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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 January 2, 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
January 30, 2004 was 34,814,458.



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##### Table of Contents

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 2, 2004



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|PART I  |  | Financial Information                                                                 |  |     
|        |  |                                                                                      
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  |                                                                                      
|        |  | Unaudited Consolidated Condensed Statement of Earnings                                |  | 3   
|        |  |                                                                                      
|        |  | Unaudited Consolidated Condensed Balance Sheet                                        |  | 4   
|        |  |                                                                                      
|        |  | Unaudited Consolidated Condensed Statement of Cash Flows                              |  | 5   
|        |  |                                                                                      
|        |  | Notes to the Unaudited Consolidated Condensed Financial Statements                    |  | 6   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 26  
|        |  |                                                                                      
|PART II |  | Other Information                                                                     |  |     
|        |  |                                                                                      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 27  





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PART I

FINANCIAL INFORMATION



Item 1. Financial Statements



VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                       |  |                      |         |               |   |        
|-------------------------------------- |  | -------------------- | ------- | ------------- | - | -------
|                                       |  | Fiscal Quarter Ended
|                                       |  | Jan. 2, 2004         |         | Dec. 27, 2002
|Sales                                  |  | $                    | 212,493 |               | $ | 195,743
|Cost of sales                          |  |                      | 132,717 |               |   | 119,353
|                                       |  |                      |         |               |   |        
|Gross profit                           |  |                      | 79,776  |               |   | 76,390 
|                                       |  |                      |         |               |   |        
|Operating expenses                     |  |                      |         |               |   |        
|Sales and marketing                    |  |                      | 37,156  |               |   | 33,686 
|Research and development               |  |                      | 11,155  |               |   | 10,874 
|General and administrative             |  |                      | 10,505  |               |   | 11,580 
|                                       |  |                      |         |               |   |        
|Total operating expenses               |  |                      | 58,816  |               |   | 56,140 
|                                       |  |                      |         |               |   |        
|Operating earnings                     |  |                      | 20,960  |               |   | 20,250 
|Interest expense, net                  |  |                      | 53      |               |   | 427    
|                                       |  |                      |         |               |   |        
|Earnings before income taxes           |  |                      | 20,907  |               |   | 19,823 
|Income tax expense                     |  |                      | 7,318   |               |   | 7,136  
|                                       |  |                      |         |               |   |        
|Net earnings                           |  | $                    | 13,589  |               | $ | 12,687 
|                                       |  |                      |         |               |   |        
|Net earnings per share:                |  |                      |         |               |   |        
|Basic                                  |  | $                    | 0.39    |               | $ | 0.37   
|                                       |  |                      |         |               |   |        
|Diluted                                |  | $                    | 0.38    |               | $ | 0.36   
|                                       |  |                      |         |               |   |        
|Shares used in per share calculations: |  |                      |         |               |   |        
|Basic                                  |  |                      | 34,440  |               |   | 33,896 
|                                       |  |                      |         |               |   |        
|Diluted                                |  |                      | 35,658  |               |   | 35,017 
|                                       |  |                      |         |               |   |        





See accompanying Notes to the Unaudited Consolidated Condensed Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                               |  |              |         |             |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ----------- | - | -------
|                                                                                                                                               |  | Jan. 2, 2004 |         | Oct. 3,2003
|ASSETS                                                                                                                                         |  |              |         |             |   |        
|                                                                                                                                               |  |             
|Current assets                                                                                                                                 |  |              |         |             |   |        
|Cash and cash equivalents                                                                                                                      |  | $            | 158,208 |             | $ | 135,791
|Accounts receivable, net                                                                                                                       |  |              | 162,921 |             |   | 165,049
|Inventories                                                                                                                                    |  |              | 136,272 |             |   | 125,649
|Deferred taxes                                                                                                                                 |  |              | 26,614  |             |   | 26,464 
|Other current assets                                                                                                                           |  |              | 15,347  |             |   | 17,788 
|                                                                                                                                               |  |              |         |             |   |        
|Total current assets                                                                                                                           |  |              | 499,362 |             |   | 470,741
|Property, plant, and equipment, net                                                                                                            |  |              | 121,309 |             |   | 120,088
|Goodwill                                                                                                                                       |  |              | 126,423 |             |   | 126,411
|Intangible assets, net                                                                                                                         |  |              | 16,076  |             |   | 16,762 
|Other assets                                                                                                                                   |  |              | 2,958   |             |   | 3,050  
|                                                                                                                                               |  |              |         |             |   |        
|Total assets                                                                                                                                   |  | $            | 766,128 |             | $ | 737,052
|                                                                                                                                               |  |              |         |             |   |        
|                                                                                                                                               |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                           |  |              |         |             |   |        
|                                                                                                                                               |  |             
|Current liabilities                                                                                                                            |  |              |         |             |   |        
|Notes payable                                                                                                                                  |  | $            | 1,860   |             | $ |       
|Current portion of long-term debt                                                                                                              |  |              | 2,500   |             |   | 2,811  
|Accounts payable                                                                                                                               |  |              | 60,344  |             |   | 61,209 
|Deferred profit                                                                                                                                |  |              | 12,576  |             |   | 14,385 
|Accrued liabilities                                                                                                                            |  |              | 137,287 |             |   | 141,938
|                                                                                                                                               |  |              |         |             |   |        
|Total current liabilities                                                                                                                      |  |              | 214,567 |             |   | 220,343
|Long-term debt                                                                                                                                 |  |              | 35,316  |             |   | 36,273 
|Deferred taxes                                                                                                                                 |  |              | 12,454  |             |   | 12,454 
|Other liabilities                                                                                                                              |  |              | 10,804  |             |   | 10,413 
|                                                                                                                                               |  |              |         |             |   |        
|Total liabilities                                                                                                                              |  |              | 273,141 |             |   | 279,483
|                                                                                                                                               |  |              |         |             |   |        
|                                                                                                                                               |  |             
|Commitments and contingencies (Notes 8, 9, and 11)                                                                                             |  |              |         |             |   |        
|                                                                                                                                               |  |             
|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34,703 shares at Jan. 2, 2004 and 34,181 shares
at Oct. 3, 2003 |  |              | 262,866 |             |   | 252,630
|Retained earnings                                                                                                                              |  |              | 207,155 |             |   | 193,566
|Accumulated other comprehensive income                                                                                                         |  |              | 22,966  |             |   | 11,373 
|                                                                                                                                               |  |              |         |             |   |        
|Total stockholders equity                                                                                                                     |  |              | 492,987 |             |   | 457,569
|                                                                                                                                               |  |              |         |             |   |        
|Total liabilities and stockholders equity                                                                                                     |  | $            | 766,128 |             | $ | 737,052
|                                                                                                                                               |  |              |         |             |   |        



