UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2006

OR

Commission file number: 000-20931

VENTANA MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

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

None

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

Common Stock with a par value of $0.001

Preferred Share Rights

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer.

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

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $1,224,264,000$1,526,589,000 based on the last sale price of common stock on June 30, 2005,2006, which is the last business day of the registrant’s most recently completed second fiscal quarter. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of common stock outstanding as of February 10, 200612, 2007 was 36,304,57737,551,038 shares.

DOCUMENTS INCORPORATED BY REFERENCE

PartParts II and III of this Form 10-K incorporates information by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2005.2006.

TABLE OF CONTENTS

PART I

This document contains forward-looking statements that are based upon current expectations that are within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. In addition, we undertake no obligations to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time. The risks and uncertainties are detailed from time to time in reports filed by us with the SEC, including Forms 8-K, 10-Q, and 10-K. Examples of such forward-looking statements include, but are not limited to statements about:

In addition, such statements are subject to the risks and uncertainties discussed in theItem 1A “Risk Factors” section and elsewhere in this document. The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place reliance on forward-looking statements as a prediction of actual results.

Item 1.    Business

Summary of Our Business

Ventana Medical Systems, Inc., was incorporated in California in 1985 and reincorporated in Delaware in 1993. We launched our first instrument-reagent system in 1991 and have since launched numerous new products using both internally developed and acquired technologies. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Ventana”, “registrant”, or “Company” refer to Ventana Medical Systems, Inc., and our fivesix subsidiaries: Ventana Medical Systems, GmbH, Ventana Medical Systems, Ltd., Ventana Medical Systems, Japan K.K., Ventana Medical Systems, Pty. Ltd. and, Ventana Medical Systems, S.A.

and Wattle Ventures Pty. Ltd.

We develop, manufacture, and market instrument-reagent systems that automate slide staining in anatomical pathology and drug discovery laboratories worldwide. Our products are designed to provide users with automated high-quality and consistent results with high throughput and significant labor savings. Our clinical systems are important tools for anatomical pathology labs in analyzing human tissue to assist in the diagnosis and treatment of cancer and infectious diseases. Our drug discovery systems are used by pharmaceutical and biotechnology companies to accelerate the discovery of new drug targets and to evaluate the safety of new drug compounds. In addition to instruments, we market consumable products, including reagents and other accessories required to operate our instruments. Our customers include the majority of the top fifty U.S. cancer centers, including recognized leaders in cancer research and treatment, such as Johns Hopkins Hospital, the Mayo Clinic, Memorial Sloan-Kettering Cancer Center, and M.D. Anderson Medical Center.

centers.

For the purposes of financial reporting, we have two reportable segments: North America (primarily the United States) and International (primarily France, Germany, United Kingdom, Japan, and Australia). Please see Note 1518 in the Notes to Consolidated Financial Statements for additional information concerning our North AmericanAmerica and International business segments.

Market Overview

There are two target markets for our instrument-reagent systems: (1) anatomical pathology laboratories, which comprise both histology and cytology laboratories, and (2) drug discovery laboratories. We currently obtain the majority of our revenues and profits from ongoing sales of consumables and instruments to anatomical pathology labs worldwide.

According to the National Cancer Institute, cancer is the leading cause of death in the United States. Mortality rates are improved by early detection and the selection of appropriate therapies. Pathologists and oncologists use histology and cytology tests to assist in the diagnosis of cancer and infectious diseases and to selectselecting an appropriate therapy. Based upon our modeling of the market, we estimate anatomical pathology labs worldwide currently purchase approximately $1.4$1.5 billion in instruments and consumables annually. Most anatomical pathology labs are hospital-based, although some independent reference labs offer these services.

Histology

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

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

·

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

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

We currently offer products that are used in H&E staining, IHC staining, ISH staining, and Special Stains staining.

H&E Staining.    The H&E, or primary staining market, is the highest volume segment of the histology laboratory. These slides are generally processed in hospital-based histology labs and private pathology/regional reference labs. We estimate that this market is growing at about 6% to 8% per year.

IHC Staining.The majority of IHC slides are stained in hospital-based histology labs. However, in North America, Japan, and Australia some hospitals send their IHC slides to regional reference labs for staining, rather than perform the work themselves. We estimate the number of IHC slides processed across all labs in the U.S. is growing about 6% to 8% annually. The firstprimary factor driving the increasing the number of IHC slides is the increasing incidencenumber of cancer cases as the general population ages, thereby increasing histology-producing surgical cases. The second factor is the emergence of new diagnostic kitstests that may influence therapeutic choices.

ISH Staining.The current clinical market for ISH staining is small currently, due to the difficulty of performing ISH stains manually and the smalllimited number of ISH tests, or assays, accepted for clinical use. Currently, ISH is used

principally to detect cancer and infectious diseases, primarily viruses, in tissue. We expect automation to grow the clinical ISH staining market significantly, and that ISH tests for genetic mutationsgene amplifications and deletions will become important clinical tools.

Special Stains Staining.We estimate the Special Stains slide market is growing, but is smaller than the worldwide IHC market. There is an opportunity to place instruments with virtually every hospital-based

histology lab, as Special Stains slides are rarely sent to reference labs. Currently, nearly allmany Special Stains slides are processed manually; we believe a major segment of the market will switch to automated slide processing over the next five to ten years.

Image Analysis.    The quantitative image analysis market is still evolving as the standard of care among pathologists in interpreting quantitative markers. Ventana’s image analysis solution is uniquely positioned to capture this segment, specifically the breast panel. As more pathologists and laboratories move toward standardizing their breast markers, we expect that the market for image analysis will certainly grow. The movement to comply with the recent CAP/ASCO HER2/neuscoring guidelines will also drive the use of image analysis as a way to standardize HER2/neu scoring.

Cytology

Cytology involves the collection and microscopic analysis of cell samples from various parts of the body for identifying significant abnormal cell changes. The information obtained by cytological analysis allows the physician to detect, diagnose, and monitor cancerous and pre-cancerous disease. Cytology is utilized in the detection and management of cervical cancer, bladder cancer, and lung cancer, among others.

