##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



---

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 29, 2006

OR



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

For the transition period from              to

Commission File Number: 0-25395



---

VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC.

(Exact name of Registrant as Specified in its Charter)



---



|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|State or other jurisdiction of Incorporation or organization: |  | IRS Employer Identification No.:
|Delaware                                                      |  | 77-0501994                      



|                                         |  |           
|---------------------------------------- |  | ----------
|35 Dory Road, Gloucester, Massachusetts  |  | 01930     
|(Address of principal executive offices) |  | (Zip code)

(978) 282-2000

(Registrants telephone number, including area code)



---

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer ̈Non-accelerated filer ̈

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

Shares of common stock outstanding at February 2, 2007: 54,855,665

An
index of exhibits filed with this Form 10-Q is located on page 30.



---



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

INDEX



|                              |  |                                                                                                                           |  |           
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----------
|Item Number                   |  |                                                                                                                           |  | PageNumber
|PART I. FINANCIAL INFORMATION |  |                                                                                                                          
|                              |  |                                                                                                                          
|Item 1.                       |  | Consolidated Financial Statements                                                                                         |  |           
|                              |  |                                                                                                                          
|                              |  | Unaudited Consolidated Balance Sheets at December 29, 2006 and September 29, 2006                                         |  | 1         
|                              |  | Unaudited Consolidated Statements of Income for the three month periods ended December 29, 2006 and December 30, 2005     |  | 2         
|                              |  | Unaudited Consolidated Statements of Cash Flows for the three month periods ended December 29, 2006 and December 30, 2005 |  | 3         
|                              |  | Notes to the Consolidated Financial Statements (Unaudited)                                                                |  | 4         
|                              |  |                                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 15        
|                              |  |                                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 21        
|                              |  |                                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                                   |  | 23        
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                          
|                              |  |                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                         |  | 24        
|                              |  |                                                                                                                          
|Item 1A.                      |  | Risk Factors                                                                                                              |  | 24        
|                              |  |                                                                                                                          
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  | 30        
|                              |  |                                                                                                                          
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                           |  | 30        
|                              |  |                                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 30        
|                              |  |                                                                                                                          
|Item 5.                       |  | Other Information                                                                                                         |  | 30        
|                              |  |                                                                                                                          
|Item 6.                       |  | Exhibits                                                                                                                  |  | 30        
|                              |  |                                                                                                                          
|                              |  | Signature                                                                                                                 |  | 32        



---

##### Table of Contents

PART 1.
 FINANCIAL INFORMATION

ITEM 1. CO
NSOLIDATED FINANCIAL STATEMENTS

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATE
S, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------- | - | ------------------ | - | -------- | -
|                                                                                                                                                                                                                  |  | December 29, 2006                         |          |   | September 29, 2006 |  
|                                                                                                                                                                                                                  |  | (Amounts in thousands, except share data) |         
|ASSETS                                                                                                                                                                                                            |  |                                           |          |   |                    |   |          |  
|Current assets                                                                                                                                                                                                    |  |                                           |          |   |                    |   |          |  
|Cash and cash equivalents                                                                                                                                                                                         |  | $                                         | 219,498  |   |                    | $ | 258,891  |  
|Short-term investments                                                                                                                                                                                            |  |                                           | 162,009  |   |                    |   | 154,810  |  
|Accounts receivable, net                                                                                                                                                                                          |  |                                           | 178,244  |   |                    |   | 125,992  |  
|Inventories                                                                                                                                                                                                       |  |                                           | 151,532  |   |                    |   | 133,929  |  
|Deferred income taxes                                                                                                                                                                                             |  |                                           | 30,836   |   |                    |   | 31,592   |  
|Other current assets                                                                                                                                                                                              |  |                                           | 13,011   |   |                    |   | 18,102   |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total current assets                                                                                                                                                                                              |  |                                           | 755,130  |   |                    |   | 723,316  |  
|                                                                                                                                                                                                                  |  |                                          
|Long-term investments                                                                                                                                                                                             |  |                                           | 151,368  |   |                    |   | 135,777  |  
|Property, plant and equipment, net                                                                                                                                                                                |  |                                           | 63,814   |   |                    |   | 62,249   |  
|Goodwill                                                                                                                                                                                                          |  |                                           | 12,280   |   |                    |   | 12,280   |  
|Other assets                                                                                                                                                                                                      |  |                                           | 4,807    |   |                    |   | 4,744    |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total assets                                                                                                                                                                                                      |  | $                                         | 987,399  |   |                    | $ | 938,366  |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                              |  |                                           |          |   |                    |   |          |  
|Current liabilities                                                                                                                                                                                               |  |                                           |          |   |                    |   |          |  
|Current portion of long-term debt                                                                                                                                                                                 |  | $                                         | 476      |   |                    | $ | 466      |  
|Accounts payable                                                                                                                                                                                                  |  |                                           | 66,665   |   |                    |   | 45,937   |  
|Accrued expenses                                                                                                                                                                                                  |  |                                           | 57,104   |   |                    |   | 53,947   |  
|Product warranty                                                                                                                                                                                                  |  |                                           | 9,691    |   |                    |   | 8,934    |  
|Deferred revenue                                                                                                                                                                                                  |  |                                           | 56,077   |   |                    |   | 49,840   |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total current liabilities                                                                                                                                                                                         |  |                                           | 190,013  |   |                    |   | 159,124  |  
|                                                                                                                                                                                                                  |  |                                          
|Long-term accrued expenses and other liabilities                                                                                                                                                                  |  |                                           | 18,563   |   |                    |   | 17,300   |  
|Deferred income taxes                                                                                                                                                                                             |  |                                           | 3,722    |   |                    |   | 3,722    |  
|Long-term debt                                                                                                                                                                                                    |  |                                           | 3,147    |   |                    |   | 3,270    |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total liabilities                                                                                                                                                                                                 |  |                                           | 215,445  |   |                    |   | 183,416  |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Commitments, contingencies and guarantees (Note 9)                                                                                                                                                                |  |                                           |          |   |                    |   |          |  
|                                                                                                                                                                                                                  |  |                                          
|Stockholders equity                                                                                                                                                                                              |  |                                           |          |   |                    |   |          |  
|Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                                                         |  |                                           |         |   |                    |   |         |  
|Common stock, $0.01 par value; 150,000,000 shares authorized; 60,023,611 shares issued and 55,199,788 outstanding at December 29, 2006;
59,308,544 shares issued and 55,560,989 outstanding at September 29, 2006 |  |                                           | 600      |   |                    |   | 593      |  
|Capital in excess of par value                                                                                                                                                                                    |  |                                           | 476,637  |   |                    |   | 453,229  |  
|Less: Cost of 4,823,823 shares of common stock held in treasury at December 29, 2006                                                                                                                              |  |                                           | (152,202 | ) |                    |   | (108,910 | )
|Retained earnings                                                                                                                                                                                                 |  |                                           | 448,006  |   |                    |   | 411,014  |  
|Accumulated other comprehensive loss                                                                                                                                                                              |  |                                           | (1,087   | ) |                    |   | (976     | )
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total stockholders equity                                                                                                                                                                                        |  |                                           | 771,954  |   |                    |   | 754,950  |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                        |  | $                                         | 987,399  |   |                    | $ | 938,366  |  
|                                                                                                                                                                                                                  |  |                                           |          |   |                    |   |          |  

The accompanying notes to the unaudited consolidated financial statements are an integral part of these
statements.



1



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME



|                                              |  |                                               |         |   |                   |   |         |  
|--------------------------------------------- |  | --------------------------------------------- | ------- | - | ----------------- | - | ------- | -
|                                              |  | Fiscal Three Months Ended                     |        
|                                              |  | December 29, 2006                             |         |   | December 30, 2005 |  
|                                              |  | (Amounts in thousands, except per share data) |        
|Revenue                                       |  |                                               |         |   |                   |   |         |  
|Product                                       |  | $                                             | 202,350 |   |                   | $ | 138,726 |  
|Service                                       |  |                                               | 21,477  |   |                   |   | 20,561  |  
|Royalty and license                           |  |                                               | 1,796   |   |                   |   | 1,629   |  
|                                              |  |                                               |         |   |                   |   |         |  
|Total revenue                                 |  |                                               | 225,623 |   |                   |   | 160,916 |  
|                                              |  |                                               |         |   |                   |   |         |  
|Cost of revenue                               |  |                                               |         |   |                   |   |         |  
|Product                                       |  |                                               | 111,512 |   |                   |   | 86,599  |  
|Service                                       |  |                                               | 13,658  |   |                   |   | 10,763  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Total cost of revenue                         |  |                                               | 125,170 |   |                   |   | 97,362  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Gross profit                                  |  |                                               | 100,453 |   |                   |   | 63,554  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Operating expenses                            |  |                                               |         |   |                   |   |         |  
|Research and development                      |  |                                               | 24,223  |   |                   |   | 21,587  |  
|Marketing, general and administrative         |  |                                               | 30,469  |   |                   |   | 28,380  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Total operating expenses                      |  |                                               | 54,692  |   |                   |   | 49,967  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Operating income                              |  |                                               | 45,761  |   |                   |   | 13,587  |  
|Other income (expense), net                   |  |                                               | 715     |   |                   |   | (41     | )
|Interest income                               |  |                                               | 5,955   |   |                   |   | 5,480   |  
|Interest expense                              |  |                                               | (330    | ) |                   |   | (49     | )
|                                              |  |                                               |         |   |                   |   |         |  
|Income before income taxes                    |  |                                               | 52,101  |   |                   |   | 18,977  |  
|Provision for (benefit from) income taxes     |  |                                               | 15,109  |   |                   |   | (3,301  | )
|                                              |  |                                               |         |   |                   |   |         |  
|Net income                                    |  | $                                             | 36,992  |   |                   | $ | 22,278  |  
|                                              |  |                                               |         |   |                   |   |         |  
|Weighted average shares outstanding - basic   |  |                                               | 55,418  |   |                   |   | 56,347  |  
|Weighted average shares outstanding - diluted |  |                                               | 56,430  |   |                   |   | 57,072  |  
|Net income per share - basic                  |  | $                                             | 0.67    |   |                   | $ | 0.40    |  
|Net income per share - diluted                |  | $                                             | 0.66    |   |                   | $ | 0.39    |  

The accompanying notes to the unaudited consolidated financial statements are an integral part of
these statements.



2



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                 |  | Fiscal Three Months Ended |        
|                                                                                                                                 |  | December 29,2006          |         |   | December 30,2005 |  
|                                                                                                                                 |  | (Amounts in thousands)    |        
|Cash flows from operating activities:                                                                                            |  |                           |         |   |                  |   |         |  
|Net income                                                                                                                       |  | $                         | 36,992  |   |                  | $ | 22,278  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                |  |                           |         |   |                  |   |         |  
|Depreciation and amortization                                                                                                    |  |                           | 3,470   |   |                  |   | 3,296   |  
|Amortization of investment (discount) premium                                                                                    |  |                           | (48     | ) |                  |   | 277     |  
|Deferred income taxes                                                                                                            |  |                           | 756     |   |                  |   | (1,028  | )
|Stock-based compensation                                                                                                         |  |                           | 4,583   |   |                  |   | 3,964   |  
|Tax benefit from stock-based compensation                                                                                        |  |                           | 2,423   |   |                  |   | 2,062   |  
|Excess tax benefits from stock-based compensation                                                                                |  |                           | (1,776  | ) |                  |   | (1,044  | )
|Changes in assets and liabilities:                                                                                               |  |                           |         |   |                  |   |         |  
|Accounts receivable                                                                                                              |  |                           | (50,982 | ) |                  |   | (22,736 | )
|Inventories                                                                                                                      |  |                           | (19,588 | ) |                  |   | 10,240  |  
|Other current assets                                                                                                             |  |                           | 5,091   |   |                  |   | 16,356  |  
|Accounts payable                                                                                                                 |  |                           | 20,687  |   |                  |   | 8,319   |  
|Accrued expenses                                                                                                                 |  |                           | 2,886   |   |                  |   | (15,262 | )
|Product warranty                                                                                                                 |  |                           | 708     |   |                  |   | 470     |  
|Deferred revenue                                                                                                                 |  |                           | 6,566   |   |                  |   | (10,749 | )
|Other                                                                                                                            |  |                           | (331    | ) |                  |   | (271    | )
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Net cash provided by operating activities                                                                                        |  |                           | 11,437  |   |                  |   | 16,172  |  
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Cash flows from investing activities:                                                                                            |  |                           |         |   |                  |   |         |  
|Purchase of property, plant and equipment                                                                                        |  |                           | (3,057  | ) |                  |   | (2,501  | )
|Proceeds from sales and maturities of investments                                                                                |  |                           | 42,728  |   |                  |   | 76,330  |  
|Purchase of investments                                                                                                          |  |                           | (64,896 | ) |                  |   | (81,734 | )
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Net cash used in investing activities                                                                                            |  |                           | (25,225 | ) |                  |   | (7,905  | )
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Cash flows from financing activities:                                                                                            |  |                           |         |   |                  |   |         |  
|Proceeds from the issuance of common stock upon exercise of options and issuance of stock under the employee stock purchase
plan |  |                           | 16,409  |   |                  |   | 8,411   |  
|Excess tax benefits from stock-based compensation                                                                                |  |                           | 1,776   |   |                  |   | 1,044   |  
|Repurchase of common stock                                                                                                       |  |                           | (43,292 | ) |                  |   | (20,040 | )
|Repayment of long-term debt                                                                                                      |  |                           | (113    | ) |                  |   | (104    | )
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Net cash used in financing activities                                                                                            |  |                           | (25,220 | ) |                  |   | (10,689 | )
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Effects of exchange rates on cash                                                                                                |  |                           | (385    | ) |                  |   | 521     |  
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Net decrease in cash and cash equivalents                                                                                        |  |                           | (39,393 | ) |                  |   | (1,901  | )
|Cash and cash equivalents at beginning of period                                                                                 |  |                           | 258,891 |   |                  |   | 193,426 |  
|                                                                                                                                 |  |                           |         |   |                  |   |         |  
|Cash and cash equivalents at end of period                                                                                       |  | $                         | 219,498 |   |                  | $ | 191,525 |  
|                                                                                                                                 |  |                           |         |   |                  |   |         |  

The accompanying notes to the unaudited consolidated financial statements are an integral part of these
statements.