See accompanying Notes
to the Unaudited Consolidated Condensed Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                    |  |                      |         |   |               |   |        |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ------------- | - | ------ | -
|                                                                                    |  | Fiscal Quarter Ended |        
|                                                                                    |  | Jan. 2, 2004         |         |   | Dec. 27, 2002 |  
|Cash flows from operating activities                                                |  |                      |         |   |               |   |        |  
|Net earnings                                                                        |  | $                    | 13,589  |   |               | $ | 12,687 |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                      |         |   |               |   |        |  
|Depreciation and amortization                                                       |  |                      | 6,306   |   |               |   | 5,440  |  
|Loss (gain) on disposition of property, plant, and equipment                        |  |                      | 37      |   |               |   | (26    | )
|Tax benefit from stock option exercises                                             |  |                      | 3,716   |   |               |   |       |  
|Changes in assets and liabilities, excluding effects of acquisitions:               |  |                      |         |   |               |   |        |  
|Accounts receivable, net                                                            |  |                      | 6,713   |   |               |   | 17,094 |  
|Inventories                                                                         |  |                      | (8,373  | ) |               |   | (5,218 | )
|Other current assets                                                                |  |                      | 4,647   |   |               |   | 785    |  
|Other assets                                                                        |  |                      | 71      |   |               |   | 18     |  
|Accounts payable                                                                    |  |                      | (2,112  | ) |               |   | (396   | )
|Deferred profit                                                                     |  |                      | (1,847  | ) |               |   | 1,004  |  
|Accrued liabilities                                                                 |  |                      | (6,882  | ) |               |   | (3,259 | )
|Other liabilities                                                                   |  |                      | (135    | ) |               |   | 502    |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Net cash provided by operating activities                                           |  |                      | 15,730  |   |               |   | 28,631 |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Cash flows from investing activities                                                |  |                      |         |   |               |   |        |  
|Proceeds from sale of property, plant, and equipment                                |  |                      | 56      |   |               |   | 174    |  
|Purchase of property, plant, and equipment                                          |  |                      | (4,359  | ) |               |   | (4,197 | )
|Purchase of businesses, net of cash acquired                                        |  |                      |        |   |               |   | (532   | )
|                                                                                    |  |                      |         |   |               |   |        |  
|Net cash used in investing activities                                               |  |                      | (4,303  | ) |               |   | (4,555 | )
|                                                                                    |  |                      |         |   |               |   |        |  
|Cash flows from financing activities                                                |  |                      |         |   |               |   |        |  
|Net issuance (repayment) of debt                                                    |  |                      | 266     |   |               |   | (931   | )
|Repurchase of common stock                                                          |  |                      | (2,478  | ) |               |   | (8,074 | )
|Issuance of common stock                                                            |  |                      | 8,997   |   |               |   | 1,380  |  
|Net transfers to Varian Medical Systems, Inc.                                       |  |                      | (326    | ) |               |   | (270   | )
|                                                                                    |  |                      |         |   |               |   |        |  
|Net cash provided by (used in) financing activities                                 |  |                      | 6,459   |   |               |   | (7,895 | )
|                                                                                    |  |                      |         |   |               |   |        |  
|Effects of exchange rate changes on cash and cash equivalents                       |  |                      | 4,531   |   |               |   | 467    |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Net increase in cash and cash equivalents                                           |  |                      | 22,417  |   |               |   | 16,648 |  
|Cash and cash equivalents at beginning of period                                    |  |                      | 135,791 |   |               |   | 65,145 |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Cash and cash equivalents at end of period                                          |  | $                    | 158,208 |   |               | $ | 81,793 |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Supplemental cash flow information                                                  |  |                      |         |   |               |   |        |  
|Income taxes paid, net of refunds received                                          |  | $                    | 4,595   |   |               | $ | 4,419  |  
|                                                                                    |  |                      |         |   |               |   |        |  
|Interest paid                                                                       |  | $                    | 597     |   |               | $ | 648    |  
|                                                                                    |  |                      |         |   |               |   |        |  



See accompanying Notes
to the Unaudited Consolidated Condensed Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



Note 1. Unaudited Interim Consolidated Condensed Financial Statements



These unaudited interim 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 generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The October 3, 2003 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim 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 3, 2003 filed with the SEC. In the opinion of the Companys
management, the unaudited interim 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 January
2, 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 generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from 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 (IB) 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 for
each share of VAI (the Distribution).



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 2004 will comprise the 52-week period ending October 1, 2004, and fiscal year 2003 was comprised of the 53-week period
ended October 3, 2003. The fiscal quarters ended January 2, 2004 and December 27, 2002 each comprised 13 weeks.



