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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(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 31, 2004



OR



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



For the transition period from
 to



Commission File Number 000-25393



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VARIAN, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 77-0501995                       
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)
|                                                               | 
|3120 Hansen Way, Palo Alto, California                         |  | 94304-1030                       
|(Address of Principal Executive Offices)                       |  | (Zip Code)                       



(650)
213-8000

(Telephone Number)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



The number of shares of the registrants common stock outstanding as of
February 2, 2005 was 35,131,163.



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##### Table of Contents

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|PART I  |  | Financial Information                                                                 |  |     
|        |  |                                                                                      
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Earnings                                |  | 3   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Balance Sheet                                        |  | 4   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Cash Flows                              |  | 5   
|        |  |                                                                                      
|        |  | Notes to the Unaudited Condensed Consolidated Financial Statements                    |  | 6   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 39  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 41  
|        |  |                                                                                      
|PART II |  | Other Information                                                                     |  |     
|        |  |                                                                                      
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 42  
|        |  |                                                                                      
|Item 5. |  | Other Information                                                                     |  | 42  
|        |  |                                                                                      
|Item 6. |  | Exhibits                                                                              |  | 43  



2



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1.    Financial Statements



VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                              |  |                      |         |   |                |   |         |  
|--------------------------------------------- |  | -------------------- | ------- | - | -------------- | - | ------- | -
|                                              |  | Fiscal Quarter Ended |        
|                                              |  | December 31,2004     |         |   | January 2,2004 |  
|Sales                                         |  | $                    | 235,859 |   |                | $ | 212,493 |  
|Cost of sales                                 |  |                      | 148,049 |   |                |   | 132,717 |  
|                                              |  |                      |         |   |                |   |         |  
|Gross profit                                  |  |                      | 87,810  |   |                |   | 79,776  |  
|                                              |  |                      |         |   |                |   |         |  
|Operating expenses                            |  |                      |         |   |                |   |         |  
|Sales and marketing                           |  |                      | 39,862  |   |                |   | 37,156  |  
|Research and development                      |  |                      | 12,840  |   |                |   | 11,155  |  
|General and administrative                    |  |                      | 16,053  |   |                |   | 10,505  |  
|Purchased in-process research and development |  |                      | 700     |   |                |   |        |  
|                                              |  |                      |         |   |                |   |         |  
|Total operating expenses                      |  |                      | 69,455  |   |                |   | 58,816  |  
|                                              |  |                      |         |   |                |   |         |  
|Operating earnings                            |  |                      | 18,355  |   |                |   | 20,960  |  
|                                              |  |                     
|Interest income (expense)                     |  |                      |         |   |                |   |         |  
|Interest income                               |  |                      | 959     |   |                |   | 565     |  
|Interest expense                              |  |                      | (571    | ) |                |   | (618    | )
|                                              |  |                      |         |   |                |   |         |  
|Total interest income (expense), net          |  |                      | 388     |   |                |   | (53     | )
|                                              |  |                      |         |   |                |   |         |  
|Earnings before income taxes                  |  |                      | 18,743  |   |                |   | 20,907  |  
|Income tax expense                            |  |                      | 3,805   |   |                |   | 7,318   |  
|                                              |  |                      |         |   |                |   |         |  
|Net earnings                                  |  | $                    | 14,938  |   |                | $ | 13,589  |  
|                                              |  |                      |         |   |                |   |         |  
|Net earnings per share:                       |  |                      |         |   |                |   |         |  
|Basic                                         |  | $                    | 0.43    |   |                | $ | 0.39    |  
|                                              |  |                      |         |   |                |   |         |  
|Diluted                                       |  | $                    | 0.42    |   |                | $ | 0.38    |  
|                                              |  |                      |         |   |                |   |         |  
|Shares used in per share calculations:        |  |                      |         |   |                |   |         |  
|Basic                                         |  |                      | 34,965  |   |                |   | 34,440  |  
|                                              |  |                      |         |   |                |   |         |  
|Diluted                                       |  |                      | 35,704  |   |                |   | 35,658  |  
|                                              |  |                      |         |   |                |   |         |  





See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                                        |  |                  |         |                |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | -------------- | - | -------
|                                                                                                                                                        |  | December 31,2004 |         | October 1,2004
|ASSETS                                                                                                                                                  |  |                  |         |                |   |        
|                                                                                                                                                        |  |                 
|Current assets                                                                                                                                          |  |                  |         |                |   |        
|Cash and cash equivalents                                                                                                                               |  | $                | 189,540 |                | $ | 184,982
|Accounts receivable, net                                                                                                                                |  |                  | 174,993 |                |   | 182,843
|Inventories                                                                                                                                             |  |                  | 165,490 |                |   | 135,344
|Deferred taxes                                                                                                                                          |  |                  | 29,660  |                |   | 30,008 
|Other current assets                                                                                                                                    |  |                  | 21,391  |                |   | 18,986 
|                                                                                                                                                        |  |                  |         |                |   |        
|Total current assets                                                                                                                                    |  |                  | 581,074 |                |   | 552,163
|Property, plant, and equipment, net                                                                                                                     |  |                  | 126,319 |                |   | 120,239
|Goodwill                                                                                                                                                |  |                  | 147,948 |                |   | 131,441
|Intangible assets, net                                                                                                                                  |  |                  | 33,492  |                |   | 21,279 
|Other assets                                                                                                                                            |  |                  | 5,610   |                |   | 5,543  
|                                                                                                                                                        |  |                  |         |                |   |        
|Total assets                                                                                                                                            |  | $                | 894,443 |                | $ | 830,665
|                                                                                                                                                        |  |                  |         |                |   |        
|                                                                                                                                                        |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                    |  |                  |         |                |   |        
|                                                                                                                                                        |  |                 
|Current liabilities                                                                                                                                     |  |                  |         |                |   |        
|Current portion of long-term debt                                                                                                                       |  | $                | 6,959   |                | $ | 6,673  
|Accounts payable                                                                                                                                        |  |                  | 67,857  |                |   | 70,667 
|Deferred profit                                                                                                                                         |  |                  | 11,719  |                |   | 11,306 
|Accrued liabilities                                                                                                                                     |  |                  | 178,770 |                |   | 160,710
|                                                                                                                                                        |  |                  |         |                |   |        
|Total current liabilities                                                                                                                               |  |                  | 265,305 |                |   | 249,356
|Long-term debt                                                                                                                                          |  |                  | 28,750  |                |   | 30,000 
|Deferred taxes                                                                                                                                          |  |                  | 10,191  |                |   | 9,411  
|Other liabilities                                                                                                                                       |  |                  | 21,879  |                |   | 14,687 
|                                                                                                                                                        |  |                  |         |                |   |        
|Total liabilities                                                                                                                                       |  |                  | 326,125 |                |   | 303,454
|                                                                                                                                                        |  |                  |         |                |   |        
|Commitments and contingencies (Notes 9, 10, 12, and 15)                                                                                                 |  |                  |         |                |   |        
|                                                                                                                                                        |  |                 
|Stockholders equity                                                                                                                                    |  |                  |         |                |   |        
|Preferred stockpar value $0.01, authorized1,000 shares; issuednone                                                                                   |  |                  |        |                |   |       
|Common stockpar value $0.01, authorized99,000 shares; issued and outstanding 35,074 shares at December 31, 2004 and 34,838
shares at October 1, 2004 |  |                  | 261,819 |                |   | 257,083
|Retained earnings                                                                                                                                       |  |                  | 268,034 |                |   | 253,096
|Accumulated other comprehensive income                                                                                                                  |  |                  | 38,465  |                |   | 17,032 
|                                                                                                                                                        |  |                  |         |                |   |        
|Total stockholders equity                                                                                                                              |  |                  | 568,318 |                |   | 527,211
|                                                                                                                                                        |  |                  |         |                |   |        
|Total liabilities and stockholders equity                                                                                                              |  | $                | 894,443 |                | $ | 830,665
|                                                                                                                                                        |  |                  |         |                |   |        



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                    |  |                      |         |   |                |   |         |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------- | - | -------------- | - | ------- | -
|                                                                                    |  | Fiscal Quarter Ended |        
|                                                                                    |  | December 31,2004     |         |   | January 2,2004 |  
|Cash flows from operating activities                                                |  |                      |         |   |                |   |         |  
|Net earnings                                                                        |  | $                    | 14,938  |   |                | $ | 13,589  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                      |         |   |                |   |         |  
|Depreciation and amortization                                                       |  |                      | 7,204   |   |                |   | 6,306   |  
|Loss on disposition of property, plant, and equipment                               |  |                      | 69      |   |                |   | 37      |  
|Purchased in-process research and development                                       |  |                      | 700     |   |                |   |        |  
|Stock-based compensation expense                                                    |  |                      | 40      |   |                |   |        |  
|Tax benefit from stock option exercises                                             |  |                      | 900     |   |                |   | 3,716   |  
|Deferred taxes                                                                      |  |                      | (3,000  | ) |                |   |        |  
|Changes in assets and liabilities, excluding effects of acquisitions:               |  |                      |         |   |                |   |         |  
|Accounts receivable, net                                                            |  |                      | 21,914  |   |                |   | 6,713   |  
|Inventories                                                                         |  |                      | (337    | ) |                |   | (8,373  | )
|Other current assets                                                                |  |                      | (206    | ) |                |   | 4,647   |  
|Other assets                                                                        |  |                      | (610    | ) |                |   | 71      |  
|Accounts payable                                                                    |  |                      | (8,856  | ) |                |   | (2,112  | )
|Deferred profit                                                                     |  |                      | (520    | ) |                |   | (1,847  | )
|Accrued liabilities                                                                 |  |                      | (6,982  | ) |                |   | (6,882  | )
|Other liabilities                                                                   |  |                      | (416    | ) |                |   | (135    | )
|                                                                                    |  |                      |         |   |                |   |         |  
|Net cash provided by operating activities                                           |  |                      | 24,838  |   |                |   | 15,730  |  
|                                                                                    |  |                      |         |   |                |   |         |  
|                                                                                    |  |                     
|Cash flows from investing activities                                                |  |                      |         |   |                |   |         |  
|Proceeds from sale of property, plant, and equipment                                |  |                      | 77      |   |                |   | 56      |  
|Purchase of property, plant, and equipment                                          |  |                      | (6,517  | ) |                |   | (4,359  | )
|Purchase of businesses, net of cash acquired                                        |  |                      | (25,198 | ) |                |   |        |  
|                                                                                    |  |                      |         |   |                |   |         |  
|Net cash used in investing activities                                               |  |                      | (31,638 | ) |                |   | (4,303  | )
|                                                                                    |  |                      |         |   |                |   |         |  
|                                                                                    |  |                     
|Cash flows from financing activities                                                |  |                      |         |   |                |   |         |  
|Repayment of debt                                                                   |  |                      | (1,250  | ) |                |   | (1,565  | )
|Issuance of debt                                                                    |  |                      |        |   |                |   | 1,831   |  
|Repurchase of common stock                                                          |  |                      |        |   |                |   | (2,478  | )
|Issuance of common stock                                                            |  |                      | 3,796   |   |                |   | 8,997   |  
|Transfers to Varian Medical Systems, Inc.                                           |  |                      | (406    | ) |                |   | (326    | )
|                                                                                    |  |                      |         |   |                |   |         |  
|Net cash provided by financing activities                                           |  |                      | 2,140   |   |                |   | 6,459   |  
|                                                                                    |  |                      |         |   |                |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                       |  |                      | 9,218   |   |                |   | 4,531   |  
|                                                                                    |  |                      |         |   |                |   |         |  
|Net increase in cash and cash equivalents                                           |  |                      | 4,558   |   |                |   | 22,417  |  
|Cash and cash equivalents at beginning of period                                    |  |                      | 184,982 |   |                |   | 135,791 |  
|                                                                                    |  |                      |         |   |                |   |         |  
|Cash and cash equivalents at end of period                                          |  | $                    | 189,540 |   |                | $ | 158,208 |  
|                                                                                    |  |                      |         |   |                |   |         |  
|                                                                                    |  |                     
|Supplemental cash flow information                                                  |  |                      |         |   |                |   |         |  
|Income taxes paid, net of refunds received                                          |  | $                    | 4,066   |   |                | $ | 4,595   |  
|                                                                                    |  |                      |         |   |                |   |         |  
|Interest paid                                                                       |  | $                    | 560     |   |                | $ | 597     |  
|                                                                                    |  |                      |         |   |                |   |         |  



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1.    Unaudited Interim Condensed Consolidated Financial Statements



These unaudited interim condensed consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the Company)
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 United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The October 1, 2004 balance sheet data was derived from audited financial statements, but does not include
all disclosures required in audited financial statements by GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended October 1, 2004 filed with the SEC. In the opinion of the Companys management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter ended December 31, 2004 are not necessarily indicative of the results to be expected for a full year or for any other
periods.



The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.



Note 2.    Description of Business and Basis of Presentation



The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum products and services, and contract electronics
manufacturing services. These businesses primarily serve life science, industrial, academic, and research customers. Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian Associates, Inc.
(VAI). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company and one share of common stock of Varian Semiconductor Equipment Associates, Inc. (VSEA), which was formerly
operated as the Semiconductor Equipment business of VAI, for each share of VAI (the Distribution). At the same time, VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (VMS).
Transfers made to VMS pursuant to the terms of the Distribution are reflected as financing activities in the Unaudited Condensed Consolidated Statement of Cash Flows.



Note 3.    Summary of Significant Accounting Policies



Fiscal Periods. The Companys fiscal years reported are the 52-
or 53-week periods ending on the Friday nearest September 30. Fiscal year 2005 will comprise the 52-week period ending September 30, 2005, and fiscal year 2004 was comprised of the 52-week period ended October 1, 2004. The fiscal quarters ended
December 31, 2004 and January 2, 2004 each comprised 13 weeks, respectively.