3



---

##### Table of Contents

Note 1. Description of Business and Basis of Presentation

Varian Semiconductor Equipment Associates, Inc. (Varian
Semiconductor) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits to customers located both in the United States (U.S.) and in international markets. Varian
Semiconductor faces risk factors similar to all companies in the semiconductor manufacturing equipment market including, but not limited to, competition, market downturn, technological change, international operations and related foreign currency
risks and the ability to recruit and retain key employees.

These unaudited interim consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the
U.S. have been condensed or omitted pursuant to such rules and regulations. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the annual report on
Form 10-K filed by Varian Semiconductor with the SEC on December 7, 2006 for the fiscal year ended September 29, 2006. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the information required to be set forth therein. The results of operations for the three month period ended December 29, 2006 are not necessarily indicative of the
results to be expected for a full year or for any other period.

Reclassifications

Certain items in the prior years consolidated financial statements have been reclassified to conform to the current presentation of the financial statements.

Note 2. Stock-Based Compensation

Varian Semiconductor adopted the
provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standard (SFAS) No. 123(R), Share-Based Payment (Revised 2004), (SFAS No. 123(R)) and
related guidance, on a modified prospective basis as of October 1, 2005. SFAS No. 123(R) requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values.
This includes stock options, restricted stock awards and employee stock purchases related to Varian Semiconductors Employee Stock Purchase Plan (ESPP). Accordingly, stock-based compensation cost is measured at grant date, based on
the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period.

The estimated fair value of Varian
Semiconductors stock-based awards, less expected forfeitures, is amortized over the awards vesting period on a straight-line basis. The effect of recording stock-based compensation for the three month periods ended December 29, 2006
and December 30, 2005 was as follows:



4



---

##### Table of Contents

|                                                           |  |                                                 |        |   |                                           |   |        |  
|---------------------------------------------------------- |  | ----------------------------------------------- | ------ | - | ----------------------------------------- | - | ------ | -
|                                                           |  | Fiscal Three Months EndedDecember 29, 2006      |        |   | Fiscal ThreeMonths EndedDecember 30, 2005 |  
|                                                           |  | (Amounts in thousands except per share amounts) |       
|Stock-based compensation expense by type of award:         |  |                                                 |        |   |                                           |   |        |  
|Stock options                                              |  | $                                               | 2,682  |   |                                           | $ | 3,021  |  
|Restricted stock                                           |  |                                                 | 1,638  |   |                                           |   | 781    |  
|Employee Stock Purchase Plan                               |  |                                                 | 265    |   |                                           |   | 250    |  
|Less: Amounts capitalized as inventory                     |  |                                                 |       |   |                                           |   | (88    | )
|                                                           |  |                                                 |        |   |                                           |   |        |  
|Total stock-based compensation                             |  |                                                 | 4,585  |   |                                           |   | 3,964  |  
|Less: Tax effect on stock-based compensation               |  |                                                 | (1,330 | ) |                                           |   | (1,189 | )
|                                                           |  |                                                 |        |   |                                           |   |        |  
|Net effect on income                                       |  | $                                               | 3,255  |   |                                           | $ | 2,775  |  
|                                                           |  |                                                 |        |   |                                           |   |        |  
|Effect on earnings per share                               |  |                                                 |        |   |                                           |   |        |  
|Basic                                                      |  | $                                               | 0.06   |   |                                           | $ | 0.05   |  
|Diluted                                                    |  | $                                               | 0.06   |   |                                           | $ | 0.05   |  
|Effect of stock-based compensation on income by line item: |  |                                                 |        |   |                                           |   |        |  
|Cost of product revenue                                    |  | $                                               | 374    |   |                                           | $ | 219    |  
|Cost of service revenue                                    |  |                                                 | 221    |   |                                           |   | 228    |  
|Research and development expense                           |  |                                                 | 912    |   |                                           |   | 1,019  |  
|Marketing, general and administrative expense              |  |                                                 | 3,078  |   |                                           |   | 2,498  |  
|Provision for income taxes                                 |  |                                                 | (1,330 | ) |                                           |   | (1,189 | )
|                                                           |  |                                                 |        |   |                                           |   |        |  
|Total cost related to stock-based compensation             |  | $                                               | 3,255  |   |                                           | $ | 2,775  |  
|                                                           |  |                                                 |        |   |                                           |   |        |  

Varian Semiconductor estimates the fair value of stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the options expected term, the expected annual dividend yield and the expected
stock price volatility. Varian Semiconductor has determined that a blended volatility, using Varian Semiconductors historical and implied volatility measures and a peer group implied volatility, best reflects expected volatility over the
expected term of the option. Varian Semiconductor believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of Varian Semiconductors stock options
granted in the three month periods ended December 29, 2006 and December 30, 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair values of each option and ESPP grant were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:



|                                       |  |                                            |       |   |                                            |   |      |         |  |   |       |   |  |   |      |  
|-------------------------------------- |  | ------------------------------------------ | ----- | - | ------------------------------------------ | - | ---- | ------- |  | - | ----- | - |  | - | ---- | -
|                                       |  | Fiscal Three Months EndedDecember 29, 2006 |       |   | Fiscal Three Months EndedDecember 30, 2005 |  
|                                       |  | Options                                    |       |   | ESPP                                       |   |      | Options |  |   | ESPP  |  
|Expected life (in years)               |  |                                            | 4.1   |   |                                            |   | 0.5  |         |  |   | 4.2   |   |  |   | 0.5  |  
|Expected volatility                    |  |                                            | 38.2  | % |                                            |   | 39.7 | %       |  |   | 38.9  | % |  |   | 35.7 | %
|Risk-free interest rate                |  |                                            | 4.7   | % |                                            |   | 5.3  | %       |  |   | 4.5   | % |  |   | 3.4  | %
|Expected dividend yield                |  |                                            | 0.0   | % |                                            |   | 0.0  | %       |  |   | 0.0   | % |  |   | 0.0  | %
|                                       |  |                                            |       |  
|Weighted-average grant date fair value |  | $                                          | 14.49 |   |                                            | $ | 8.82 |         |  | $ | 10.12 |   |  | $ | 6.35 |  

Stock Incentive Plan

The 2006 Stock Incentive Plan (the Plan), which replaced the Amended and Restated Omnibus Stock Plan upon shareholder approval on February 9, 2006, provides for the grant of non-qualified share-based awards to eligible
employees, consultants and non-employee directors of Varian Semiconductor. As of December 29, 2006, there were a total of 6,736,580 shares reserved for future issuance under the Plan.



5



---

##### Table of Contents

Stock option awards granted under the Plan generally have a life no longer than eight years after the date of the grant
and generally vest as to 25% one year from date of grant with the remaining 75% vesting in twelve equal quarterly installments so that all options are vested at the end of four years.

Restricted stock awards are granted under the Plan at $0.01 per share, have a life no longer than eight years after the date of the grant and generally vest as to 25% one year from the date of grant with the remaining
75% vesting in twelve equal quarterly installments. In December 2006, the Board of Directors approved a performance-based restricted stock award to certain executives of Varian Semiconductor. Varian Semiconductor assesses the probability of these
executives meeting the performance goals on a quarterly basis. The restricted stock awards will vest only if specified performance targets and service conditions, as established by the Compensation Committee, are satisfied for the fiscal year ending
September 28, 2007.

Stock compensation expense associated with restricted common stock and restricted stock units is charged for the difference
between the market value on the date of grant and the issuance price, less estimated forfeitures, and is amortized over the awards vesting period on a straight-line basis.

The following table summarizes the stock option and restricted stock activity as of and for the three month period ended December 29, 2006:



|                                         |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |         |                                     |  |   |      
|---------------------------------------- |  | --------------------- | - | --------------------------------- | ----------------------------- | ----- | ---------------------------------------- | --- | ----------------------- | - | ------ |  | ------- | ----------------------------------- |  | - | -----
|                                         |  | Stock Option Activity |   | Unvested RestrictedStock Activity
|                                         |  | Shares                |   |                                   | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue |   | Shares |  |         | Weighted-AverageGrantDate FairValue
|                                         |  |                       |   |                                   |                               |       | (In years)                               |     | (In thousands)          |   |        |  |         |                                    
|Outstanding at September 29, 2006        |  | 4,546,855             |   |                                   | $                             | 24.29 |                                          |     |                         |   |        |  | 711,840 |                                     |  | $ | 30.25
|Granted                                  |  | 284,101               |   |                                   |                               | 39.54 |                                          |     |                         |   |        |  | 254,228 |                                     |  |   | 40.80
|Options exercised                        |  | (611,182              | ) |                                   |                               | 24.12 |                                          |     |                         |   |        |  |        |                                     |  |   |     
|Vesting of restricted stock              |  |                      |   |                                   |                               |      |                                          |     |                         |   |        |  | (44,036 | )                                   |  |   | 27.26
|Forfeited/expired/cancelled              |  | (50,346               | ) |                                   |                               | 21.69 |                                          |     |                         |   |        |  | (8,685  | )                                   |  |   | 28.16
|                                         |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |         |                                     |  |   |      
|Outstanding at December 29, 2006         |  | 4,169,428             |   |                                   |                               | 25.39 |                                          | 5.0 |                         | $ | 83,936 |  | 913,347 |                                     |  |   | 33.35
|                                         |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |         |                                     |  |   |      
|Options exercisable at December 29, 2006 |  | 2,412,970             |   |                                   | $                             | 23.08 |                                          | 4.3 |                         | $ | 54,158 |  |         |                                     |  |   |      

As of December 29, 2006, the unrecognized compensation cost related to unvested stock options was $19.9
million before estimated forfeitures. This unrecognized balance will be recognized over an estimated weighted average amortization period of 2.7 years.

As
of December 29, 2006, the unrecognized compensation cost related to unvested restricted stock was $27.9 million before estimated forfeitures. This unrecognized balance will be recognized over an estimated weighted average amortization period of
3.4 years.

The total intrinsic value of options exercised during the three month periods ended December 29, 2006 and December 30, 2005 was $10.4
million and $5.7 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price.

The total fair value of restricted stock grants that vested during the three month periods ended December 29, 2006 and December 30, 2005 was $1.8 million and $0.5 million, respectively.

During the three months ended December 29, 2006, Varian Semiconductor did not award any restricted stock units.

Employee Stock Purchase Plan

Employees of Varian Semiconductor who
elect to participate in the ESPP are able to purchase common stock at the lower of 85% of the fair market value of Varian Semiconductors common stock on the first or last day of the applicable offering period. Typically, each offering period
lasts six months. As of December 29, 2006, there were a total of 737,089 shares of common stock reserved for issuance under the ESPP.



6



---

##### Table of Contents

Note 3. Computation of Net Income Per Share

Basic net income per share is calculated based on net income and the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per share includes additional dilution
from stock issuable pursuant to the exercise of stock options outstanding and unvested restricted stock. Options to purchase common shares with exercise prices that exceeded the market value of the underlying common stock are excluded from the
computation of diluted earnings per share, as these options are anti-dilutive. For purposes of the diluted net income per share calculation, the additional shares issuable upon exercise of stock options are determined using the treasury stock method
which, as required by SFAS No. 123(R), includes as assumed proceeds share-based compensation expense and the tax effect of such compensation.