Cell samples are gathered by the clinician using scraping, brushing, lavaging, or aspiration. The cells are examined, fresh or fixed, and stained by a cytotechnologist who searches for the morphologic abnormalities that characterize disease. The cytopathologist takes this information, along with the patient’s medical history and clinical condition, and classifies the findings according to accepted categories. The cytological diagnosis enables the clinician to identify patients who may be at risk for the subsequent development of cancer, detect those who already have cancer, and to monitor the response of cancer to treatment.

In those cases where abnormalities are found to exist, tests, including IHC, ISH, or Special Stains, can be done to assist the cytopathologist in assessing patient samples.

Worldwide, the greatest application of cytology is in cervical cancer screening. Cervical cancer is the second most common cancer in women and is the principal cancer of women in developing countries, which account for approximately 80% of the reported cases. Globally, approximately 370,000 cases of cervical cancer are diagnosed annually. In the United States, according to historical incidence data from the National Cancer Institute, there are approximately 10,000 new cases of cervical cancer diagnosed each year. Because cervical cancer can be a highly treatable disease, there is an emphasis on screening and early detection through the use of cervical cytology. According to Women’sWomen's Health in Primary Care, of the 50 to 60 million American women who undergo cervical cytology, or PAP,Pap, testing each year, approximately 3.5 million will have a cytologic abnormality that requires further evaluation.

Drug Discovery / Translational Diagnostics

The research market for new drugs comprises over 250,000 researchers in the U.S. located in labs operated by traditional pharmaceutical and biopharmaceutical companies, governments, and medical research centers. Research is conducted in these labs to determine the causes of disease and to identify specific drugs to treat disease.illness. Genomics, the study of genes and their function, and proteomics, the study of proteins and their function, seek to accelerate the drug discovery process by understanding the molecular mechanisms of disease.

Genomics has created opportunities to impact the field of human medicine through the discovery of new biological targets for drugs and an improved ability to diagnose and manage disease. Interest in understanding the relationships between genes and disease has generated a worldwide effort to identify and sequence the genes of many organisms, including the approximately three billion nucleotide pairs and the estimated 30,000 genes within the human genome. Researchers then use gene expression and ISH experiments to identify targets and to study localized gene expression. Large pharmaceutical and biotechnology companies use our DISCOVERY^® family of systems to hybridizelocalize gene expression arraysby mRNA ISH experiments. Whole genome scanning with SNP’s identifies gene amplifications and to run ISH experiments.deletions that can also be tracked by the DISCOVERY system in tissue with DNA ISH.

Proteomics is the analysis of proteins that are encoded by active genes, the direct cause of disease in the body. Common beliefgenes. It is commonly believed that there are many more proteins in the human body than genes, which will make mapping the human proteome significantly more challenging than mapping the genome. In drug discovery laboratories, measuring protein expression is a critical step in target validation and determining the mechanism of action for drug candidates. Our DISCOVERY systems are used by large pharmaceutical and biotechnology companies to run IHC and ISH experiments in their target validation, biomarker discovery, toxicology laboratories, and toxicology laboratories.translational medicine. Translating these discovery biomarkers into useful diagnostic tests is the goal of personalized medicine.

Strategy

Our objective is to build shareholder value by expanding our competitive position in anatomical pathology lab automation and by leveraging the core technologies we have developed for histology labs into drug discovery labs. Key elements of our strategy include the following:

Our Products

Our product offerings are summarized as follows:

Staining Systems and Associated Reagents

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

Today, we market automated instrument systems with a full line of complementary reagents and accessories.

Primary Staining.    We devoted a great deal of our research and development investment in 2005 to SYMPHONY™,launched our first H&E, system. We expect to conduct an initial launch ofor primary staining system, the systemSYMPHONY^® in the middlesecond quarter of 20062006. The SYMPHONY provides laboratories with the next generation of H&E slide preparation automation. Leveraging technologies available on our advanced staining systems, the SYMPHONY fully automates the slide preparation process including baking, paraffin removal, staining, coverslipping, and ramp upslide curing.

Importantly, the distributionSYMPHONY system uses a proprietary chemistry and staining process to produce an H&E slide with superior clarity and discrimination of the product late in 2006. When SYMPHONY is introduced to the histology market, it will be our first entrance into themicro anatomic detail. Branded as Ventana High Definition H&E^™, or HD H&E, staining market.we believe that a SYMPHONY stained slide offers improved diagnostic visualization thereby providing the potential to expand the diagnostic value beyond the ordinary “dip and dunk” H&E.

Advanced Staining.Our first product, the ES^®, launched in 1991, was an instrument-reagent system to automate IHC staining. Prior to the introduction of this system, all IHC staining was performed manually, or with low levels of automation. In early 1996, we acquired BioTek Solutions, Inc., and the TECHMATE^® automated stainer. The TECHMATE 500 batch processing instrument had a 120-slide capacity and was designed for large-volume, single-application testing, applicable to large and moderate-sized hospital clinical and reference labs. Though no longer available for sale, there are TECHMATE instruments still in operation.

Today, we market IHC instrument systems with a full line of complementary reagents and accessories. Our NexES^® IHC staining system, launched in 1997, was the first real advance in automating IHC slide staining and introduced a new level of staining quality, while combining system modularity and ease of operation for improved laboratory productivity. The NexES IHC continues to be used by many small to mid-sized laboratories.

Our groundbreaking BENCHMARKDISCOVERY IHC/ISH and BenchMark^® and DISCOVERY IHC/ISH systems were launched in late1999 and 2000, and 1999, respectively, and were subsequently replaced by the BENCHMARK XT, BENCHMARK LT, and DISCOVERY XT, BenchMark XT and BenchMark LT systems. The BENCHMARKBenchMark series of instruments areis still the only slide preparationindustry standard for systems to offeroffering fully automated Baking Through Staining (BTS™(BTS^®) technology and the flexibility of multiple technologies (IHC and ISH), providing superior, standardized stain quality, increased testing efficiency, and maximum laboratory productivity. BTS™BTS technology describes the automation process, which saves work by performing the baking, deparaffinization, cell conditioning, or antigen unmasking, and staining all on-line, thereby providing full walk-away convenience.