Stock-Based Compensation. The Company has adopted the pro forma disclosure provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No.
(SFAS) 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123. Accordingly, the Company
applies the intrinsic value method as prescribed by Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its employee stock compensation plans.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



If the Company had elected to recognize compensation cost based on the fair value of options granted
under its Omnibus Stock Plan and shares issued under its Employee Stock Purchase Plan (ESPP) as prescribed by SFAS 123, net earnings and net earnings per share would have been reduced to the pro forma amounts shown below:



|                                                                                                                                            |  |                      |        |   |                |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | -------------- | - | ------ | -
|                                                                                                                                            |  | Fiscal Quarter Ended |       
|                                                                                                                                            |  | December 31,2004     |        |   | January 2,2004 |  
|(in thousands, except per share amounts)                                                                                                    |  |                      |        |   |                |   |        |  
|Net earnings:                                                                                                                               |  |                      |        |   |                |   |        |  
|As reported                                                                                                                                 |  | $                    | 14,938 |   |                | $ | 13,589 |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                      | (1,230 | ) |                |   | (1,618 | )
|                                                                                                                                            |  |                      |        |   |                |   |        |  
|Pro forma                                                                                                                                   |  | $                    | 13,708 |   |                | $ | 11,971 |  
|                                                                                                                                            |  |                      |        |   |                |   |        |  
|Net earnings per share:                                                                                                                     |  |                      |        |   |                |   |        |  
|Basic  as reported                                                                                                                         |  | $                    | 0.43   |   |                | $ | 0.39   |  
|                                                                                                                                            |  |                      |        |   |                |   |        |  
|Basic  pro forma                                                                                                                           |  | $                    | 0.39   |   |                | $ | 0.35   |  
|                                                                                                                                            |  |                      |        |   |                |   |        |  
|Diluted  as reported                                                                                                                       |  | $                    | 0.42   |   |                | $ | 0.38   |  
|                                                                                                                                            |  |                      |        |   |                |   |        |  
|Diluted  pro forma                                                                                                                         |  | $                    | 0.38   |   |                | $ | 0.34   |  
|                                                                                                                                            |  |                      |        |   |                |   |        |  



Comprehensive
Income. A summary of the components of the Companys comprehensive income follows:



|                                                         |  |                      |        |                |   |       
|-------------------------------------------------------- |  | -------------------- | ------ | -------------- | - | ------
|                                                         |  | Fiscal Quarter Ended
|                                                         |  | December 31,2004     |        | January 2,2004
|(in thousands)                                           |  |                      |        |                |   |       
|Net earnings                                             |  | $                    | 14,938 |                | $ | 13,589
|Other comprehensive income:                              |  |                      |        |                |   |       
|Currency translation adjustment                          |  |                      | 20,317 |                |   | 11,593
|Minimum pension liability adjustment, net of tax of $478 |  |                      | 1,116  |                |   |      
|                                                         |  |                      |        |                |   |       
|Total other comprehensive income                         |  |                      | 21,433 |                |   | 11,593
|                                                         |  |                      |        |                |   |       
|Total comprehensive income                               |  | $                    | 36,371 |                | $ | 25,182
|                                                         |  |                      |        |                |   |       



Note
4.    Balance Sheet Detail



|                        |  |                  |         |                |   |        
|----------------------- |  | ---------------- | ------- | -------------- | - | -------
|                        |  | December 31,2004 |         | October 1,2004
|(In thousands)          |  |                  |         |                |   |        
|Inventories             |  |                  |         |                |   |        
|Raw materials and parts |  | $                | 75,382  |                | $ | 70,660 
|Work in process         |  |                  | 29,112  |                |   | 12,076 
|Finished goods          |  |                  | 60,996  |                |   | 52,608 
|                        |  |                  |         |                |   |        
|                        |  | $                | 165,490 |                | $ | 135,344
|                        |  |                  |         |                |   |        



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Note 5.    Forward Exchange Contracts



The Company enters into foreign exchange forward contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities denominated in non-functional currencies. These contracts are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The Company
records these contracts at fair value with the related gains and losses recorded in general and administrative expenses. The gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balance being
hedged.



From time to time, the Company also enters into
foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under SFAS 133. At December 31, 2004, there were no outstanding foreign
exchange forward contracts designated as cash flow hedges of forecasted transactions.



The Companys foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 31, 2004
follows:



|                  |  |                    |        |                         |   |       
|----------------- |  | ------------------ | ------ | ----------------------- | - | ------
|                  |  | Notional ValueSold |        | NotionalValue Purchased
|(in thousands)    |  |                    |        |                         |   |       
|Euro              |  | $                  |       |                         | $ | 54,265
|Australian dollar |  |                    |       |                         |   | 11,800
|Japanese yen      |  |                    | 4,216  |                         |   |      
|British pound     |  |                    | 220    |                         |   |      
|Danish krona      |  |                    | 1,178  |                         |   |      
|Canadian dollar   |  |                    | 5,730  |                         |   |      
|Swedish krona     |  |                    | 717    |                         |   |      
|                  |  |                    |        |                         |   |       
|                  |  | $                  | 12,061 |                         | $ | 66,065
|                  |  |                    |        |                         |   |       



Note
6.    Goodwill and Other Intangible Assets



Changes in the carrying amount of goodwill for each of the Companys reporting segments in the first quarter of fiscal year 2005 were as follows:



|                                               |  |                       |         |                    |   |                          |  |              |       |  |   |        
|---------------------------------------------- |  | --------------------- | ------- | ------------------ | - | ------------------------ |  | ------------ | ----- |  | - | -------
|                                               |  | ScientificInstruments |         | VacuumTechnologies |   | ElectronicsManufacturing |  | TotalCompany
|(in thousands)                                 |  |                       |         |                    |   |                          |  |              |       |  |   |        
|Balance as of October 1, 2004                  |  | $                     | 128,373 |                    | $ | 966                      |  | $            | 2,102 |  | $ | 131,441
|Fiscal year 2005 acquisition (Note 15)         |  |                       | 15,984  |                    |   |                         |  |              |      |  |   | 15,984 
|Foreign currency impacts and other adjustments |  |                       | 523     |                    |   |                         |  |              |      |  |   | 523    
|                                               |  |                       |         |                    |   |                          |  |              |       |  |   |        
|Balance as of December 31, 2004                |  | $                     | 144,880 |                    | $ | 966                      |  | $            | 2,102 |  | $ | 147,948
|                                               |  |                       |         |                    |   |                          |  |              |       |  |   |        



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



The following intangible assets have been recorded and are being amortized by the Company:



|                            |  |                   |        |                         |   |        |     |  |   |       
|--------------------------- |  | ----------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                            |  | December 31, 2004
|                            |  | Gross             |        | AccumulatedAmortization |   |        | Net
|(in thousands)              |  |                   |        |                         |   |        |     |  |   |       
|Intangible assets           |  |                   |        |                         |   |        |     |  |   |       
|Existing technology         |  | $                 | 10,172 |                         | $ | (3,344 | )   |  | $ | 6,828 
|Patents and core technology |  |                   | 18,547 |                         |   | (1,571 | )   |  |   | 16,976
|Trade names and trademarks  |  |                   | 2,176  |                         |   | (721   | )   |  |   | 1,455 
|Customer lists              |  |                   | 9,305  |                         |   | (2,313 | )   |  |   | 6,992 
|Other                       |  |                   | 2,653  |                         |   | (1,412 | )   |  |   | 1,241 
|                            |  |                   |        |                         |   |        |     |  |   |       
|                            |  | $                 | 42,853 |                         | $ | (9,361 | )   |  | $ | 33,492
|                            |  |                   |        |                         |   |        |     |  |   |       
|                            | 
|                            |  | October 1, 2004  
|                            |  | Gross             |        | AccumulatedAmortization |   |        | Net
|(in thousands)              |  |                   |        |                         |   |        |     |  |   |       
|Intangible assets           |  |                   |        |                         |   |        |     |  |   |       
|Existing technology         |  | $                 | 10,172 |                         | $ | (2,988 | )   |  | $ | 7,184 
|Patents and core technology |  |                   | 6,777  |                         |   | (1,066 | )   |  |   | 5,711 
|Trade names and trademarks  |  |                   | 2,176  |                         |   | (654   | )   |  |   | 1,522 
|Customer lists              |  |                   | 7,505  |                         |   | (1,806 | )   |  |   | 5,699 
|Other                       |  |                   | 2,445  |                         |   | (1,282 | )   |  |   | 1,163 
|                            |  |                   |        |                         |   |        |     |  |   |       
|                            |  | $                 | 29,075 |                         | $ | (7,796 | )   |  | $ | 21,279
|                            |  |                   |        |                         |   |        |     |  |   |       



Amortization expense
relating to intangible assets was $1.5 million and $0.7 million during the fiscal quarters ended December 31, 2004 and January 2, 2004, respectively. At December 31, 2004, estimated amortization expense for the remainder of fiscal 2005 and for each
of the five succeeding fiscal years and thereafter follows:



|                                      |  |                              |       
|------------------------------------- |  | ---------------------------- | ------
|                                      |  | EstimatedAmortizationExpense
|(in thousands)                        |  |                              |       
|Nine months ending September 30, 2005 |  | $                            | 4,949 
|Fiscal year 2006                      |  |                              | 6,319 
|Fiscal year 2007                      |  |                              | 5,719 
|Fiscal year 2008                      |  |                              | 4,896 
|Fiscal year 2009                      |  |                              | 4,100 
|Fiscal year 2010                      |  |                              | 3,776 
|Thereafter                            |  |                              | 3,733 
|                                      |  |                              |       
|Total                                 |  | $                            | 33,492
|                                      |  |                              |       



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Note 7.    Restructuring Activities



Fiscal Year 2005 Plan. During the first quarter of fiscal year 2005,
the Company undertook certain restructuring actions to rationalize its Scientific Instruments field support administration in the United Kingdom following the completion of the Companys acquisition of Magnex Scientific Limited
(Magnex). These actions were undertaken to achieve operational efficiencies and eliminate redundant costs resulting from the acquisition which involved the termination of approximately 20 employees, the consolidation of certain field
support administrative functions currently located in the Companys Walton, U.K. location to Magnexs location in Oxford, U.K., and the closure of the Walton facility. Restructuring and other-related costs relating to this plan are
expected to be recorded and included in general and administrative expenses.



The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:



|                             |  |                  |     |                     |   |       |  |   |    
|---------------------------- |  | ---------------- | --- | ------------------- | - | ----- |  | - | ---
|                             |  | Employee-Related |     | Facilities- Related |   | Total
|(in thousands)               |  |                  |     |                     |   |       |  |   |    
|Balance at October 1, 2004   |  | $                |    |                     | $ |      |  | $ |   
|Charges to expense           |  |                  | 270 |                     |   |      |  |   | 270
|                             |  |                  |     |                     |   |       |  |   |    
|Balance at December 31, 2004 |  | $                | 270 |                     | $ |      |  | $ | 270
|                             |  |                  |     |                     |   |       |  |   |    



In addition to the
foregoing restructuring costs, the Company incurred approximately $0.1 million in other costs relating directly to the consolidation of certain field support administrative functions from the Companys Walton location to Magnexs location
in Oxford during the first quarter of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs which will be settled
in cash.



Fiscal Year 2004 Plans. During fiscal year
2004, the Company undertook certain restructuring actions to reorganize the management structure in its Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of
these factories and involved the termination of three employees. These actions were initiated in the fourth quarter of fiscal year 2004. All severance and other employee-related costs relating to this restructuring plan were initially recorded and
included in general and administrative expenses in the fourth quarter of fiscal year 2004. This restructuring plan did not involve any non-cash components.



The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during the first quarter of fiscal
year 2005:



|                                               |  |                  |     |   |                     |   |       |  |   |     |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------- | - | ----- |  | - | --- | -
|                                               |  | Employee-Related |     |   | Facilities- Related |   | Total | 
|(in thousands)                                 |  |                  |     |   |                     |   |       |  |   |     |  
|Balance at October 1, 2004                     |  | $                | 665 |   |                     | $ |      |  | $ | 665 |  
|Charges to expense                             |  |                  | 335 |   |                     |   |      |  |   | 335 |  
|Cash payments                                  |  |                  | (23 | ) |                     |   |      |  |   | (23 | )
|Foreign currency impacts and other adjustments |  |                  | 21  |   |                     |   |      |  |   | 21  |  
|                                               |  |                  |     |   |                     |   |       |  |   |     |  
|Balance at December 31, 2004                   |  | $                | 998 |   |                     | $ |      |  | $ | 998 |  
|                                               |  |                  |     |   |                     |   |       |  |   |     |  



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Also during fiscal year 2004, the Company committed to a separate plan to reorganize the Scientific
Instruments and corporate marketing organizations and to consolidate certain Scientific Instruments administrative functions in North America. This plan, which involved the termination of approximately 20 employees, was undertaken to more
closely align the strategic and operational focus of these organizations across different product lines and to improve efficiency and reduce operating costs. These actions were initiated in the fourth quarter of fiscal year 2004 and are expected to
be completed by the end of the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in general and administrative expenses. This restructuring
plan did not involve any non-cash components.



The following
table sets forth changes in the Companys liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:



|                             |  |                  |      |   |                     |   |       |  |   |      |  
|---------------------------- |  | ---------------- | ---- | - | ------------------- | - | ----- |  | - | ---- | -
|                             |  | Employee-Related |      |   | Facilities- Related |   | Total | 
|(in thousands)               |  |                  |      |   |                     |   |       |  |   |      |  
|Balance at October 1, 2004   |  | $                | 859  |   |                     | $ |      |  | $ | 859  |  
|Reversals of expense, net    |  |                  | (11  | ) |                     |   |      |  |   | (11  | )
|Cash payments                |  |                  | (224 | ) |                     |   |      |  |   | (224 | )
|                             |  |                  |      |   |                     |   |       |  |   |      |  
|Balance at December 31, 2004 |  | $                | 624  |   |                     | $ |      |  | $ | 624  |  
|                             |  |                  |      |   |                     |   |       |  |   |      |  



Fiscal Year 2003
Plan. During fiscal year 2003, the Company undertook certain restructuring actions to improve efficiency and more closely align employee skill sets and other resources with the Companys evolving product mix as a result of the
Companys continued emphasis on nuclear magnetic resonance (NMR), mass spectroscopy, and consumable products, with a bias toward life science applications. In addition, actions were undertaken to create a more efficient consumable
products operation. These actions primarily impacted the Scientific Instruments segment and involved the termination of approximately 160 employees (principally in sales and marketing, administration, service, and manufacturing functions), the
closure of three sales offices, and the consolidation of three consumable products factories into one in Southern California. Substantially all of these activities were completed during fiscal year 2003 except for the termination of approximately 20
employees, which took place in the second and third quarters of fiscal year 2004, and the Southern California facility consolidation, which was initiated in the third quarter of fiscal year 2003 and was substantially completed in the first quarter
of fiscal year 2005. Costs relating to restructuring activities recorded under this plan through the first quarter of fiscal year 2005 were included in general and administrative expenses.