Stock-Based Compensation. The Company has adopted the pro forma disclosure provisions of Financial Accounting Standards Board (the
FASB) Statement of Financial Accounting Standards No. (FAS) 123, Accounting for Stock-Based Compensation, as amended by FAS 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 CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS(Continued)



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



|                                                                                                                                            |  |                      |        |   |              |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------ | - | ------ | -
|                                                                                                                                            |  | Fiscal Quarter Ended |       
|                                                                                                                                            |  | Jan. 2,2004          |        |   | Dec. 27,2002 |  
|(in thousands, except per share amounts)                                                                                                    |  |                      |        |   |              |  
|Net earnings:                                                                                                                               |  |                      |        |   |              |   |        |  
|As reported                                                                                                                                 |  | $                    | 13,589 |   |              | $ | 12,687 |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                      | (1,618 | ) |              |   | (1,780 | )
|                                                                                                                                            |  |                      |        |   |              |   |        |  
|Pro forma                                                                                                                                   |  | $                    | 11,971 |   |              | $ | 10,907 |  
|                                                                                                                                            |  |                      |        |   |              |   |        |  
|Net earnings per share:                                                                                                                     |  |                      |        |   |              |   |        |  
|Basic  as reported                                                                                                                         |  | $                    | 0.39   |   |              | $ | 0.37   |  
|                                                                                                                                            |  |                      |        |   |              |   |        |  
|Basic  pro forma                                                                                                                           |  | $                    | 0.35   |   |              | $ | 0.32   |  
|                                                                                                                                            |  |                      |        |   |              |   |        |  
|Diluted  as reported                                                                                                                       |  | $                    | 0.38   |   |              | $ | 0.36   |  
|                                                                                                                                            |  |                      |        |   |              |   |        |  
|Diluted  pro forma                                                                                                                         |  | $                    | 0.34   |   |              | $ | 0.31   |  
|                                                                                                                                            |  |                      |        |   |              |   |        |  



The presentation of
pro forma net earnings and net earnings per share does not include the effects of options granted prior to April 2, 1999 and, accordingly, is not necessarily representative of future pro forma calculations.



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



|                                       |  |                      |        |               |   |       
|-------------------------------------- |  | -------------------- | ------ | ------------- | - | ------
|                                       |  | Fiscal Quarter Ended
|                                       |  | Jan. 2, 2004         |        | Dec. 27, 2002
|(in thousands)                         |  |                      |        |              
|Net earnings                           |  | $                    | 13,589 |               | $ | 12,687
|Other comprehensive income:            |  |                      |        |               |   |       
|Currency translation adjustment        |  |                      | 11,593 |               |   | 5,206 
|Cash flow hedge fair value adjustments |  |                      |       |               |   | 107   
|                                       |  |                      |        |               |   |       
|Total other comprehensive income       |  |                      | 11,593 |               |   | 5,313 
|                                       |  |                      |        |               |   |       
|Total comprehensive income             |  | $                    | 25,182 |               | $ | 18,000
|                                       |  |                      |        |               |   |       



Note 4. Balance Sheet Detail



|                        |  |             |         |             |   |        
|----------------------- |  | ----------- | ------- | ----------- | - | -------
|                        |  | Jan. 2,2004 |         | Oct. 3,2003
|(In thousands)          |  |             |         |            
|Inventories             |  |             |         |             |   |        
|Raw materials and parts |  | $           | 71,981  |             | $ | 62,809 
|Work in process         |  |             | 12,863  |             |   | 12,539 
|Finished goods          |  |             | 51,428  |             |   | 50,301 
|                        |  |             |         |             |   |        
|                        |  | $           | 136,272 |             | $ | 125,649
|                        |  |             |         |             |   |        





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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED 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 currencies other than the local functional currencies. These contracts are accounted for under FAS 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 FAS 133. At January 2, 2004, there were no outstanding forward contracts
designated as cash flow hedges of forecasted transactions. During the fiscal quarter ended January 2, 2004, no gains or losses from hedge ineffectiveness were recognized.



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 January 2, 2004 follows:



|                  |  |                     |        |                          |   |       
|----------------- |  | ------------------- | ------ | ------------------------ | - | ------
|                  |  | Notional Value Sold |        | Notional Value Purchased
|(in thousands)    |  |                     |        |                         
|Euro              |  | $                   |       |                          | $ | 43,924
|Australian dollar |  |                     |       |                          |   | 15,150
|Japanese yen      |  |                     | 5,083  |                          |   |      
|Canadian dollar   |  |                     | 6,304  |                          |   |      
|British pound     |  |                     |       |                          |   | 4,839 
|Swedish krona     |  |                     |       |                          |   | 4,359 
|                  |  |                     |        |                          |   |       
|                  |  | $                   | 11,387 |                          | $ | 68,272
|                  |  |                     |        |                          |   |       



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 2004 were as follows:



|                              |  |                        |         |                     |   |                           |  |               |       |  |   |        
|----------------------------- |  | ---------------------- | ------- | ------------------- | - | ------------------------- |  | ------------- | ----- |  | - | -------
|                              |  | Scientific Instruments |         | Vacuum Technologies |   | Electronics Manufacturing |  | Total Company
|(in thousands)                |  |                        |         |                     |   |                           |  |              
|Balance as of October 3, 2003 |  | $                      | 123,343 |                     | $ | 966                       |  | $             | 2,102 |  | $ | 126,411
|Other adjustments             |  |                        | 12      |                     |   |                          |  |               |      |  |   | 12     
|                              |  |                        |         |                     |   |                           |  |               |       |  |   |        
|Balance as of January 2, 2004 |  | $                      | 123,355 |                     | $ | 966                       |  | $             | 2,102 |  | $ | 126,423
|                              |  |                        |         |                     |   |                           |  |               |       |  |   |        



The Company performs
an annual goodwill impairment assessment in the second quarter of each fiscal year. In the fiscal quarters ended March 28, 2003 and March 29, 2002, the Company completed its annual impairment tests as required by FAS 142, Goodwill and Other
Intangible Assets, and determined that there was no impairment of goodwill. The Company expects to complete its annual impairment test for fiscal year 2004 in its second fiscal quarter.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                            |  |              |        |   |              |   |        |  
|--------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | -
|                            |  | Jan. 2, 2004 |        |   | Oct. 3, 2003 |  
|(in thousands)              |  |              |        |   |              |  
|Intangible assets           |  |              |        |   |              |   |        |  
|Existing technology         |  | $            | 6,972  |   |              | $ | 6,972  |  
|Patents and core technology |  |              | 4,572  |   |              |   | 4,572  |  
|Trade names and trademarks  |  |              | 2,176  |   |              |   | 2,176  |  
|Customer lists              |  |              | 5,905  |   |              |   | 5,905  |  
|Other                       |  |              | 2,059  |   |              |   | 2,023  |  
|                            |  |              |        |   |              |   |        |  
|                            |  |              | 21,684 |   |              |   | 21,648 |  
|Accumulated amortization    |  |              | (5,608 | ) |              |   | (4,886 | )
|                            |  |              |        |   |              |   |        |  
|                            |  | $            | 16,076 |   |              | $ | 16,762 |  
|                            |  |              |        |   |              |   |        |  



Amortization expense
relating to intangible assets was $0.7 million and $0.5 million during the fiscal quarters ended January 2, 2004 and December 27, 2002, respectively.