The BENCHMARKDISCOVERY and DISCOVERYBenchMark systems use a bar code that is affixed to each slide to identify the sample and the testing procedures to be performed. Dispensing, incubation (i.e., temperature and time control), and

washing are performed using proprietary chemical and mechanical methods critical to obtaining precise, sensitive, and rapid test results. All aspects of the testing procedure are controlled by our proprietary software, which makes the systems reliable and easy to use.

Our current-generation BENCHMARKBenchMark XT and BENCHMARKBenchMark LT systems, introduced in late 2003 and early 2004, respectively, represent the latest and most advanced instrumentation developed by us to date by us.for advanced staining. The XT and LT provide additional flexibility by providing more protocol options, including the ability to optimize temperature, incubation, and pretreatment steps, in addition to allowing simultaneous processing of IHC and ISH samples. The XT also adds more capacity by increasing throughput by up to 50%. The next-generation DISCOVERY XT, introduced in early 2004, combines all of the improvements of the BENCHMARKBenchMark XT, with the added advantage of microarray capability and research-level flexibility for protocol development.

We manufacture and market an extensive line of primary antibodies, probes, and detection chemistries for use on our systems. In combination, these reagents detect antigens of interest in tissue samples by generating a visual signal in an IHC/ISH reaction at the site where a primary antibody or probe is bound to a specific antigen or molecule in the cell or tissue.

Customers performing tests with our instruments must use our detection chemistries on all tests, but have the option of purchasing primary antibodies from other sources. Our detection chemistries, primary antibodies, probes, and other reagents have been developed using proprietary formulations that, when combined with our instruments, optimize the results of the tests performed.

Special Stains.    In late 1998, we offered anatomical pathology labs the first automated system for Special Stains testing with the launch of our second instrument-reagent system. The Special Stains module can be operated with the same control computer that operates our NexES IHC and BENCHMARK series of systems,

with up to eight complete systems operating from one computer. This flexibility enables customers to design a combination Special Stains/IHC/ISH system that meets their specific needs and provides flexibility for future lab growth. Presently, our 14 Special Stains kits, all developed using proprietary protocols, potentially serveare capable of serving 90% of all Special Stains testing performed in anatomical pathology labs.

Image Analysis.    In the second half of 2004, we signed an agreement with TriPath Imaging Inc. of Burlington, North Carolina. Under the agreement, we obtained exclusive rights to sell and distribute worldwide a Ventana-branded version of TriPath Imaging’s interactive histology imaging system, VIAS™VIAS^™, that is optimized for both Ventana and TriPath Imaging assays. The interactive histology imaging system, launched in 2005, offers anatomic pathology laboratories a cost-effective solution utilizing on-demand digital imaging, direct visualization of IHC stained slides, and real-time quantitative analysis of tissue samples.

Contracts

Instruments are placed through direct sales, instrument rentals, and our Performance Evaluation PeriodProgram (PEP) program.. The PEP program is a formal agreement whereby a staining or imaging system is installed on the premises of a pre-qualified customer for the purpose of allowing the customer to evaluate the system’s functionality over an extended trial period. The customer agrees to purchase a reagent starter kit at the time of installation and to purchase a minimum volume of reagents over the life of the trial period. Minimum purchase requirements vary by customer. Upon completion of the trial period, the customer purchases the staining or imaging system, or returns it to us.

Research and Development

Our research and development organization is divided into two distinct, but complementary teams. One team, the Discovery team, is focused on core research/discovery in the area of technology development and the second team, the Development team, is focused on new product development. As new technologies are proven to be feasible by the Discovery team, they are transferred to the Development team for incorporation into new products. Our efforts are focused on innovative combined instrument-reagent systems, as well as enhancements to existing instruments. In addition, we are developing new reagents for current and future customer applications.

Our 161180 research and development employees perform the majority of our research and development activities. Their efforts are supplemented by consulting services and assistance from scientific advisors. We incurred research and development expenses of $31.9 million, $25.7 million, and $21.2 million in 2006, 2005, and $19.6 million in 2005, 2004, and 2003, respectively.

Instrumentation Development Projects

Our instrumentation development is focused on product improvement and new product development. The modular platform used by our NexES IHC system enabled us to develop new products rapidly, such as the NexES Special Stains system, the DISCOVERY system, the BENCHMARKBenchMark system, and mostmore recently the BENCHMARKBenchMark XT/LT and DISCOVERY XT systems. With the launch of SYMPHONY, we introduced our first system with internal modularity thereby enabling the system to be configured differently for various customer needs. This modular development strategy will continue as we explore new opportunities in instrument systems and in automating manual lab processes.

In 2005,2006, our Research and Development teams devoted significant time to developing SYMPHONY, as well as our first H&ENext Generation IHC/ISH staining system.

platform.

Reagent Development Projects

Our reagent development is divided into five principal areas:

·

molecular probes;

We continueIn addition to our own development of primary antibodies, we monitor third-party development of new primary antibodies used to identify abnormal levels of protein expression in patients and to assist pathologists in recommending treatment. We will license or purchase these antibodies where possible and as appropriate. New detection chemistries with improved sensitivity continue to be developed through our research efforts. Reagent development for our systems is on going.

Customers

Our customers consist of hospital-based anatomical pathology labs, independent reference labs, the drug discovery labs of pharmaceutical companies, biotechnology companies, government labs, medical research centers, and resellers serving these entities. None of our customers accounted for more than 5% of our consolidated revenues in 2006, 2005, 2004, or 2003.

2004.