The following table sets forth changes in the Companys liability
relating to the foregoing restructuring activities during the first quarter of fiscal year 2005:



|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------- | - | ---- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |     |   | Facilities- Related |   |      | Total | 
|(in thousands)                                 |  |                  |     |   |                     |   |      |       |  |   |       |  
|Balance at October 1, 2004                     |  | $                | 149 |   |                     | $ | 830  |       |  | $ | 979   |  
|Charges to expense, net                        |  |                  |    |   |                     |   | 402  |       |  |   | 402   |  
|Cash payments                                  |  |                  | (63 | ) |                     |   | (296 | )     |  |   | (359  | )
|Foreign currency impacts and other adjustments |  |                  | 1   |   |                     |   | 16   |       |  |   | 17    |  
|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  
|Balance at December 31, 2004                   |  | $                | 87  |   |                     | $ | 952  |       |  | $ | 1,039 |  
|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  



The non-cash portion
of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



In addition to the foregoing restructuring costs, the Company incurred approximately $0.1 million in
other costs relating directly to the Southern California facility consolidation during the first quarter of fiscal year 2005. These costs primarily related to non-cash charges for accelerated depreciation of assets to be disposed of upon the closure
of the facilities.



Note 8.    Net Earnings Per Share



Basic earnings per share are calculated based on net
earnings and the weighted-average number of shares of common stock outstanding during the reported period. Diluted earnings per share include dilution from potential shares of common stock issuable pursuant to the exercise of outstanding stock
options determined using the treasury stock method.



For the
fiscal quarters ended December 31, 2004 and January 2, 2004, options to purchase approximately 618,000 and 73,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.



A reconciliation of weighted-average basic shares outstanding to
weighted-average diluted shares outstanding follows:



|                                            |  |                      |  |               
|------------------------------------------- |  | -------------------- |  | --------------
|                                            |  | Fiscal Quarter Ended
|                                            |  | December 31,2004     |  | January 2,2004
|(in thousands)                              |  |                      |  |               
|Weighted-average basic shares outstanding   |  | 34,965               |  | 34,440        
|Net effect of dilutive stock options        |  | 739                  |  | 1,218         
|                                            |  |                      |  |               
|Weighted-average diluted shares outstanding |  | 35,704               |  | 35,658        
|                                            |  |                      |  |               



Note 9.    Debt
and Credit Facilities



Credit Facilities. During
fiscal year 2003, the Company established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.9 million at December 31, 2004). The credit facility is available to the Companys wholly owned Japanese
subsidiary for working capital purposes. As of December 31, 2004, no amounts were outstanding under this credit facility and 300 million yen (approximately $2.9 million) was available for future borrowing. This credit facility contains certain
covenants that limit future borrowings from this facility, with which the Company was in compliance at December 31, 2004.



In addition to these bank credit facilities, as of December 31, 2004, the Company and its subsidiaries had a total of $87.4 million in other uncommitted
and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 31, 2004. All of these credit facilities contain
certain customary conditions and events of default, with which the Company was in compliance at December 31, 2004. Of the $87.4 million in uncommitted and unsecured credit facilities, a total of $52.9 million was limited for use by, or in favor of,
certain subsidiaries at December 31, 2004, and a total of $15.4 million of this $52.9 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to
advance payments or deposits made to the Companys subsidiaries by customers for which separate liabilities were recorded in the unaudited condensed consolidated financial statements at December 31, 2004. No amounts had been drawn by
beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Long-term Debt. As of December 31, 2004, the Company had $31.2 million in term loans
outstanding compared to $32.5 million at October 1, 2004. As of both December 31, 2004 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both
December 31, 2004 and October 1, 2004. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in
compliance with all restrictive covenants of the term loan agreements at December 31, 2004. The Company also had other long-term notes payable of $4.5 million as of December 31, 2004 with a weighted-average interest rate of 0.0% and $4.2 million as
of October 1, 2004 with a weighted-average interest rate of 0.0%.



The following table summarizes future principal payments on borrowings under long-term debt outstanding as of December 31, 2004:



|                                          |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|----------------------------------------- |  | ----------------------------- | ----- | ------------ | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                          |  | NineMonthsEndingSept. 30,2005 |       | Fiscal Years |      |      
|                                          |  |                               | 2006  |              | 2007 |       | 2008 |   | 2009  |  | 2010 |       | Thereafter |   | Total
|(in thousands)                            |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Long-term debt(including current portion) |  | $                             | 5,709 |              | $    | 2,500 |      | $ | 2,500 |  | $    | 6,250 |            | $ |      |  | $ | 6,250 |  | $ | 12,500 |  | $ | 35,709
|                                          |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       



Note
10.    Warranty and Indemnification Obligations



Product Warranties. The Companys products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time
the related sale is recognized. The amount of liability to be recorded is based on managements best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. Changes in the
Companys estimated liability for product warranty during the fiscal quarters ended December 31, 2004 and January 2, 2004 follow:



|                                        |  |                      |        |   |                |   |        |  
|--------------------------------------- |  | -------------------- | ------ | - | -------------- | - | ------ | -
|                                        |  | Fiscal Quarter Ended |       
|                                        |  | December 31,2004     |        |   | January 2,2004 |  
|(in thousands)                          |  |                      |        |   |                |   |        |  
|Beginning balance                       |  | $                    | 10,475 |   |                | $ | 10,261 |  
|Charges to costs and expenses           |  |                      | 2,496  |   |                |   | 1,373  |  
|Warranty expenditures                   |  |                      | (1,865 | ) |                |   | (1,290 | )
|Acquired warranty liabilities (Note 15) |  |                      | 1,742  |   |                |   |       |  
|                                        |  |                      |        |   |                |   |        |  
|Ending balance                          |  | $                    | 12,848 |   |                | $ | 10,344 |  
|                                        |  |                      |        |   |                |   |        |  



Indemnification
Obligations. FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires a guarantor to recognize a liability for
and/or disclose obligations it has undertaken in relation to the issuance of the guarantee. Under this guidance, arrangements involving indemnification clauses are subject to the disclosure requirements of FIN 45 only.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



The Company is subject to certain indemnification obligations to VMS (formerly VAI) and VSEA in
connection with the Instruments business as conducted by VAI prior to the Distribution. These indemnification obligations cover a variety of aspects of the Companys business, including, but not limited to, employee, tax, intellectual property,
litigation, and environmental matters. The agreements containing these indemnification obligations are disclosed as exhibits to the Companys Annual Report on Form 10-K. The estimated fair value of these indemnification obligations is not
considered to be material.



The Companys By-Laws require
it to indemnify its officers and directors, as well as those who act as directors and officers of other entities at the request of the Company, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceedings arising out of their services to the Company. In addition, the Company has entered into separate indemnity agreements with each director and officer that provide for indemnification of these directors and officers
under certain circumstances. The form of these indemnity agreements is disclosed as an exhibit to the Companys Annual Report on Form 10-K. The indemnification obligations are more fully described in the By-Laws and the indemnification
agreements. The Company purchases insurance to cover claims or a portion of any claims made against its directors and officers. Since a maximum obligation is not explicitly stated in the Companys By-Laws or these indemnity agreements and will
depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not made payments related to these indemnification obligations,
and the estimated fair value of these indemnification obligations is not considered to be material.



As is customary in the Companys industry and as provided for in local law in the U.S. and other jurisdictions, many of the Companys standard
contracts provide remedies to customers and other third parties with whom the Company enters into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. From time to time,
the Company also agrees to indemnify customers, suppliers, contractors, lessors, lessees, and others with whom it enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale
and the use of the Companys products and services, the use of their goods and services, the use of facilities and state of Company-owned facilities, and other matters covered by such contracts, usually up to a specified maximum amount. In
addition, from time to time, the Company sometimes also agrees to indemnify these parties against claims related to undiscovered liabilities, additional product liability, or environmental obligations. Claims made under such indemnification
obligations have been insignificant and the estimated fair value of these indemnification obligations is not considered to be material.



Note 11.    Common Stock



Stock-Based Compensation.In November 2004, the Company granted 24,850 shares of unvested common stock to its executive officers under the
Companys Omnibus Stock Plan. These shares, which were issued upon grant, remain restricted for three years from the grant date and will vest only if the employee is still actively employed by the Company on the vesting date. An aggregate of
approximately $0.9 million, representing the fair market value of the unvested shares on the date of the grant, was recorded as deferred compensation (included as a component of stockholders equity) and is being recognized by the Company as
stock-based compensation expense ratably over the three-year vesting period. During the fiscal quarter ended December 31, 2004, the Company recognized approximately $40,000 in stock-based compensation expense relating to these unvested stock
grants.



Stock Repurchase Program. During fiscal
year 2004, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007. During the fiscal quarter ended December 31, 2004, there were no shares repurchased under this
authorization. As of December 31, 2004, the Company had remaining authorization for future repurchases of approximately 808,000 shares.



14



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Note 12.    Contingencies



Environmental Matters. The Companys operations are subject to various foreign, federal, state, and local laws
regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Companys operations. However, the Company does not
currently anticipate that its compliance with these regulations will have a material effect on the Companys capital expenditures, earnings, or competitive position.



The Company and VSEA are each obligated (pursuant to the terms of the Distribution) to indemnify VMS for one-third of
certain costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs) relating to environmental matters. In that regard, VMS has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at nine sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or
disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring, and/or remediation activities under the direction of, or in consultation with, foreign, federal, state, and/or local
agencies at certain current VMS or former VAI facilities. The Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds
and taxes).



For certain of these sites and facilities, various
uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 31, 2004, it was nonetheless estimated that the
Companys share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are
expected to be incurred varies with each site and facility, ranging up to approximately 13 years as of December 31, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other
amount in such range, and the Company therefore had an accrual of $1.3 million as of December 31, 2004.



As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future
environmental-related activities. As of December 31, 2004, it was estimated that the Companys share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $4.7 million to $15.8
million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 31, 2004. As to each of these sites and
facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future
costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at December 31, 2004. The Company therefore had an accrual of $4.6 million as of December 31, 2004, which represents the best estimate of its
share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.



The foregoing amounts 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, monitoring, and remediation activities and the large number of
sites where such investigation, monitoring, and remediation activities are being undertaken.



15



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



An insurance company has agreed to pay a portion of certain of VAIs (now VMS) future
environmental-related costs for which the Company has an indemnification obligation, and the Company therefore has a short-term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of inflation) in
other assets as of December 31, 2004 for the Companys share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.



Management believes that the Companys reserves for the foregoing and
other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges against or credits to earnings may be made. Although any ultimate liability
arising from environmental-related matters could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Companys financial statements, the likelihood of such occurrence
is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of environmental-related matters are not reasonably likely
to have a material adverse effect on the Companys financial condition or results of operations.



Legal Proceedings. The Company is involved in pending legal proceedings that are ordinary, routine and incidental to its business. While the
ultimate outcome of these legal matters is not determinable, the Company believes that these matters are not reasonably likely to have a material adverse effect on the Companys financial condition or results of operations.



Note 13.    Defined Benefit Retirement Plans



Net Periodic Pension Cost. The components of net periodic pension
cost relating to the Companys defined benefit retirement plans follow:



|                                                                  |  |                      |       |   |                 |   |      |  
|----------------------------------------------------------------- |  | -------------------- | ----- | - | --------------- | - | ---- | -
|                                                                  |  | Fiscal Quarter Ended |      
|                                                                  |  | December 31,2004     |       |   | January 2, 2004 |  
|(in thousands)                                                    |  |                      |       |   |                 |   |      |  
|Service cost, net of plan participant contributions               |  | $                    | 289   |   |                 | $ | 724  |  
|Interest cost                                                     |  |                      | 810   |   |                 |   | 750  |  
|Expected return on plan assets                                    |  |                      | (806  | ) |                 |   | (712 | )
|Amortization of prior service cost and actuarial gains and losses |  |                      | 50    |   |                 |   | 157  |  
|Settlement loss                                                   |  |                      | 1,477 |   |                 |   |     |  
|                                                                  |  |                      |       |   |                 |   |      |  
|Net periodic pension cost                                         |  | $                    | 1,820 |   |                 | $ | 919  |  
|                                                                  |  |                      |       |   |                 |   |      |  



Defined Benefit
Pension Plan Settlement. During the first quarter of fiscal year 2005, the Company settled a defined benefit pension plan in Australia, which resulted in a settlement loss of approximately $1.5 million. This loss offset a net curtailment gain of
approximately $1.2 million recorded relating to this pension plan in the third and fourth quarters of fiscal year 2004.



Employer Contributions. During the first quarter of fiscal year 2005, the Company made contributions totaling $0.2 million to its defined benefit
pension plans. The Company currently anticipates contributing an additional $0.7 million to these plans in fiscal year 2005.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Note 14.    Industry Segments



The Companys operations are grouped into three business segments:
Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The Scientific Instruments segment designs, develops, manufactures, sells, and services equipment and consumable laboratory supplies for a broad range of life science and
chemical analysis applications requiring identification, quantification, and analysis of the composition or structure of liquids, solids, or gases. The Vacuum Technologies segment designs, develops, manufactures, sells, and services high-vacuum
pumps, leak detection equipment, and related products and services used to create, contain, control, measure, and test vacuum environments in a broad range of life science, industrial, and scientific applications requiring ultra-clean or high-vacuum
environments. The Electronics Manufacturing segment provides contract electronics manufacturing services, including design, support, manufacturing, and post-manufacturing services, of electronic assemblies and subsystems for a wide range of
customers, in particular small- and medium-sized companies with low- to medium-volume, high-mix requirements.



These segments were determined based on how management views and evaluates the Companys operations as required by SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. Management also views and evaluates as its core business the combined operations of the Companys Scientific Instruments and Vacuum Technologies segments.