A
reconciliation of the numerator and denominator used in the net income per share calculations is presented as follows:



|                                             |  |                                               |        |                   |   |       
|-------------------------------------------- |  | --------------------------------------------- | ------ | ----------------- | - | ------
|                                             |  | Fiscal Three Months Ended                    
|                                             |  | December 29, 2006                             |        | December 30, 2005
|                                             |  | (Amounts in thousands, except per share data)
|Numerator                                    |  |                                               |        |                   |   |       
|Net Income                                   |  | $                                             | 36,992 |                   | $ | 22,278
|                                             |  |                                               |        |                   |   |       
|Denominator                                  |  |                                               |        |                   |   |       
|Denominator for basic income per share:      |  |                                               |        |                   |   |       
|Weighted average shares outstanding          |  |                                               | 55,418 |                   |   | 56,347
|Effect of dilutive securities:               |  |                                               |        |                   |   |       
|Stock options and restricted common stock    |  |                                               | 1,012  |                   |   | 725   
|                                             |  |                                               |        |                   |   |       
|Denominator for diluted net income per share |  |                                               | 56,430 |                   |   | 57,072
|                                             |  |                                               |        |                   |   |       
|Net income per share - basic                 |  | $                                             | 0.67   |                   | $ | 0.40  
|Net income per share - diluted               |  | $                                             | 0.66   |                   | $ | 0.39  

For the three month periods ended December 29, 2006 and December 30, 2005, 0.6 million and
2.7 million potentially dilutive shares, respectively, were excluded from the computation of diluted earnings per share.

Note 4. Accounts
Receivable

Accounts receivable consist of the following:



|                                |  |                        |         |   |                   |   |         |  
|------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                |  | December 29,2006       |         |   | September 29,2006 |  
|                                |  | (Amounts in thousands) |        
|Billed receivables              |  | $                      | 179,100 |   |                   | $ | 126,900 |  
|Allowance for doubtful accounts |  |                        | (856    | ) |                   |   | (908    | )
|                                |  |                        |         |   |                   |   |         |  
|Accounts receivable, net        |  | $                      | 178,244 |   |                   | $ | 125,992 |  
|                                |  |                        |         |   |                   |   |         |  

Substantially all of Varian Semiconductors accounts receivable balance relates to trade receivables. Trade
accounts receivable are recorded at the invoiced amounts and do not bear interest.



7



---

##### Table of Contents

Note 5. Inventories

The components of inventories are as follows:



|                        |  |                        |         |                   |   |        
|----------------------- |  | ---------------------- | ------- | ----------------- | - | -------
|                        |  | December 29,2006       |         | September 29,2006
|                        |  | (Amounts in thousands)
|Raw materials and parts |  | $                      | 79,411  |                   | $ | 65,599 
|Work in process         |  |                        | 37,843  |                   |   | 36,224 
|Finished goods          |  |                        | 34,278  |                   |   | 32,106 
|                        |  |                        |         |                   |   |        
|Total inventories       |  | $                      | 151,532 |                   | $ | 133,929
|                        |  |                        |         |                   |   |        

Note 6. Accrued Expenses

The components of accrued expenses are as follows:



|                            |  |                        |        |                   |   |       
|--------------------------- |  | ---------------------- | ------ | ----------------- | - | ------
|                            |  | December 29,2006       |        | September 29,2006
|                            |  | (Amounts in thousands)
|Income taxes payable        |  | $                      | 16,622 |                   | $ | 12,291
|Accrued employee benefits   |  |                        | 10,011 |                   |   | 10,029
|Accrued retirement benefits |  |                        | 8,983  |                   |   | 7,494 
|Accrued incentives          |  |                        | 8,823  |                   |   | 11,887
|Accrued payroll             |  |                        | 7,087  |                   |   | 5,408 
|Other                       |  |                        | 5,578  |                   |   | 6,838 
|                            |  |                        |        |                   |   |       
|Total accrued expenses      |  | $                      | 57,104 |                   | $ | 53,947
|                            |  |                        |        |                   |   |       

Note 7. Product Warranties

Varian Semiconductor warrants that its products will be free from defects in materials and workmanship and will conform to its standard published specifications in effect at the time of delivery for a period of three
to twentyfour months from the date the customer accepts the products. Additionally, Varian Semiconductor warrants that maintenance services will be performed in a workmanlike manner consistent with generally accepted industry standards for a
period of 90 days from the completion of any agreedupon services. Varian Semiconductor provides for the estimated cost of product warranties, the amount of which is based primarily upon historical information, at the time product revenue is
recognized. Varian Semiconductors warranty obligation is affected by a number of factors, including product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier
warranties on parts delivered to Varian Semiconductor. Should these factors or other factors affecting warranty costs differ from Varian Semiconductors estimates, revisions to the estimated warranty liability would be required.

Product warranty activity for the first three months of fiscal years 2006 and 2005 was as follows:



|                                                 |  |                           |        |   |                  |   |        |  
|------------------------------------------------ |  | ------------------------- | ------ | - | ---------------- | - | ------ | -
|                                                 |  | Fiscal Three Months Ended |       
|                                                 |  | December 29,2006          |        |   | December 30,2005 |  
|                                                 |  | (Amounts in thousands)    |       
|Beginning product warranty balance               |  | $                         | 9,813  |   |                  | $ | 8,585  |  
|Accruals for warranties issued during the period |  |                           | 3,921  |   |                  |   | 3,259  |  
|Adjustments to pre-existing warranties           |  |                           | (359   | ) |                  |   | 3      |  
|Fulfillments during the period                   |  |                           | (2,823 | ) |                  |   | (2,814 | )
|                                                 |  |                           |        |   |                  |   |        |  
|Ending product warranty balance                  |  | $                         | 10,552 |   |                  | $ | 9,033  |  
|                                                 |  |                           |        |   |                  |   |        |  
|Current portion of product warranty              |  | $                         | 9,691  |   |                  | $ | 8,762  |  
|Long-term portion of product warranty            |  |                           | 861    |   |                  |   | 271    |  
|                                                 |  |                           |        |   |                  |   |        |  
|Total product warranty liability                 |  | $                         | 10,552 |   |                  | $ | 9,033  |  
|                                                 |  |                           |        |   |                  |   |        |  



8



---

##### Table of Contents

Note 8. Deferred Revenue

The components of deferred revenue are as follows:



|                                                            |  |                        |        |                   |   |       
|----------------------------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ------
|                                                            |  | December 29,2006       |        | September 29,2006
|                                                            |  | (Amounts in thousands)
|Fully deferred systems, installation and acceptance revenue |  | $                      | 43,733 |                   | $ | 31,270
|Extended warranties                                         |  |                        | 11,266 |                   |   | 11,351
|Maintenance and service contracts                           |  |                        | 6,069  |                   |   | 6,092 
|Other deferred revenue                                      |  |                        | 584    |                   |   | 5,880 
|                                                            |  |                        |        |                   |   |       
|Total deferred revenue                                      |  | $                      | 61,652 |                   | $ | 54,593
|                                                            |  |                        |        |                   |   |       
|Current portion of deferred revenue                         |  | $                      | 56,077 |                   | $ | 49,840
|Long-term portion of deferred revenue                       |  |                        | 5,575  |                   |   | 4,753 
|                                                            |  |                        |        |                   |   |       
|Total deferred revenue                                      |  | $                      | 61,652 |                   | $ | 54,593
|                                                            |  |                        |        |                   |   |       

Note 9. Commitments, Contingencies and Guarantees

Varian Semiconductor is currently a defendant in a number of legal actions and could incur an uninsured liability in one or more of them. In the opinion of management,
the outcome of such litigation would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of Varian Semiconductor.

As permitted under Delaware law, Varian Semiconductor has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving in such
capacity at the request of Varian Semiconductor. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments Varian Semiconductor could be required to make under these
indemnification agreements is unlimited; however, Varian Semiconductor has a Director and Officer insurance policy that limits its exposure and enables Varian Semiconductor to recover a portion of any future amounts paid. As a result of Varian
Semiconductors insurance policy coverage, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities for these agreements as of
December 29, 2006.

Varian Semiconductor enters into indemnification agreements in the normal course of business. Pursuant to these agreements, Varian
Semiconductor indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally Varian Semiconductor customers, in connection with any patent, or any copyright or other
intellectual property infringement claim by any third party with respect to Varian Semiconductor products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of
future payments Varian Semiconductor could be required to make under these indemnification agreements is unlimited. Management believes the estimated fair value of these agreements is minimal. Accordingly, Varian Semiconductor has not recorded any
liabilities for these agreements as of December 29, 2006.

Varian Semiconductor also indemnifies certain customers with respect to damages, losses and
liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of Varian Semiconductors products and services or resulting from the acts or omissions
of Varian Semiconductor, its employees, officers, authorized agents or subcontractors. Varian Semiconductor has general and umbrella insurance policies that limit its exposure under these indemnification obligations and guarantees. As a result of
Varian Semiconductors insurance policy coverage, Varian Semiconductor believes the estimated fair value of these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities for these agreements as
of December 29, 2006.

Prior to the spinoff of Varian Semiconductor from VAI, Varian Semiconductors business was operated as the
Semiconductor Equipment Business (SEB) of VAI. On April 2, 1999, VAI contributed its SEB to Varian Semiconductor, its Instruments Business (IB) to Varian, Inc. (VI), and changed its name to VMS. In connection
with the spinoff from VAI, Varian Semiconductor, VMS and VI entered into certain agreements which include a Distribution Agreement, an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a
Transition Services Agreement (collectively, the Distribution Related Agreements) whereby Varian Semiconductor agreed to indemnify VMS and VI for any costs, liabilities or expenses relating to Varian Semiconductors legal
proceedings. Under the Distribution Related Agreements, Varian Semiconductor has agreed to



9



---

##### Table of Contents

reimburse VMS for onethird of the costs, liabilities, and expenses, adjusted for any related tax benefits recognized or realized by VMS, with respect
to certain legal proceedings relating to discontinued operations of VMS. Varian Semiconductor believes the estimated fair value of the indemnification agreements is minimal, except as already recorded on the financial statements.

Varian Semiconductors operations are subject to various foreign, federal, state and/or local laws relating to the protection of the environment. These include laws
regarding discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require manufacturers
to dispose of their products at the end of a products useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of certain operations.

Varian Semiconductor also enters into purchase order commitments in the normal course of business. As of December 29, 2006, Varian Semiconductor had approximately
$75.0 million of purchase order commitments with various suppliers.

Environmental Remediation

VAI has been named by the United States Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response
Compensation and Liability Act of 1980, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VAI is also involved in various stages of environmental investigation and/or remediation under the direction
of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former VAI facilities (including facilities disposed of in connection with VAIs sale of its Electron Devices business during fiscal year 1995, and
the sale of its Thin Film Systems business during fiscal year 1997). The Distribution Related Agreements provide that each of VMS, Varian Semiconductor and VI will indemnify the others for onethird of these environmental investigation and
remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon payment of these costs.

For certain of these sites
and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. Varian Semiconductor has accrued $1.2
million in estimated environmental investigation and remediation costs for these sites and facilities as of December 29, 2006. As to other sites and facilities, sufficient knowledge has been gained to be able to reasonably estimate the scope
and costs of future environmental activities. As such, Varian Semiconductor has accrued $4.2 million as of December 29, 2006, which represents future costs discounted at 7%, net of inflation, to cover Varian Semiconductors portion of
these costs. This reserve is in addition to the $1.2 million as of December 29, 2006.

As of December 29, 2006, Varian Semiconductors
environmental liability, based upon future environmentalrelated costs estimated by VMS as of that date and included in current and longterm accrued expenses, totaled $5.4 million, of which $0.4 million is classified as current.

The amounts set forth in the foregoing paragraph are only estimates of anticipated future environmentalrelated costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where VMS
is undertaking such investigation and remediation activities. VMS believes that most of these cost ranges will narrow as investigation and remediation activities progress. Varian Semiconductor believes that its reserves are adequate, but as the
scope of the obligations becomes more clearly defined, these reserves may be modified and related charges against income may be made.

Although any
ultimate liability arising from environmentalrelated matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to Varian Semiconductors
financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to management and its best assessment of the ultimate amount and timing of environmentalrelated events, Varian
Semiconductors management believes that the costs of these environmentalrelated matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of Varian Semiconductor.

Varian Semiconductor evaluates its liability for environmentalrelated investigation and remediation in light of the liability and financial wherewithal of
potentially responsible parties and insurance companies where Varian Semiconductor believes that it has rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and remediation costs already
incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. In 1992, VAI filed a lawsuit against 36 insurance companies with respect to most of the abovereferenced sites and
facilities. VAI received certain cash settlements with respect to these lawsuits in prior years. VMS has also reached an agreement with an insurance



10



---

##### Table of Contents

company under which the insurance company agreed to pay a portion of Varian Semiconductors past and future environmentalrelated expenditures.
Although VMS intends to aggressively pursue additional insurance recoveries, Varian Semiconductor has not reduced any liability in anticipation of recovery with respect to claims made against third parties.

Legal Proceedings

Varian Semiconductor is currently the plaintiff in
several legal disputes related to employment and contract matters. While Varian Semiconductor believes favorable judgments will be rendered with respect to such claims, the timing and amount, if any, of these judgments is uncertain.