Note 7. Net Earnings Per Share



Basic earnings per share are calculated based on net earnings and the weighted-average number of shares 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 January 2, 2004 and December 27, 2002, options to purchase 61,000 and 987,000 shares,
respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.



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



|                                            |  |                      |  |              
|------------------------------------------- |  | -------------------- |  | -------------
|                                            |  | Fiscal Quarter Ended
|                                            |  | Jan. 2, 2004         |  | Dec. 27, 2002
|(in thousands)                              |  |                      |  |              
|Weighted-average basic shares outstanding   |  | 34,440               |  | 33,896       
|Net effect of dilutive stock options        |  | 1,218                |  | 1,121        
|                                            |  |                      |  |              
|Weighted-average diluted shares outstanding |  | 35,658               |  | 35,017       
|                                            |  |                      |  |              



Note 8. Debt and Credit Facilities



Credit facilities. During fiscal year 2002, the
Company established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of January 2, 2004. Borrowings under this credit
facility bear interest at rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings of the Company and
require the maintenance by the Company of certain levels of financial performance. The Company was in compliance with all such covenants and requirements at January 2, 2004. Subsequent to January 2, 2004, the Company terminated this credit facility.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



During fiscal year 2003, the Company established a short-term bank credit facility in Japan in the
amount of 300 million yen (approximately $2.8 million at January 2, 2004). The credit facility is available to the Companys wholly owned Japanese subsidiary for working capital purposes. As of January 2, 2004, an aggregate of 200 million yen
(approximately $1.9 million) was outstanding under this credit facility at an annual interest rate of 0.8%, and 100 million yen (approximately $0.9 million) was available for future borrowing. This credit facility contains certain covenants that
limit future borrowings of the Company from this facility, with which the Company was in compliance at January 2, 2004.



In addition to these bank credit facilities, as of January 2, 2004, the Company and its subsidiaries had a total of $66.4 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 January 2, 2004. All of these credit facilities contain
certain conditions and events of default customary for such facilities, with which the Company was in compliance at January 2, 2004. Of the $66.4 million in uncommitted and unsecured credit facilities, a total of $40.2 million was limited for use
by, or in favor of, certain subsidiaries. As of January 2, 2004, a total of $25.8 million of the $40.2 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 Consolidated Financial Statements at January 2, 2004. No amounts had been drawn by beneficiaries under
these or any other outstanding guarantees or letters of credit as of that date.



Long-term debt. As of January 2, 2004, the Company had $33.7 million in term loans outstanding compared to $35.0 million at October 3, 2003. As of both January 2, 2004 and October 3, 2003, 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 January 2, 2004 and October 3, 2003. 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 January 2, 2004. The Company also had other long-term notes
payable of $4.1 million as of January 2, 2004 with a weighted-average interest rate of 0.0% and $4.1 million as of October 3, 2003 with a weighted-average interest rate of 0.1%.



Future principal payments on long-term debt outstanding on January 2, 2004 will be $1.3 million, $4.5 million, $4.5
million, $2.5 million, $6.2 million, $0.0 million, and $18.8 million during the nine months ending October 1, 2004 and fiscal years 2005, 2006, 2007, 2008, 2009, and thereafter, respectively.



Note 9. 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 quarter ended January 2, 2004
follow:



|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|(in thousands)                |  |   |       
|Balance as of October 3, 2003 |  | $ | 10,261 |  
|Charges to costs and expenses |  |   | 1,373  |  
|Warranty expenditures         |  |   | (1,290 | )
|                              |  |   |        |  
|Balance as of January 2, 2004 |  | $ | 10,344 |  
|                              |  |   |        |  



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Indemnification obligations. In November 2002, the FASB issued Interpretation No.
(FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to recognize a liability for and/or disclose obligations it has
undertaken in relation to the issuance of the guarantee. In June 2003, the FASB issued guidance clarifying certain provisions within FIN 45. Under this guidance, arrangements involving indemnification clauses are subject to the disclosure
requirements of FIN 45 only.



The Company has given multiple
indemnities to Varian Medical Systems, Inc. (VMS) (formerly VAI) and Varian Semiconductor Equipment Associates, Inc. (VSEA) in connection with the IB as conducted by VAI prior to the Distribution. These indemnities 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 indemnities are disclosed as exhibits to the
Companys Annual Report on Form 10-K. The estimated fair value of these indemnities 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,
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 indemnity 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 indemnities and the estimated fair value of these indemnities 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. To date, claims
made under such indemnities have been insignificant and the estimated fair value of these indemnities is not considered to be material.



Note 10. Stock Repurchase Program



During fiscal year 2002, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until
October 1, 2004. During the fiscal quarter ended January 2, 2004, the Company repurchased and retired 60,000 shares under this authorization at an aggregate cost of $2.5 million. As of January 2, 2004, the Company had remaining authorization for
future repurchases of 537,000 shares.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 11. 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 January 2, 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 $1.7 million to $4.8 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 January 2, 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 $1.7 million as of January 2, 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 January 2, 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 $5.7 million to $12.0
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 27 years as of January 2, 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, these amounts totaled $7.1 million at January 2, 2004. The Company therefore had an accrual of $4.9 million as of January 2, 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 $1.7 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.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED 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 indemnity obligation, and the Company therefore has a short-term receivable of $0.2 million in accounts receivable and a $1.2 million receivable in Other assets as of January 2, 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 12. 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, or 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.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Corporate includes 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.