General corporate costs include shared costs of legal, tax, accounting, human
resources, real estate, information technology, treasury, insurance, and other management costs. A portion of the indirect and common costs has been allocated to the segments through the use of estimates. Also, transactions between segments are
accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but might not be indicative of the financial results of the reported segments were they
independent organizations. In addition, comparisons of the Companys operations to similar operations of other companies might not be meaningful.



|                          |  |                      |       |                      |   |                  |  |   |                |   |  |   |      |  
|------------------------- |  | -------------------- | ----- | -------------------- | - | ---------------- |  | - | -------------- | - |  | - | ---- | -
|                          |  | Sales                |       | Pretax Earnings      |  
|                          |  | Fiscal Quarter Ended |       | Fiscal Quarter Ended |  
|                          |  | December 31,2004     |       | January 2,2004       |   | December 31,2004 |  |   | January 2,2004 |  
|(in millions)             |  |                      |       |                      |   |                  |  |   |                |   |  |   |      |  
|Scientific Instruments    |  | $                    | 156.0 |                      | $ | 134.1            |  | $ | 11.2           |   |  | $ | 12.7 |  
|Vacuum Technologies       |  |                      | 35.0  |                      |   | 31.3             |  |   | 6.2            |   |  |   | 4.8  |  
|Electronics Manufacturing |  |                      | 44.9  |                      |   | 47.1             |  |   | 4.6            |   |  |   | 5.1  |  
|                          |  |                      |       |                      |   |                  |  |   |                |   |  |   |      |  
|Total industry segments   |  |                      | 235.9 |                      |   | 212.5            |  |   | 22.0           |   |  |   | 22.6 |  
|General corporate         |  |                      |      |                      |   |                 |  |   | (3.6           | ) |  |   | (1.6 | )
|Interest income           |  |                      |      |                      |   |                 |  |   | 0.9            |   |  |   | 0.5  |  
|Interest expense          |  |                      |      |                      |   |                 |  |   | (0.6           | ) |  |   | (0.6 | )
|                          |  |                      |       |                      |   |                  |  |   |                |   |  |   |      |  
|Total                     |  | $                    | 235.9 |                      | $ | 212.5            |  | $ | 18.7           |   |  | $ | 20.9 |  
|                          |  |                      |       |                      |   |                  |  |   |                |   |  |   |      |  



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



Note 15.    Acquisitions



Magnex Scientific Limited. In November 2004, the Company acquired Magnex for approximately $32.3 million in cash and
assumed net debt, subject to certain net asset adjustments. The transaction also includes an opportunity for additional purchase price payments of up to $6.0 million over a three-year period, depending on the performance of the Magnex business
relative to certain financial targets. Magnex designs, develops, manufactures, sells, and services superconducting magnets for human and other magnetic resonance (MR) imaging, NMR, and Fourier Transform mass spectroscopy, and gradients
for MR microscopy. These magnets are used in the Companys NMR and MR imaging systems, and are also sold to original equipment manufacturers and end-users. The Magnex business became part of the Companys Scientific Instruments segment.



The Company allocated the purchase price paid for this
acquisition to the estimated fair value of assets acquired and liabilities assumed as follows:



|                                              |  |                 |       |  
|--------------------------------------------- |  | --------------- | ----- | -
|                                              |  | AmountAllocated |      
|(in millions)                                 |  |                 |       |  
|Accounts receivable, net                      |  | $               | 6.0   |  
|Inventories                                   |  |                 | 23.5  |  
|Other current assets                          |  |                 | 1.7   |  
|Property, plant, and equipment                |  |                 | 3.1   |  
|Goodwill                                      |  |                 | 16.0  |  
|Identified intangible assets                  |  |                 | 12.6  |  
|                                              |  |                 |       |  
|Total assets acquired                         |  |                 | 62.9  |  
|Liabilities assumed                           |  |                 | (31.3 | )
|                                              |  |                 |       |  
|Net assets acquired                           |  |                 | 31.6  |  
|Purchased in-process research and development |  |                 | 0.7   |  
|                                              |  |                 |       |  
|Total consideration                           |  | $               | 32.3  |  
|                                              |  |                 |       |  



The amounts allocated
to identified intangible assets are based upon a preliminary analysis which utilized the income approach, the royalty savings approach, and the cost approach to determine the fair value of significant identified intangible assets acquired in the
transaction. The identified intangible assets are being amortized using the straight-line method over their respective estimated useful lives (weighted average of 6.0 years). The amount allocated to in-process research and development (which was
immediately expensed) related to MR imaging products that were in the research and development stage at the time of the acquisition. Risk-adjusted discount rates ranging from 15.0% to 18.0% were applied to cash flow projections to determine the
present value of the different intangible assets including the in-process research and development.



The Magnex acquisition was accounted for using the purchase method of accounting. Accordingly, the unaudited condensed consolidated statement of earnings
for the fiscal quarter ended December 31, 2004 includes the results of operations of Magnex since the effective date of its purchase. Significant purchase accounting adjustments were made to conform Magnexs revenue recognition policy with the
Companys policy under U.S. GAAP (these adjustments are reflected in purchase price allocation set forth above). Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effect of
this acquisition was not material.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



The purchase price allocation for Magnex is preliminary pending finalization of the intangible asset
valuation, which is expected during the fiscal quarter ending April 1, 2005. Upon completion of this matter, any necessary adjustments will be made to the preliminary purchase price allocation and will result in corresponding adjustments to
goodwill.



Digilab Business. In September 2004, the
Company acquired certain assets of Digilab, LLC (the Digilab Business) for approximately $14.0 million in cash, subject to certain net asset adjustments. The transaction also includes an opportunity for an additional purchase price
payment of up to $10.0 million if the acquired product lines reach specific financial performance targets during the 12-month period following closing.



As a result of the completion of the final intangible asset valuation and certain other tasks completed during the first quarter of fiscal year 2005, certain adjustments
were made to the initial purchase price allocation to reflect the Companys final determination of the fair value of significant intangible assets acquired and to adjust certain other assets and liabilities. These adjustments, which primarily
impacted inventories, identified intangible assets and liabilities assumed had no impact on net assets acquired. After reflecting these adjustments, the allocation of the purchase price paid for this acquisition is now as follows:



|                                              |  |                 |      |  
|--------------------------------------------- |  | --------------- | ---- | -
|                                              |  | AmountAllocated |     
|(in millions)                                 |  |                 |      |  
|Accounts receivable, net                      |  | $               | 4.2  |  
|Inventories                                   |  |                 | 3.1  |  
|Other current assets                          |  |                 | 0.1  |  
|Property, plant, and equipment                |  |                 | 0.1  |  
|Goodwill                                      |  |                 | 3.7  |  
|Identified intangible assets                  |  |                 | 6.3  |  
|                                              |  |                 |      |  
|Total assets acquired                         |  |                 | 17.5 |  
|Liabilities assumed                           |  |                 | (3.6 | )
|                                              |  |                 |      |  
|Net assets acquired                           |  |                 | 13.9 |  
|Purchased in-process research and development |  |                 | 0.1  |  
|                                              |  |                 |      |  
|Total consideration                           |  | $               | 14.0 |  
|                                              |  |                 |      |  



Finalization of the
Digilab Business closing balance sheet, which is required for purposes of determining whether any net asset adjustments are necessary, has not yet been completed. This is expected to take place during the fiscal quarter ending April 1, 2005. Upon
completion of this matter, any necessary adjustments will be made to the preliminary purchase price allocation and will result in corresponding adjustments to goodwill.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



In connection with the Magnex and Digilab Business acquisitions, the Company has accrued but not yet
paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheet and/or to secure the sellers indemnification obligations. As of December 31, 2004, retained amounts for the
Magnex acquisition included $1.0 million relating to the closing balance sheet (which was paid during the second quarter of fiscal year 2005) and $6.0 million relating to the sellers indemnification obligations, which is due to be paid (or
received in the form of notes payable by the Company at the payees election) in two equal installments on the first and second anniversaries of the closing of that acquisition (net of any indemnification claims). The retained amount for the
Digilab Business acquisition, which is due to be paid during fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at December 31, 2004. In addition to these retained payments, the Company is, from time to time,
obligated to pay additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of December 31, 2004, up to a maximum of approximately $25.5 million could be payable
through fiscal year 2007 under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial performance
targets through fiscal year 2005, and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. The balance of approximately
$9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as
additional goodwill at the time they are earned.



Note
16.    Income Taxes



During the first
quarter of fiscal year 2005, the Company recorded a discrete, one-time reduction in income tax expense of approximately $3.0 million as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. This
reduction was partially offset by approximately $0.2 million increase in tax expense relating to a non-deductible purchased in-process research and development charge recorded during the same period.



Note 17.    Recent Accounting Pronouncements



In December 2003, the FASB issued a proposed amendment to SFAS 128,
Earnings per Share, to make it consistent with International Accounting Standard 33, Earningsper Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would
require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of
calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of
SFAS 128 that would not impact the Companys earnings per share calculations. The amended standard is expected to be issued in 2005 and when issued, the provisions of the final standard will be effective in 2005 and will require retrospective
application for all prior periods presented. Should the proposed statement be finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on the Companys financial condition or
results of operations.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, an amendment
of FASB Statements Nos. 123 and 95, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the
fair value of that companys equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates the Companies ability to account for share-based compensation transactions using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the
Consolidated Statement of Earnings. Under SFAS 123, the Company is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used
at date of adoption. The Company currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use of
the Black-Scholes option-pricing model. In addition, the adoption of SFAS 123 will require additional accounting related to the tax benefit on employee stock options and for stock issued under the Companys employee stock purchase plan. The
Company is required to adopt SFAS 123 in the fourth quarter of fiscal year 2005. The Company is evaluating the requirements of SFAS 123 and expects its adoption could have a material impact on the Companys results of operations.



In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment
of ARB No. 43, Chapter 4. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation
of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption
of SFAS 151 to have a material impact on its financial condition or results of operations.



In December 2004, the FASB issued FASB Staff Position No. (FSP) 109-1, Application of FASB 109, Accounting for Incomes Taxes, to the Tax Deduction on Qualified Production Activities provided by the
American Jobs Creation Act of 2004 (the Act). The Act, which became law in October 2004, provides for a special tax deduction on qualified domestic production activities income that is defined by the Act. The FASB has decided that
these amounts should be recorded as a special deduction, and recorded in the year earned. The Company has not yet determined the impact that the adoption of FSP 109-1 will have on its financial condition or results of operations.



Note 18.    Subsequent Events



Agreement to Sell Electronics Manufacturing Business. On February 4,
2005, the Company and Jabil Circuit, Inc. (Jabil) entered into an Asset Purchase Agreement (the Purchase Agreement) providing for the sale of substantially all of the assets of the Companys Electronics Manufacturing
segment (the Electronics Manufacturing Business) to Jabil. Under the terms of the Purchase Agreement, Jabil will pay to the Company $195 million in cash (subject to a working capital adjustment) and assume certain liabilities and
obligations of the Electronics Manufacturing Business at the closing of the transactions contemplated by the Purchase Agreement (the Closing). In addition, effective as of the Closing, the Company and Jabil will enter into a four-year
Supply Agreement pursuant to which Jabil will continue to supply certain products to the Company that are currently manufactured by the Electronics Manufacturing Business for the Company and its affiliates. Completion of the Purchase Agreement and
Closing are subject to customary closing conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Act, which is expected to occur within 30 days.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



For purposes of these unaudited condensed consolidated financial statements, the Electronics
Manufacturing Business has been classified and treated as held and used under SFAS 144, Accounting for the Disposal or Impairment of Long-Lived Assets. However, the Company expects to reclassify the Electronics Manufacturing Business as
discontinued operations under SFAS 144 for disclosure purposes in future periods. As of December 31, 2004, the carrying amounts of major classes of assets and liabilities included in these unaudited condensed consolidated financial statements
relating to the Electronics Manufacturing Business were as follows:



|                               |  |                |     
|------------------------------ |  | -------------- | ----
|                               |  | CarryingAmount
|(in millions)                  | 
|Assets                         |  |                |     
|Accounts receivable            |  | $              | 30.5
|Inventories                    |  |                | 37.8
|Other current assets           |  |                | 0.5 
|                               |  |                |     
|Total current assets           |  |                | 68.8
|Property, plant, and equipment |  |                | 22.9
|Goodwill                       |  |                | 2.1 
|                               |  |                |     
|Total assets                   |  | $              | 93.8
|                               |  |                |     
|Liabilities                    |  |                |     
|Accounts payable               |  | $              | 16.6
|Accrued liabilities            |  |                | 2.1 
|                               |  |                |     
|Total current liabilities      |  |                | 18.7
|Long-term liabilities          |  |                |    
|                               |  |                |     
|Total liabilities              |  | $              | 18.7
|                               |  |                |     



Stock Repurchase
Program. On February 4, 2005, the Companys Board of Directors conditionally approved a new authorization under which the Company may repurchase up to $145 million of its common stock. That repurchase authorization is contingent upon the
closing of the sale of the Electronics Manufacturing Business, and is effective until September 30, 2006. If that condition is satisfied, this new repurchase authorization will replace the prior repurchase authorization approved in May 2004
(purchases under which will not count toward the $145 million authorized under the new repurchase program).



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##### Table of Contents

Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations



Caution Regarding Forward-Looking Statements



Throughout this Report, and particularly in this Item 2Managements Discussion and Analysis of Financial Condition and Results of
Operations, there are forward-looking statements that are based upon our current expectations, estimates, and projections, and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some
cases, you can identify these statements by words such as may, might, will, should, expects, plans, anticipates, believes, estimates,
predicts, potential, or continue, and other similar terms. These forward-looking statements include those relating to the timing and amount of anticipated restructuring costs and related costs savings, our current
expectations relating to our effective income tax rate, anticipated capital expenditures and anticipated Sarbanes-Oxley Act Section 404 compliance costs.



We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These forward-looking
statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance, or achievements could differ materially from those expressed or implied by
the forward-looking statements. Some of the important factors that could cause our results to differ are discussed in Item 2Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors. We
encourage you to read those sections carefully.



Other risks
and uncertainties that could cause actual results to differ materially from those in our forward-looking statements include, but are not limited to, the following: whether we will succeed in new product development, release, commercialization,
performance, and acceptance; whether we can achieve continued growth in sales in life science applications; risks arising from the timing of shipments, installations, and the recognition of revenues on leading-edge nuclear magnetic resonance
(NMR) and magnetic resonance (MR) imaging systems and superconducting magnets; whether we can increase margins on newer leading-edge NMR and MR imaging systems and superconducting magnets; the impact of shifting product mix
on profit margins in the Scientific Instruments segment; whether we will see continued strong demand for vacuum products and increased demand for electronics manufacturing services; competitive products and pricing; economic conditions in our
product and geographic markets; whether we will see continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; whether we will see sustained
or improved market investment in capital equipment; whether we will see reduced demand from customers that operate in cyclical industries; the impact of any delay or reduction in government funding for research; our ability to successfully integrate
acquisitions; the actual cost of anticipated restructuring activities and their timing and impact on future costs; our ability to improve efficiency; the timing and amount of discrete income tax events; whether the actual cost of complying with the
requirements of Section 404 of the Sarbanes-Oxley Act will exceed our current estimates; and other risks detailed from time to time in our filings with the Securities and Exchange Commission. We disclaim any intent or obligation to update publicly
any forward-looking statements, whether in response to new information, future events, or otherwise.