From time to time, Varian Semiconductor may become involved in a number of legal actions and could incur an uninsured liability in one or more of them. Accordingly,
while the ultimate outcome of these legal matters is not determinable, management believes the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of Varian Semiconductor.

Note 10. Derivative Financial Instruments

Varian
Semiconductor uses derivative instruments to protect its interests from fluctuations in earnings and cash flows caused by volatility in currency exchange rates. Varian Semiconductor has a policy of hedging its balance sheet and certain foreign
currency sales exposures with hedging instruments having terms of up to twelve months.

Varian Semiconductors international sales are primarily
denominated in U.S. dollars. For foreign currency denominated sales, however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward
sales contracts whose critical terms are designed to match those of the underlying exposure. These hedges are evaluated for effectiveness at least quarterly by comparing the change in value of the forward contracts to the change in value of the
underlying transaction, with the effective portion of the hedge accumulated in other comprehensive income (OCI). Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of income.
There has been no amount of ineffectiveness recognized during the three month period ended December 29, 2006. OCI associated with hedges of sales denominated in foreign currencies is reclassified to revenue upon recognition in income of the
underlying hedged exposure.

The following table summarizes OCI activity associated with hedges of foreign currency denominated sales during the first
quarter of fiscal year 2007:



|                                                 |  |                        |        |  
|------------------------------------------------ |  | ---------------------- | ------ | -
|                                                 |  | Amount of Income       |       
|                                                 |  | (Amounts in thousands) |       
|Balance as of September 29, 2006                 |  | $                      | 399    |  
|Unrealized gain on cash flow hedging instruments |  |                        | 634    |  
|Realized gain on cash flow hedging instruments   |  |                        | (1,033 | )
|                                                 |  |                        |        |  
|Balance as of December 29, 2006                  |  | $                      |       |  
|                                                 |  |                        |        |  



11



---

##### Table of Contents

Note 11. Comprehensive Income

The following table reconciles net income to comprehensive income for the first quarter of fiscal years 2007 and 2006:



|                                                                                              |  |                           |        |   |                  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                              |  | Fiscal Three Months Ended |       
|                                                                                              |  | December 29,2006          |        |   | December 30,2005 |  
|                                                                                              |  | (Amounts in thousands)    |       
|Net income                                                                                    |  | $                         | 36,992 |   |                  | $ | 22,278 |  
|Other comprehensive income (loss):                                                            |  |                           |        |   |                  |   |        |  
|Unrealized gain on cash flow hedging instruments                                              |  |                           | 634    |   |                  |   | 916    |  
|Reclassification adjustment for gains on cash flow hedging instruments included in net income |  |                           | (1,033 | ) |                  |   | (2,037 | )
|Unrealized gain (loss) on investments                                                         |  |                           | 235    |   |                  |   | (190   | )
|Reclassification adjustment for (gains) losses on investments                                 |  |                           | (1     | ) |                  |   | 43     |  
|Tax benefit related to items of other comprehensive loss                                      |  |                           | 55     |   |                  |   | 381    |  
|                                                                                              |  |                           |        |   |                  |   |        |  
|Comprehensive income                                                                          |  | $                         | 36,882 |   |                  | $ | 21,391 |  
|                                                                                              |  |                           |        |   |                  |   |        |  

Note 12. Share Repurchase Program

In October 2004, Varian Semiconductor announced that its Board of Directors had authorized the repurchase of up to $100 million of Varian Semiconductors common stock on the open market. In August and December
2006, the Board of Directors voted to increase the amount of funds that may be expended in repurchasing Varian Semiconductors common stock to $200 million and then $300 million. Varian Semiconductor plans to continue to execute authorized
repurchases. Share repurchases under this authorization during the first three months of fiscal year 2007 were as follows:



|                                                          |  |                                                            |  |                         |        |                            |   |                                 |  |   |        
|--------------------------------------------------------- |  | ---------------------------------------------------------- |  | ----------------------- | ------ | -------------------------- | - | ------------------------------- |  | - | -------
|                                                          |  | Total Number of SharesRepurchased                          |  | Total Cost ofRepurchase |        | AveragePrice PaidPer Share |   | Amount Available for Repurchase
|                                                          |  | (Amounts in thousands, except share and per share amounts)
|As of September 29, 2006                                  |  |                                                            |  |                         |        |                            |   |                                 |  | $ | 91,194 
|Fiscal month ending October 27, 2006                      |  | 263,716                                                    |  | $                       | 9,998  |                            | $ | 37.91                           |  | $ | 81,196 
|Fiscal month ending November 24, 2006                     |  | 293,280                                                    |  |                         | 11,496 |                            |   | 39.20                           |  | $ | 69,700 
|Additional authorization of $100 million - December, 2006 |  |                                                           |  |                         |       |                            |   |                                |  | $ | 169,700
|Fiscal month ending December 29, 2006                     |  | 519,272                                                    |  |                         | 21,765 |                            |   | 41.92                           |  | $ | 147,935
|                                                          |  |                                                            |  |                         |        |                            |   |                                 |  |   |        
|Total                                                     |  | 1,076,268                                                  |  | $                       | 43,259 |                            | $ | 40.19                           |  |   |        
|                                                          |  |                                                            |  |                         |        |                            |   |                                 |  |   |        

In addition to the repurchases made during the first three months of fiscal year 2007, Varian Semiconductor
repurchased 453,202 shares at total cost of $19.5 million between December 29, 2006 and February 2, 2007, the latest practicable date prior to the filing date of this quarterly report on Form 10-Q.

Note 13. Operating Segments and Geographic Information

Varian
Semiconductor has determined that it operates in one business segment: the manufacturing, marketing and servicing of semiconductor processing equipment for ion implantation systems. Since Varian Semiconductor operates in one segment, all financial
segment information required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, can be found in the consolidated financial statements.

Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future. In the first quarter of fiscal year 2007,
revenue from two customers accounted for 14% and 11%, respectively, of Varian Semiconductors total revenue. In the first quarter of fiscal year 2006, revenue from three customers accounted for 14%, 14% and 13%, respectively, of Varian
Semiconductors total revenue.



12



---

##### Table of Contents

As of December 29, 2006, one customer represented 10% of the total accounts receivable balance. As of
September 29, 2006, two customers accounted for 15% and 11% of the total accounts receivable balance.

The following table summarizes revenue based on
final geographic destination and long-lived assets by geography:



|                              |  |                        |        |        |   |        |  |        |        |       |   |        |  |              |        |  |   |        |  |   |        
|----------------------------- |  | ---------------------- | ------ | ------ | - | ------ |  | ------ | ------ | ----- | - | ------ |  | ------------ | ------ |  | - | ------ |  | - | -------
|                              |  | NorthAmerica           |        | Europe |   | Japan  |  | Taiwan |        | Korea |   | Other  |  | Consolidated
|                              |  | (Amounts in thousands)
|Revenue  Three months ended: |  |                        |        |        |   |        |  |        |        |       |   |        |  |              |        |  |   |        |  |   |        
|December 29, 2006             |  | $                      | 48,579 |        | $ | 21,061 |  | $      | 30,006 |       | $ | 45,945 |  | $            | 44,402 |  | $ | 35,630 |  | $ | 225,623
|December 30, 2005             |  |                        | 30,492 |        |   | 16,787 |  |        | 28,394 |       |   | 24,501 |  |              | 47,012 |  |   | 13,730 |  |   | 160,916
|                              | 
|Long term assets, net, as of: |  |                        |       
|December 29, 2006             |  | $                      | 58,261 |        | $ | 444    |  | $      | 8,814  |       | $ | 464    |  | $            | 11,549 |  | $ | 1,369  |  | $ | 80,901 
|September 29, 2006            |  |                        | 56,513 |        |   | 465    |  |        | 8,820  |       |   | 431    |  |              | 11,652 |  |   | 1,392  |  |   | 79,273 

Note 14. Income Taxes

Varian Semiconductors effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the United States and other tax jurisdictions throughout the world.

In the first quarter of fiscal year 2007, Varian Semiconductors income tax expense of $15.1 million included a discrete net benefit of $2.1 million related to the
reinstatement of the research and development tax credit retroactive to January 1, 2006. Varian Semiconductors effective income tax rate was 29% for the first quarter of fiscal year 2007. The discrete income tax benefit received in the
first quarter of fiscal year 2007 reduced the effective tax rate by approximately 4 percentage points.

In the first quarter of fiscal year 2006, Varian
Semiconductor recognized an income tax benefit of $3.3 million which included a provision of $5.7 million and a benefit of $9.0 million related to the favorable conclusion of a multi-year examination. Additionally, Varian Semiconductor reduced other
current assets by $8.0 million upon the receipt of a refund from the IRS. Included in interest income for the first quarter of fiscal year 2006 is $1.3 million of interest income related to the final resolution of the examination. Varian
Semiconductors effective income tax rate was a benefit of 17% for the first quarter of fiscal year 2006. The discrete income tax benefit received in the first quarter of fiscal year 2006 and other discrete items reduced the tax rate by
approximately 47 percentage points.

Note 15. Recent Accounting Pronouncements

In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 063, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation) (EITF 063). EITF 063 states that a company should disclose its accounting policy regarding the gross or net presentation of certain taxes. If taxes included in gross
revenues are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented (i.e., both interim and annual periods). Taxes within the scope of EITF 063 are those that are imposed on
and concurrent with a specific revenueproducing transaction, such as sales tax or valueadded tax. Taxes assessed on an entitys activities over a period of time, such as gross receipts taxes, are not within the scope of the issue.
EITF 063 will be effective for Varian Semiconductors second quarter of fiscal year 2007. The disclosures required under this Issue, which may be presented on an aggregate basis, are effective retrospectively for all periods presented.
Varian Semiconductor is in the process of evaluating whether the adoption of EITF 063 will have a material impact on its financial statements.

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. This interpretation will be effective for Varian Semiconductor for its fiscal year 2008. Varian Semiconductor is in the process of evaluating whether the adoption of this interpretation will have a material impact on its financial
statements.



13



---

##### Table of Contents

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some
entities, the application of this statement will change current practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this statement on its
financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires employers that sponsor defined benefit plans to recognize the funded status of a benefit plan on its balance sheet; recognize
gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of other comprehensive income, net of tax; measure defined benefit plan assets and
obligations as of the date of the employers fiscal yearend balance sheet; and disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. Most provisions of the statement will be effective for Varian Semiconductor for its fiscal year 2007, except for the requirement to
measure benefits and obligations as of the employers fiscal year end, which will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating whether the adoption of this statement will have a
material impact on its financial statements.



14



---

##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains
certain forward-looking statements. For purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, any statements using the terms believes, anticipates, expects,
plans or similar expressions are forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. There are a number of important
factors that could cause Varian Semiconductor Equipment Associates, Inc. (Varian Semiconductor)s actual results to differ materially from those indicated by forward-looking statements made in this report and presented by management
from time to time. Some of the important risks and uncertainties that may cause Varian Semiconductors financial results to differ are described under the heading Risk Factors in this report and in the annual report on Form 10-K for
the fiscal year ended September 29, 2006, filed with the Securities and Exchange Commission (SEC) on December 7, 2006.

The following
information should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Item 1. Consolidated Financial Statements of this quarterly report and the audited consolidated
financial statements and notes thereto and the section titled Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in Varian Semiconductors annual report on Form 10-K for the fiscal
year ended September 29, 2006, filed with the SEC on December 7, 2006.

Overview

Varian Semiconductor is the leading supplier of ion implantation equipment used in the fabrication of semiconductor chips. Varian Semiconductor designs, manufactures,
markets and services semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. Varian Semiconductors VIIStaTMion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. Varian Semiconductor has shipped over 3,600 systems
worldwide.

Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and
productivity, reduce operating costs, and extend capital productivity of investments through multiple product generations. In fiscal year 2006, Varian Semiconductor was ranked number one in customer satisfaction in VLSI Research Inc.s customer
survey for all large suppliers of wafer processing equipment, an honor received in nine of the past ten years.

Varian Semiconductors business is
cyclical. The business depends upon semiconductor manufacturers expectations and resulting capacity investments for future integrated circuit demand. In fiscal year 2004 Varian Semiconductor experienced an increase in business activity owing
to a generally strengthening economy and increased demand for semiconductor equipment. During calendar year 2005, there was an 11% decline in worldwide ion implanter sales. However, due to market share gains, Varian Semiconductors fiscal year
2005 revenue increased 13% over fiscal year 2004 as customers migrated to single wafer systems, which favor Varian Semiconductors product offerings. Single wafer systems are now preferred over batch systems as they process wafers in such a way
that results in higher yields for advanced device manufacturers. Varian Semiconductor believes its 22% revenue increase during fiscal year 2006 from fiscal year 2005 was the result of both increases in worldwide ion implanter sales as well as Varian
Semiconductors continued market share gains for the calendar year 2006.