|                          |  |                      |       |                      |   |                 |  |   |                 |   |  |   |      |  
|------------------------- |  | -------------------- | ----- | -------------------- | - | --------------- |  | - | --------------- | - |  | - | ---- | -
|                          |  | Fiscal Quarter Ended |       | Fiscal Quarter Ended |  
|                          |  | Jan. 2, 2004         |       | Dec. 27, 2002        |   | Jan. 2, 2004    |  |   | Dec. 27, 2002   |  
|                          |  | Sales                |       | Sales                |   | Pretax Earnings |  |   | Pretax Earnings |  
|(in millions)             |  |                      |       |                      |   |                 |  |   |                 |  
|Scientific Instruments    |  | $                    | 134.1 |                      | $ | 124.3           |  | $ | 12.7            |   |  | $ | 13.1 |  
|Vacuum Technologies       |  |                      | 31.3  |                      |   | 29.4            |  |   | 4.8             |   |  |   | 4.5  |  
|Electronics Manufacturing |  |                      | 47.1  |                      |   | 42.0            |  |   | 5.1             |   |  |   | 4.7  |  
|                          |  |                      |       |                      |   |                 |  |   |                 |   |  |   |      |  
|Total industry segments   |  |                      | 212.5 |                      |   | 195.7           |  |   | 22.6            |   |  |   | 22.3 |  
|General corporate         |  |                      |      |                      |   |                |  |   | (1.6            | ) |  |   | (2.1 | )
|Interest expense, net     |  |                      |      |                      |   |                |  |   | (0.1            | ) |  |   | (0.4 | )
|                          |  |                      |       |                      |   |                 |  |   |                 |   |  |   |      |  
|Total                     |  | $                    | 212.5 |                      | $ | 195.7           |  | $ | 20.9            |   |  | $ | 19.8 |  
|                          |  |                      |       |                      |   |                 |  |   |                 |   |  |   |      |  



Note 13. Recent Accounting
Pronouncements



In December 2003, the FASB issued FAS 132
(revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106. FAS 132 does not change the measurement or recognition of those plans; rather, it requires
additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit plans and other postretirement benefit plans. The disclosure requirements of FAS 132 are effective for interim periods beginning after
December 15, 2003, and will be adopted by the Company in the second quarter of fiscal year 2004.



In December 2003, the SEC issued Staff Accounting Bulletin No. (SAB) 104, Revenue Recognition, which supercedes SAB 101, Revenue
Recognition in Financial Statements.SAB 104s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements that was superceded as a result of the issuance of Emerging Issues Task
Force Issue No. (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 differs from SAB 101 to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The Company adopted the provisions of SAB 101 in fiscal year 2001 and the provisions of EITF 00-21 in fiscal year 2003. As a
result, the issuance of SAB 104 had no impact on the Companys revenue recognition policy or its financial condition or results of operations.



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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.



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 that section carefully.



Other risks and uncertainties include, but are not limited to, the following:
whether we will succeed in new product development, commercialization, performance, and acceptance, particularly in life science applications; 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) systems; whether we can increase profit margins on newer leading-edge NMR products; whether we will see continued demand
for vacuum products and 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 be able to successfully integrate acquired
businesses; whether we will see reduced demand from customers that operate in cyclical industries; whether government funding for research might decline; the actual cost of anticipated restructuring activities and their impact on future costs; and
other risks detailed from time to time in our filings with the Securities and Exchange Commission (the SEC). You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the
SEC, before deciding to invest in our stock or to maintain or change your investment. We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise.



Results of Operations



First Quarter of Fiscal Year 2004 Compared to First Quarter of Fiscal
Year 2003



Segment Results



Scientific Instruments. Scientific Instruments sales of $134.1
million in the first quarter of fiscal year 2004 increased 7.9% over the first quarter of fiscal year 2003 sales of $124.3 million. All major geographic regions contributed to the increase in sales, which was primarily driven by good customer
acceptance of new products introduced over the past two years. In addition, strong sales of mass spectrometer products helped to offset lower sales of low-field NMR systems, which appears to have resulted from lower funding in the quarter for such
systems and some shift in remaining funding toward other NMR systems, NMR accessories, or other instruments.



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##### Table of Contents

Earnings from operations in the first quarter of fiscal year 2004 of $12.7 million (9.5% of sales)
decreased from $13.1 million (10.5% of sales) in the first quarter of fiscal year 2003. These results reflect pretax restructuring costs of $0.2 million and $1.6 million in the first quarters of fiscal year 2004 and 2003, respectively. The
restructuring costs incurred in the first quarter of fiscal year 2004 related to preparations for the consolidation of three consumable products factories into one in Southern California. The restructuring costs incurred in the first quarter of
fiscal year 2003 were comprised of employee severance-related costs to improve efficiency and more closely align employee skill sets with the Companys evolving product mix as we continued to emphasize products targeted toward life science
applications. Excluding the impact of these restructuring costs, the decrease in operating earnings resulted primarily from lower gross profit margins, which were adversely impacted by a disproportionate increase in sales of lower-margin high-field
NMR systems and leading-edge cold probes for NMR and lower sales of higher-margin low-field NMR systems. In particular, cold probes, which are state-of-the-art products, have high initial costs. While margins on these products are expected to
improve as we progress along the learning curve in producing, installing, and supporting this breakthrough technology, they will continue to have some adverse impact on gross profit margins over the remainder of fiscal year 2004.



Vacuum Technologies. Vacuum Technologies sales of $31.3 million in the
first quarter of fiscal year 2004 increased 6.5% from $29.4 million in the first quarter of fiscal year 2003. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the first
quarter of fiscal year 2004 increased to $4.8 million (15.4% of sales), up from $4.5 million (15.2% of sales) in the first quarter of fiscal year 2003. The increase in operating earnings was primarily attributable to higher gross profit margins,
partially offset by higher operating costs outside of the United States due in part to the impact of the weaker U.S. dollar on operating costs.



Electronics Manufacturing. Electronics Manufacturing sales in the first quarter of fiscal year 2004 of $47.1 million increased 12.0% from $42.0
million in the first quarter of fiscal year 2003. The increase in sales was primarily due to improved demand from industrial customers and included approximately $3 million in revenues from new customers obtained through an acquisition completed
during the third quarter of fiscal year 2003. Earnings from operations in the first quarter of fiscal year 2004 of $5.1 million (10.8% of sales) increased from $4.7 million (11.2% of sales) in the first quarter of fiscal year 2003. This increase was
primarily due to the higher sales in the first quarter of fiscal year 2004.