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##### Table of Contents

Results of Operations



First Quarter of Fiscal Year 2005 Compared to First Quarter of Fiscal Year 2004



Segment Results



Our operations are grouped into three reportable business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The
following table presents comparisons of our sales and operating earnings for each of our segments and in total for the first quarters of fiscal years 2005 and 2004:



|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|------------------------------ |  | -------------------- | ----- | - | ------------------ | ---- | - | - | - | ----- | --------- |  | ---- | - |  | - | ---- | - |  | ----- | --
|                               |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |     
|                               |  | December 31,2004     |       |   | January 2, 2004    |      |  
|                               |  | $                    |       |   | % ofSales          |      |   | $ |   |       | % ofSales |  |      | $ |  |   | %    |  
|(dollars in millions)          |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Sales by Segment:              |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                    | 156.0 |   |                    |      |   |   | $ | 134.1 |           |  |      |   |  | $ | 21.9 |   |  | 16.3  | % 
|Vacuum Technologies            |  |                      | 35.0  |   |                    |      |   |   |   | 31.3  |           |  |      |   |  |   | 3.7  |   |  | 11.8  |   
|Electronics Manufacturing      |  |                      | 44.9  |   |                    |      |   |   |   | 47.1  |           |  |      |   |  |   | (2.2 | ) |  | (4.6  | ) 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                    | 235.9 |   |                    |      |   |   | $ | 212.5 |           |  |      |   |  | $ | 23.4 |   |  | 11.0  | % 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Operating Earnings by Segment: |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                    | 11.2  |   |                    | 7.2  | % |   | $ | 12.7  |           |  | 9.5  | % |  | $ | (1.5 | ) |  | (11.8 | )%
|Vacuum Technologies            |  |                      | 6.2   |   |                    | 17.6 |   |   |   | 4.8   |           |  | 15.4 |   |  |   | 1.4  |   |  | 27.4  |   
|Electronics Manufacturing      |  |                      | 4.6   |   |                    | 10.2 |   |   |   | 5.1   |           |  | 10.8 |   |  |   | (0.5 | ) |  | (9.8  | ) 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total segments                 |  |                      | 22.0  |   |                    | 9.3  |   |   |   | 22.6  |           |  | 10.7 |   |  |   | (0.6 | ) |  | (2.7  | ) 
|General corporate              |  |                      | (3.6  | ) |                    | (1.5 | ) |   |   | (1.6  | )         |  | (0.8 | ) |  |   | 2.0  |   |  | 114.0 |   
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                    | 18.4  |   |                    | 7.8  | % |   | $ | 21.0  |           |  | 9.9  | % |  | $ | (2.6 | ) |  | (12.4 | )%
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   



Scientific
Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe. Increased customer demand for our information rich detection products, particularly NMR and spectroscopy products, as
well as those obtained through the acquisitions of Magnex Scientific Limited (Magnex) in November 2004 and of a product line from Digilab LLC (the Digilab Business) in September 2004, drove higher sales volume in both life
science and industrial applications.



Scientific Instruments
operating earnings for the first quarters of fiscal years 2005 and 2004 reflect pretax restructuring and other related costs of $1.2 million and $0.2 million, respectively (see Restructuring Activities below), and acquisition-related
intangible amortization of $1.5 million and $0.7 million, respectively. In addition, operating earnings for the first quarter of fiscal year 2005 include the impact of an in-process research and development charge of $0.7 million as well as
amortization of $1.6 million related to inventory written up in connection with the acquisitions of Magnex and the Digilab Business. Excluding the impact of these items, the increase in operating earnings as a percentage of sales resulted primarily
from a favorable shift in overall product mix and efficiency improvements. The increase from these positive factors was partially offset by the adverse impact of higher sales of lower margin high-field NMR and MR imaging systems due in part to the
Magnex acquisition and transition costs relating to the Magnex and Digilab Business acquisitions on operating profit margins.



Vacuum Technologies. The increase in Vacuum Technologies sales resulted primarily from an increase in the volume of products sold, particularly
those serving life science applications. The increase in Vacuum Technologies operating earnings as a percentage of sales was primarily attributable to the positive impact of sales volume leverage and cost reduction initiatives on manufacturing costs
and operating expenses and a shift in product mix toward higher-margin products.



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Electronics Manufacturing. The decrease in Electronics Manufacturing sales was due to inventory
adjustments made by a large customer during the first quarter of fiscal year 2005. Excluding the impact of this customers inventory adjustments, sales increased primarily as a result of higher volume from industrial customers. The decrease in
Electronics Manufacturing operating earnings as a percentage of sales was primarily due to higher start-up costs relating to new business from both existing and new customers and a shift in product mix toward some lower-margin industrial equipment
products.



Consolidated Results



The following table presents comparisons of our sales and other selected
consolidated financial results for the first quarter of fiscal years 2005 and 2004:



|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|--------------------------------------------- |  | -------------------- | ----- | - | ------------------ | ----- | - | - | - | ----- | --------- |  | ----- | - |  | - | ---- | - |  | ----- | -
|                                              |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |      
|                                              |  | December 31, 2004    |       |   | January 2, 2004    |       |  
|                                              |  | $                    |       |   | % ofSales          |       |   | $ |   |       | % ofSales |  |       | $ |  |   | %    |  
|(dollars in millions, except per share data)  |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Sales                                         |  | $                    | 235.9 |   |                    | 100.0 | % |   | $ | 212.5 |           |  | 100.0 | % |  | $ | 23.4 |   |  | 11.0  | %
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Gross profit                                  |  | $                    | 87.8  |   |                    | 37.2  |   |   | $ | 79.8  |           |  | 37.5  |   |  | $ | 8.0  |   |  | 10.1  |  
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating expenses:                           |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Sales and marketing                           |  |                      | 39.9  |   |                    | 16.9  |   |   |   | 37.2  |           |  | 17.5  |   |  |   | 2.7  |   |  | 7.3   |  
|Research and development                      |  |                      | 12.8  |   |                    | 5.4   |   |   |   | 11.1  |           |  | 5.2   |   |  |   | 1.7  |   |  | 15.1  |  
|General and administrative                    |  |                      | 16.0  |   |                    | 6.8   |   |   |   | 10.5  |           |  | 4.9   |   |  |   | 5.5  |   |  | 52.8  |  
|Purchased in-process research and development |  |                      | 0.7   |   |                    | 0.3   |   |   |   |      |           |  |      |   |  |   | 0.7  |   |  | 100   |  
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Total operating expenses                      |  |                      | 69.4  |   |                    | 29.4  |   |   |   | 58.8  |           |  | 27.6  |   |  |   | 10.6 |   |  | 18.1  |  
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating earnings                            |  |                      | 18.4  |   |                    | 7.8   |   |   |   | 21.0  |           |  | 9.9   |   |  |   | (2.6 | ) |  | (12.4 | )
|Interest income                               |  |                      | 0.9   |   |                    | 0.3   |   |   |   | 0.5   |           |  | 0.2   |   |  |   | 0.4  |   |  | 69.7  |  
|Interest expense                              |  |                      | (0.6  | ) |                    | (0.2  | ) |   |   | (0.6  | )         |  | (0.3  | ) |  |   |     |   |  |      |  
|Income tax expense                            |  |                      | (3.8  | ) |                    | (1.6  | ) |   |   | (7.3  | )         |  | (3.4  | ) |  |   | (3.5 | ) |  | (48.0 | )
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Net earnings                                  |  | $                    | 14.9  |   |                    | 6.3   | % |   | $ | 13.6  |           |  | 6.4   | % |  | $ | 1.3  |   |  | 9.9   | %
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Net earnings per diluted share                |  | $                    | 0.42  |   |                    |       |   |   | $ | 0.38  |           |  |       |   |  | $ | 0.04 |   |  |       |  
|                                              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  



Sales. As shown
above, sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 16.3%, 11.8%, and (4.6%), respectively, compared to the prior-year quarter. The overall improvement in sales was
primarily attributable to continued acceptance of our newer products for both life science and industrial applications, including those obtained through the Magnex and Digilab Business acquisitions.



Geographically, sales in North America of $121.6 million, Europe of $77.3
million, and the rest of the world of $37.0 million in the first quarter of fiscal year 2005 represented increases of 1.3%, 29.1%, and 13.4%, respectively, compared to the first quarter of fiscal year 2004. Sales by all three segments increased
across all major geographic regions that they served except for sales by the Vacuum Technologies and Electronics Manufacturing segments into North America, which were flat and slightly lower, respectively. The decrease in Electronics Manufacturing
sales in North America in the first quarter of fiscal year 2005 was due to a large customers inventory adjustments in that period. These factors were more than offset by higher sales in North America by the Scientific Instruments segment. The
increase in Europe was driven by increased Scientific Instruments and Vacuum Technologies sales volume; in part, this reflects the currency effect of the stronger Euro in the first quarter of fiscal year 2005.



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##### Table of Contents

Gross Profit. Gross profit for the first quarter of fiscal year 2005 reflects the impact of $1.6
million in amortization expense related to inventory written up in connection with the Magnex and the Digilab Business acquisitions (this amount was included in cost of sales). Excluding the impact of this amortization, the increase in gross profit
percentage resulted from a shift in sales mix toward the Scientific Instruments and Vacuum Technologies segments, which have significantly higher gross profit margins than the Electronics Manufacturing segment, as well as sales volume leverage and a
shift in product mix to higher-margin products in the Vacuum Technologies segment. The increase in the gross profit percentage due to these factors was between one-half and one percent. This increase was partially offset by the impact of higher
sales of lower-margin leading edge NMR and MR imaging products within the Scientific Instruments segment in the first quarter of fiscal year 2005 due in part to the Magnex acquisition. The decrease in gross profit percentage from this was less than
one-half of one percent.



Sales and Marketing. The
decrease in sales and marketing expenses as a percentage of sales resulted primarily from higher sales volume leverage and the positive effects of efficiency improvements in the first quarter of fiscal year 2005. In absolute dollars, the increase in
sales and marketing expenses primarily related to the acquisitions of Magnex and the Digilab Business and the impact of the weaker U.S. dollar, which increased costs for most of our non-U.S. operations.



Research and Development. The increase in research and development as
a percentage of sales was due primarily to our continued focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications, including costs relating to the acquisitions
of Magnex and the Digilab Business. The weaker U.S. dollar also contributed to the increase, as the costs of certain non-U.S. based research and development resources were higher.



General and Administrative. General and administrative expenses for the first quarter of fiscal year 2005 included
approximately $1.2 million in pretax restructuring and other related costs, approximately $1.5 in amortization expense relating to acquisition-related intangible assets, and a pretax loss of approximately $1.5 million relating to the settlement
of a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in second half of fiscal year 2004). In comparison, general and administrative
expenses for the first quarter of fiscal year 2004 included approximately $0.2 million in pretax restructuring costs and approximately $0.7 million in acquisition-related intangible amortization. Excluding the impact of these items, the increase in
general and administrative expenses as a percentage of sales was primarily due to general and administrative costs relating to the acquisitions of Magnex and the Digilab Business, higher Sarbanes-Oxley compliance costs, and the impact of the weaker
U.S. dollar, which increased costs for most of our non-U.S. operations.



We currently anticipate that general and administrative expenses will continue to be adversely impacted for the remainder of fiscal year 2005 by high initial costs to comply with the requirements of Section 404 of the Sarbanes-Oxley Act.



Purchased In-Process Research and Development. In
connection with the Magnex acquisition in November 2004, we recorded a one-time charge of approximately $0.7 million for purchased in-process research and development relating to several MR imaging products that were in process at the time the
acquisition was completed. No such charges were recorded in the first quarter of fiscal year 2004.



Restructuring Activities.



Fiscal Year 2005 Plan. During the first quarter of fiscal year 2005, we undertook certain restructuring actions to rationalize our Scientific
Instruments field support administration in the United Kingdom following the completion of our acquisition of Magnex. These actions were undertaken to achieve operational efficiencies and eliminate redundant costs resulting from the acquisition
which involved the termination of approximately 20 employees, the consolidation of certain field support administrative functions currently located in our Walton, U.K. location to Magnexs location in Oxford, U.K. and the closure of the
Walton facility. Restructuring and other-related costs relating to this plan are expected to be included in general and administrative expenses.



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##### Table of Contents

The following table sets forth changes in our liability relating to the foregoing restructuring plan
during the first quarter of fiscal year 2005:



|                             |  |                  |     |                     |   |       |  |   |    
|---------------------------- |  | ---------------- | --- | ------------------- | - | ----- |  | - | ---
|                             |  | Employee-Related |     | Facilities- Related |   | Total
|(in thousands)               |  |                  |     |                     |   |       |  |   |    
|Balance at October 1, 2004   |  | $                |    |                     | $ |      |  | $ |   
|Charges to expense           |  |                  | 270 |                     |   |      |  |   | 270
|                             |  |                  |     |                     |   |       |  |   |    
|Balance at December 31, 2004 |  | $                | 270 |                     | $ |      |  | $ | 270
|                             |  |                  |     |                     |   |       |  |   |    



In addition to the
foregoing restructuring costs, we incurred approximately $0.1 million in other costs relating directly to the consolidation of certain field support administrative functions from our Walton location to Magnexs Oxford location during the first
quarter of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs which will be settled in cash.



We currently anticipate that general and administrative expenses for the
second quarter of fiscal year 2005 will include approximately $1.6 million in pretax restructuring costs and approximately $0.6 million in other related costs in connection with the Walton facility consolidation and closure. Substantially all of the
$0.6 million in other related costs is comprised of anticipated facility and employee relocation and employee training costs. Substantially all actions under the plan are expected to be completed by the end of the second quarter of fiscal year
2005.



Fiscal Year 2004 Plans. During fiscal year 2004,
we undertook certain restructuring actions to reorganize the management structure in our Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of these
factories and involved the termination of three employees. These actions were initiated in the fourth quarter of fiscal year 2004. All severance and other employee-related costs relating to this restructuring plan were initially recorded and
included in general and administrative expenses in the fourth quarter of fiscal year 2004. This restructuring plan did not involve any non-cash components.



