchase price was allocated as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Tangible net assets......................................... $ 2,252
In-process research and development......................... 7,900
Goodwill and other intangibles.............................. 2,055
Developed technology........................................ 2,800
Customer base............................................... 4,100
-------
Total purchase price........................................ $ 19,107
=======
</TABLE>

The Company charged to expense at the date of the acquisition $7.9 million
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established and where there are no alternative future uses. This amount is
included as a component of nonrecurring expenses in the accompanying
consolidated statements of operations. The remaining nonrecurring expenses of
$2.3 million consist of integration and other indirect acquisition costs.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
-------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales.................................................... $ 19,475 $25,211
Net loss..................................................... $(15,792) $(2,353)
Net loss per share........................................... $ (1.56) $ (0.22)
</TABLE>

F-18
<PAGE> 91

VENTANA MEDICAL SYSTEMS, INC.

APPENDIX -- GRAPHIC IMAGES

INSIDE FRONT COVER

(1) [Image: The Ventana ES System, an automated diagnostic instrument used to
perform standardized IHC testing in clinical and research laboratories.]

(2) [Image: The Ventana gen II, an automated diagnostic used to perform ISH (in
situ hybridization) testing in clinical and research laboratories.]

BACK INSIDE COVER

(3) [The BioTek TechMate 500 System, a semi-automated diagnostic instrument used
to perform standardized IHC testing in clinical and research laboratories.]
<PAGE> 92

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, ANY UNDERWRITER
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 18
Use of Proceeds...................... 18
Price Range of Common Stock and
Dividend Policy.................... 18
Dilution............................. 19
Capitalization....................... 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 30
Management........................... 49
Certain Transactions................. 58
Principal and Selling Stockholders... 60
Description of Capital Stock......... 63
Shares Eligible for Future Sale...... 65
Certain United States Tax
Considerations..................... 67
Underwriting......................... 69
Legal Matters........................ 71
Experts.............................. 71
Available Information................ 71
Index to Financial Statements........ F-1
</TABLE>

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

VENTANA MEDICAL
SYSTEMS, INC.

LOGO
------------------------------

2,700,000 SHARES

COMMON STOCK
PROSPECTUS

FEBRUARY 12, 1997

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

DILLON, READ & CO. INC.

BEAR, STEARNS & CO. INC.

COWEN & COMPANY

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