Consolidated Results



Sales. Sales were $212.5 million in the first quarter of fiscal year 2004, an increase of 8.6% from sales of $195.7 million in the first quarter of fiscal year 2003. Sales by the Scientific Instruments, Vacuum
Technologies, and Electronics Manufacturing segments increased by 7.9%, 6.5%, and 12.0%, respectively, compared to the prior-year period.



Geographically, sales in North America of $120.0 million, Europe of $59.9 million, and the rest of the world of $32.6 million in the first quarter of
fiscal year 2004 represented increases of 9.1%, 4.5%, and 14.7%, respectively, as compared to the first quarter of fiscal year 2003. All three segments experienced an increase in sales across all major geographic regions that they served, primarily
because of general economic improvement and continued acceptance of new products introduced by us over the past two years. The increase in North America sales was mainly due to higher demand for Scientific Instruments and Electronics Manufacturing
products. The increase in Europe was driven by improved Scientific Instruments and Vacuum Technologies sales; in part, this reflects the currency effect of the stronger Euro in the first quarter of fiscal year 2004. The increase in the rest of the
world was primarily driven by continued growth in Scientific Instruments sales into the Pacific Rim and Latin America.



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##### Table of Contents

Gross Profit. Gross profit was $79.8 million (representing 37.5% of sales) in the first quarter of
fiscal year 2004, compared to $76.4 million (representing 39.0% of sales) in the first quarter of fiscal year 2003. The decrease in gross profit percentage resulted primarily from increased sales of certain newer leading-edge Scientific Instruments
products, which had lower margins due to higher production, installation, and support costs, and a mix shift toward high-field NMR systems and NMR cold probes and away from low-field NMR systems in the first quarter of fiscal year 2004.



Sales and Marketing. Sales and marketing expenses were $37.2
million (representing 17.5% of sales) in the first quarter of fiscal year 2004, compared to $33.7 million (representing 17.2% of sales) in the first quarter of fiscal year 2003. The increase in sales and marketing expenses resulted primarily from
our acquisition of the non-clinical, drugs of abuse testing business (the DAT Business) of Roche Diagnostics Corporation in January 2003, the weaker U.S. dollar, which increased costs for most non-U.S. operations, and costs associated
with higher revenues.



Research and Development.
Research and development expenses were $11.2 million (5.2% of sales) in the first quarter of fiscal year 2004, compared to $10.9 million (representing 5.6% of sales) in the first quarter of fiscal year 2003. The higher research and development
expenses were primarily the result of our continued focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications. 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. As a percentage of sales, research and development expenses decreased primarily because of the timing of certain project-specific costs. We expect that,
as a percentage of sales, research and development expenses will be slightly above this level for the remainder of fiscal year 2004 as we continue to invest in new product development.



General and Administrative. General and administrative expenses were $10.5 million (representing 4.9% of sales) in
the first quarter of fiscal year 2004, compared to $11.6 million (representing 5.9% of sales) in the first quarter of fiscal year 2003. The decrease in general and administrative expenses resulted primarily from $2.0 million in pretax restructuring
costs that were incurred in the first quarter of fiscal year 2003, of which $1.6 million related to actions taken in the Scientific Instruments segment, as described above. During the first quarter of fiscal year 2004, a total of $0.2 million in
pretax restructuring costs were incurred in the Scientific Instruments segment, as described above. This decrease due to lower restructuring costs was partially offset by higher intangible asset amortization resulting from the acquisition of the DAT
Business and higher insurance costs.



We currently anticipate
that general and administrative expenses for the remainder of fiscal year 2004 will include approximately $3.8 million in pretax restructuring costs relating to the consolidation of three consumable products factories into one in Southern
California. Of this amount, approximately $3.4 million is expected to be incurred in the fourth quarter of fiscal year 2004, including a non-cash charge of approximately $2.1 million relating to the write-off of leasehold improvements and certain
fixed assets.



Taxes on Earnings. The effective income
tax rate was 35.0% for the first quarter of fiscal year 2004 compared to 36.0% for the first quarter of fiscal year 2003. The tax rate in the first quarter of fiscal year 2004 was lower than the rate in the first quarter of fiscal year 2003 due
mainly to a reduction in tax rates and higher tax credits in certain foreign jurisdictions. For the full fiscal year 2003, the effective tax rate was 35.0%.



Net Earnings. Net earnings for the first quarter of fiscal year 2004 were $13.6 million ($0.38 net earnings per diluted share), compared to $12.7
million ($0.36 net earnings per diluted share) in the first quarter of fiscal year 2003. These results include the impact of $0.2 million and $2.0 million in pretax restructuring costs in the first quarter of fiscal years 2004 and 2003,
respectively. Excluding the impact of these costs, the decrease in net earnings resulted primarily from decreased profitability in the Scientific Instruments segment due to lower gross profit margins. The decrease due to lower Scientific Instruments
profitability was partially offset by increased Vacuum Technologies and Electronics Manufacturing profitability from higher sales.



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With respect to consolidated results for the remainder of fiscal year 2004, we expect high single-digit
revenue growth for both the second quarter of fiscal year 2004 and the full fiscal year. On a GAAP basis, operating margins are expected to be between 8.5% and 9.5% in the second quarter of fiscal year 2004 and between 8.8% and 9.8% for the full
fiscal year. GAAP net earnings per diluted share are expected to be between $0.34 and $0.38 for the second quarter of fiscal year 2004 and between $1.47 and $1.61 for the full fiscal year. These projected GAAP operating margins and GAAP net earnings
per diluted share include anticipated pretax restructuring costs of approximately $4 million relating to the consolidation of three consumable products factories into one in Southern California, of which $0.2 million was incurred in the first
quarter of fiscal year 2004 and approximately $3.4 million is expected to be incurred in the fourth quarter of fiscal year 2004, including a non-cash charge of approximately $2.1 million relating to the write-off of leasehold improvements and
certain fixed assets. The projected GAAP operating margins and GAAP net earnings per diluted share also include approximately $0.7 million and $2.8 million in anticipated pretax intangible asset amortization during the second quarter of fiscal year
2004 and for the full fiscal year, respectively.