Patents and Proprietary Rights

We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights, trademarks, and trade secret laws. We file applications for and obtain patents, copyrights, and trademarks in the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also seek to protect our trade secrets and confidential information by non-disclosure policies and through the use of appropriate confidentiality agreements. We have obtained a substantial number of patents and trademarks in the United States and in other countries. There can be no assurance, however, that these patents are valid or can be enforced against competitive products in every jurisdiction.

Many of our products include intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, based upon experience and

standard industry practice, we believe such licenses could generally be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms or the need to engage in litigation regarding these matters, could have material adverse effects on our business, operating results, and financial condition.

The industry in which we compete is characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding patent and other intellectual property rights. For example, in the CytoLogix litigation, described in further detail underItem 3, Legal Proceedings“Legal Proceedings”,, we have received an adverse judgment and were determined to infringe CytoLogix’sCytoLogix's patents for “Moving Platform Slide Stainer With Heating Elements” (U.S. 6,180,061), and “Random Access Slide Stainer with Independent Slide Heating Regulation” (U.S. 6,183,693). Currently, we are enjoined from the manufacture and sale of our first-generation DISCOVERY and BENCHMARKBenchMark instruments and may have to pay damages, including royalties, depending on the final outcome of ongoing litigation. Our second-generation BENCHMARKBenchMark XT/LT instruments are also the subject of a separate patent litigation by CytoLogix (see(see Item 3, Legal ProceedingsProceedings)).

There can be no assurance that our patents and other proprietary rights will not be challenged, invalidated, or circumvented, that others will not assert intellectual property rights to technologies that are relevant to us, or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. The risks associated with patents and intellectual property is more fully discussed in the section of this report titled“RiskItem 1A, “Risk Factors”..

Sales and Marketing

In our major markets, including North America, most of Europe, Japan, and Australia, we sell our products directly to our customers. We believe we have the largest direct sales force calling on histology labs today. Our sales teams are organized by region in North America, except for national and certain key accounts, and internationally by country internationally.country. In smaller markets, we rely on strategic distributors to sell and service our products.

To augment our clinical anatomical pathology sales and tactical marketing organizations, we have established similar operations to covercommercialize our drug discovery line of business.product line. These sales forces in North America, Europe, and Japan primarily promote our DISCOVERY XT systems and related consumables.

A complementary worldwidestrategic marketing team is responsible for identifying new product opportunities, for working with our research and development group on product development, and for driving worldwide revenues through marketing support.

Competition

We face an array of competitors in the anatomical pathology lab and drug discovery lab markets. Competition is intense and is based on product performance, product price, product line breadth, and after-sales service.

Histology

WhileIn 2006 we entered the H&E testing market where we face entrenched competitors offering competing slide staining systems which utilize widely adopted “dip and dunk” technologies which remain largely unchanged for the last 40 years. In addition, while we are a leader in automated IHC and ISH staining, we face strong competition from the manual method of performing IHC and ISH tests and from competitors marketing instrument-reagent IHC and ISH staining systems. AWhile most H&E staining is done using some form of automation, a number of anatomical pathology labs in the U.S. and the majority outside the U.S. continue to perform IHC and ISH slide staining manually. Significant barriers exist to automation in countries where insurance or government healthcare reimbursement for IHC testing is low. Additionally, labs in whichwhere pathologists prefer manually stained slides remain reluctant to automate their processes.

Currently, direct competition primarily comes from fiveeight competitors selling instrument-reagent IHC staining systems. TheseOur competitors arein advanced staining include Dako A/S, a Danish company that holds a significant share of the market for manual IHC reagents; BioGenex Laboratories, Inc. (BioGenex), a company marketing instruments with a reagent annuity; Lab Vision Corporation, a subsidiary of Apogent Technologies, Inc., a company that supplies Dako A/S with instruments and markets its instruments through distributors and a direct sales force; Diagnostics Products Corp., a company that markets high-volume IHC staining systems in Europe,Europe; and Vision Bio Systems Ltd. (Vision), an Australian biomedical company. Dako launched an automated IHC systemcompany which was acquired by Danaher Corporation in 2004. Vision launched an automated IHC/ISH staining system in Europe and Asia Pacific during 2004, and in the U.S. launched the BOND™ OCR system in 2005(see Item 3, Legal Proceedings).January 2007. Two automated Special Stains systems compete with our Special Stains module: one system offered by Dako which is the subject of a patent infringement lawsuit filed by us,A/S and another offered by BioGenex. We believe our successIn the primary staining market we compete with ThermoFisher Inc, a company marketing instruments with a reagent annuity; Sakura Finetek, a Japanese company that manufactures a range of instruments for the histology market; and Leica Instruments (Leica), a Swiss biomedical company which was acquired by Danaher Corporation in the Special Stains market will attract additional competitors.

2005.

Cytology

The current Human Papillomavirus (HPV) testing market is dominated by Digene Corporation with its U.S. Food and Drug Administration (FDA) approved HYBRID CAPTURE II^® liquid-based prep assay holding more than 95%the majority of the HPV testing market.

Drug DiscoveryDiscovery/Translational Diagnostics

Our focus is on the study of the hybridization of nucleic acid microarrays and messenger RNA expression. Our competitors in nucleic acid micro array hybridization include Tecan Group Ltd., and Affymetrix, Inc., and

Amersham Biosciences UK Limited. Currently, we do not face competition providing automated systems for messenger RNA expression studies. In drug discovery IHC staining, competition includes clinical IHC competitors, Dako A/S, Vision, and BioGenex.

Manufacturing

AllThe majority of our instrument and reagent manufacturing operations are housedremain in a singleour corporate headquarters facility located in Tucson, Arizona. Medical device manufacturing operations are conducted under the FDA Quality System Regulations. These regulations subject our facilities to inspections to verify compliance and require us to maintain documentation and controls for our manufacturing and quality activities. ISO 13485 is the international quality standard for medical device manufacturers, based upon the ISO 9001 quality standard, with additional specific industry requirements consistent with the FDA Quality System Regulations. We received ISO 13485 certification in February 2003.