The following table sets forth changes in our liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:



|                                               |  |                  |     |   |                     |   |       |  |   |     |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------- | - | ----- |  | - | --- | -
|                                               |  | Employee-Related |     |   | Facilities- Related |   | Total | 
|(in thousands)                                 |  |                  |     |   |                     |   |       |  |   |     |  
|Balance at October 1, 2004                     |  | $                | 665 |   |                     | $ |      |  | $ | 665 |  
|Charges to expense                             |  |                  | 335 |   |                     |   |      |  |   | 335 |  
|Cash payments                                  |  |                  | (23 | ) |                     |   |      |  |   | (23 | )
|Foreign currency impacts and other adjustments |  |                  | 21  |   |                     |   |      |  |   | 21  |  
|                                               |  |                  |     |   |                     |   |       |  |   |     |  
|Balance at December 31, 2004                   |  | $                | 998 |   |                     | $ |      |  | $ | 998 |  
|                                               |  |                  |     |   |                     |   |       |  |   |     |  



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##### Table of Contents

Also during fiscal year 2004, we committed to a separate plan to reorganize our Scientific Instruments
and corporate marketing organizations and to consolidate certain Scientific Instruments administrative functions in North America. This plan, which involved the termination of approximately 20 employees, was undertaken to more closely align the
strategic and operational focus of these organizations across different product lines and to improve efficiency and reduce operating costs. These actions were initiated in the fourth quarter of fiscal year 2004 and are expected to be completed by
the end of the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in general and administrative expenses in the fourth quarter of fiscal year
2004. This restructuring plan did not involve any non-cash components.



The following table sets forth changes in our liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:



|                             |  |                  |      |   |                     |   |       |  |   |      |  
|---------------------------- |  | ---------------- | ---- | - | ------------------- | - | ----- |  | - | ---- | -
|                             |  | Employee-Related |      |   | Facilities- Related |   | Total | 
|(in thousands)               |  |                  |      |   |                     |   |       |  |   |      |  
|Balance at October 1, 2004   |  | $                | 859  |   |                     | $ |      |  | $ | 859  |  
|Reversals of expense, net    |  |                  | (11  | ) |                     |   |      |  |   | (11  | )
|Cash payments                |  |                  | (224 | ) |                     |   |      |  |   | (224 | )
|                             |  |                  |      |   |                     |   |       |  |   |      |  
|Balance at December 31, 2004 |  | $                | 624  |   |                     | $ |      |  | $ | 624  |  
|                             |  |                  |      |   |                     |   |       |  |   |      |  



Fiscal Year 2003
Plan. During fiscal year 2003, we undertook certain restructuring actions to improve efficiency and more closely align employee skill sets and other resources with our evolving product mix as a result of our continued emphasis on NMR, mass
spectroscopy, and consumable products, with a bias toward life science applications. In addition, actions were undertaken to create a more efficient consumable products operation. These actions primarily impacted the Scientific Instruments segment
and involved the termination of approximately 160 employees (principally in sales and marketing, administration, service, and manufacturing functions), the closure of three sales offices, and the consolidation of three consumable products factories
into one in Southern California. Substantially all of these activities were completed during fiscal year 2003 except for the termination of approximately 20 employees, which took place in the second and third quarters of fiscal year 2004, and the
Southern California facility consolidation, which was initiated in the third quarter of fiscal year 2003 and was substantially completed in the first quarter of fiscal year 2005. Costs relating to restructuring activities recorded under this plan
through the first quarter of fiscal year 2005 were included in general and administrative expenses.



The following table sets forth changes in our liability relating to the foregoing restructuring activities during the first quarter of fiscal year 2005:



|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------- | - | ---- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |     |   | Facilities- Related |   |      | Total | 
|(in thousands)                                 |  |                  |     |   |                     |   |      |       |  |   |       |  
|Balance at October 1, 2004                     |  | $                | 149 |   |                     | $ | 830  |       |  | $ | 979   |  
|Charges to expense, net                        |  |                  |    |   |                     |   | 402  |       |  |   | 402   |  
|Cash payments                                  |  |                  | (63 | ) |                     |   | (296 | )     |  |   | (359  | )
|Foreign currency impacts and other adjustments |  |                  | 1   |   |                     |   | 16   |       |  |   | 17    |  
|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  
|Balance at December 31, 2004                   |  | $                | 87  |   |                     | $ | 952  |       |  | $ | 1,039 |  
|                                               |  |                  |     |   |                     |   |      |       |  |   |       |  



The non-cash portion
of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period.



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In addition to the foregoing restructuring costs, the Company incurred approximately $0.1 million in
other costs relating directly to the Southern California facility consolidation during the first quarter of fiscal year 2005. These costs primarily related to non-cash charges for accelerated depreciation of assets to be disposed of upon the closure
of facilities.



Restructuring Cost Savings. When they
were initiated, each of the foregoing restructuring plans was eventually expected to result in a reduction in annual operating expenses. The following table sets forth the estimated annual cost savings for each plan as well as where those cost
savings were expected to be realized:



|                                                                                                                                                                                             |  |                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|Restructuring Plan                                                                                                                                                                           |  | Estimated Annual Cost Savings
|Fiscal Year 2003 Plan (Scientific Instruments resource realignment including employee terminations, sales office closures, and Southern
California consumable product factory consolidation) |  | $9.0 million - $11.0 million 
|                                                                                                                                                                                             | 
|Fiscal Year 2004 Plan (Scientific Instruments factory management)                                                                                                                            |  | $0.6 million - $0.8 million  
|                                                                                                                                                                                             | 
|Fiscal Year 2004 Plan (Scientific Instruments and corporate marketing organizations; Scientific Instruments administrative
functions)                                                        |  | $1.0 million - $1.5 million  
|                                                                                                                                                                                             | 
|Fiscal Year 2005 Plan (Scientific Instruments U.K. field support administration)                                                                                                             |  | $0.8 million - $1.2 million  



These estimated costs
savings are primarily expected to impact selling, general, and administrative expenses and, to a lesser extent, cost of sales. Some of these cost savings have been and will continue to be reinvested in other parts of our business, for example, as
part of our continued emphasis on NMR and MR imaging, mass spectroscopy, and consumable products, with a bias toward life science applications. In addition, unrelated cost increases in other areas of our operations such as corporate compliance costs
could offset some of these cost savings. Although it is difficult to quantify with any precision our actual cost savings to date from these activities, many of which are still ongoing, we currently believe that the ultimate savings realized will not
differ materially from our initial estimate.



Income Tax
Expense.The effective income tax rate was 20.3% for the first quarter of fiscal year 2005, compared to 35.0% for the first quarter of fiscal year 2004. The lower rate in the first quarter of fiscal year 2005 was due to a discrete, one-time
reduction in income tax expense of $3.0 million recorded during the period as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. This reduction was partially offset as a result of the
purchased in-process research and development charge recorded during the same period, which increased the effective income tax rate because it was not tax deductible. Excluding the impact of these two discrete items, the effective income tax rate
was the same in the first quarters of fiscal years 2005 and 2004.



Net Earnings. Net earnings for the first quarter of fiscal year 2005 reflect the impact of approximately $1.2 million in pretax restructuring and other related costs, approximately $1.5 million in pretax acquisition-related
intangible amortization, approximately $1.6 million in pretax amortization related to inventory written up in connection with acquisitions, an in-process research and development charge of approximately $0.7 million related to the Magnex
acquisition, a pretax loss of approximately $1.5 million relating to the settlement of a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in
fiscal year 2004), and a discrete, one-time reduction in income tax expense of $3.0 million recorded during the period as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. Net earnings for
the first quarter of fiscal year 2004 reflect the impact of approximately $0.2 million in pretax restructuring costs and other related costs and approximately $0.7 million in pretax acquisition-related intangible amortization. Excluding the impact
of these items, the increase in net earnings resulted primarily from increased sales and improved operating profit margins in our Scientific Instruments and Vacuum Technologies segments in the first quarter of fiscal year 2005.



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Liquidity and Capital Resources



We generated $24.8 million of cash from operating activities in the first quarter of fiscal year 2005, which compares to
$15.7 million generated in the first quarter of fiscal year 2004. The increase in cash from operating activities resulted primarily from a higher cash inflows resulting from decreases in accounts receivable ($15.2 million) and inventories ($8.0
million), partially offset by higher cash outflows resulting from decreases in accounts payable ($6.7 million). The relative increase in cash provided by accounts receivable was primarily attributable to stronger cash collections in the first
quarter of fiscal year 2005. The average number of days that accounts receivable were outstanding was 67 and 69 in the first quarters of fiscal year 2005 and 2004, respectively. The relative decrease in cash used for inventory during the first
quarter of fiscal year 2005 was primarily due to the timing of inventory purchases and deliveries for NMR and MR imaging systems, partially offset by an increase in inventory to support an anticipated increase in shipments by the Electronics
Manufacturing segment in the second quarter of fiscal year 2005. Inventory turnover was 3.9 and 4.1 in the first quarters of fiscal year 2005 and 2004, respectively. The decrease in cash from operating activities relating to these changes in
accounts receivable and inventories was partially offset by the cash flow impact of a larger decrease in accounts payable in the first quarter of fiscal year 2005. This decrease was primarily due to the timing of payments to vendors.



We used $31.6 million of cash for investing activities in the first quarter
of fiscal year 2005, which compares to $4.3 million used for investing activities in the first quarter of fiscal year 2005. The increase in cash used for investing activities was primarily due to the acquisition of Magnex in the first quarter of
fiscal year 2005. No significant acquisition-related cash payments were made in the first quarter of fiscal year 2004.



We generated $2.1 million of cash from financing activities in the first quarter of fiscal year 2005, which compares to $6.5 million generated from
financing activities in the first quarter of fiscal year 2004. The decrease in cash generated from financing activities was primarily due to fewer stock option exercises, which resulted in a decrease in proceeds from the issuance of common stock.



During fiscal year 2003, we established a short-term bank
credit facility in Japan in the amount of 300 million yen (approximately $2.9 million at December 31, 2004). The credit facility is available to our wholly owned Japanese subsidiary for working capital purposes. As of December 31, 2004, no amounts
were outstanding under this credit facility and 300 million yen (approximately $2.9 million) was available for future borrowing. This credit facility contains certain covenants that limit future borrowings under this facility, with which we were in
compliance at December 31, 2004.



In addition to these bank
credit facilities, as of December 31, 2004, we had a total of $87.4 million in other uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were
outstanding under these credit facilities as of December 31, 2004. All of these credit facilities contain certain customary conditions and events of default, with which we were in compliance at December 31, 2004. Of the $87.4 million in uncommitted
and unsecured credit facilities, a total of $52.9 million was limited for use by, or in favor of, certain subsidiaries at December 31, 2004, and a total of $15.4 million of this $52.9 million was being utilized in the form of bank guarantees or
short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to our subsidiaries by customers for which separate liabilities were recorded in the unaudited condensed consolidated
financial statements at December 31, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



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As of December 31, 2004, we had $31.2 million in term loans outstanding compared to $32.5 million at
October 1, 2004. As of both December 31, 2004 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both December 31, 2004 and October 1, 2004. The term
loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. We were in compliance with all restrictive covenants of the term
loan agreements at December 31, 2004. We also had other long-term notes payable of $4.5 million as of December 31, 2004 with a weighted-average interest rate of 0.0% and $4.2 million as of October 1, 2004 with a weighted-average interest rate of
0.0%.



In connection with the Magnex and Digilab Business
acquisitions, the Company has accrued but not yet paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheet and/or to secure the sellers indemnification obligations. As of
December 31, 2004, retained amounts for the Magnex acquisition included $1.0 million relating to the closing balance sheet (which was paid during the second quarter of fiscal year 2005) and $6.0 million relating to the sellers indemnification
obligations, which is due to be paid (or received in the form of notes payable by the Company at the payees election) in two equal installments on the first and second anniversaries of the closing of that acquisition (net of any
indemnification claims). The retained amount for the Digilab Business acquisition, which is due to be paid during fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at December 31, 2004. In addition to these
retained payments, the Company is, from time to time, obligated to pay additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of December 31, 2004, up to a maximum
of approximately $25.5 million could be payable through fiscal year 2007 under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired
product lines reach specific financial performance targets through fiscal year 2005, and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to
certain financial targets. The balance of approximately $9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal
year 2006. Any contingent payments made will be recorded as additional goodwill at the time they are earned.



The Distribution Agreement provides that we are responsible for certain litigation to which VAI was a party, and further provides that we will indemnify
VMS and VSEA for one-third of the costs, expenses, and other liabilities relating to certain discontinued, former, and corporate operations of VAI, including certain environmental liabilities (see below under the heading Risk
FactorsEnvironmental Matters).



As of December 31,
2004, we had cancelable commitments to a contractor for capital expenditures totaling approximately $1.2 million relating to the ongoing consolidation of three consumable products factories into one in Southern California. In the event that these
commitments are canceled for reasons other than the contractors default, we may be responsible for reimbursement of actual costs incurred by the contractor. We had no material non-cancelable commitments for capital expenditures as of December
31, 2004. In the aggregate, we currently anticipate that our capital expenditures will be between $20 million and $25 million during the remaining nine months of fiscal year 2005.



Our liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others
related to the uncertainties of the industries in which we compete and global economies. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with our
current cash balance and borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next 12 months.



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Contractual Obligations and Other Commercial Commitments



The following table summarizes future principal payments on outstanding debt
and minimum rentals due for certain facilities and other leased assets under long-term, non-cancelable operating leases as of December 31, 2004:



|                                          |  |                               |        |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|----------------------------------------- |  | ----------------------------- | ------ | ------------ | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                          |  | NineMonthsEndingSept. 30,2005 |        | Fiscal Years |      | Total
|                                          |  |                               | 2006   |              | 2007 |       | 2008 |   | 2009  |  | 2010 |       | Thereafter |  
|(in thousands)                            |  |                               |        |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Operating leases                          |  | $                             | 8,129  |              | $    | 6,713 |      | $ | 4,598 |  | $    | 3,734 |            | $ | 3,456 |  | $ | 3,001 |  | $ | 30,815 |  | $ | 60,446
|Long-term debt(including current portion) |  |                               | 5,709  |              |      | 2,500 |      |   | 2,500 |  |      | 6,250 |            |   |      |  |   | 6,250 |  |   | 12,500 |  |   | 35,709
|                                          |  |                               |        |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Total contractual cash obligations        |  | $                             | 13,838 |              | $    | 9,213 |      | $ | 7,098 |  | $    | 9,984 |            | $ | 3,456 |  | $ | 9,251 |  | $ | 43,315 |  | $ | 96,155
|                                          |  |                               |        |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       



In addition to the
non-cancelable contractual obligations included in the above table and the cancelable commitments for capital expenditures of approximately $1.2 million described under Liquidity and Capital Resources above, we had cancelable commitments to
purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $16.8 million, net of deposits paid, as of December 31, 2004. In the event that these commitments are canceled for reasons other than the
suppliers default, we may be responsible for reimbursement of actual costs incurred by the supplier.