Liquidity and Capital
Resources



We generated $15.7 million of cash from
operating activities in the first quarter of fiscal year 2004, which compares to $28.6 million generated in the first quarter of fiscal year 2003. The decrease in cash from operating activities resulted primarily from lower collections of accounts
receivable, higher inventory levels, and other overall reductions in working capital utilization due, in part, to the fact that both the Christmas and New Years Day holidays fell in our first quarter in fiscal year 2004 while the New
Years Day holiday fell in the second quarter of fiscal year 2003.



We generated $6.5 million of cash from financing activities in the first quarter of fiscal year 2004, which compares to $7.9 million used in the first quarter of fiscal year 2003. The increase in cash provided by financing activities in the
first quarter of fiscal year 2004 was primarily due to lower cash expenditures to repurchase common stock and higher cash proceeds from the issuance of common stock pursuant to stock option exercises and purchases of stock by employees under our
Employee Stock Purchase Plan.



During fiscal year 2002, we
established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of January 2, 2004. Borrowings under this credit facility bear
interest at rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings and require us to maintain certain
levels of financial performance. We were in compliance with all such covenants and requirements at January 2, 2004. Subsequent to January 2, 2004, we determined that our current liquidity position and the short remaining term of the credit facility
no longer justified the cost of maintaining the facility. As a result, the facility was terminated in January 2004.



During fiscal year 2003, we established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.8 million at January
2, 2004). The credit facility is available to our wholly owned Japanese subsidiary for working capital purposes. As of January 2, 2004, an aggregate of 200 million yen (approximately $1.9 million) was outstanding under this credit facility at an
annual interest rate of 0.8%, and 100 million yen (approximately $0.9 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
January 2, 2004.



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In addition to these bank credit facilities, as of January 2, 2004, we had a total of $66.4 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 January 2, 2004. All of these credit
facilities contain certain conditions and events of default customary for such facilities, with which we were in compliance at January 2, 2004. Of the $66.4 million in uncommitted and unsecured credit facilities, a total of $40.2 million was limited
for use by, or in favor of, certain subsidiaries. As of January 2, 2004, a total of $25.8 million of the $40.2 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 Consolidated Financial Statements at January 2, 2004. No amounts had been drawn by beneficiaries under these
or any other outstanding guarantees or letters of credit as of that date.



As of January 2, 2004, we had $33.7 million in term loans outstanding compared to $35.0 million at October 3, 2003. As of both January 2, 2004 and October 3, 2003, 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 January 2, 2004 and October 3, 2003. 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 January 2, 2004. We also had other long-term notes payable of $4.1 million as of January 2,
2004 with a weighted-average interest rate of 0.0% and $4.1 million as of October 3, 2003 with a weighted-average interest rate of 0.1%.



Future principal payments on long-term debt outstanding on January 2, 2004 will be $1.3 million, $4.5 million, $4.5 million, $2.5 million, $6.2 million,
$0.0 million and $18.8 million during the nine months ending October 1, 2004 and fiscal years 2005, 2006, 2007, 2008, 2009, and thereafter, respectively.



In connection with an acquisition completed during fiscal year 2003, we have accrued but not yet paid a portion of the purchase price amount that has been
retained to secure the sellers indemnification obligations. This retained amount, which is due to be paid during fiscal year 2004 (net of any indemnification claims), totaled approximately $0.1 million at January 2, 2004. In addition to this
retained payment, we are, from time to time, obligated to pay additional cash purchase price amounts in the event that contingent financial or operational milestones are met by the acquired businesses. As of January 2, 2004, up to a maximum of $10.6
million could be payable through fiscal year 2006 under these contingent consideration arrangements. 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).



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 industry 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 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 January 2, 2004:



|                                           |  |                                 |       |              |   |       |  |      |       |      |   |            |  |       |       |  |   |       |  |   |        |  |   |       
|------------------------------------------ |  | ------------------------------- | ----- | ------------ | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                           |  | Nine Months Ending Oct. 1, 2004 |       | Fiscal Years |   |      
|                                           |  | 2005                            |       | 2006         |   | 2007  |  | 2008 |       | 2009 |   | Thereafter |  | Total
|(in thousands)                             |  |                                 |       |              |   |       |  |      |       |      |   |            |  |       |       | 
|Operating leases                           |  | $                               | 5,897 |              | $ | 5,442 |  | $    | 3,421 |      | $ | 2,405      |  | $     | 2,040 |  | $ | 1,833 |  | $ | 25,540 |  | $ | 46,578
|Notes payable                              |  |                                 | 1,860 |              |   |      |  |      |      |      |   |           |  |       |      |  |   |      |  |   |       |  |   | 1,860 
|Long-term debt (including current portion) |  |                                 | 1,250 |              |   | 4,533 |  |      | 4,533 |      |   | 2,500      |  |       | 6,250 |  |   |      |  |   | 18,750 |  |   | 37,816
|                                           |  |                                 |       |              |   |       |  |      |       |      |   |            |  |       |       |  |   |       |  |   |        |  |   |       
|Total contractual cash obligations         |  | $                               | 9,007 |              | $ | 9,975 |  | $    | 7,954 |      | $ | 4,905      |  | $     | 8,290 |  | $ | 1,833 |  | $ | 44,290 |  | $ | 86,254
|                                           |  |                                 |       |              |   |       |  |      |       |      |   |            |  |       |       |  |   |       |  |   |        |  |   |       



In addition to the
above, we had cancelable commitments to purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $33.1 million, net of deposits paid, as of January 2, 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 January 2, 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 $10.6 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 FAS 132 (revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106. FAS 132 does not change the measurement or recognition of those plans; rather, it requires additional disclosures about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit plans and other postretirement benefit plans. The disclosure requirements of FAS 132 are effective for interim periods beginning after December 15, 2003, and we will
adopt them in the second quarter of fiscal year 2004.