Employees

As of December 31, 2005,2006, we had 802952 full-time employees, including our 97 officers.

Available Information

We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains at http://www.sec.gov an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

You may also find electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on our website at http://www.ventanamed.com. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC.

FACTORS THAT COULD AFFECT FUTURE RESULTSItem 1A.    Risk Factors

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

OurWe are engaged in litigation, including patent litigation, and a court could determine that our products could infringe the intellectual property rights of others which might cause us to engage in costly litigation, and if we are not successful, could causemay require us to pay substantial damages andor prohibit us from selling our products.

ThirdWe are involved in numerous litigation proceedings with counterparties that allege we infringe certain patents held by them. A court may determine that patents held by third parties may assert patent, trademark, or copyright infringement or other intellectual property claims againstare valid and infringed by us based on their patents or other intellectual property. Weand we may be required to pay substantial damages (including treble damages) for past infringement; if it is ultimately determined our products infringe a third-party’s intellectual property rights. to:

Even if infringement claims against us are without merit, defending a lawsuit takes significant time, is expensive, and may divert management’s attention from other business concerns. If we are not successfulAny significant adverse ruling in a lawsuit, we may be unable to sellone of our products or to continue to sell our products until we

obtain a license from the owner of the relevant technology or other intellectual property rights, which may not be available to us. Even if a license is available, it may require us to pay substantial royalties. (For further discussion of litigation matters please refermay have a negative effect on our operations and cause our stock price to Part I, Item 3, Legal Proceedings of this document).

decline.

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

As discussed in more detailPart I,Item 3, Legal Proceedingsof this document, weWe have been involved in litigation with CytoLogix, Inc., pursuant to which a jury determined that we infringed certain CytoLogix patents.patents—see Part I, Item 3, Legal Proceedings. The patents in question relate to prior versions of our BENCHMARKBenchMark and DISCOVERY instruments and do not apply to the current versions of the BENCHMARK XT / BenchMark XT/LT and DISCOVERY XT instruments.instruments; however, these instruments are subject to separate litigation. In September 2005, the Court of Appeals upheld certain of the jury findings of patent infringement, and the case is expected to proceed to trial on the issue of damages. We have accrued a liability of $5.0 million in this regard. At trial, CytoLogix may advance arguments for damages several times higher than the amount accrued by the Company.we have accrued. In view of the complexity of this case and the inherent uncertainty of patent infringement litigation, there is a possibility the amount of damages paid to CytoLogix couldmay be substantially different from the $5.0 million we have accrued byand if substantial, could cause the Company.price of our stock to decline.

If we fail to comply with the FDA’s Quality System regulations, our manufacturing operations could be delayed, and our product sales and profitability could suffer.

When manufacturing our medical devices, including Analyte Specific Reagents, we are required to adhere to Quality System regulations, which require us to manufacture our products and maintain records in a prescribed manner. We are subject to future FDA Quality System inspections, and we cannot assure you that we will pass these inspections or maintain compliance.

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

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

We face significant competition and may not be able to compete effectively.

We compete with companies ranging from other multinationals to small start-ups. Competition takes many forms, including the development of new products by competitors having lower prices or superior performance or that are otherwise competitive with our current products, patents and registrations obtained by competitors, and business combinations among our competitors or major customers. Our present or future products could be rendered obsolete or uneconomical as the result of this competition. Our failure to compete effectively could cause us to lose market share to our competitors and/or have a material adverse effect on our revenues and profitability.

If our customers do not receive adequate third-party reimbursement, our products may not be accepted in the market.

In the United States, our products are primarily purchased by medical institutions and laboratories that bill third-party payers, such as government health administration authorities, private health coverage insurers, managed care organizations, and other similar organizations. Our ability to earn sufficient returns oneffectively market our products will depend in part on the extent to which reimbursement for our products and related treatments will be available to our customers from third-party payers. Third-party payers are increasingly attempting to limit both the coverage and the level of reimbursement of products to contain costs, and if they are successful, our ability to sustain revenue growth and profitably will be adversely affected.

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

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

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

We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in different jurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax

rates, in the valuation of deferred tax assets and liabilities or in tax laws, or by material audit assessments, which could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, the amount of tax we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability. Further tax law changes in jurisdictions in which we conduct business could materially affect our profitability.

We are responsible for charging end customers certain taxes in numerous international jurisdictions. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. In the future, we may come under audit which could result in changes to their estimates. We believe that we maintain adequate tax reserves to offset potential liabilities that may arise upon audit. Although we believe our tax estimates and associated reserves are reasonable, the final determination of tax audits and any related litigation could be materially different than the amounts established for tax contingencies. To the extent that such estimates ultimately prove to be inaccurate, the associated reserves would be adjusted resulting in our recording a benefit or expense in the period a final determination was made.

If we fail to comply with the FDA’s Quality System regulations, our manufacturing operations could be delayed, and our product sales and profitability could suffer.

When manufacturing our medical devices, including our reagents, we are required to adhere to Quality System regulations, which require us to manufacture our products and maintain records in a prescribed manner. We are subject to future FDA Quality System inspections, and we cannot assure you that we will pass these inspections or maintain compliance. If we are unable to pass these inspections or maintain compliance, our product sales and profitability could suffer.

Clinical Laboratory Improvement Act (CLIA) regulations or FDA regulation of clinical laboratories could harm our business by limiting the potential market for our products.

Customers using our products for clinical use in the United States may be regulated under the CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualification, administration, proficiency testing, patient test management, quality control, quality assurance, and inspections. The regulations promulgated under CLIA establish three levels of clinical tests, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using our products. Therefore, CLIA regulations and future administrative interpretations of CLIA could harm our business by limiting the potential market for our products. In addition, the FDA issued draft guidance on September 1, 2006 on the sale of Analyte Specific Reagents (ASRs) to CLIA-regulated laboratories, which if enforced as written, could limit the sales of certain ASRs we currently sell.