As of December 31, 2004, we did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence
of some contingent event, except for contingent payments of up to a maximum of $25.5 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific timing and amounts of which are not currently
determinable.



Recent Accounting Pronouncements



In December 2003, the FASB issued a proposed amendment to SFAS 128,
Earnings per Share, to make it consistent with International Accounting Standard 33, Earningsper Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would
require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of
calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of
SFAS 128 that would not impact our earnings per share calculations. The amended standard is expected to be issued in 2005 and when issued, the provisions of the final standard will be effective in 2005 and will require retrospective application for
all prior periods presented. Should the proposed statement be finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on our financial condition or results of operations.



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In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, an amendment of
FASB Statements Nos. 123 and 95, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the
fair value of that companys equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates the Companies ability to account for share-based compensation transactions using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a fair value-based method and recognized as expense in our
Consolidated Statement of Earnings. Under SFAS 123, we are required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date
of adoption. We currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes
option-pricing model. In addition, the adoption of SFAS 123 will require additional accounting related to the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. We are required to adopt SFAS 123 in the
fourth quarter of fiscal year 2005. We are evaluating the requirements of SFAS 123 and expects its adoption could have a material impact on the Companys results of operations.



In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments
made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 to have a material impact on our financial
condition or results of operations.



In December 2004, the FASB
issued FASB Staff Position No. (FSP) 109-1, Application of FASB 109, Accounting for Incomes Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004 (the Act).
The Act, which became law in October 2004, provides for a special tax deduction on qualified domestic production activities income that is defined by the Act. The FASB has decided that these amounts should be recorded as a special deduction, and
recorded in the year earned. We have not yet determined the impact that the adoption of FSP 109-1 will have on our financial condition or results of operations.



Risk Factors



Customer Demand. Demand for our products depends upon, among other factors, the level of capital expenditures by current and prospective customers,
the rate of economic growth in the markets in which we compete, and the competitiveness of our products and services. Changes in any of these factors could have an adverse effect on our financial condition or results of operations.



In the case of our Scientific Instruments and Vacuum Technologies segments,
we must continue to assess and predict customer needs, regulatory requirements, and evolving technologies. We must develop new products, including enhancements to existing products, new services, and new applications, successfully commercialize,
manufacture, market, and sell these products, and protect our intellectual property in these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely affected.



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In the case of our Electronics Manufacturing segment, we must respond quickly to our customers
changing requirements. Customers may change, delay, or cancel orders for many reasons, including lack of success of their products or business strategies and economic conditions in the markets they serve. In addition, some customers, including
start-up companies, have limited product histories and financial resources, which make them riskier customers for us. We must determine, based on our judgment and our customers estimates of their future requirements, what levels of business we
will accept, what start-up costs to incur for new customers or products, production schedules, component procurement commitments, personnel needs, and other resource requirements. All of these decisions require predictions about the future and
judgments that could be wrong. Cancellations, reductions, or delays in orders by a significant customer or group of customers, or their inability to meet financial commitments with respect to orders or shipments, could have an adverse impact on our
financial condition or results of operations.



Variability
of Operating Results. We experience some cyclical patterns in sales of our products. Generally, sales and earnings in the first quarter of our fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there
are fewer working days in our first fiscal quarter (October to December) and many customers defer December deliveries until the next calendar year, our second fiscal quarter. Sales and earnings in our third fiscal quarter are usually flat to down
sequentially compared to the second fiscal quarter, primarily because there are a number of holidays in the early part of the quarter, especially in Europe, and the June quarter-end has no significant customer year ends to influence orders. Our
fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the other three quarters, primarily because many customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced
by other factors, including general economic conditions, acquisitions, new product introductions, and products requiring long manufacturing and installation lead times (such as NMR and MR imaging systems and superconducting magnets). Consequently,
our results of operations may fluctuate significantly from quarter to quarter.



For most of our products, we operate on a short backlog, as short as a few days for some products and less than a fiscal quarter for most others. We also experience significant shipments in the last month of each
quarter, in part because of how our customers place orders and schedule shipments. This can make it difficult for us to forecast our results of operations.



Certain of our leading-edge NMR and MR imaging systems, NMR probes, superconducting magnets, and related components sell for high prices and on long
lead-times. These systems and components are complex; require development of new technologies and, therefore, significant research and development resources; are often intended for evolving leading-edge research applications; often have
customer-specific features, custom capabilities, and specific acceptance criteria; and, in the case of NMR and MR imaging systems, require superconducting magnets that can be difficult to manufacture. Most superconducting magnets for our
leading-edge NMR systems are not manufactured by us, so our ability to ship, install, and obtain customer acceptance of our leading-edge NMR systems is dependent upon the superconducting magnet suppliers timely development, delivery, and
installation of magnets that perform to customer specifications. If we are unable to meet these challenges, it could have an adverse effect on our financial condition or results of operations. In addition, all of these factors can make it difficult
for us to forecast shipment, installation, and acceptance of, and installation and warranty costs on, leading-edge NMR and MR imaging systems, NMR probes, and superconducting magnets, which in turn can make it difficult for us to forecast the timing
of revenue recognition and the achieved gross profit margin on these products.



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Competition. The industries in which we operatescientific instruments, vacuum technologies,
and electronics manufacturingare highly competitive. In each of these industries, we compete against many U.S. and non-U.S. companies, most with global operations. Some of our competitors have greater financial resources than we have, which
may enable them to respond more quickly to new or emerging technologies, take advantage of acquisition opportunities, compete on price, or devote greater resources to research and development, engineering, manufacturing, marketing, sales, or
managerial activities. Others have greater name recognition and geographic and market presence or lower cost structures than we do. In addition, weaker demand and excess capacity in our industries could cause greater price competition as our
competitors seek to maintain sales volumes and market share.



Additionally, in the case of electronics manufacturing, current and prospective customers continually evaluate the merits of manufacturing products internally; there is substantial excess manufacturing capacity in the industry; certain
competitors manufacture or are seeking to manufacture outside the U.S. where there can be significant cost advantages, and certain customers may be willing to move to off-shore manufacturing for cost reasons; larger competitors might
have greater direct buying power from suppliers; and electronics manufacturing processes are generally not subject to significant intellectual property protection.



For all of the foregoing reasons, competition could result in lower revenues due to lost sales or price reductions, lower
margins, and loss of market share, which could have an adverse effect on our financial condition or results of operations.



Key Suppliers. Some items we purchase for the manufacture of our products, including superconducting magnets used in NMR and MR imaging systems and
wire used in superconducting magnets, are purchased from limited or single sources of supply. The loss of a key supplier or the inability to obtain certain key raw materials or components could cause delays or reductions in shipments of our products
or increase our costs, which could have an adverse effect on our financial condition or results of operations.



We have experienced and could again experience delivery delays in superconducting magnets used in NMR systems, which has caused and could again cause
delays in our product shipments. In addition, end-users of our NMR and MR imaging systems and superconducting magnets require helium to operate those products; shortages of helium could result in higher helium prices, and thus higher operating costs
for NMR and MR imaging systems and superconducting magnets, which could impact demand for those products.



Our Electronics Manufacturing segment uses electronic components in the manufacture of its products. These components can be more or less difficult and
expensive to obtain, depending on the overall demand for these components as a result of general economic cycles or other factors. Consequently, the Electronics Manufacturing segments results of operations could fluctuate over time.



Business Interruption. Our facilities, operations, and
systems could be impacted by fire, flood, terrorism, or other natural or man-made disasters. In particular, we have significant facilities in areas prone to earthquakes and fires, such as our production facilities and headquarters in California. Due
to their limited availability, broad exclusions, and prohibitive costs, we do not have insurance policies that would cover losses resulting from an earthquake. If any of our facilities or surrounding areas were to be significantly damaged in an
earthquake or fire, it could disrupt our operations, delay shipments, and cause us to incur significant repair or replacement costs, which could have an adverse effect on our financial condition or results of operations.



Our employees based in certain foreign countries are subject to
factory-specific and/or industry-wide collective bargaining agreements. Of these, certain of our employees in Australia are subject to a collective bargaining agreement that will need to be renewed in April 2006. A work stoppage, strike, or other
labor action at this or other of our facilities could have an adverse effect on our financial condition or results of operations.



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Intellectual Property. Our success depends on our intellectual property. We rely on a combination
of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and licensing arrangements to establish and protect that intellectual property, but these protections might not be available in all countries, might not be enforceable,
might not fully protect our intellectual property, and might not provide meaningful competitive advantages. Moreover, we might be required to spend significant resources to police and enforce our intellectual property rights, and we might not detect
infringements of those intellectual property rights. If we fail to protect our intellectual property and enforce our intellectual property rights, our competitive position could suffer, which could have an adverse effect on our financial condition
or results of operations.



Other third parties might claim that
we infringe their intellectual property rights, and we may be unaware of intellectual property rights that we are infringing. Any litigation regarding intellectual property of others could be costly and could divert personnel and resources from our
operations. Claims of intellectual property infringement might also require us to develop non-infringing alternatives or enter into royalty-bearing license agreements. We might also be required to pay damages or be enjoined from developing,
manufacturing, or selling infringing products. We sometimes rely on licenses to avoid these risks, but we cannot be assured that these licenses will be available in the future or on favorable terms. These risks could have an adverse effect on our
financial condition or results of operations.



Acquisitions. We have acquired companies and operations, and intend to acquire companies and operations in the future, as part of our growth strategy. Acquisitions must be carefully evaluated and negotiated if they are to be
successful. Once completed, acquired operations must be carefully integrated to realize expected synergies, efficiencies, and financial results. Some of the challenges in doing this include retaining key employees, managing operations in new
geographic areas, retaining key customers, and managing transaction costs. All of this must be done without diverting management and other resources from other operations and activities. Failure to successfully evaluate, negotiate, and integrate
acquisitions could have an adverse effect on our financial condition or results of operations.



Restructuring Activities. We have undertaken restructuring activities, and may undertake restructuring activities in the future, that we expect to result in certain costs and eventual cost savings. These costs
and cost savings are based on estimates at the time of plan commitment as to the timing of activities to be completed and the timing and amount of related costs to be incurred. We could experience delays in completing restructuring activities and
our estimates of the costs to complete these activities could change. Such events could adversely impact the eventual costs of, and savings achieved by, the restructuring activities. As a result, these risks could have an adverse impact on our
financial condition or results of operations.



Foreign
Operations and Currency Exchange Rates. A significant portion of our sales, manufacturing activities, and employees are outside of the United States. As a result, we are subject to various risks, including the following: duties, tariffs, and
taxes; restrictions on currency conversions, fund transfers, or profit repatriations; import, export, and other trade restrictions; protective labor regulations and union contracts; compliance with local laws and regulations; travel and
transportation difficulties; and adverse developments in political or economic environments in countries where we operate. These risks could have an adverse effect on our financial condition or results of operations.



Additionally, the U.S. dollar value of our sales and operating costs varies
with currency exchange rate fluctuations. Because we manufacture and sell in the U.S. and a number of other countries, the impact that currency exchange rate fluctuations have on us is dependent on the interaction of a number of variables. These
variables include, but are not limited to, the relationships between various foreign currencies, the relative amount of our revenues that are denominated in U.S. dollars or in U.S. dollar-linked currencies, customer resistance to currency-driven
price changes, and the suddenness and severity of changes in certain foreign currency exchange rates. In addition, we hedge most of our balance sheet exposures denominated in other-than-local currencies based upon forecasts of those exposures; in
the event that these forecasts are overstated or understated during periods of currency volatility, foreign exchange losses could result. For all of these reasons, currency exchange fluctuations could have an adverse effect on our financial
condition or results of operations.



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During the first quarter of fiscal year 2005, the U.S. dollar has weakened significantly in relation to
other major world currencies including the Euro, the British pound, and the Japanese yen. Because of the variables detailed in the preceding paragraph, it is difficult to predict whether, and the extent to which, the weaker U.S. dollar will have an
adverse effect on our financial condition or results of operations.



Key Personnel. Our success depends upon the efforts and abilities of key personnel, including research and development, engineering, manufacturing, finance, administrative, marketing, sales, and management personnel. The availability
of qualified personnel can vary significantly based on factors such as the strength of the general economy. However, even in weak economic periods, there is still intense competition for personnel with certain expertise in the geographic areas where
we compete for personnel. In addition, certain employees have significant institutional and proprietary technical knowledge, which could be difficult to quickly replace. Failure to attract and retain qualified personnel, who generally do not have
employment agreements or post-employment non-competition agreements, could have an adverse effect on our financial condition or results of operations.



Certain Employee Benefit Plans. Many of our U.S. employees participate in health care plans under which the Company is self-insured. We maintain a
stop-loss insurance policy that covers the cost of certain individually large claims under these plans. During each year, our expenses under these plans are recorded based on actuarial estimates of the number and costs of expected claims,
administrative costs, and stop-loss premiums. These estimates are then adjusted at the end of each plan year to reflect actual costs incurred. Actual costs under the plan are subject to variability depending primarily upon the actual number and
costs of claims made and whether and how much the stop-loss insurance we purchase covers the cost of these claims. In the event that our cost estimates differ from actual costs, our financial condition and results of operations could be adversely
impacted.



We also maintain defined benefit pension plans for
our employees in several foreign countries. In accordance with SFAS 87, Employers Accounting for Pensions, we utilize a number of assumptions including the expected long-term rate of return on plan assets and the discount rate in order
to determine our defined benefit pension plan costs each year. These assumptions are set based on relevant debt, equity, and other market conditions in the countries in which the plans are maintained. We adjust these assumptions each year in
response to corresponding changes in the underlying market conditions. Changes in these market conditions result in corresponding changes in our defined benefit pension plan assumptions and costs. These changes could have an adverse effect on our
financial condition or results of operations.



Environmental
Matters. Our operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs
and potential liabilities of our operations. However, we do not currently anticipate that our compliance with these regulations will have a material effect on our capital expenditures, earnings, or competitive position.



As is described above, we and VSEA are each obligated (pursuant to the terms
of the Distribution) to indemnify VMS for one-third of certain costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs) relating to environmental matters. In that regard, VMS has been named by
the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at nine sites where VAI is alleged to have shipped
manufacturing waste for recycling, treatment, or disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring, and/or remediation activities under the direction of, or in
consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities. We and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation
costs (after adjusting for any insurance proceeds and taxes).



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For certain of these sites and facilities, various uncertainties make it difficult to assess the
likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 31, 2004, it was nonetheless estimated that our share of the future exposure for environmental-related
costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up
to approximately 13 years as of December 31, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and we therefore had an accrual of $1.3 million as
of December 31, 2004.



As to certain sites and facilities,
sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of December 31, 2004, it was estimated that our share of the future exposure for these
environmental-related costs for these sites and facilities ranged in the aggregate from $4.7 million to $15.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of December 31, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future
environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at December 31, 2004. We
therefore had an accrual of $4.6 million as of December 31, 2004, which represents the best estimate of our share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million
described in the preceding paragraph.



The foregoing amounts
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, monitoring, and remediation activities and the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.



An insurance company has agreed to pay a portion of certain of VAIs
(now VMS) future environmental-related costs for which we have an indemnification obligation, and we therefore have a short-term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of
inflation) in other assets as of December 31, 2004 for our share of such recovery. We have not reduced any environmental-related liability in anticipation of recoveries from third parties.



Management believes that our reserves for the foregoing and other
environmental-related matters are adequate, but as the scope of our obligation becomes more clearly defined, these reserves may be modified, and related charges against or credits to earnings may be made. Although any ultimate liability arising from
environmental-related matters could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to our financial statements, the likelihood of such occurrence is considered remote. Based
on information currently available and our best assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of environmental-related matters are not reasonably likely to have a material adverse
effect on our financial condition or results of operations.



Governmental Regulations. Our businesses are subject to many governmental regulations in the U.S. and other countries, including with respect to protection of the environment, employee health and safety, labor matters, product
safety, medical devices, import, export, competition, and sales to governmental entities. These regulations are complex and change frequently. We incur significant costs to comply with governmental regulations, costs to comply with new or changed
regulations could be significant, and failure to comply could result in suspension of or restrictions on our operations, product recalls, fines, and other civil and criminal penalties, private party litigation, and damage to our reputation, which
could have an adverse effect on our financial condition or results of operations.



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Item 3.    Quantitative and Qualitative Disclosures About Market Risk



Foreign Currency Exchange Risk. We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations
on assets and liabilities denominated in non-functional currencies. From time to time, we also enter into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. The success of our
hedging activities depends on our ability to forecast balance sheet exposures and transaction activity in various foreign currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses. However, we believe that in most cases any such gains or losses would be substantially offset by losses or gains from the related foreign exchange forward contracts. We therefore believe that the
direct effect of an immediate 10% change in the exchange rate between the U.S. dollar and all other currencies is not reasonably likely to have a material adverse effect on our financial condition or results of operations.



At December 31, 2004, there were no outstanding forward contracts designated
as cash flow hedges of forecasted transactions. During the fiscal quarter ended December 31, 2004, no foreign exchange gains or losses from cash flow hedge ineffectiveness were recognized.



Our foreign exchange forward contracts generally range from one to 12 months
in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 31, 2004 follows:



|                  |  |                    |        |                         |   |       
|----------------- |  | ------------------ | ------ | ----------------------- | - | ------
|                  |  | Notional ValueSold |        | NotionalValue Purchased
|(in thousands)    |  |                    |        |                         |   |       
|Euro              |  | $                  |       |                         | $ | 54,265
|Australian dollar |  |                    |       |                         |   | 11,800
|Japanese yen      |  |                    | 4,216  |                         |   |      
|British pound     |  |                    | 220    |                         |   |      
|Danish krona      |  |                    | 1,178  |                         |   |      
|Canadian dollar   |  |                    | 5,730  |                         |   |      
|Swedish krona     |  |                    | 717    |                         |   |      
|                  |  |                    |        |                         |   |       
|                  |  | $                  | 12,061 |                         | $ | 66,065
|                  |  |                    |        |                         |   |       



Interest Rate
Risk. We have no material exposure to market risk for changes in interest rates. We invest any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to our
financial condition or results of operations. We enter into debt obligations principally to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At December 31, 2004, our debt
obligations had fixed interest rates.



Based upon rates
currently available to us for debt with similar terms and remaining maturities, the carrying amounts of long-term debt approximate their estimated fair values.



Although payments under certain of our operating leases for our facilities are tied to market indices, we are not exposed to material interest rate
risk associated with our operating leases.



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Debt Obligations.



Principal Amounts and Related Weighted-Average Interest Rates By Year of Maturity



|                                          |  |                               |       |   |              |      |       |       |      |   |       |      |  |   |       |   |  |            |   |   |  |   |       |   |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ----------------------------- | ----- | - | ------------ | ---- | ----- | ----- | ---- | - | ----- | ---- |  | - | ----- | - |  | ---------- | - | - |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                          |  | NineMonthsEndingSept. 30,2005 |       |   | Fiscal Years |      |       | Total |     
|                                          |  |                               | 2006  |   |              | 2007 |       |       | 2008 |   |       | 2009 |  |   | 2010  |   |  | Thereafter |   |  
|(dollars in thousands)                    |  |                               |       |   |              |      |       |       |      |   |       |      |  |   |       |   |  |            |   |   |  |   |       |   |  |   |        |   |  |   |        |  
|Long-term debt(including current portion) |  | $                             | 5,709 |   |              | $    | 2,500 |       |      | $ | 2,500 |      |  | $ | 6,250 |   |  | $          |  |   |  | $ | 6,250 |   |  | $ | 12,500 |   |  | $ | 35,709 |  
|Average interest rate                     |  |                               | 1.6   | % |              |      | 7.2   | %     |      |   | 7.2   | %    |  |   | 6.7   | % |  |            |  | % |  |   | 6.7   | % |  |   | 6.7    | % |  |   | 6.0    | %



Defined Benefit
Retirement Plans. Most of our retirement plans, including all U.S.-based plans, are defined contribution plans. However, we also provide defined benefit pension plans in certain foreign countries. Our obligations under these defined benefit
plans will ultimately be settled in the future and are therefore subject to estimation. Defined benefit pension accounting under SFAS 87, Employers Accounting for Pensions, is intended to reflect the recognition of future benefit costs
over the employees estimated service periods based on the terms of the pension plans and the investment and funding decisions made by us.



For our defined benefit pension plans, we make assumptions regarding several variables including the expected long-term rate of return on plan assets and
the discount rate in order to determine defined benefit pension plan expense for the year. This expense is referred to as net periodic pension cost. We assess the expected long-term rate of return on plan assets and discount rate
assumption for each defined benefit plan based on relevant market conditions as prescribed by SFAS 87 and make adjustments to the assumptions as appropriate. On an annual basis, we analyze the rates of return on plan assets and discount rates used
and determine that these rates are reasonable. For rates of return, this analysis is based on a review of the nature of the underlying assets, the allocation of those assets and their historical performance relative to the overall markets in the
countries where the related plans are effective. Historically, our assumed asset allocations have not varied significantly from the actual allocations. Discount rates are based on the prevailing market long-term interest rates in the countries where
the related plans are effective. As of October 1, 2004, the estimated long-term rate of return on our defined benefit pension plan assets ranged from 0.5% to 7.1% (weighted-average of 6.2%), and the assumed discount rate for our defined benefit
pension plan obligations ranged from 2.0% to 5.8% (weighted-average of 5.5%).



If any of these assumptions were to change, our net periodic pension cost would also change. We incurred net periodic pension cost relating to our defined benefit pension plans of $2.7 million in fiscal year 2004
(excluding curtailment gains), $2.3 million in fiscal year 2003, and $1.7 million in fiscal year 2002, and expect our net periodic pension cost (excluding settlement losses) to be approximately $1.6 million in fiscal year 2005. A one percent
decrease in the weighted-average estimated return on plan assets or assumed discount rate would increase our net periodic pension cost for fiscal year 2005 by $0.3 million and $0.9 million, respectively. As of October 1, 2004, our projected benefit
obligation relating to defined benefit pension plans was $59.3 million. A one percent decrease in the weighted-average estimated discount rate would increase this obligation by $8.8 million.



During fiscal year 2004, we ceased future benefit accruals to our existing
defined benefit pension plans in Australia and the Netherlands and commenced contributions to new defined contribution plans for the benefit of their participants. In connection with these actions, we recorded curtailment gains of approximately $1.5
million during fiscal year 2004. These curtailment gains were offset by a loss of approximately $1.5 million relating to the settlement of the defined benefit plan in Australia in the first quarter of fiscal year 2005.



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Item 4.    Controls and Procedures



Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of the Chief Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective
to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.



Changes in internal control over financial reporting. There was no
change in our internal control over financial reporting that occurred during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II

OTHER INFORMATION



Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds



(c)    During fiscal year 2004, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of
its common stock until September 30, 2007. No shares were repurchased under this authorization during the fiscal quarter ended December 31, 2004. As of December 31, 2004, the Company had remaining authorization for future repurchases of 807,897
shares.



On February 4, 2005, the Companys Board of
Directors conditionally approved a new authorization under which the Company may repurchase up to $145 million of its common stock. That repurchase authorization is contingent upon the closing of the sale of the Electronics Manufacturing business,
and is effective until September 30, 2006. If that condition is satisfied, this new repurchase authorization will replace the prior repurchase authorization approved in May 2004 (purchases under which will not count toward the $145 million
authorized under the new repurchase program).



Item 5.    Other Information



Exhibit 10.6, Varian, Inc. Omnibus Stock Plan. On February 3, 2005, the Companys stockholders approved the amended and restated Varian, Inc. Omnibus Stock Plan (the Plan). A total of
10,200,000 shares of the Companys common stock are authorized for issuance under the Plan, plus however many shares are necessary for stock options as were required to be granted by the Company to (a) Varian Associates, Inc. (VAI)
employees and directors who became employees or directors of the Company as part of the Companys spin-off from VAI, (b) VAI employees whose employment with VAI terminated as part of the spin-off from VAI, and (c) VAI directors who did not
become directors of the Company, in each case to replace options previously granted by VAI to those employees and directors to acquire VAI shares. Employees of the Company and its affiliates and non-employee directors of the Company may receive
awards under the Plan. The Plan permits awards of stock options, stock appreciation rights, restricted stock, stock units, performance units and performance shares (each, an award). The Plan is administered by a committee of at least two
directors appointed by the board of directors. Awards granted under the Plan generally have terms, such as vesting and exercise or purchase price, determined by the Plan administrator at the time of grant.



Under the terms of the Plan, each non-employee director (other than the
Chairman of the board of directors) automatically is granted an option to purchase 10,000 shares of the Companys common stock on the date of his or her appointment or election as a non-employee director, and is thereafter annually granted an
option to purchase 5,000 shares of the Companys common stock if he or she remains a non-employee director on the grant date. The non-employee Chairman of the board of directors automatically is granted an option to purchase 50,000 shares of
the Companys common stock on the date he or she becomes Chairman. On the first business day following each annual meeting of the Companys stockholders, each person then serving as a non-employee director automatically is granted stock
units having an initial value of $25,000, which vests upon the directors termination of service as a director and is paid out as soon as possible thereafter.



The Board generally is authorized to amend, suspend or terminate the Plan at any time, but no amendment, suspension or
termination of the Plan may adversely affect any award previously granted under the Plan without the written consent of the holder of the award.



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##### Table of Contents

Exhibit 10.21, Description of Compensatory Arrangements Between Varian, Inc. and Non-employee
Directors. This exhibit explains the compensation arrangements, which include both cash and equity compensation, between the Company and its non-employee directors. Non-employee directors other than the Chairman of the Board each receive an
annual retainer fee of $30,000, cash compensation for each board meeting attended in person ($2,000 per meeting) or by telephone ($1,000 per meeting), and for each board committee meeting attended in person or by telephone ($1,500 per meeting). The
non-employee director who chairs the Audit Committee is paid an additional annual retainer of $15,000, the non-employee directors who chair the Compensation and the Nominating and Governance committees of the board are each paid an additional annual
retainer of $7,500, and the non-employee Chairman of the Board is paid an annual retainer of $120,000. Employee directors also receive equity compensation under the Plan as described above under the headingExhibit 10.6, Varian, Inc.
Omnibus Stock Plan.



Exhibit 10.23, Stock Unit Agreement
for Non-employee Directors under the Plan. On February 4, 2005, the Board of Directors adopted the form of Stock Unit Agreement for non-employee directors under the Plan. The number of stock units granted will represent $25,000 of value as of
the grant date, and the stock units will vest upon the directors termination of service as a director and will be paid out as soon as possible thereafter. Under the terms of the Stock Unit Agreement, the stock units will be paid out in shares.
The non-employee director will not have rights as a stockholder with respect to the shares until such shares are paid out. The stock units are not transferable, except to the non-employee directors designated beneficiary or estate in the event
of his or her death. The terms of the Stock Unit Agreement require that the non-employee director make satisfactory arrangements for the payment of any applicable taxes for which the Company is required to withhold.



Item 6.    Exhibits



(a)    Exhibits.



|           |  |                                                                                                     |  |                           |  |      |  |               |  |              
|---------- |  | --------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- |  | ------------- |  | -------------
|           |  |                                                                                                     |  | Incorporated by Reference |  |     
|ExhibitNo. |  | Exhibit Description                                                                                 |  | Form                      |  | Date |  | ExhibitNumber |  | FiledHerewith
|10.6  *    |  | Amended and Restated Varian, Inc. Omnibus Stock Plan                                                |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|10.21*     |  | Description of Compensatory Arrangements Between Varian, Inc. and Non-Employees Directors           |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|10.23*     |  | Varian, Inc. Stock Unit Agreement                                                                   |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  |              
|           |  |                                                                                                     |  |                           | 
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  |              

---

|* |  | Management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------



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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, INC. (Registrant)
|                       |  |                          
|Date: February 7, 2005 |  | By:                       |  | /s/ G. EDWARD MCCLAMMY                                                                                                                   
|                       |  |                           |  | G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)



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