Wafer size and market. The migration from 200mm wafers to 300mm
wafers began at the end of the 1990s and 300mm fabs now represent more than half of semiconductor expansions. Most advanced devices below 130nm are produced on 300mm wafers. Varian Semiconductor believes the increase in shipments from 200mm wafers
to 300mm wafers will continue and is evidence that Varian Semiconductors tools meet the newest technology requirements. Memory manufacturers typically produce integrated circuits used for DRAM, flash, etc. which store and retrieve information,
while logic manufacturers typically produce integrated circuits used to process data. Significant purchasing fluctuations from memory, logic and foundry fabs could lead to significant fluctuations in Varian Semiconductors revenues, even if the
total ion implant market remains flat.

The first table below shows Varian Semiconductors calendar year 2005 and 2004 market share, as reported by
Gartner Dataquest in April 2006 and April 2005, respectively. Market share estimates are calculated on a subset of revenue, and information reported by Gartner Dataquest may not be consistent on a company by company basis. The second table below
shows the total available market for ion implanter sales in calendar years 2005 and 2004, also reported by Gartner Dataquest in April 2006 and April 2005, respectively. The total available market represents an estimated worldwide total revenue for
ion implanters sold by all companies which sell ion implanters during each of the calendar years.



15



---

##### Table of Contents

|               |  |                     |   |  |                       |   |                     |        |   |  |                |  |                  |       |                  |   |        |  |     |  
|-------------- |  | ------------------- | - |  | --------------------- | - | ------------------- | ------ | - |  | -------------- |  | ---------------- | ----- | ---------------- | - | ------ |  | --- | -
|Market Share   |  | Calendar Year Ended |   |  | Total AvailableMarket |   | Calendar Year Ended |       
|               |  | December 31,2005    |   |  | December 31,2004      |   |                     | Change |   |  | (in millions)  |  | December 31,2005 |       | December 31,2004 |   | Change | 
|By market      |  |                     |   |  |                       |   |                     |        |   |  | By market      |  |                  |       |                  |   |        |  |     |  
|Medium current |  | 58                  | % |  | 52                    | % |                     | 6      | % |  | Medium current |  | $                | 330   |                  | $ | 447    |  | -26 | %
|High current   |  | 38                  | % |  | 22                    | % |                     | 16     | % |  | High current   |  |                  | 598   |                  |   | 595    |  | 1   | %
|High energy    |  | 10                  | % |  | 10                    | % |                     | 0      | % |  | High energy    |  |                  | 194   |                  |   | 223    |  | -13 | %
|               |  |                     |   |  |                       |   |                     |        |   |  |                |  |                  |       |                  |   |        |  |     |  
|Overall        |  | 39                  | % |  | 31                    | % |                     | 8      | % |  | Overall        |  | $                | 1,122 |                  | $ | 1,265  |  | -11 | %
|               |  |                     |   |  |                       |   |                     |        |   |  |                |  |                  |       |                  |   |        |  |     |  

Market Share and Total Available Market. Market share and total available market research data is also
published by VLSI Research Inc. In April 2006, VLSI Research Inc. reported that Varian Semiconductors overall market share was 41% and that the total available market was $1,070 million for calendar year 2005. Varian Semiconductors
increase in high current and medium current market share has led to increased revenues, as the total available market for ion implanter sales decreased by 11% during calendar year 2005, compared to calendar year 2004. Varian Semiconductors
increase in high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes (65nm and below). Varian Semiconductor began developing single wafer high current tools during 1994 and believes it is
currently the industry leader. In addition, Varian Semiconductor continues to invest in research and development to maintain its medium current market share lead. High energy implanters are the smallest component of the total available market for
ion implanter sales and Varian Semiconductor maintained its market share.

Critical Accounting Policies and Significant Accounting Estimates

Varian Semiconductors discussion and analysis of its financial condition and results of operations are based upon Varian Semiconductors
consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.). The preparation of these consolidated financial statements requires
Varian Semiconductor to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, Varian Semiconductor evaluates
its estimates, including those related to revenues, inventories, accounts receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies.
Varian Semiconductor continues to have the same critical accounting policies and estimates as are described in Item 7 in the annual report on Form 10-K for the fiscal year ended September 29, 2006, filed with the SEC on December 7,
2006. Varian Semiconductor operates in a highly cyclical and competitive industry that is influenced by a variety of diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and
geographic and macroeconomic trends. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian Semiconductor
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors discussed in the section titled Risk Factors in Part II, Item 1A.



16



---

##### Table of Contents

Results of Operations

Revenue

The following table sets forth revenue by category for the three month periods ended December 29, 2006 and December 30,
2005:



|                      |  |                           |         |                   |   |         |  |               |        |  |      |  
|--------------------- |  | ------------------------- | ------- | ----------------- | - | ------- |  | ------------- | ------ |  | ---- | -
|                      |  | Fiscal Three Months Ended |        
|                      |  | December 29,2006          |         | December 30, 2005 |   | Change  |  | PercentChange |       
|                      |  | (Amounts in thousands)    |        
|Revenue               |  |                           |         |                  
|Product               |  | $                         | 202,350 |                   | $ | 138,726 |  | $             | 63,624 |  | 45.9 | %
|Service               |  |                           | 21,477  |                   |   | 20,561  |  |               | 916    |  | 4.5  | %
|Royalty and license   |  |                           | 1,796   |                   |   | 1,629   |  |               | 167    |  | 10.3 | %
|                      |  |                           |         |                   |   |         |  |               |        |  |      |  
|Revenue               |  | $                         | 225,623 |                   | $ | 160,916 |  | $             | 64,707 |  | 40.2 | %
|                      |  |                           |         |                   |   |         |  |               |        |  |      |  
|Revenue by territory: |  |                           |         |                   |   |         |  |               |        |  |      |  
|Asia Pacific          |  | $                         | 155,983 |                   | $ | 113,637 |  | $             | 42,346 |  | 37.3 | %
|North America         |  |                           | 48,579  |                   |   | 30,492  |  |               | 18,087 |  | 59.3 | %
|Europe                |  |                           | 21,061  |                   |   | 16,787  |  |               | 4,274  |  | 25.5 | %
|                      |  |                           |         |                   |   |         |  |               |        |  |      |  
|Revenue               |  | $                         | 225,623 |                   | $ | 160,916 |  | $             | 64,707 |  | 40.2 | %
|                      |  |                           |         |                   |   |         |  |               |        |  |      |  

Product

During the first quarter of fiscal year 2007, product revenue was $202.4 million, compared to $138.7 million for the same period a year ago. The increase in product revenue was primarily due to increased tool sales in all three markets. On
a unit basis, the number of tools recorded in revenue increased 47% for the first quarter of fiscal year 2007 compared to the first quarter of fiscal year 2006. Most of this increase is attributable to the high current and medium current markets.
Parts sales for the first quarter of fiscal 2007 also increased by approximately 25% when compared to the same period in fiscal year 2006.

Service

Service revenue during the first quarter of fiscal year 2007 was $21.5 million, compared to $20.6 million for the same period a year ago. Despite a
significant increase in product revenue from the first quarter of fiscal year to 2007 compared to the first quarter of fiscal year 2006, system installation revenue was slightly lower due to a decrease in the fair value of installation revenue. As
products mature and installations require less effort to complete, the fair value of the installation revenue decreases and product revenue simultaneously increases. Generally, installation revenue is influenced by shipment volume of systems,
product mix, customer mix, and timing of customer acceptances.

Royalty and License

Royalty revenue during the first quarter of fiscal year 2007 was $1.8 million compared to $1.6 million for the same period in fiscal 2006.

Customers

During the first quarter of fiscal year 2007, revenue from two customers accounted for 14% and 11%,
respectively, of Varian Semiconductors total revenue, compared to three customers accounting for 14%, 14% and 13% of revenue, respectively, during the first quarter of fiscal year 2006. Varian Semiconductor expects that sales of its products
to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future.

Fluctuations in the timing and mix of
product shipments, customer requirements for systems, and the completion of the installation of the product will continue to have a significant impact on the timing and amount of revenue in any given reporting period (see also Risk
Factors).

Shipment Mix

Varian
Semiconductors tools are used primarily for 300mm and 200mm wafer size implants. In addition, Varian Semiconductors tools are used in two major markets  memory and logic for integrated circuits. The following table sets forth
tool shipments by wafer size and market, as a percent of total tool shipments, for the first quarter of fiscal years 2007 and 2006. Percentages are based on the number of tools shipped during the respective period.



17



---

##### Table of Contents

|              |  |                           |   |  |                  |   |  |               |  
|------------- |  | ------------------------- | - |  | ---------------- | - |  | ------------- | -
|              |  | Fiscal Three Months Ended |  
|              |  | December 29,2006          |   |  | December 30,2005 |   |  | PercentChange |  
|By wafer size |  |                           |   |  |                  |   |  |               |  
|300mm         |  | 83                        | % |  | 83               | % |  | 0             | %
|200mm         |  | 17                        | % |  | 17               | % |  | 0             | %
|              |  |                           |   |  |                  |   |  |               |  
|Shipments     |  | 100                       | % |  | 100              | % |  | 0             | %
|              |  |                           |   |  |                  |   |  |               |  
|By market     |  |                           |   |  |                  |   |  |               |  
|Memory        |  | 83                        | % |  | 72               | % |  | 15            | %
|Logic         |  | 17                        | % |  | 28               | % |  | -39           | %
|              |  |                           |   |  |                  |   |  |               |  
|Shipments     |  | 100                       | % |  | 100              | % |  | 0             | %
|              |  |                           |   |  |                  |   |  |               |  

Cost of Product Revenue

Cost of product revenue was $111.5 million and gross margin was 45% for the first quarter of fiscal year 2007, compared to the cost of product revenue of $86.6 million and gross margin of 38% for the first quarter of
fiscal year 2006. The primary reason for the increase in gross margin is the increased tool volume in the first quarter of fiscal 2007. In addition, the first quarter of fiscal year 2006 saw a lower than normal gross product margin due to increased
costs associated with new account penetration initiatives.

Cost of Service Revenue

Cost of service revenue was $13.7 million and gross margin was 36% for the first quarter of fiscal year 2007, compared to a cost of service revenue of $10.8 million and gross margin of 48% for the first quarter of
fiscal year 2006. The increase in cost of service was the result of additional installation, contract and paid service costs. The decrease in service margins is related to decreased margins on installations due to the lower fair value of
installation revenue and product mix. Please also refer to the discussion of service revenue, above.

Research and Development

Research and development expense was $24.2 million for the first quarter of fiscal year 2007, compared to $21.6 million for the first quarter of fiscal year 2006. The
increase in research and development spending is attributable to Varian Semiconductors rapid product development cycle and continuing efforts to improve productivity and technical development of its products. In addition to maintaining its
leadership position in the markets for medium current and high current implanters, Varian Semiconductor continues to invest in new and next generation products.

Marketing, General and Administrative

Marketing, general and administrative expense was $30.5 million, for the first quarter of fiscal year
2007, compared to $28.4 million for the first quarter of fiscal year 2006. The increase was spread across all areas including marketing, service, information technology and finance and was primarily due to higher compensation-related expenses.

Interest Income and Interest Expense

During the first
quarter of fiscal year 2007, Varian Semiconductor earned $5.6 million in net interest income, compared to $5.4 million in net interest income for the same period of fiscal year 2006. Interest income for the first quarter of fiscal year 2006 included
$1.3 million related to the release of tax refunds by the IRS upon the conclusion of a multi-year tax examination. Higher cash and investment balances and rates of return, along with an increased portfolio of investments compared to the total cash
and investments balance has led to higher interest income from investments. This was partially offset by the fact that during the latter half of fiscal year 2006 Varian Semiconductor began investing in cash equivalents whose interest was exempt from
taxation by the IRS. The rates of return on these cash equivalents were approximately 33% lower than rates earned on comparable fullytaxable cash equivalents.

Other Income (Expense), Net

Other income (expense), net, was $0.7 million in income for the first quarter of fiscal
year 2007, compared to other expense of less than $0.1 million for the first quarter fiscal year 2006. Other income for the first quarter of fiscal 2007 included $0.8 million for the reversal of a liability related to the expiration of the statute
of limitations on a pre-spin discontinued operation.



18



---

##### Table of Contents

Provision for (benefit from) Income Taxes

Varian Semiconductors effective income tax rate was a provision of 29% for the first quarter of fiscal year 2007 and a benefit of 17% for the same period in fiscal year 2006. The 2007 provision was offset by a
cumulative retroactive benefit related to the extension of the research and development tax credit. The discrete income tax benefit received in the first quarter of fiscal year 2007 reduced the effective tax rate by approximately 4 percentage
points. The 2006 benefit related primarily to the favorable conclusion of a multi-year examination by the Internal Revenue Service. The discrete income tax benefit received in the first quarter of fiscal year 2006 and other discrete items reduced
the tax rate by approximately 47 percentage points. The increase in the effective rate, exclusive of the benefits received, is primarily due to increased profits on increased sales and the phase out of the ETI exclusion. The rate is lower than the
U.S. federal statutory rate principally due to credits and lower-taxed foreign income. Future tax rates may vary from the historic rates depending on the worldwide composition of earnings and the continuing availability of income tax credits as well
as the potential resolution of tax contingencies.