If we have problems with key suppliers, our product development and commercialization efforts could be delayed or stopped.

Our reagent products are formulated from chemical and biological materials using proprietary technology and standard processing techniques. We purchase components and raw materials used to make our reagent products primarily from single-source vendors. We cannot assure the materials or reagents will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a significant effect on our ability to manufacture our products. Developing alternative or additional suppliers could be time consuming and expensive.

A number of components used to manufacture instruments are made on a custom basis to our specifications and are available from a limited number of sources. If the supply of materials or components from any of these vendors were delayed or interrupted for any reason, or if the quality or reliability of the materials or components proves inadequate for use in our instruments, our ability to make instruments in a timely fashion could be impaired, and our results of operations would suffer.

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

Sales of our products in the European Union (EU)or EU are subject to strict regulatory requirements, and approval is never certain. All of our products must be in compliance with the “In VitroDiagnostics Directive” and bear the CE mark before being imported for sale in the EU. The CE mark is a symbol indicatingthat indicates the device conforms to the essential requirements of the applicable directive and can be commercially distributed throughout the EU. TheIn VitroDiagnostic Directive also subjects our manufacturing facilities to compliance inspections and requires design, manufacturing, and quality process documentation and controls. Some of our products do not bear the CE mark. We cannot assure you that the CE mark will be granted for all our products or that regulatory review will not involve delays that would harm our ability to market and sell our products in the EU.

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

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

Customers using our products for clinical use in the United States may be regulated under the CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the U.S. by mandating specific standards in the areas of personnel qualification, administration, proficiency testing, patient test management, quality control, quality assurance, and inspections. The regulations promulgated under CLIA establish three levels of clinical tests, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using our products. Therefore, CLIA regulations and future administrative interpretations of CLIA could harm our business by limiting the potential market for our products.

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

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

If we have problems with key suppliers, our product development and commercialization efforts could be delayed or stopped.

Our reagent products are formulated from chemical and biological materials using proprietary technology and standard processing techniques. We purchase components and raw materials used to make our reagent products from single-source vendors. We cannot assure the materials or reagents will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a significant effect on our ability to manufacture our products. Developing alternative or additional suppliers could be time consuming and expensive.

A number of components used to manufacture instruments are made on a custom basis to our specifications and are available from a limited number of sources. If the supply of materials or components from any of these vendors were delayed or interrupted for any reason, or if the quality or reliability of the materials or components proves inadequate for use in our instruments, our ability to make instruments in a timely fashion could be impaired, and our results of operations would suffer.

We could bring litigation to enforce our intellectual property rights, which might result in substantial expense.

We rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. In particular, it is not certain that:

We may become involved in interference proceedings in the U.S. Patent and Trademark Office to determine the priority of our inventions. We also could become involved in opposition proceedings in foreign countries challenging the validity of our patents. In addition, costly litigation could be necessary to protect our patent position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving, and consequently, patent positions in our industry are generally uncertain. We may not prevail in any lawsuit, or if we do prevail, we may not receive commercially valuable remedies. Failure or inability to protect our patent rights or intellectual property could have serious adverse effects on our business and could affect our profitability.

We also rely on trade secrets, unpatented proprietary know-how, and continuing technological innovation that we seek to protect with confidentiality agreements with employees, consultants, and others with whom we discuss our business. These individuals may breach our confidentiality agreements, and our contractual remedies may not be adequate to enforce these agreements. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of these agreements, and we may not be able to resolve these disputes in our favor. Furthermore, competitors may independently develop trade secrets and proprietary technology similar to ours. We may not be able to maintain the confidentiality of information relating to products.information.

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

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

·

the cost of manufacturing scale-up activities;

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

Recent legislation requires us to undertake an annual evaluation of our internal control over financial reporting that may identify internal control weaknesses requiring remediation that could harm our reputation or subject us to investigation and sanctions by regulatory authorities.Item 1B.    Unresolved Staff Comments

Not applicable.

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

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

Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages and have accounted for them using the intrinsic value method of APB No. 25,Accounting for Stock Issued to Employees.We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with the Company. In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),Share-Based Payments, (“SFAS No. 123R”) which changed U.S. Generally Accepted Accounting Principles in such a way to require us to record a charge to earnings for the fair value of employee stock option grants and other share based compensation beginning in the first quarter of 2006. This regulation will negatively impact our earnings for those share based awards that vest beginning in 2006. For example, recording a charge for employee stock options under SFAS No. 123 would have decreased our net income by $8.5 million in 2005. The impact on net income of SFAS No. 123R may differ significantly from the impact as calculated under SFAS No. 123. See also Note 1 to the Condensed Consolidated Financial Statements—Stock Based Employee Compensation.

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

Item 2.    Properties

Our U.S. operation, including research laboratories, instrument and reagent manufacturing facilities and administrative offices, is located in approximately 182,400-square-feet of owned space in Tucson, Arizona.

We anticipate completing an approximate 130,000-square-foot expansion of our Tucson facility in early 2008.

Our European operation is located in approximately 39,000-square-feet of owned space in Strasbourg, France.

Our Japanese operation is located in 1,400-square-feet of leased office space in Yokohama. The lease for the Yokohama facility expires in January 2007.

2008.

Our Asia Pacific operation is located in approximately 700-square-feet1,400-square-feet of leased office space in Melbourne, Australia. The lease for the Melbourne facility expires in December 2006.

March 2007 with monthly renewal options thereafter.

We believe our properties described above are adequate for our current operations.

Item 3.    Legal Proceedings

VENTANA v. DAKOCYTOMATION, Civil Action No. 04-1522, was filed in December 2004, in the U.S. District Court, District of Delaware, alleging infringement of U.S. Patent No. 6,827,901 (“Automated Biological Reaction Apparatus”) by the making, using, and selling of the ARTISAN™ARTISAN^™ staining system. The suit seeks injunctive relief including a Preliminary Injunction against the continued making, using, and selling of the instrument and unspecified damages. DakoCytomation filed an Answer to the Complaint in January 2005. A claim construction hearing and mediation werewas conducted in December 2005. Discovery is ongoing and trial is currently scheduled for July 2006.