In
December 2003, the SEC issued Staff Accounting Bulletin No. (SAB) 104, Revenue Recognition, which supercedes SAB 101, Revenue Recognition in Financial Statements.SAB 104s primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements that was superceded as a result of the issuance of Emerging Issues Task Force Issue No. (EITF) 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB 104 rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 differs from SAB 101 to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. We adopted the provisions of SAB 101 in fiscal year 2001 and the provisions of EITF 00-21 in fiscal year 2003. As a result, the issuance of SAB 104 had no impact on our revenue recognition policy or our financial condition or
results of operations.



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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.



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. 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, and new product introductions. 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 systems, probes, and components (together
accounting for less than 10% of our revenues and operating profits) 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 systems, require superconducting magnets that can be
difficult to manufacture. These superconducting magnets 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 systems and probes, which in turn can make it difficult for us to forecast the timing of revenue
recognition and the achieved gross profit margin on these systems and probes.



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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 systems, 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 systems require helium to operate
those systems; shortages of helium could result in higher helium prices, and thus higher operating costs for NMR systems, which could impact demand for those systems.



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 was renegotiated following a recent brief work stoppage. A further 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.



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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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.



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).



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
January 2, 2004, it was nonetheless estimated that the our share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.7 million to $4.8 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 January 2, 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 $1.7 million as of January 2, 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 January 2, 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 $5.7 million to $12.0 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 27 years as of January 2, 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, these amounts totaled $7.1 million at January 2, 2004. We therefore had an accrual of $4.9 million as of January 2, 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 $1.7 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.



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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 indemnity obligation, and we therefore have a short-term receivable of $0.2 million in accounts receivable and a $1.2 million receivable in other assets as of January 2, 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, 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.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Foreign Currency Exchange Risk



We typically hedge our foreign currency exposures associated with certain assets and liabilities denominated in non-functional currencies and, from time to time, hedge certain forecasted foreign currency cash flows. 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 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. Our foreign exchange forward
contracts generally range from one to 12 months in original maturity.



At January 2, 2004, there were no outstanding forward contracts designated as cash flow hedges of forecasted transactions. During the fiscal quarter ended January 2, 2004, no gains or losses from cash flow hedge ineffectiveness were
recognized. A summary of all forward exchange contracts that were outstanding as of January 2, 2004 follows:



|                  |  |                     |        |                          |   |       
|----------------- |  | ------------------- | ------ | ------------------------ | - | ------
|                  |  | Notional Value Sold |        | Notional Value Purchased
|(in thousands)    |  |                     |        |                         
|Euro              |  | $                   |       |                          | $ | 43,924
|Australian dollar |  |                     |       |                          |   | 15,150
|Japanese yen      |  |                     | 5,083  |                          |   |      
|Canadian dollar   |  |                     | 6,304  |                          |   |      
|British pound     |  |                     |       |                          |   | 4,839 
|Swedish krona     |  |                     |       |                          |   | 4,359 
|                  |  |                     |        |                          |   |       
|                  |  | $                   | 11,387 |                          | $ | 68,272
|                  |  |                     |        |                          |   |       



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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 January 2, 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 and notes payable
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.



Debt Obligations



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



|                                           |  |                                 |       |   |              |      |       |   |      |   |       |      |  |   |       |   |  |            |       |   |       |   |   |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------------------------------- | ----- | - | ------------ | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---------- | ----- | - | ----- | - | - | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | Nine Months Ending Oct. 1, 2004 |       |   | Fiscal Years |      |       |   |     
|                                           |  |                                 | 2005  |   |              | 2006 |       |   | 2007 |   |       | 2008 |  |   | 2009  |   |  | Thereafter |       |   | Total |  
|(dollars in thousands)                     |  |                                 |       |   |              |      |       |   |      |   |       |      |  |   |       |   |  |            |       |   |       |   |   |  
|Notes payable                              |  | $                               | 1,860 |   |              | $    |      |   |      | $ |      |      |  | $ |      |   |  | $          |      |   |       | $ |  |   |  | $ |       |   |  | $ | 1,860  |  
|Average interest rate                      |  |                                 | 0.8   | % |              |      |      | % |      |   |      | %    |  |   |      | % |  |            |      | % |       |   |  | % |  |   |       | % |  |   | 0.8    | %
|Long-term debt (including current portion) |  | $                               | 1,250 |   |              | $    | 4,533 |   |      | $ | 4,533 |      |  | $ | 2,500 |   |  | $          | 6,250 |   |       | $ |  |   |  | $ | 18,750 |   |  | $ | 37,816 |  
|Average interest rate                      |  |                                 | 7.2   | % |              |      | 4.0   | % |      |   | 4.0   | %    |  |   | 7.2   | % |  |            | 6.7   | % |       |   |  | % |  |   | 6.7    | % |  |   | 6.1    | %





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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##### Table of Contents

PART II

OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits.
| | --- |  | ---------



|            |  |                                                                                                                              |  |               
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Exhibit No. |  | Exhibit Description                                                                                                          |  | Filed Herewith
|10.7*       |  | Amended and Restated Management Incentive Plan, dated as of November 10, 2003.                                               |  | X             
|            |  |                                                                                                                             
|10.16*      |  | Amended and Restated Change in Control Agreement, dated as of December 31, 2003, between Varian, Inc. and Garry W. Rogerson. |  | X             
|            |  |                                                                                                                             
|10.18*      |  | Description of Compensatory Arrangements Between Registrant and Directors.                                                   |  | 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.
|- |  | --------------------------------------------------------



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------



The Company furnished a Current Report on Form 8-K on November 5, 2003 for its press release reporting the results for the fourth quarter and fiscal year
ended October 3, 2003.



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##### Table of Contents

SIGNATURES



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



|                        |  |  |  |                           |  |                        |  |                                                                                                                                          
|----------------------- |  |  |  | ------------------------- |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                        |  |  |  | VARIAN, INC. (Registrant)
|                        |  |  | 
|Date: February 11, 2004 |  |  |  | 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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