Net Income

As a result of the foregoing factors, in the first quarter of fiscal year 2007, Varian Semiconductor recorded net income of $37.0 million compared to net income of $22.3 million for the same period of fiscal year 2006. Net income per
diluted share was $0.66 for the first quarter of fiscal year 2007, compared to net income per diluted share of $0.39 for the first quarter of fiscal year 2006.

Liquidity and Capital Resources

Varian Semiconductor generated $11.4 million of cash from operations during the first three months of
fiscal year 2007, compared to $16.2 million of cash generated from operations during the first three months of fiscal year 2006. Cash provided by operations in the first three months of fiscal year 2007 was primarily a result of net income of $37.0
million, plus non-cash expenses such as stock-based compensation of $5.2 million and depreciation and amortization of $3.5 million. Also contributing to cash from operations were a decrease in other current assets of $5.1 million and increases in
accounts payable and deferred revenue of $20.7 million and $6.6 million, respectively. These changes were partially offset by a $51.0 million increase in accounts receivable and a $19.6 million increase in inventories. The increase in deferred
revenue is related to the timing of tool shipments within the quarter. The increase in accounts payable is mainly related to the timing of inventory receipts and payments throughout the first quarter of fiscal year 2007. The increase in accounts
receivable is related to the volume of revenue recognized during the latter portion of the first quarter of fiscal year 2007. The increase in inventories is related to an increase in the manufacturing schedule for the second quarter of fiscal year
2007.

Cash provided by operations of $16.2 million in the first three months of fiscal year 2006 was primarily a result of net income of $22.3 million,
decreases in other current assets of $16.4 million and inventories of $10.2 million, and an increase in accounts payable of $8.3 million. These changes were partially offset by a $22.7 million increase in accounts receivable, a $15.3 million
decrease in accrued expenses, and a $10.7 million decrease in deferred revenue. The decrease in other current assets is related to the receipt of refunds from the IRS associated with the conclusion of a multi-year tax examination and the high number
of completed installations during the first quarter of fiscal year 2006, which reduced the amount of inventory related to installations, which is included in other current assets. The increase in accounts payable is related to an increase in the
manufacturing schedule for the second quarter of fiscal year 2006 as opposed to the first quarter of fiscal year 2006s plan. The increase in accounts receivable is related to the timing of revenue recognition within the first quarter of fiscal
year 2006.

Varian Semiconductor used $25.2 million in investing activities during the first three months of fiscal 2007 and $7.9 million in the first
three months of fiscal 2006. Varian Semiconductor used $64.9 million of cash and cash equivalents for the purchase of investments during the first three months of fiscal year 2007. This outflow was partially offset by proceeds from sales and
maturities of investments of $42.7 million during the period. In the first three months of fiscal year 2006, Varian Semiconductor used $81.7 million of cash and cash equivalents for the purchase of investments. This was partially offset by proceeds
from sales and maturities of investments of $76.3 million during the first three months of fiscal year 2006.

During the first three months of fiscal year
2007, Varian Semiconductor used $25.2 million of cash in financing activities, primarily due to $43.3 million for the repurchase of treasury stock. This was offset by $16.4 million of cash received from the issuance of common stock upon the exercise
of stock options and the issuance of common stock under the Employee Stock Purchase Plan. During the first three months of fiscal year 2006, Varian Semiconductor used $10.7 million of cash for financing activities, primarily due to $20.0 million for
the repurchase of treasury stock, offset by $8.4 million received from the issuance of common stock upon the exercise of stock options and the issuance of common stock under the Employee Stock Purchase Plan.



19



---

##### Table of Contents

Varian Semiconductors Board of Directors adopted a share repurchase program on October 22, 2004, pursuant to
which Varian Semiconductor was authorized to expend up to $100 million in repurchasing its common stock under the program. In August 2006, Varian Semiconductors Board of Directors amended the share repurchase program by increasing the amount
of funds that may be expended in repurchasing common stock from $100 million to $200 million. In December 2006, Varian Semiconductors Board of Directors increased the program to $300 million. In the first quarter of fiscal year 2007, Varian
Semiconductor repurchased 1,076,268 shares at a weighted-average price of $40.19 per share. In the first quarter of fiscal year 2006, Varian Semiconductor repurchased 796,273 shares at a weighted-average price of $25.17 per share. At the end of the
first quarter of fiscal year 2007, Varian Semiconductor had $147.9 million remaining in its repurchase authorization.

Varian Semiconductors
liquidity is affected by many factors, some based on the normal operations of the business and others related to the uncertainties of the industry and global economies. Varian Semiconductor believes that cash, cash equivalents and investments of
$532.9 million at December 29, 2006 will be sufficient to satisfy working capital requirements, commitments for capital expenditures and other purchase commitments, environmental contingencies and cash requirements for the foreseeable future.

Off-Balance Sheet Arrangements

Varian Semiconductor
does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, Varian Semiconductor is not exposed to any financing, liquidity, market or credit risk that could arise if Varian Semiconductor had engaged in such
relationships.

Contractual Obligations

Under GAAP,
certain obligations and commitments are not required to be included in the consolidated balance sheets and statements of income. These obligations and commitments, while entered into in the normal course of business, may have a material impact on
liquidity. The following commitments as of December 29, 2006 have not been included in the consolidated balance sheets and statements of income included under Item 1. Consolidated Financial Statements; however, they have been disclosed in
the following table in order to provide a more complete picture of Varian Semiconductors financial position and liquidity.



|                           |  |                        |        |                 |   |          |  |          |     |  |   |   
|-------------------------- |  | ---------------------- | ------ | --------------- | - | -------- |  | -------- | --- |  | - | --
|                           |  | Payments Due by Period |        |                
|                           |  | Total                  |        | Less than 1Year |   | 1-3Years |  | 3-5Years
|                           |  | (Amounts in thousands)
|Operating leases           |  | $                      | 2,367  |                 | $ | 1,903    |  | $        | 442 |  | $ | 22
|Purchase order commitments |  |                        | 75,004 |                 |   | 74,987   |  |          | 17  |  |   |  
|                           |  |                        |        |                 |   |          |  |          |     |  |   |   
|Total commitments          |  | $                      | 77,371 |                 | $ | 76,890   |  | $        | 459 |  | $ | 22
|                           |  |                        |        |                 |   |          |  |          |     |  |   |   

Transactions with Affiliates and Related Parties

Operations prior to April 2, 1999 had been part of the former Varian Associates, Inc. (VAI), now known as Varian Medical Systems, Inc. (VMS)
(See Note 9. Commitments, Contingencies and Guarantees in the Notes to the Unaudited Interim Consolidated Financial Statements). During the first quarter of fiscal year 2007, Varian Semiconductor was charged by VMS $0.3 million in settlement of
these obligations. During the first quarter of fiscal year 2006, Varian Semiconductor was charged by VMS $0.2 million in settlement of these obligations.

Recent Accounting Pronouncements

In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 063, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 063). EITF 063 states that a company should disclose its
accounting policy regarding the gross or net presentation of certain taxes. If taxes included in gross revenues are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented (i.e.,
both interim and annual periods). Taxes within the scope of EITF 063 are those that are imposed on and concurrent with a specific revenueproducing transaction, such as sales tax or value-added



20



---

##### Table of Contents

tax. Taxes assessed on an entitys activities over a period of time, such as gross receipts taxes, are not within the scope of the issue. EITF 063
will be effective for Varian Semiconductors second quarter of fiscal year 2007. The disclosures required under this Issue, which may be presented on an aggregate basis, are effective retrospectively for all periods presented. Varian
Semiconductor is in the process of evaluating whether the adoption of EITF 063 will have a material impact on its financial statements.

In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. This interpretation will be effective for Varian Semiconductor for its fiscal year 2008. Varian Semiconductor is in the process of evaluating whether the adoption of this interpretation will have a material impact on its financial
statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities,
the application of this statement will change current practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this statement on its financial
statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires employers that sponsor defined benefit plans to recognize the funded status of a benefit plan on its balance sheet; recognize gains, losses
and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of other comprehensive income, net of tax; measure defined benefit plan assets and obligations as of
the date of the employers fiscal yearend balance sheet; and disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. Most provisions of statement will be effective for Varian Semiconductor for its fiscal year 2007, except for the requirement to measure benefits
and obligations as of the employers fiscal year end, which will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating whether the adoption of this statement will have a material impact on
its financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Exchange Risk

As a multinational company, Varian Semiconductor faces exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as Varian
Semiconductors business practices evolve and could impact Varian Semiconductors financial results. However, based on the results of an annual test, a 10% change in the exchange rate of the U.S. dollar against other major currencies would
not have a material effect on Varian Semiconductors results of operations. Historically, Varian Semiconductors primary exposures have resulted from non-U.S. dollar-denominated sales and purchases in Asia Pacific and Europe. Varian
Semiconductor does not enter into forward exchange contracts for trading purposes. Varian Semiconductors forward exchange contracts generally range from one to nine months in original maturity. No forward exchange contract exceeds one year in
original maturity.

Varian Semiconductor hedges currency exposures that are associated with certain of its assets and liabilities denominated in various
non-U.S. dollar currencies. The aggregate exchange loss for the first quarter of fiscal year 2007 was $135 thousand. For the first quarter of fiscal year 2006, the aggregate exchange gain was $14 thousand.



21



---

##### Table of Contents

Forward exchange contracts outstanding are summarized as follows (amounts in thousands):



|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|----------------------------------------- |  | ----------------- | ------ | ------------------ | ------ | --------- | - | ------------- |  | ------------ | ------ | --------- | ------ |  | - | ------
|                                          |  | December 29, 2006 |        | September 29, 2006
|                                          |  | NotionalValue     |        | ContractRate       |        | FairValue |   | NotionalValue |  | ContractRate |        | FairValue
|Foreign currency purchase contracts:      |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Singapore Dollar                          |  | $                 | 2,956  |                    | 1.54   |           | $ | 2,960         |  | $            | 1,239  |           | 1.57   |  | $ | 1,224 
|New Taiwan Dollar                         |  |                   | 2,420  |                    | 32.15  |           |   | 2,381         |  |              | 2,227  |           | 32.83  |  |   | 2,215 
|Korean Won                                |  |                   | 1,641  |                    | 928.00 |           |   | 1,638         |  |              | 2,251  |           | 947.68 |  |   | 2,254 
|Euro                                      |  |                   | 1,592  |                    | 0.76   |           |   | 1,580         |  |              |       |           |       |  |   |      
|Japanese Yen                              |  |                   | 967    |                    | 118.36 |           |   | 964           |  |              | 4,133  |           | 117.60 |  |   | 4,132 
|British Pound                             |  |                   | 65     |                    | 0.51   |           |   | 65            |  |              |       |           |       |  |   |      
|Israeli Shekel                            |  |                   |       |                    |       |           |   |              |  |              | 51     |           | 4.30   |  |   | 51    
|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Total foreign currency purchase contracts |  | $                 | 9,641  |                    |        |           | $ | 9,588         |  | $            | 9,901  |           |        |  | $ | 9,876 
|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Foreign currency sell contracts:          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Japanese Yen                              |  | $                 | 21,844 |                    | 117.59 |           | $ | 21,621        |  | $            | 10,265 |           | 117.72 |  | $ | 10,272
|Korean Won                                |  |                   | 5,834  |                    | 931.00 |           |   | 5,842         |  |              | 3,232  |           | 961.90 |  |   | 3,286 
|Israeli Shekel                            |  |                   | 473    |                    | 4.25   |           |   | 476           |  |              | 203    |           | 4.37   |  |   | 206   
|Euro                                      |  |                   |       |                    |       |           |   |              |  |              | 205    |           | 0.78   |  |   | 203   
|British Pound                             |  |                   |       |                    |       |           |   |              |  |              | 78     |           | 0.53   |  |   | 77    
|New Taiwan Dollar                         |  |                   |       |                    |       |           |   |              |  |              | 61     |           | 32.91  |  |   | 61    
|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Total foreign currency sell contracts     |  | $                 | 28,151 |                    |        |           | $ | 27,939        |  | $            | 14,044 |           |        |  | $ | 14,105
|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Total contracts                           |  | $                 | 37,792 |                    |        |           | $ | 37,527        |  | $            | 23,945 |           |        |  | $ | 23,981
|                                          |  |                   |        |                    |        |           |   |               |  |              |        |           |        |  |   |       

Varian Semiconductor uses derivative instruments to protect its foreign operations from fluctuations in earnings
and cash flows caused by volatility in currency exchange rates. Varian Semiconductor hedges its current exposures and a portion of its anticipated foreign currency exposures with hedging instruments having terms of up to twelve months.

Varian Semiconductors international sales, except for those in Japan, are primarily denominated in the U.S. dollar. For foreign currency-denominated sales,
however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward sales contracts whose critical terms are designed to match those of
the underlying exposure. These hedges are evaluated for effectiveness at least quarterly using the change in value of the forward contracts to the change in value of the underlying transaction, with the effective portion of the hedge accumulated in
other comprehensive income. Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of operations. There was an immaterial amount of ineffectiveness recognized during the fiscal quarter ended
December 29, 2006. There were no forward foreign exchange sell contracts designated as hedges of product sales in Japanese Yen, nor any offsetting purchase contracts, outstanding at December 29, 2006.

There were no net unrealized losses on any forward Yen contracts as of December 29, 2006. There were approximately $0.7 million in net unrealized gains on forward
Yen revenue contracts as of September 29, 2006. The fair value of forward exchange contracts generally reflects the estimated amounts that Varian Semiconductor would receive or pay to terminate the contracts at the reporting date. The notional
amounts of forward exchange contracts are not a measure of Varian Semiconductors exposure.

Interest Rate Risk

Although payments under certain of Varian Semiconductors overseas borrowing facilities are tied to market indices, Varian Semiconductor is not exposed to material
interest rate risk from these borrowing facilities. Varian Semiconductor has no material cash flow exposure due to rate changes for cash equivalents and investments. Varian Semiconductor maintains cash investments primarily in U.S. Treasury,
government agency and investment-grade corporate and municipal securities, as well as short-term time deposits with investment grade financial institutions. Cash equivalents at December 29, 2006 and September 29, 2006 were $204.7 million
and $234.1 million, respectively. At December 29, 2006 and September 29, 2006, Varian Semiconductors investments were $313.4 million and $290.6 million, respectively, and consisted primarily of U.S. Treasury, government agency and
corporate bonds and certificates of deposit with ratings of AA or better.



22



---

##### Table of Contents

Commodity Price Risk

Varian Semiconductor is not exposed to material commodity price risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The management of Varian Semiconductor, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure
controls and procedures of Varian Semiconductor as of December 29, 2006. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of Varian Semiconductors disclosure controls and procedures as of December 29, 2006, the Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, Varian Semiconductors disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No change in Varian Semiconductors internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 29, 2006 that has materially affected, or is reasonably likely to materially affect, the internal control over financial
reporting.



23



---

##### Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is provided in Note 9. Commitments, Contingencies and
Guarantees to the Unaudited Interim Consolidated Financial Statements under Part I, Item 1 and is incorporated herein by reference.

ITEM 1A. Risk Factors

The semiconductor industry is cyclical, and a slowdown in demand for Varian
Semiconductors semiconductor manufacturing equipment may negatively affect financial results.

The semiconductor industry historically has been
cyclical in nature and has experienced periodic downturns. The industry may experience volatility in product pricing and in product demand. Volatility may result in significant reductions and delays in the purchase of semiconductor manufacturing
equipment and the construction of new fab facilities. If such significant reductions and delays in purchasing occur and Varian Semiconductor has procured materials prior to the receipt of the customer purchase order, significant inventory charges
could be incurred, thereby negatively impacting Varian Semiconductors financial results. In addition, even though Varian Semiconductors revenues may fluctuate significantly from period to period, in order to remain competitive, Varian
Semiconductor continues to invest in research and development and to maintain its worldwide customer service and support capabilities. These investments in the business may adversely affect Varian Semiconductors financial results.

Varian Semiconductor faces intense competition in the semiconductor equipment industry.

Significant competitive factors in semiconductor equipment manufacturing include the strength of customer relationships, pricing, technological performance and timing, distribution capabilities and financial
viability. Varian Semiconductor believes that in order to remain competitive in this industry, it will need to devote significant financial resources to research and development, to offer and market a broad range of products, and maintain and
enhance customer service and support centers worldwide. The semiconductor equipment industry is increasingly dominated by large manufacturers who have resources to support customers worldwide, and some of Varian Semiconductors competitors have
substantially greater financial resources and more extensive engineering, manufacturing, marketing, service and support than does Varian Semiconductor. With fewer resources, Varian Semiconductor may not be able to match the product offerings or
customer service and technical support offered by its competitors. In addition, there are several smaller companies that provide innovative technology that may have performance advantages over Varian Semiconductors systems. If these
manufacturers continue to improve their product performance and pricing, enter into strategic relationships, expand their current targeted geographic territory or consolidate with large equipment manufacturers, sales of Varian Semiconductors
products may be adversely affected.

Varian Semiconductor derives a substantial portion of its revenues from a small number of customers, and its
business may be harmed by the loss of any one significant customer.

From time to time within the same accounting period, Varian Semiconductor has sold
significant percentages of its systems to its major customers, some of which include Chartered Semiconductor Manufacturing, Limited, Elpida Memory, Inc., Hynix Semiconductor, Inc., Hynix-ST Semiconductor Limited, Infineon Technologies AG, Intel
Corporation, Micron Technology, Inc., Promos Technologies, Inc., Samsung Electronics Company Limited, Sony Corporation, STMicroelectronics, Taiwan Semiconductor Manufacturing Corporation, Limited, Texas Instruments, Inc., United Microelectronics
Corporation, and Winbond Electronics Corporation. During some quarters, some of these customers have individually accounted for more than 10% of Varian Semiconductors total revenue. Varian Semiconductor expects that sales of its products to
relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future. Furthermore, Varian Semiconductor may have difficulty attracting additional large customers because its sales depend, in large part,
upon the decision of a prospective customer to increase manufacturing capacity in an existing fabrication facility or to transfer a manufacturing process to a new fabrication facility, both of which typically involve a significant capital
commitment. Once a semiconductor manufacturer has selected a particular suppliers capital equipment, the manufacturer generally relies upon that equipment for the specific production line application. Consequently, Varian Semiconductor may
experience difficulty in selling to a prospective customer if that customer initially selects a competitors capital equipment.

Varian
Semiconductors quarterly results of operations are likely to fluctuate, and as a result, Varian Semiconductor may fail to meet the expectations of its investors and securities analysts, which may cause the price of its common stock to decline.

Varian Semiconductor has experienced and expects to continue to experience significant fluctuations in its quarterly financial results. From time to
time, customers may accelerate, postpone or cancel shipments, or production difficulties may delay shipments. A cancellation, delay in shipment or delay in customer acceptance of the product upon installation in any quarter may cause revenue in



24



---

##### Table of Contents

such quarter to fall significantly below expectations, which could cause the market price of Varian Semiconductors common stock to decline. Varian
Semiconductors financial results also fluctuate based on gross profit realized on sales. Gross profit as a percentage of revenue may vary based on a variety of factors, including the mix and average selling prices of products sold, costs to
manufacture and customize systems and inventory management. In addition, a number of other factors may impact Varian Semiconductors quarterly financial results, including, but not limited to the following:



| |  |  | changing global economic conditions and worldwide political instability;
| | - |  | ------------------------------------------------------------------------



| |  |  | general conditions in the semiconductor equipment industry;
| | - |  | -----------------------------------------------------------



| |  |  | unexpected procurement or manufacturing difficulties;
| | - |  | -----------------------------------------------------



| |  |  | pricing of key components;
| | - |  | --------------------------



| |  |  | fluctuations in foreign exchange rates;
| | - |  | ---------------------------------------



| |  |  | a technical change that Varian Semiconductor is unable to address with its products;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a failure to achieve continued market acceptance of Varian Semiconductors key products;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | ability to develop, introduce and market new, enhanced and competitive products in a timely manner;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | introduction of new products by Varian Semiconductors competitors;
| | - |  | -------------------------------------------------------------------



| |  |  | strategic technology investment decisions;
| | - |  | ------------------------------------------



| |  |  | legal or technical challenges to Varian Semiconductors products and technology;
| | - |  | --------------------------------------------------------------------------------



| |  |  | adverse weather conditions at its manufacturing facilities or customers facilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | changes in the effective tax rate; and
| | - |  | --------------------------------------



| |  |  | new or modified accounting regulations.
| | - |  | ---------------------------------------

Because
Varian Semiconductors operating expenses are based on anticipated capacity levels and a high percentage of Varian Semiconductors expenses are relatively fixed, a fluctuation in the timing of recognition of revenue and the level of gross
profit from a single transaction could cause financial results to vary significantly from quarter to quarter.

It is difficult for Varian Semiconductor
to predict the quarter in which it will be recognizing revenue from large product orders.

Varian Semiconductor customarily sells a relatively small
number of systems within any period. Consequently, Varian Semiconductors revenue and financial results could be negatively impacted for a particular quarter if anticipated orders from even a few customers are not received in time to permit
shipment and/or there are delays in customer acceptance of the product upon installation. Generally, Varian Semiconductor recognizes all or a portion of the revenue from a product upon shipment provided title and risk of loss has passed to the
customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer
acceptance. Please refer to the full revenue recognition policy in the Critical Accounting Policies and Significant Judgments and Accounting Estimates section of Varian Semiconductors annual report on Form 10-K for the fiscal year ended
September 29, 2006, filed with the SEC on December 7, 2006. As a result, it is often difficult to determine the timing of product revenue recognition. In addition, Varian Semiconductors product order backlog at the beginning of each
quarter may not include all systems needed to achieve expected revenues for that quarter. Because Varian Semiconductor may build systems according to forecast, the absence of a significant backlog for an extended period of time could adversely
affect financial results.

Varian Semiconductors future business depends, in part, on its ability to successfully introduce and manage the
transition to new products, and Varian Semiconductor may not succeed in accomplishing these goals.

Varian Semiconductor believes that its future
success will depend on its ability to develop, manufacture and successfully introduce new systems and product lines with improved capabilities and to continue enhancing existing products; in particular, products that respond to the trend toward
single wafer processing and 300mm wafer processing at more advanced nodes. Varian Semiconductor derives virtually all of its revenue from sales and servicing of systems and related products and services. Varian Semiconductor must



25



---

##### Table of Contents

accurately forecast the demand for new products while managing the transition from older products. In addition, Varian Semiconductor may be unable to
complete the development or meet the technical specifications of new systems or enhancements or to manufacture and ship these systems or enhancements in volume and on time, which may harm its reputation and business. If any of Varian
Semiconductors new products have reliability or quality problems, Varian Semiconductor may incur additional warranty and service expenses, experience a decline in product orders or incur higher manufacturing costs to correct such problems, all
of which could adversely affect financial results.

Varian Semiconductor is subject to the risks of operating internationally and it derives a
substantial portion of its revenues from outside the U.S.

International revenue accounts for a substantial portion of Varian Semiconductors
revenue. Because Varian Semiconductor relies on sales to customers in Asia Pacific for a significant portion of its revenue, its business is very likely to be adversely impacted by economic downturns and instability in that region. Varian
Semiconductors business in Asia Pacific is affected by demand in each country. In addition, international sales are subject to risks, including, but not limited to:



| |  |  | changes in legal and regulatory requirements;
| | - |  | ---------------------------------------------



| |  |  | political and economic instability and acts of terrorism;
| | - |  | ---------------------------------------------------------



| |  |  | difficulties in accounts receivable collection;
| | - |  | -----------------------------------------------



| |  |  | natural disasters or public health crises;
| | - |  | ------------------------------------------



| |  |  | difficulties in staffing for cultural diversity and managing international operations;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | foreign trade disputes; and
| | - |  | ---------------------------



| |  |  | fluctuations in foreign exchange rates.
| | - |  | ---------------------------------------

If
Varian Semiconductor is unable to protect its proprietary rights adequately, it may lose its ability to compete effectively in the semiconductor equipment industry.

Varian Semiconductor relies on obtaining and maintaining patent, copyright and trade secret protection for significant new technologies, products and processes and obtaining key licenses because of the length of time
and expense associated with bringing new products through the development process to market. Varian Semiconductor intends to continue to file applications as appropriate for patents covering new products and manufacturing processes. However, Varian
Semiconductor cannot provide assurance of the following:



| |  |  | that patents will be issued from any pending or future patent applications owned by, or licensed to, Varian Semiconductor;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | that the claims allowed under any issued patents will be sufficiently broad to protect Varian Semiconductors technology position against competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | that any issued patents owned by or licensed to Varian Semiconductor will not be challenged, invalidated or circumvented; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | that the rights granted under Varian Semiconductors patents will provide it with competitive advantages.
| | - |  | ---------------------------------------------------------------------------------------------------------

Varian Semiconductor also has agreements with third parties for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and
technology cross-licenses.

In addition, Varian Semiconductor maintains and enforces its trademarks to increase customer recognition of its products. If
its trademarks are used by unauthorized third parties, Varian Semiconductors business may be harmed. Varian Semiconductor also relies on contractual restrictions on disclosure, copying and transferring title, including confidentiality
agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties to protect its proprietary rights. If these contractual agreements are breached, Varian Semiconductor may not have adequate remedies for
any such breaches. Varian Semiconductor also cannot provide assurance that its trade secrets will not otherwise become known to or be independently developed by others.



26



---

##### Table of Contents

Patent claims may be expensive to pursue, defend or settle and may substantially divert Varian Semiconductors
resources and the attention of management.

Varian Semiconductor could incur substantial costs and diversion of management resources in defending
patent suits brought against it or in asserting its patent rights against others. If the outcome of any such litigation is unfavorable to Varian Semiconductor, its business may be harmed. Varian Semiconductor may not be aware of pending or issued
patents held by third parties that relate to its products or technologies. In the event that a claim is asserted against Varian Semiconductor, it may need to acquire a license to or contest the validity of a competitors patent. Varian
Semiconductor cannot be certain that it could acquire such a license on commercially acceptable terms, if at all, or that it would prevail in such a proceeding. From time to time Varian Semiconductor has received notices from and has issued notices
to such third parties alleging infringement of patent and other intellectual property rights relating to its products. If Varian Semiconductor is subject to future claims of patent infringement, it may be required to make substantial settlement or
damage payments and may have to devote substantial resources to reengineering its products.

Varian Semiconductor depends on limited groups of suppliers
or single source suppliers, the loss of which could impair its ability to manufacture products and systems.

Varian Semiconductor obtains some of the
components and subassemblies included in its products from a limited group of suppliers, or in some cases a single source supplier. The loss of any supplier, (or the temporary inability of any supplier to meet Varian Semiconductors production
requirements, including any single source supplier) would require obtaining one or more replacement suppliers and may also require devoting significant resources to product development to incorporate new parts from other sources into Varian
Semiconductors products. The need to change suppliers or to alternate between suppliers might cause delays in delivery or significantly increase Varian Semiconductors costs. Although Varian Semiconductor has insurance to protect against
loss due to business interruption from some sources as necessary, Varian Semiconductor cannot provide assurance that such coverage will be adequate or that it will remain available on commercially acceptable terms. Although Varian Semiconductor
seeks to reduce its dependence on these limited source suppliers, disruption or loss of these sources could negatively impact its business and damage customer relationships.

Varian Semiconductors outsource providers may fail to perform as it expects.

Outsource providers have an
increasing role in Varian Semiconductors manufacturing operations, research and development initiatives and in transactional and administrative functions. Although Varian Semiconductor aims at selecting reputable providers and securing their
performance on terms documented in written contracts, it is possible that one or more of these providers could fail to perform as Varian Semiconductor expects and such failure could have an adverse impact on Varian Semiconductors business. In
addition, the expansive role of outsource providers has required and will continue to require Varian Semiconductor to implement changes to its existing operations and to adopt new procedures to deal with and manage the performance of these outsource
providers. Any delay or failure in the implementation of our operational changes and new procedures could adversely affect Varian Semiconductors customer relationships and/or have a negative effect on Varian Semiconductors operating
results.

Varian Semiconductors indemnification obligations under the Distribution Related Agreements could be substantial, and Varian
Semiconductor may not be fully indemnified in accordance with the Distribution Related Agreements for the expenses it incurs.

Under the terms of the
Distribution Related Agreements, each of VMS, VI and Varian Semiconductor has agreed to indemnify the other parties, and certain related persons, from and after the spin-off with respect to certain indebtedness, liabilities and obligations which
could be significant. The availability of such indemnities will depend upon the future financial strength of the companies. There is a risk that one or more of these companies will not be able to satisfy their indemnification obligations. In
addition, the Distribution Related Agreements generally provide that if a court prohibits a company from satisfying its indemnification obligations, then such obligations will be shared equally by the other companies.

Failure to comply with present or future environmental regulations could subject Varian Semiconductor to penalties and environmental remediation costs.

Varian Semiconductor is subject to a variety of foreign, federal, state and local laws regulating the discharge of materials into the environment and
the protection of the environment. These regulations include discharges into the soil, water and air and the generation, handling, storage, and transportation and disposal of waste and hazardous substances. These laws increase the costs and
potential liabilities associated with the conduct of Varian Semiconductors operations.

VAI has been named by the U.S. Environmental Protection
Agency and third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA), at eight sites where VAI is alleged to have shipped manufacturing
waste for recycling or disposal. VAI is also in various stages of environmental investigation and/or remediation under the direction of, or in consultation with foreign, federal, state and local agencies at certain current or former VAI facilities.
The Distribution Related Agreements provide that each of VMS, Varian Semiconductor and VI will indemnify the others for one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits
expected to be realized upon payment of these costs.

For certain of these sites and facilities, various uncertainties make it difficult to assess the
likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. Varian Semiconductor has



27



---

##### Table of Contents

accrued estimated environmental investigation and remediation costs for these sites and facilities. As to other sites and facilities, sufficient knowledge
has been gained to be able to reasonably estimate the scope and costs of future environmental activities. As such, Varian Semiconductor has sufficient accruals to cover Varian Semiconductors portion of these costs.

Accrued amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater than such estimates. Accordingly,
Varian Semiconductor may need to make additional accruals and subsequent payments to cover its indemnification obligations that would exceed current estimates. In addition, Varian Semiconductors present and past facilities have been in
operation for many years, and over that time in the course of those operations, such facilities have used substances which are or might be considered hazardous. Varian Semiconductor also may have generated and disposed of wastes which are or might
be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future that Varian Semiconductor cannot now predict.

Varian Semiconductors ability to manage potential growth or decline, integration of potential acquisitions, and potential disposition of product lines and technologies creates risks.

The cyclical nature of the semiconductor industry may cause Varian Semiconductor to experience rapid growth or decline in demand for products and services. As a result,
Varian Semiconductor may face significant challenges in maintaining adequate financial and business controls, materials management, management processes, information systems and procedures on a timely basis and training, managing and appropriately
sizing the work force. There can be no assurance that Varian Semiconductor will be able to perform such actions successfully.

An important element of
Varian Semiconductors management strategy is to review acquisition prospects that would complement existing products, augment market coverage and distribution ability, or enhance technological capabilities. In the future, Varian Semiconductor
may make acquisitions of complementary companies, products or technologies, or may reduce or dispose of certain product lines or technologies that no longer fit Varian Semiconductors long-term strategies. Managing an acquired business,
disposing of product technologies or reducing personnel entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of
managements attention to other business concerns, amortization of acquired intangible assets, the incurrence of debt and contingent liabilities and potential loss of key employees or customers of acquired or disposed operations, among others.
Varian Semiconductors success will depend, to a significant extent, on the ability of its executive officers and other members of its senior management to identify and respond to these challenges effectively. In addition, any acquisitions
could result in dilutive issuances of equity securities. There can be no assurance that Varian Semiconductor will be able to achieve and manage successfully any such growth, decline, integration of potential acquisitions, disposition of product
lines or technologies, or reduction in personnel, or that management, personnel or systems will be adequate to support continued operations. Any such inabilities or inadequacies may have a material adverse effect on Varian Semiconductors
business, operating results, financial condition, cash flows and/or the price of Varian Semiconductor common stock.

Varian Semiconductor manufactures
its products at one primary manufacturing facility and is thus subject to risk of disruption.

Varian Semiconductor has one primary manufacturing
facility, located in Gloucester, Massachusetts, and its operations are subject to disruption for a variety of reasons, including, but not limited to natural disasters, work stoppages, operational facility constraints and terrorism. Such disruption
may cause delays in shipments of products to Varian Semiconductors customers and may result in cancellation of orders or loss of customers and could seriously harm Varian Semiconductors business.

If Varian Semiconductor loses key employees or is unable to attract and retain key employees, it may be unable to pursue business opportunities.

Varian Semiconductors future success depends to a significant extent on the continued service of key managerial, technical and engineering personnel. Competition
for such personnel is intense, particularly in the labor markets around Varian Semiconductors facilities in Massachusetts. The available pool of qualified candidates is limited, and Varian Semiconductor may not be able to retain its key
personnel or to attract, train, assimilate or retain other highly qualified engineers and technical and managerial personnel in the future. The loss of these persons or Varian Semiconductors inability to hire, train or retrain qualified
personnel could harm Varian Semiconductors business and results of operations.



28



---

##### Table of Contents

Varian Semiconductor has anti-takeover defenses that could delay or prevent an acquisition and could adversely affect
the price of its common stock.

Provisions of Varian Semiconductors certificate of incorporation and by-laws and of Delaware law could delay,
defer or prevent an acquisition or change in control of Varian Semiconductor or otherwise adversely affect the price of its common stock. For example, Varian Semiconductors Board of Directors is classified into three classes, and stockholders
do not have the right to call special meetings of stockholders. Varian Semiconductors certificate of incorporation also permits its Board of Directors to issue shares of preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred shares could adversely affect the price of the common stock. Varian Semiconductor has also adopted a stockholders rights plan which could significantly dilute the
equity interests of a person seeking to acquire control of Varian Semiconductor without the approval of the Board of Directors.

Varian Semiconductor
does not anticipate paying dividends on its common stock in the future.

Varian Semiconductor has not paid and does not anticipate paying dividends on
its common stock. Varian Semiconductors Board of Directors has discretion to make decisions to pay dividends to common stockholders in the future. The decision will depend on a number of factors, including results of operations, financial
conditions and contractual restrictions that the Board, in its opinion, deems relevant.

Varian Semiconductors financial results may be adversely
impacted by higher than expected tax rates or exposure to additional income tax liabilities.

As a global company, Varian Semiconductors
effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. Varian Semiconductor is subject to income taxes in both the U.S. and various foreign jurisdictions, and
significant judgment is required to determine worldwide tax liabilities. Varian Semiconductors effective tax rate could be adversely affected by changes in the distribution of earnings between countries with differing statutory tax rates, in
the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect profitability. For example, recent U.S. legislation governing taxation of extraterritorial income repealed certain export subsidies that were
prohibited by the World Trade Organization and enacted different tax provisions. These new tax provisions are not expected to fully offset the loss of the repealed tax provisions and, as a result, Varian Semiconductors U.S. tax liability may
increase. In addition, Varian Semiconductors effective tax rate has benefited from the research and development (R & D) tax credit which will expire on December 31, 2007. If the R & D credit is not extended,
Varian Semiconductors tax liability may increase. Further, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on Varian Semiconductors ability to generate future taxable income in the U.S. In
addition, the amount of income taxes paid is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect profitability.



29



---

##### Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about
purchases by Varian Semiconductor Equipment Associates, Inc. (Varian Semiconductor) during the quarter ended December 29, 2006 of equity securities that are registered by Varian Semiconductor pursuant to Section 12 of the
Securities Exchange Act of 1934:

ISSUER PURCHASES OF EQUITY SECURITIES



|                                |  |                                               |  |                                          |       |                                                                                                 |           |                                                                                                                                             |   |        
|------------------------------- |  | --------------------------------------------- |  | ---------------------------------------- | ----- | ----------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------------------------------- | - | -------
|Period                          |  | (a) Total Number ofShares (or Units)Purchased |  | (b) Average PricePaid per Share(or Unit) |       | (c) Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs (1) |           | (d) Maximum Number (or ApproximateDollar Value) of Shares (or
Units)that May Yet Be Purchased Underthe Plans or Programs (in
thousands) (2)
|September 30 - October 27, 2006 |  | 263,716                                       |  | $                                        | 37.91 |                                                                                                 | 263,716   |                                                                                                                                             | $ | 81,196 
|October 28, - November 24, 2006 |  | 293,280                                       |  | $                                        | 39.20 |                                                                                                 | 293,280   |                                                                                                                                             | $ | 69,700 
|November 25 - December 29, 2006 |  | 519,272                                       |  | $                                        | 41.92 |                                                                                                 | 519,272   |                                                                                                                                             | $ | 147,935
|Total: (3)                      |  | 1,076,268                                     |  | $                                        | 40.19 |                                                                                                 | 1,076,268 |                                                                                                                                             | $ | 147,935

---

|(1) | Varian Semiconductor repurchased an aggregate of 4,823,823 shares of its common stock through December 29, 2006 pursuant to the repurchase program that was first announced in
October, 2004 (the Program).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | At the beginning of the quarter ended December 29, 2006, Varian Semiconductor had an existing authorization to expend up to $200,000,000 in repurchasing common stock under the
Program. In December, 2006, Varian Semiconductors Board of Directors amended the Program by increasing the amount of funds that may be expended in repurchasing common stock from $200,000,000 to $300,000,000. The program does not have a fixed
expiration date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In addition to the repurchases made during the quarter ended December 29, 2006, Varian Semiconductor has repurchased 453,202 shares at total cost of $19.5 million between
December 29, 2006 and February 2, 2007, the latest practicable date prior to the filing date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------



| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

| | 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.



|                                                |  |     |  |                                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------- |  | --- |  | --------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
|Registrant                                     
|                                                |  |    
|                                                |  | By: |  | /S/ Robert J. Halliday                                   
|                                                |  |     |  | Robert J. Halliday                                       
|                                                |  |     |  | Executive Vice President and Chief Financial Officer     
|                                                |  |     |  | (Principal Financial Officer and Duly Authorized Officer)
|Date: February 5, 2007                          |  |     |  |                                                          



32