CYTOLOGIX v. VENTANA, was served in April 2004, inIn May 2006, the U.S. District Court, District of Delaware alleging infringement of U.S. Patent No. 6,541,261 B1. In July 2004, the case was transferred to the Federal District Court in Boston, Civil Action No. 04-11783 (RWZ). CytoLogix alleges the manufacture, use, and sale of our BENCHMARK XT slide staining system infringes the ‘261 patent. We dispute all of these contentions and we will defend ourselves vigorously. CytoLogix has asked for an injunction, unspecified damages, and enhanced damages for willful infringement. Discovery is currently ongoing. CytoLogix has filedparties entered into a Motion for Summary Judgment of Infringement. Our opposition to the motion will be due February 2006confidential settlement agreement and a hearing onJoint Stipulation of Dismissal, with Prejudice, was filed, terminating the matter is presently scheduled for March 2006.litigation.

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

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

At the December 2003 conclusion of the trial on the issues of patent infringement and trade secret misappropriation, the jury found Ventana liable for infringement on the two patent cases (no willful infringement). On the trade secret issue, the jury determined we had not misappropriated any trade secrets. A permanent injunction was entered by the Court in April 2004, which prohibits us from making and selling the DISCOVERY/BENCHMARKBenchMark systems, but does not prohibit their continued use by customers and will not prohibit us from servicing the instruments or supplying reagents to customers. In May 2004, we filed a Notice of Appeal to the Court of Appeals for the Federal Circuit (“CAFC”), on the patent infringement claims and CytoLogix, on the willfulness and misappropriation claims. The Appeals CourtCAFC rendered its decision in September 2005 upholding the infringement finding on most of the claims of the ‘061 and the ‘693 patents and remanded the case to District Court for further proceedings. We

CYTOLOGIX v. VENTANA, was served in April 2004, in the U.S. District Court, District of Delaware alleging infringement of U.S. Patent No. 6,541,261 B1. In July 2004, the case was transferred to the Federal District Court in Boston, Civil Action No. 04-11783 (RWZ). CytoLogix alleges the manufacture, use, and sale of our BenchMark XT slide staining system infringes the ‘261 patent. In December 2005, Cytologix moved to file an Amended Complaint adding allegations on infringement of U.S. Patent No. 6,783,733. The Court allowed the motion in February 2006. CytoLogix has asked for an injunction, unspecified damages, and enhanced damages for willful infringement. CytoLogix filed dispositive motions on severala Motion for Summary Judgment of Infringement of the outstanding issues in January 2006. Cytologix’ opposition will be due in February‘261 patent. In June 2006, and hearing on these matters is scheduled March 2006. No further dates have been set by the Court pendingissued a decision denying CytoLogix’ motion. In July 2006, the March hearing. The CompanyCourt denied Cytologix Motion for Reconsideration of the Court’s June 2006 decision. Discovery is currently ongoing.

In July 2006, on a summary judgment motion brought by Ventana, the Court dismissed the state unfair competition and Lanham Act claims, but not the Sherman Act claims of monopolization and attempted monopolization. As of this date, a trial has accruednot been scheduled on the remaining issues of patent infringement damages and the Sherman Act claims. We have recorded a liability of $5$5.0 million for potential patent infringement damages.

VISION BIOSYSTEMS, LTD v. VENTANA, Civil Action No. 03 CV 10391-GAO was filed in March 2003, in the U.S. District Court, Eastern District of Massachusetts. We were served with a Summons and Complaint by Vision BioSystems (Vision) for a Declaratory Judgment seeking a declaration of no infringement and invalidity of U.S. Patent Nos. 5,355,439 and 6,352,861, both owned by us. In September 2004, the Judge denied Vision’s motion for Summary Judgment, andbut ruled in favor of our cross-motion for Summary Judgment that Vision’s BOND system infringes claims 1 and 5 of the ‘861 patent. The Court also dismissed the ‘439 patent from the case. Trial on the issues of patent invalidity and damages remain. This matter was consolidated with VENTANA v. VISION BIOSYSTEMS, LTD, Civil Action No. 05-10614 (see below). Following the BioGenex

claim construction ruling (seeVentana v. BioGenex, below) and entry of Judgment in that matter in October 2005, we filed a Notice of Appeal to the CAFC. Vision filed a motion for Summary Judgment of Non-Infringement based upon collateral estoppel in both cases. We have filed our opposition. The matter has been taken off the trial calendar and stayed pending the Court’sCAFC’s ruling on these motions.the BioGenex appeal. In December 2006, the CAFC rendered its decision, overturning the claim construction of the district court in the Ventana v. BioGenex case. This case is expected to be restored to the Court’s docket in 2007.

VENTANA v. VISION BIOSYSTEMS, LTD., Civil Action No. 05-10614 GAO, was filed in March 2005, in the U.S. District Court, Eastern District of Massachusetts. This complaint alleges that Vision’s BOND™BOND^™ OCR system infringes U.S. Patent No. 6,352,861. The suit seeks injunctive relief including a preliminary injunction against the continued making, using and selling of the instrument and unspecified damages. This matter was consolidated with VISION BIOSYSTEMS, LTD v. VENTANA, Civil Action No. 03 CV 10391-GAO for trial (see above). The matter has beenwas also taken off the trial calendar and stayed pending the Court’sCAFC’s ruling on the Summary Judgment motions described in the immediately preceding paragraph.BioGenex appeal. The case is expected to be restored to the Court’s docket in 2007.

VENTANA v. VISION BIOSYSTEMS, LTD., Civil Action No. 1:06-11684, was filed in September 2006, in the U.S. District Court, Eastern District of Massachusetts. This complaint alleges that Vision’s BOND^™ OCR system infringes U.S. Patent No. 6,594,537. The suit seeks injunctive relief including a preliminary injunction against the continued making, using and selling of the instrument and unspecified damages. Vision was not served and we filed a Notice of Voluntary Dismissal, without prejudice.

DIGENE CORPORATION v. VENTANA, Civil Action No. 01-752, was filed in November 2001, in the U.S. District Court, District of Delaware. This Complaint alleges we infringe two U.S. patents held by Digene, U.S. 4,849,331 and 4,849,332, by activities relating to our INFORM^® HPV Family 16 and Family 6 probe products. In November 2002, Digene filed a motion to amend its Complaint to add numerous causes of action related to our September 2002 acquisition of Beckman Coulter’s (“Beckman”) HPV business and to add Beckman as a party. Digene seeks, among other remedies, an injunction against the sale of our INFORM HPV products, unspecified monetary damages, cancellation of the Beckman HPV acquisition, and related claims. Several motions were filed by the parties, one of them being a motion to compel arbitration by Beckman and us. In May 2004, the Court ordered arbitration to proceed as against Beckman only, and stayed the proceedings pending in the District Court until the conclusion of the arbitration. The matter is nowarbitration before the International Centre for Dispute Resolution (“ICDR”) was conducted in March 2006 and post-hearing briefs were filed by the parties in April 2006. In July 2006, the ICDR rendered a Final Award, ruling that Beckman had the right to assign both the Cross-License (“CLA”) and Sublicense (“SLA”) Agreements to Ventana; the transaction as a whole (i.e., a divisionthe inclusion of AAA. Briefingthe Letter Agreement in the arbitration willAsset Purchase Agreement) violates the prohibition in the CLA against further sublicensing; and that the CLA prevents the sale of cell paste. Upon motion of Beckman and Digene, the Delaware District Court confirmed the Award. In addition, the Court removed the Stay and the action has resumed in the Court. In August 2006, Digene moved for Preliminary Injunction against Ventana. Ventana filed its Opposition in October 2006 along with a Motion to Dismiss another claim. In September 2006, Beckman moved to dismiss the case against it. These motions are scheduled to be completedheard in February 2006, with the hearing scheduledearly 2007. Trial is expected in March 2006.late 2007.

VENTANA v. INSTITUT PASTEUR, ICC No. 12764/FM, was filed in June 2003,2003. Ventana and Beckman filed a request for arbitration with the International Chamber of Commerce in Paris, France, to contest the purported termination by Institut Pasteur of the Sublicense AgreementSLA acquired by us from Beckman in September 2002. The ICC hearing was conducted in September 2004. In a decision rendered in April 2005, the

ICC decided that Institut Pasteur did not have standing to terminate the Sublicense AgreementSLA and that Ventana was a proper licensee and sub-licensee of the relevant HPV patents. The ICC further determined that Ventana is entitled to seek damages in an amount to be quantified. TheAs of June 2006, the parties entered into a confidential Settlement Agreement which, inter alia, confirmed the award of the ICC has renewed proceedings on this issuetribunal and provided for the recovery of a portion of Company’s legal expenses. As a result, the parties have withdrawn all pending claims and terminated the ICC Arbitration together with the hearing on damages scheduled for July 2006.related French court proceedings.

VENTANA v. BIOGENEX LABORATORIES INC., No. CIV-03-92-TUC-RCC, was filed by Ventana in February 2003, in U.S. District Court, District of Arizona alleging infringement of U.S. Patent No. 6,352,861 (“Automated Biological Reaction Apparatus”). In August 2005, the Court issued a claim construction ruling favorable to BioGenex on one key point.BioGenex. In September 2005, the parties filed a Stipulation of Entry of Judgment of Non-infringement based solely on the claim construction, for the purpose of being able to proceed to an appeal of the ruling. In October 2005, the Court entered an appealable Judgment, and we filed a Notice of Appeal to the CAFC. Following briefing, oral argument was conducted in September 2006. In December 2006, the CAFC rendered its decision, overturning the claim construction of the District Court of Appealsand remanded the case for further proceedings. The case is expected to return to the Federal Circuit (CAFC). Briefing is underway with a hearing date anticipatedCourt’s docket in the second quarter 2006 and a decision anticipated in the third quarter 2006. BioGenex has also filed a motion for costs and for attorney’s fees in this matter.

2007.

BIOGENEX LABORATORIES, INC. v. VENTANA, Case No. C03 03916 JF, was filed in August 2003, in the U.S. District Court, Northern District of California, San Jose Division. This Complaint alleges we infringe three U.S. patents held by BioGenex, U.S. Patent Nos. 5,578,452, 5,244,787, and 6,451,551. BioGenex seeks, among other remedies, an injunction against our alleged infringement and unspecified monetary damages. In June 2004, BioGenex moved to amend its Complaint adding allegations that we also infringe U.S. Patent No. 6,632,598 and has also filed an action for Contempt against us arising out of previous litigation associated with BioTek Solutions Inc., which we acquired in 1996. In February 2005, the Court ruled in favor of our Motion for Summary Judgment of Non-infringement of the ‘551 patent. The Court also found the ‘452 patent invalid against us for purposes of this litigation. Finally, the Court denied BioGenex’s motion to add the ‘598 patent to the suit. In October 2005, the Court denied entry of an order to show cause on the Contempt claim, dismissing the Contempt action. The Court did note however, that the ‘787 infringement action remains. BioGenex has appealed the Court’s ruling. Discovery is ongoingThe appeal was scheduled to be heard in November 2006, but taken off the calendar. The district court case has been stayed and no trial dates have been set.

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

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

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

No matters were submitted to a vote of security holders in the fourth quarter of 2005.2006.

PART II

Our common stock is listed on the Nasdaq National Market under the symbol “VMSI”. The closing price of our common stock on February 10, 200612, 2007 was $36.71.$42.50. The following table shows the high and low sales prices in dollars per share for the last two years as reported by Nasdaq: