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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 April 1, 2005



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
May 6, 2005 was 34,156,395.



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##### Table of Contents

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2005



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|PART I  |  | Financial Information                                                                 |  |     
|        |  |                                                                                      
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Earnings                                |  | 3   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Balance Sheet                                        |  | 4   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Cash Flows                              |  | 5   
|        |  |                                                                                      
|        |  | Notes to the Unaudited Condensed Consolidated Financial Statements                    |  | 6   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 25  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 46  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 48  
|        |  |                                                                                      
|PART II |  | Other Information                                                                     |  |     
|        |  |                                                                                      
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 49  
|        |  |                                                                                      
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 49  
|        |  |                                                                                      
|Item 6. |  | Exhibits                                                                              |  | 50  





2



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1.    Financial Statements



VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                                      |  | Fiscal Quarter Ended |         |   | Six Months Ended |  
|                                                                                      |  | April 1,2005         |         |   | April 2,2004     |   |         | April 1,2005 |  |   | April 2,2004 |  
|Sales                                                                                 |  | $                    | 197,009 |   |                  | $ | 188,388 |              |  | $ | 387,950      |   |  | $ | 353,805 |  
|Cost of sales                                                                         |  |                      | 112,072 |   |                  |   | 105,411 |              |  |   | 221,490      |   |  |   | 197,572 |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Gross profit                                                                          |  |                      | 84,937  |   |                  |   | 82,977  |              |  |   | 166,460      |   |  |   | 156,233 |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Operating expenses                                                                    |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Sales and marketing                                                                   |  |                      | 41,848  |   |                  |   | 40,469  |              |  |   | 81,592       |   |  |   | 77,495  |  
|Research and development                                                              |  |                      | 14,233  |   |                  |   | 12,649  |              |  |   | 27,073       |   |  |   | 23,804  |  
|General and administrative                                                            |  |                      | 14,745  |   |                  |   | 12,304  |              |  |   | 29,762       |   |  |   | 22,094  |  
|Purchased in-process research and development                                         |  |                      |        |   |                  |   |        |              |  |   | 700          |   |  |   |        |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Total operating expenses                                                              |  |                      | 70,826  |   |                  |   | 65,422  |              |  |   | 139,127      |   |  |   | 123,393 |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Operating earnings                                                                    |  |                      | 14,111  |   |                  |   | 17,555  |              |  |   | 27,333       |   |  |   | 32,840  |  
|                                                                                      |  |                      |         |  
|Interest income (expense)                                                             |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Interest income                                                                       |  |                      | 1,333   |   |                  |   | 803     |              |  |   | 2,292        |   |  |   | 1,368   |  
|Interest expense                                                                      |  |                      | (558    | ) |                  |   | (598    | )            |  |   | (1,129       | ) |  |   | (1,216  | )
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Total interest income, net                                                            |  |                      | 775     |   |                  |   | 205     |              |  |   | 1,163        |   |  |   | 152     |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Earnings from continuing operations before income taxes                               |  |                      | 14,886  |   |                  |   | 17,760  |              |  |   | 28,496       |   |  |   | 32,992  |  
|Income tax expense                                                                    |  |                      | 5,061   |   |                  |   | 5,980   |              |  |   | 6,927        |   |  |   | 11,109  |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Earnings from continuing operations                                                   |  |                      | 9,825   |   |                  |   | 11,780  |              |  |   | 21,569       |   |  |   | 21,883  |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|                                                                                      |  |                      |         |  
|Discontinued operations (Note 4)                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Earnings from operations of disposed Electronics Manufacturing business, net of taxes |  |                      | 1,975   |   |                  |   | 2,914   |              |  |   | 5,169        |   |  |   | 6,400   |  
|Gain on sale of Electronics Manufacturing business, net of taxes                      |  |                      | 70,085  |   |                  |   |        |              |  |   | 70,085       |   |  |   |        |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Earnings from discontinued operations                                                 |  |                      | 72,060  |   |                  |   | 2,914   |              |  |   | 75,254       |   |  |   | 6,400   |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net earnings                                                                          |  | $                    | 81,885  |   |                  | $ | 14,694  |              |  | $ | 96,823       |   |  | $ | 28,283  |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net earnings per basic share:                                                         |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Continuing operations                                                                 |  | $                    | 0.28    |   |                  | $ | 0.34    |              |  | $ | 0.62         |   |  | $ | 0.63    |  
|Discontinued operations                                                               |  |                      | 2.07    |   |                  |   | 0.08    |              |  |   | 2.15         |   |  |   | 0.19    |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net earnings                                                                          |  | $                    | 2.35    |   |                  | $ | 0.42    |              |  | $ | 2.77         |   |  | $ | 0.82    |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net earnings per diluted share:                                                       |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Continuing operations                                                                 |  | $                    | 0.28    |   |                  | $ | 0.33    |              |  | $ | 0.60         |   |  | $ | 0.61    |  
|Discontinued operations                                                               |  |                      | 2.01    |   |                  |   | 0.08    |              |  |   | 2.11         |   |  |   | 0.18    |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net earnings                                                                          |  | $                    | 2.29    |   |                  | $ | 0.41    |              |  | $ | 2.71         |   |  | $ | 0.79    |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Shares used in per share calculations:                                                |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic                                                                                 |  |                      | 34,902  |   |                  |   | 34,663  |              |  |   | 34,913       |   |  |   | 34,530  |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted                                                                               |  |                      | 35,687  |   |                  |   | 35,870  |              |  |   | 35,673       |   |  |   | 35,785  |  
|                                                                                      |  |                      |         |   |                  |   |         |              |  |   |              |   |  |   |         |  



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.





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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                                    |  |              |         |                |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | -------------- | - | -------
|                                                                                                                                                    |  | April 1,2005 |         | October 1,2004
|ASSETS                                                                                                                                              |  |              |         |                |   |        
|                                                                                                                                                    |  |             
|Current assets                                                                                                                                      |  |              |         |                |   |        
|Cash and cash equivalents                                                                                                                           |  | $            | 342,916 |                | $ | 159,982
|Short-term investments                                                                                                                              |  |              |        |                |   | 25,000 
|Accounts receivable, net                                                                                                                            |  |              | 149,642 |                |   | 182,843
|Inventories                                                                                                                                         |  |              | 123,120 |                |   | 135,344
|Deferred taxes                                                                                                                                      |  |              | 28,666  |                |   | 30,008 
|Other current assets                                                                                                                                |  |              | 15,510  |                |   | 18,986 
|                                                                                                                                                    |  |              |         |                |   |        
|Total current assets                                                                                                                                |  |              | 659,854 |                |   | 552,163
|Property, plant, and equipment, net                                                                                                                 |  |              | 103,409 |                |   | 120,239
|Goodwill                                                                                                                                            |  |              | 145,982 |                |   | 131,441
|Intangible assets, net                                                                                                                              |  |              | 31,808  |                |   | 21,279 
|Other assets                                                                                                                                        |  |              | 5,608   |                |   | 5,543  
|                                                                                                                                                    |  |              |         |                |   |        
|Total assets                                                                                                                                        |  | $            | 946,661 |                | $ | 830,665
|                                                                                                                                                    |  |              |         |                |   |        
|                                                                                                                                                    |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                |  |              |         |                |   |        
|                                                                                                                                                    |  |             
|Current liabilities                                                                                                                                 |  |              |         |                |   |        
|Current portion of long-term debt                                                                                                                   |  | $            | 2,500   |                | $ | 6,673  
|Accounts payable                                                                                                                                    |  |              | 53,161  |                |   | 70,667 
|Deferred profit                                                                                                                                     |  |              | 10,662  |                |   | 11,306 
|Accrued liabilities                                                                                                                                 |  |              | 204,186 |                |   | 160,710
|                                                                                                                                                    |  |              |         |                |   |        
|Total current liabilities                                                                                                                           |  |              | 270,509 |                |   | 249,356
|Long-term debt                                                                                                                                      |  |              | 28,750  |                |   | 30,000 
|Deferred taxes                                                                                                                                      |  |              | 8,359   |                |   | 9,411  
|Other liabilities                                                                                                                                   |  |              | 20,487  |                |   | 14,687 
|                                                                                                                                                    |  |              |         |                |   |        
|Total liabilities                                                                                                                                   |  |              | 328,105 |                |   | 303,454
|                                                                                                                                                    |  |              |         |                |   |        
|Commitments and contingencies (Notes 10, 11, 13, and 16)                                                                                            |  |              |         |                |   |        
|                                                                                                                                                    |  |             
|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 34,584 shares at April 1, 2005 and 34,838
shares at October 1, 2004 |  |              | 237,502 |                |   | 257,083
|Retained earnings                                                                                                                                   |  |              | 349,919 |                |   | 253,096
|Accumulated other comprehensive income                                                                                                              |  |              | 31,135  |                |   | 17,032 
|                                                                                                                                                    |  |              |         |                |   |        
|Total stockholders equity                                                                                                                          |  |              | 618,556 |                |   | 527,211
|                                                                                                                                                    |  |              |         |                |   |        
|Total liabilities and stockholders equity                                                                                                          |  | $            | 946,661 |                | $ | 830,665
|                                                                                                                                                    |  |              |         |                |   |        



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.





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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                             |  |                  |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                             |  | Six Months Ended |        
|                                                                                             |  | April 1,2005     |         |   | April 2,2004 |  
|Cash flows from operating activities                                                         |  |                  |         |   |              |   |         |  
|Net earnings                                                                                 |  | $                | 96,823  |   |              | $ | 28,283  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities:          |  |                  |         |   |              |   |         |  
|Gain on sale of Electronics Manufacturing business                                           |  |                  | (70,085 | ) |              |   |        |  
|Depreciation and amortization                                                                |  |                  | 14,317  |   |              |   | 12,904  |  
|(Gain) loss on disposition of property, plant, and equipment                                 |  |                  | (44     | ) |              |   | 40      |  
|Purchased in-process research and development                                                |  |                  | 700     |   |              |   |        |  
|Stock-based compensation expense                                                             |  |                  | 265     |   |              |   |        |  
|Tax benefit from stock option exercises                                                      |  |                  | 3,500   |   |              |   | 3,716   |  
|Deferred taxes                                                                               |  |                  | (3,000  | ) |              |   |        |  
|Changes in assets and liabilities, excluding effects of acquisitions and divestitures:       |  |                  |         |   |              |   |         |  
|Accounts receivable, net                                                                     |  |                  | 15,872  |   |              |   | 237     |  
|Inventories                                                                                  |  |                  | (802    | ) |              |   | (12,842 | )
|Other current assets                                                                         |  |                  | 4,420   |   |              |   | 2,608   |  
|Other assets                                                                                 |  |                  | (676    | ) |              |   | (103    | )
|Accounts payable                                                                             |  |                  | (7,622  | ) |              |   | 7,242   |  
|Deferred profit                                                                              |  |                  | (1,510  | ) |              |   | (2,462  | )
|Accrued liabilities                                                                          |  |                  | (21,579 | ) |              |   | 4,831   |  
|Other liabilities                                                                            |  |                  | (534    | ) |              |   | (392    | )
|                                                                                             |  |                  |         |   |              |   |         |  
|Net cash provided by operating activities                                                    |  |                  | 30,045  |   |              |   | 44,062  |  
|                                                                                             |  |                  |         |   |              |   |         |  
|Cash flows from investing activities                                                         |  |                  |         |   |              |   |         |  
|Proceeds from sale of property, plant, and equipment                                         |  |                  | 391     |   |              |   | 623     |  
|Purchase of property, plant, and equipment                                                   |  |                  | (12,611 | ) |              |   | (10,637 | )
|Purchase of businesses, net of cash acquired                                                 |  |                  | (26,198 | ) |              |   | (750    | )
|Private company equity investments                                                           |  |                  |        |   |              |   | (1,318  | )
|Purchase of short-term investments                                                           |  |                  | (10,000 | ) |              |   |        |  
|Proceeds from sales of short-term investments                                                |  |                  | 35,000  |   |              |   |        |  
|Proceeds from sale of Electronics Manufacturing business, net of transaction costs and taxes |  |                  | 189,946 |   |              |   |        |  
|                                                                                             |  |                  |         |   |              |   |         |  
|Net cash provided by (used in) investing activities                                          |  |                  | 176,528 |   |              |   | (12,082 | )
|                                                                                             |  |                  |         |   |              |   |         |  
|Cash flows from financing activities                                                         |  |                  |         |   |              |   |         |  
|Repayment of debt                                                                            |  |                  | (5,856  | ) |              |   | (1,565  | )
|Issuance of debt                                                                             |  |                  |        |   |              |   | 1,831   |  
|Repurchase of common stock                                                                   |  |                  | (33,590 | ) |              |   | (23,895 | )
|Issuance of common stock                                                                     |  |                  | 10,244  |   |              |   | 14,935  |  
|Transfers to Varian Medical Systems, Inc.                                                    |  |                  | (621    | ) |              |   | (683    | )
|                                                                                             |  |                  |         |   |              |   |         |  
|Net cash used in financing activities                                                        |  |                  | (29,823 | ) |              |   | (9,377  | )
|                                                                                             |  |                  |         |   |              |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                                |  |                  | 6,184   |   |              |   | 5,268   |  
|                                                                                             |  |                  |         |   |              |   |         |  
|Net increase in cash and cash equivalents                                                    |  |                  | 182,934 |   |              |   | 27,871  |  
|Cash and cash equivalents at beginning of period                                             |  |                  | 159,982 |   |              |   | 135,791 |  
|                                                                                             |  |                  |         |   |              |   |         |  
|Cash and cash equivalents at end of period                                                   |  | $                | 342,916 |   |              | $ | 163,662 |  
|                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                             |  |                 
|Supplemental cash flow information                                                           |  |                  |         |   |              |   |         |  
|Income taxes paid, net of refunds received                                                   |  | $                | 13,110  |   |              | $ | 5,386   |  
|                                                                                             |  |                  |         |   |              |   |         |  
|Interest paid                                                                                |  | $                | 1,085   |   |              | $ | 1,184   |  
|                                                                                             |  |                  |         |   |              |   |         |  



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.





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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1.    Unaudited Interim Condensed Consolidated Financial Statements



These unaudited interim condensed consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the Company)
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The October 1, 2004 balance sheet data was derived from audited financial statements, but does not include
all disclosures required in audited financial statements by GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended October 1, 2004 filed with the SEC. In the opinion of the Companys management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter and six months ended April 1, 2005 are not necessarily indicative of the results to be expected for a full year or for any
other periods.



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



Note 2.    Description of Business and Basis of Presentation



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



As described more fully in Note 4, the Company sold its Electronics Manufacturing business during the second quarter of fiscal year 2005. In connection
with the sale, the Company determined that this business should be accounted for as discontinued operations in accordance with GAAP. Consequently, the results of operations of the Electronics Manufacturing business have been excluded from the
Companys results from continuing operations for all periods presented and have instead been presented on a discontinued operations basis.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 3.    Summary of Significant Accounting Policies



Fiscal Periods. The Companys fiscal years reported are the 52-
or 53-week periods ending on the Friday nearest September 30. Fiscal year 2005 will comprise the 52-week period ending September 30, 2005, and fiscal year 2004 was comprised of the 52-week period ended October 1, 2004. The fiscal quarters and six
months ended April 1, 2005 and April 2, 2004 each comprised 13 weeks and 26 weeks, respectively.



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



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



|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                                            |  | Fiscal Quarter Ended |        |   | Six Months Ended |  
|                                                                                                                                            |  | April 1,2005         |        |   | April 2,2004     |   |        | April 1,2005 |  |   | April 2,2004 |  
|(in thousands, except per share amounts)                                                                                                    |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Net earnings:                                                                                                                               |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|As reported                                                                                                                                 |  | $                    | 81,885 |   |                  | $ | 14,694 |              |  | $ | 96,823       |   |  | $ | 28,283 |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                      | (1,835 | ) |                  |   | (1,455 | )            |  |   | (3,073       | ) |  |   | (3,072 | )
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Pro forma                                                                                                                                   |  | $                    | 80,050 |   |                  | $ | 13,239 |              |  | $ | 93,750       |   |  | $ | 25,211 |  
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|                                                                                                                                            |  |                      |        |  
|Net earnings per share:                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Basic  as reported                                                                                                                         |  | $                    | 2.35   |   |                  | $ | 0.42   |              |  | $ | 2.77         |   |  | $ | 0.82   |  
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Basic  pro forma                                                                                                                           |  | $                    | 2.29   |   |                  | $ | 0.38   |              |  | $ | 2.69         |   |  | $ | 0.73   |  
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Diluted  as reported                                                                                                                       |  | $                    | 2.29   |   |                  | $ | 0.41   |              |  | $ | 2.71         |   |  | $ | 0.79   |  
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Diluted  pro forma                                                                                                                         |  | $                    | 2.24   |   |                  | $ | 0.37   |              |  | $ | 2.63         |   |  | $ | 0.70   |  
|                                                                                                                                            |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  



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



|                                                                                               |  |                      |        |                  |              |   |              |  |               |         |  |   |       
|---------------------------------------------------------------------------------------------- |  | -------------------- | ------ | ---------------- | ------------ | - | ------------ |  | ------------- | ------- |  | - | ------
|                                                                                               |  | Fiscal Quarter Ended |        | Six Months Ended
|                                                                                               |  | April 1,2005         |        |                  | April 2,2004 |   | April 1,2005 |  | April 2, 2004
|(in thousands)                                                                                 |  |                      |        |                  |              |   |              |  |               |         |  |   |       
|Net earnings                                                                                   |  | $                    | 81,885 |                  |              | $ | 14,694       |  | $             | 96,823  |  | $ | 28,283
|Other comprehensive income:                                                                    |  |                      |        |                  |              |   |              |  |               |         |  |   |       
|Currency translation adjustment                                                                |  |                      | (7,330 | )                |              |   | 1,559        |  |               | 12,987  |  |   | 13,152
|Minimum pension liability adjustment, net of tax of $478 in the six months ended April 1, 2005 |  |                      |       |                  |              |   |             |  |               | 1,116   |  |   |      
|                                                                                               |  |                      |        |                  |              |   |              |  |               |         |  |   |       
|Total other comprehensive income                                                               |  |                      | (7,330 | )                |              |   | 1,559        |  |               | 14,103  |  |   | 13,152
|                                                                                               |  |                      |        |                  |              |   |              |  |               |         |  |   |       
|Total comprehensive income                                                                     |  | $                    | 74,555 |                  |              | $ | 16,253       |  | $             | 110,926 |  | $ | 41,435
|                                                                                               |  |                      |        |                  |              |   |              |  |               |         |  |   |       



7



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Reclassification. As of October 1, 2004, the Company held $25.0 million in auction rate
securities which were previously included in cash and cash equivalents. This amount has been reclassified as short-term investments in accordance with guidance issued by the SEC during the second quarter of fiscal year 2005. Purchases and sales of
these auction rate securities have been included in our statement of cash flows as components of cash flows from investing activities. These reclassifications had no impact on the Companys results of operations, stockholders equity, or
cash flows from operating activities.



Note 4.    Sale
of Electronics Manufacturing Business and Discontinued Operations



On February 4, 2005, the Company and Jabil Circuit, Inc. (Jabil) entered into an Asset Purchase Agreement (the Purchase Agreement) providing for the sale of substantially all of the assets and liabilities of the
Companys Electronics Manufacturing segment (the Electronics Manufacturing Business) to Jabil in exchange for $195.0 million in cash (subject to a post-closing working capital adjustment, which is expected to result in the payment
of an additional $6.6 million in purchase price to the Company). On March 11, 2005, the Company completed the sale of the Electronics Manufacturing Business (the Closing) and transferred substantially all of the assets and certain
liabilities and obligations of the business to Jabil. In addition, effective as of the Closing, the Company and Jabil entered into a four-year Supply Agreement pursuant to which Jabil will continue to supply certain products to the Company that are
currently manufactured by the Electronics Manufacturing Business for the Company.



The Company has determined that the disposed Electronics Manufacturing Business should be accounted for as discontinued operations in accordance with SFAS 144, Accounting for the Disposal of or Impairment of
Long-Lived Assets, and EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FAS 144 in Determining Whether to Report Discontinued Operations. Consequently, the results of operations of the Electronics Manufacturing Business
have been excluded from the Companys results from continuing operations for all periods presented and have instead been presented on a discontinued operations basis.



Sales by the disposed Electronics Manufacturing Business (through the date of Closing) and the components of earnings from
discontinued operations for the fiscal quarters and six months ended April 1, 2005 and April 2, 2004 are presented below:



|                                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ------ | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                                     |  | Fiscal Quarter Ended |        |   | Six Months Ended |  
|                                                                                                                                     |  | April 1,2005         |        |   | April 2,2004     |   |        | April 1,2005 |  |   | April 2,2004 |  
|(in thousands)                                                                                                                       |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Sales                                                                                                                                |  | $                    | 35,327 |   |                  | $ | 44,356 |              |  | $ | 80,245       |   |  | $ | 91,432 |  
|                                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Earnings from operations of disposed Electronics Manufacturing Business                                                              |  | $                    | 3,202  |   |                  | $ | 4,845  |              |  | $ | 8,337        |   |  | $ | 10,520 |  
|Income tax expense                                                                                                                   |  |                      | (1,227 | ) |                  |   | (1,931 | )            |  |   | (3,168       | ) |  |   | (4,120 | )
|                                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Earnings from operations of disposed Electronics Manufacturing Business, net of taxes                                                |  |                      | 1,975  |   |                  |   | 2,914  |              |  |   | 5,169        |   |  |   | 6,400  |  
|Gain on sale of Electronics Manufacturing Business, net of taxes of $42,955 in the fiscal quarter and six months ended April 1,
2005 |  |                      | 70,085 |   |                  |   |       |              |  |   | 70,085       |   |  |   |       |  
|                                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Earnings from discontinued operations                                                                                                |  | $                    | 72,060 |   |                  | $ | 2,914  |              |  | $ | 75,254       |   |  | $ | 6,400  |  
|                                                                                                                                     |  |                      |        |   |                  |   |        |              |  |   |              |   |  |   |        |  



8



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



The following table presents the calculation of the gain on the sale of the Electronics Manufacturing
Business recorded by the Company during the second quarter of fiscal year 2005:



|                                 |  |   |         |  
|-------------------------------- |  | - | ------- | -
|(in thousands)                   |  |   |         |  
|Proceeds from sale               |  | $ | 195,000 |  
|Transaction costs                |  |   | (5,054  | )
|                                 |  |   |         |  
|Net proceeds                     |  |   | 189,946 |  
|Net assets sold                  |  |   | (76,906 | )
|                                 |  |   |         |  
|Gain on sale before income taxes |  |   | 113,040 |  
|Income tax expense               |  |   | (42,955 | )
|                                 |  |   |         |  
|Gain on sale, net of taxes       |  | $ | 70,085  |  
|                                 |  |   |         |  



The following table
presents the carrying amounts of major classes of assets and liabilities relating to the Electronics Manufacturing Business at the time of Closing:



|                               |  |                |     
|------------------------------ |  | -------------- | ----
|                               |  | CarryingAmount
|(in millions)                  |  |                |     
|Assets                         |  |                |     
|Accounts receivable            |  | $              | 28.5
|Inventories                    |  |                | 41.0
|Other current assets           |  |                | 0.3 
|                               |  |                |     
|Total current assets           |  |                | 69.8
|Property, plant, and equipment |  |                | 22.1
|Goodwill                       |  |                | 2.1 
|                               |  |                |     
|Total assets                   |  |                | 94.0
|                               |  |                |     
|Liabilities                    |  |                |     
|Accounts payable               |  |                | 14.7
|Accrued liabilities            |  |                | 2.4 
|                               |  |                |     
|Total current liabilities      |  |                | 17.1
|Long-term liabilities          |  |                |    
|                               |  |                |     
|Total liabilities              |  |                | 17.1
|                               |  |                |     
|Net assets sold                |  | $              | 76.9
|                               |  |                |     



Note
5.    Balance Sheet Detail



|                        |  |              |         |                |   |        
|----------------------- |  | ------------ | ------- | -------------- | - | -------
|                        |  | April 1,2005 |         | October 1,2004
|(In thousands)          |  |              |         |                |   |        
|Inventories             |  |              |         |                |   |        
|Raw materials and parts |  | $            | 59,000  |                | $ | 70,660 
|Work in process         |  |              | 19,386  |                |   | 12,076 
|Finished goods          |  |              | 44,734  |                |   | 52,608 
|                        |  |              |         |                |   |        
|                        |  | $            | 123,120 |                | $ | 135,344
|                        |  |              |         |                |   |        



9



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 6.    Forward Exchange Contracts



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



From time to time, the Company also enters into
foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under SFAS 133. At April 1, 2005, there were no outstanding foreign exchange
forward contracts designated as cash flow hedges of forecasted transactions. During the six months ended April 1, 2005, no foreign exchange 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 April 1, 2005 follows:



|                  |  |                   |        |                        |   |       
|----------------- |  | ----------------- | ------ | ---------------------- | - | ------
|                  |  | NotionalValueSold |        | NotionalValuePurchased
|(in thousands)    |  |                   |        |                        |   |       
|Euro              |  | $                 |       |                        | $ | 61,253
|Australian dollar |  |                   |       |                        |   | 12,175
|Japanese yen      |  |                   | 3,001  |                        |   |      
|British pound     |  |                   | 15,131 |                        |   |      
|Danish krona      |  |                   | 1,182  |                        |   |      
|Canadian dollar   |  |                   | 8,374  |                        |   |      
|Swiss franc       |  |                   |       |                        |   | 1,423 
|                  |  |                   |        |                        |   |       
|                  |  | $                 | 27,688 |                        | $ | 74,851
|                  |  |                   |        |                        |   |       



Note
7.    Goodwill and Other Intangible Assets



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



|                                               |  |                       |         |                    |   |                                    |  |   |              |   |  |   |         |  
|---------------------------------------------- |  | --------------------- | ------- | ------------------ | - | ---------------------------------- |  | - | ------------ | - |  | - | ------- | -
|                                               |  | ScientificInstruments |         | VacuumTechnologies |   | ElectronicsManufacturing(Disposed) |  |   | TotalCompany |  
|(in thousands)                                 |  |                       |         |                    |   |                                    |  |   |              |   |  |   |         |  
|Balance as of October 1, 2004                  |  | $                     | 128,373 |                    | $ | 966                                |  | $ | 2,102        |   |  | $ | 131,441 |  
|Fiscal year 2005 acquisition (Note 16)         |  |                       | 16,062  |                    |   |                                   |  |   |             |   |  |   | 16,062  |  
|Foreign currency impacts and other adjustments |  |                       | 581     |                    |   |                                   |  |   |             |   |  |   | 581     |  
|Fiscal year 2005 divestiture (Note 4)          |  |                       |        |                    |   |                                   |  |   | (2,102       | ) |  |   | (2,102  | )
|                                               |  |                       |         |                    |   |                                    |  |   |              |   |  |   |         |  
|Balance as of April 1, 2005                    |  | $                     | 145,016 |                    | $ | 966                                |  | $ |             |   |  | $ | 145,982 |  
|                                               |  |                       |         |                    |   |                                    |  |   |              |   |  |   |         |  



10



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



As required by SFAS 142, Goodwill and Other Intangible Assets, the Company performs an annual
goodwill impairment assessment. This assessment is performed in the second quarter of each fiscal year. In the fiscal quarter ended April 1, 2005, the Company completed its annual impairment test and determined that there was no impairment of
goodwill.



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



|                            |  |                 |        |                         |   |         |     |  |   |       
|--------------------------- |  | --------------- | ------ | ----------------------- | - | ------- | --- |  | - | ------
|                            |  | April 1, 2005  
|                            |  | Gross           |        | AccumulatedAmortization |   |         | Net
|(in thousands)              |  |                 |        |                         |   |         |     |  |   |       
|Intangible assets           |  |                 |        |                         |   |         |     |  |   |       
|Existing technology         |  | $               | 10,172 |                         | $ | (3,694  | )   |  | $ | 6,478 
|Patents and core technology |  |                 | 18,603 |                         |   | (2,231  | )   |  |   | 16,372
|Trade names and trademarks  |  |                 | 2,176  |                         |   | (788    | )   |  |   | 1,388 
|Customer lists              |  |                 | 9,305  |                         |   | (2,870  | )   |  |   | 6,435 
|Other                       |  |                 | 2,508  |                         |   | (1,373  | )   |  |   | 1,135 
|                            |  |                 |        |                         |   |         |     |  |   |       
|                            |  | $               | 42,764 |                         | $ | (10,956 | )   |  | $ | 31,808
|                            |  |                 |        |                         |   |         |     |  |   |       
|                            | 
|                            |  | October 1, 2004
|                            |  | Gross           |        | AccumulatedAmortization |   |         | Net
|(in thousands)              |  |                 |        |                         |   |         |     |  |   |       
|Intangible assets           |  |                 |        |                         |   |         |     |  |   |       
|Existing technology         |  | $               | 10,172 |                         | $ | (2,988  | )   |  | $ | 7,184 
|Patents and core technology |  |                 | 6,777  |                         |   | (1,066  | )   |  |   | 5,711 
|Trade names and trademarks  |  |                 | 2,176  |                         |   | (654    | )   |  |   | 1,522 
|Customer lists              |  |                 | 7,505  |                         |   | (1,806  | )   |  |   | 5,699 
|Other                       |  |                 | 2,445  |                         |   | (1,282  | )   |  |   | 1,163 
|                            |  |                 |        |                         |   |         |     |  |   |       
|                            |  | $               | 29,075 |                         | $ | (7,796  | )   |  | $ | 21,279
|                            |  |                 |        |                         |   |         |     |  |   |       



Amortization expense
relating to intangible assets was $1.7 million and $0.7 million during the fiscal quarters ended April 1, 2005 and April 2, 2004, respectively, and $3.2 million and $1.4 million during the six months ended April 1, 2005 and April 2, 2004,
respectively. At April 1, 2005, estimated amortization expense for the remainder of fiscal 2005 and for each of the five succeeding fiscal years and thereafter follows:



|                                     |  |                                |       
|------------------------------------ |  | ------------------------------ | ------
|                                     |  | Estimated Amortization Expense
|(in thousands)                       |  |                                |       
|Six months ending September 30, 2005 |  | $                              | 3,239 
|Fiscal year 2006                     |  |                                | 6,319 
|Fiscal year 2007                     |  |                                | 5,719 
|Fiscal year 2008                     |  |                                | 4,896 
|Fiscal year 2009                     |  |                                | 4,100 
|Fiscal year 2010                     |  |                                | 3,776 
|Thereafter                           |  |                                | 3,759 
|                                     |  |                                |       
|Total                                |  | $                              | 31,808
|                                     |  |                                |       



11



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 8.    Restructuring Activities



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



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



|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at October 1, 2004                     |  | $                |     |   |                    | $ |      |       |  | $ |      |  
|Charges to expense                             |  |                  | 270  |   |                    |   |      |       |  |   | 270   |  
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at December 31, 2004                   |  |                  | 270  |   |                    |   |      |       |  |   | 270   |  
|Charges to expense, net                        |  |                  |     |   |                    |   | 1,527 |       |  |   | 1,527 |  
|Cash payments                                  |  |                  | (131 | ) |                    |   | (3    | )     |  |   | (134  | )
|Foreign currency impacts and other adjustments |  |                  | (15  | ) |                    |   | (11   | )     |  |   | (26   | )
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at April 1, 2005                       |  | $                | 124  |   |                    | $ | 1,513 |       |  | $ | 1,637 |  
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  



In addition to the foregoing
restructuring costs, the Company incurred approximately $0.2 million in other costs relating directly to the consolidation of certain field support administrative functions from the Companys Walton location to Magnexs Oxford location
during the first six months of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention and relocation costs, which will
be settled in cash. Since the inception of this plan, the Company has recorded approximately $1.8 million in restructuring charges and approximately $0.3 million of other related costs.



Fiscal Year 2004 Plans. During fiscal year 2004, the Company undertook certain restructuring actions to reorganize
the management structure in its Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of these factories and involved the termination of three employees. These
actions were initiated in the fourth quarter of fiscal year 2004 and were completed in the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in
general and administrative expenses in the fourth quarter of fiscal year 2004; an adjustment to these amounts was subsequently recorded in the first quarter of fiscal year 2005. This restructuring plan did not involve any non-cash components. Since
the inception of this plan, the Company has recorded restructuring charges of approximately $1.4 million.



12



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- |  | - | ---- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at October 1, 2004                     |  | $                | 665  |   |                    | $ |      |  | $ | 665  |  
|Charges to expense                             |  |                  | 335  |   |                    |   |      |  |   | 335  |  
|Cash payments                                  |  |                  | (23  | ) |                    |   |      |  |   | (23  | )
|Foreign currency impacts and other adjustments |  |                  | 21   |   |                    |   |      |  |   | 21   |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at December 31, 2004                   |  |                  | 998  |   |                    |   |      |  |   | 998  |  
|Cash payments                                  |  |                  | (981 | ) |                    |   |      |  |   | (981 | )
|Foreign currency impacts and other adjustments |  |                  | (17  | ) |                    |   |      |  |   | (17  | )
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                |     |   |                    | $ |      |  | $ |     |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  



Also during fiscal
year 2004, the Company committed to a separate plan to reorganize the Scientific Instruments and corporate marketing organizations and to consolidate certain Scientific Instruments administrative functions in North America. This plan, which involved
the termination of approximately 20 employees, was undertaken to more closely align the strategic and operational focus of these organizations across different product lines and to improve efficiency and reduce operating costs. These actions were
initiated in the fourth quarter of fiscal year 2004 and were completed by the end of the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in
general and administrative expenses in the fourth quarter of fiscal year 2004. This restructuring plan did not involve any non-cash components. Since the inception of this plan, the Company has recorded restructuring charges of approximately $0.9
million.



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



|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- |  | - | ---- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at October 1, 2004                     |  | $                | 859  |   |                    | $ |      |  | $ | 859  |  
|Reversals of expense, net                      |  |                  | (11  | ) |                    |   |      |  |   | (11  | )
|Cash payments                                  |  |                  | (224 | ) |                    |   |      |  |   | (224 | )
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at December 31, 2004                   |  |                  | 624  |   |                    |   |      |  |   | 624  |  
|Cash payments                                  |  |                  | (371 | ) |                    |   |      |  |   | (371 | )
|Foreign currency impacts and other adjustments |  |                  | 5    |   |                    |   |      |  |   | 5    |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                | 258  |   |                    | $ |      |  | $ | 258  |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



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



|                                               |  |                  |     |   |                    |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------ | - | ---- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |     |   | Facilities-Related |   |      | Total | 
|(in thousands)                                 |  |                  |     |   |                    |   |      |       |  |   |       |  
|Balance at October 1, 2004                     |  | $                | 149 |   |                    | $ | 830  |       |  | $ | 979   |  
|Charges to expense, net                        |  |                  |    |   |                    |   | 402  |       |  |   | 402   |  
|Cash payments                                  |  |                  | (63 | ) |                    |   | (296 | )     |  |   | (359  | )
|Foreign currency impacts and other adjustments |  |                  | 1   |   |                    |   | 16   |       |  |   | 17    |  
|                                               |  |                  |     |   |                    |   |      |       |  |   |       |  
|Balance at December 31, 2004                   |  |                  | 87  |   |                    |   | 952  |       |  |   | 1,039 |  
|Cash payments                                  |  |                  |    |   |                    |   | (217 | )     |  |   | (217  | )
|Foreign currency impacts and other adjustments |  |                  | (3  | ) |                    |   | (6   | )     |  |   | (9    | )
|                                               |  |                  |     |   |                    |   |      |       |  |   |       |  
|Balance at April 1, 2005                       |  | $                | 84  |   |                    | $ | 729  |       |  | $ | 813   |  
|                                               |  |                  |     |   |                    |   |      |       |  |   |       |  



The non-cash portion
of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period. Since the inception of this plan, the Company has recorded approximately $7.9
million in restructuring charges and approximately $2.3 million of other related costs.



Note 9.    Net Earnings Per Share



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



For the fiscal quarters ended April 1, 2005 and April 2, 2004, options to purchase approximately 157,000 and 61,000 shares, respectively, were excluded
from the calculation of diluted earnings per share as their effect was anti-dilutive. For the six months ended April 1, 2005 and April 2, 2004, options to purchase approximately 199,000 and 89,000 shares, respectively, were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                                            |  |                      |  |                  |  |              |  |             
|------------------------------------------- |  | -------------------- |  | ---------------- |  | ------------ |  | ------------
|                                            |  | Fiscal Quarter Ended |  | Six Months Ended
|                                            |  | April 1,2005         |  | April 2,2004     |  | April 1,2005 |  | April 2,2004
|(in thousands)                              |  |                      |  |                  |  |              |  |             
|Weighted-average basic shares outstanding   |  | 34,902               |  | 34,663           |  | 34,913       |  | 34,530      
|Net effect of dilutive stock options        |  | 785                  |  | 1,207            |  | 760          |  | 1,255       
|                                            |  |                      |  |                  |  |              |  |             
|Weighted-average diluted shares outstanding |  | 35,687               |  | 35,870           |  | 35,673       |  | 35,785      
|                                            |  |                      |  |                  |  |              |  |             



Note
10.    Debt and Credit Facilities



Credit Facilities. As of April 1, 2005, the Company and its subsidiaries had a total of $83.3 million in 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 April 1, 2005. All of these credit facilities contain certain customary conditions and events of default, with which the Company was in compliance at April 1, 2005. Of the
$83.3 million in uncommitted and unsecured credit facilities, a total of $50.8 million was limited for use by, or in favor of, certain subsidiaries at April 1, 2005, and a total of $11.8 million of this $50.8 million was being utilized in the form
of bank guarantees and short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments and deposits made to the Companys subsidiaries by customers for which separate liabilities were recorded
in the unaudited condensed consolidated financial statements at April 1, 2005. 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 April 1, 2005, the Company had $31.3 million in
term loans outstanding compared to $32.5 million at October 1, 2004. As of both April 1, 2005 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both
April 1, 2005 and October 1, 2004. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in
compliance with all restrictive covenants of the term loan agreements at April 1, 2005. At October 1, 2004, the Company had other long-term notes payable of $4.2 million with a weighted-average interest rate of 0.0%. During the second quarter of
fiscal year 2005, the Company paid the outstanding balance on this long-term note in advance of a significant scheduled increase in the applicable interest rate.



The following table summarizes future principal payments on borrowings under long-term debt outstanding as of April 1, 2005:



|                                           |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|------------------------------------------ |  | ----------------------------- | ----- | ------------ | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                           |  | Six MonthsEndingSept. 30,2005 |       | Fiscal Years
|                                           |  |                               | 2006  |              | 2007 |       | 2008 |   | 2009  |  | 2010 |       | Thereafter |   | Total
|(in thousands)                             |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Long-term debt (including current portion) |  | $                             | 1,250 |              | $    | 2,500 |      | $ | 2,500 |  | $    | 6,250 |            | $ |      |  | $ | 6,250 |  | $ | 12,500 |  | $ | 31,250
|                                           |  |                               |       |              |      |       |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 11.    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 six months ended April 1, 2005 and April
2, 2004 follow:



|                                        |  |                  |        |   |              |   |        |  
|--------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                                        |  | Six Months Ended |       
|                                        |  | April 1,2005     |        |   | April 2,2004 |  
|(in thousands)                          |  |                  |        |   |              |   |        |  
|Beginning balance                       |  | $                | 10,475 |   |              | $ | 10,261 |  
|Charges to costs and expenses           |  |                  | 3,792  |   |              |   | 3,407  |  
|Warranty expenditures                   |  |                  | (4,376 | ) |              |   | (3,442 | )
|Acquired warranty liabilities (Note 16) |  |                  | 1,742  |   |              |   |       |  
|                                        |  |                  |        |   |              |   |        |  
|Ending balance                          |  | $                | 11,633 |   |              | $ | 10,226 |  
|                                        |  |                  |        |   |              |   |        |  



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



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



The Company is subject to certain indemnification obligations to Jabil in connection with the Companys sale of its Electronics Manufacturing Business to Jabil. These indemnification obligations cover certain aspects of the
Companys conduct of the Electronics Manufacturing Business prior to its sale to Jabil, including, but not limited to, employee, tax, litigation, and environmental matters. The agreement containing these indemnification obligations is disclosed
as an exhibit to this Quarterly Report on Form 10-Q. The estimated fair value of these indemnification obligations is not considered to be material.



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



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



or these indemnity agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the
obligations cannot be reasonably estimated. Historically, the Company has not made payments related to these indemnification obligations, and the estimated fair value of these indemnification obligations is not considered to be material.



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



Note 12.    Common Stock



Stock-Based Compensation.In November 2004, the Company granted
24,850 shares of nonvested common stock to its executive officers under the Companys Omnibus Stock Plan. These shares, which were issued upon grant, remain restricted for three years from the grant date and will vest only if the employee is
still actively employed by the Company on the vesting date. An aggregate of approximately $0.9 million, representing the fair market value of the unvested shares on the date of the grant, was recorded as deferred compensation (included as a
component of stockholders equity) and is being recognized by the Company as stock-based compensation expense ratably over the three-year vesting period. During the fiscal quarter and six months ended April 1, 2005, the Company recognized
approximately $75,000 and $115,000 in stock-based compensation expense relating to these nonvested stock grants, respectively.



In February 2005, the Companys stockholders approved the amended and restated Varian, Inc. Omnibus Stock Plan (the Plan). Under the
terms of the Plan, on the first business day following each annual meeting of the Companys stockholders, each person then serving as a non-employee director is automatically granted stock units having an initial value of $25,000, which vest
upon the directors termination of service as a director and are paid out as soon as possible thereafter. Under the terms of the Stock Unit Agreement, the stock units will be paid out in shares. The non-employee director will not have rights as
a stockholder with respect to the shares until such shares are paid out. The stock units are not transferable, except to the non-employee directors designated beneficiary or estate in the event of his or her death. During the fiscal quarter
ended April 1, 2005, the Company granted stock units with an aggregate value of $150,000 to non-employee members of its Board of Directors (of which there were six) and recognized the total value of $150,000 in stock-based compensation
expense.



Stock Repurchase Programs. In May 2004,
the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007. During the fiscal quarter and six months ended April 1, 2005, the Company repurchased and retired 801,553
shares under this authorization at an aggregate cost of $33.6 million. As described in the following paragraph, this repurchase authorization was replaced upon the closing of the sale of the Electronics Manufacturing Business on March 11, 2005 and
the remaining 6,344 shares under this authorization were no longer available for repurchase.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



On February 4, 2005, the Companys Board of Directors approved a new stock repurchase
authorization under which the Company may repurchase up to $145 million of its common stock. This new authorization was conditioned upon the closing of the sale of the Electronics Manufacturing Business and, upon becoming effective, was intended to
replace the prior repurchase authorization approved in May 2004. The sale of the Electronics Manufacturing Business closed on March 11, 2005, and the new repurchase authorization became effective on that date and will remain effective through
September 30, 2006. No shares were repurchased under this new authorization during the fiscal quarter ended April 1, 2005. As of April 1, 2005, the Company had remaining authorization of $145 million for future repurchases of its common stock under
this program.



Note 13.    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 April 1, 2005, it was nonetheless estimated that the Companys share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without
discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 13 years as of April 1, 2005. No amount in the foregoing range of estimated future costs
is believed to be more probable of being incurred than any other amount in such range, and the Company therefore had an accrual of $1.3 million as of April 1, 2005.



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 April 1, 2005, it was estimated that the Companys share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $4.6
million to $15.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of April 1, 2005. As to each of these
sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of
these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at April 1, 2005. The Company therefore had an accrual of $4.5 million as of April 1, 2005, which represents the best estimate of
its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.



18



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



The foregoing amounts are only estimates of anticipated future environmental-related costs, and the
amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation, monitoring, and remediation activities and
the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.



An insurance company has agreed to pay a portion of certain of VAIs (now VMS) future environmental-related costs for which the Company has an
indemnification obligation, and the Company therefore has a short- term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of inflation) in other assets as of April 1, 2005 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 14. Defined Benefit Retirement Plans



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



|                                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |        |  
|---------------------------------------------------------------- |  | -------------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                                 |  | Fiscal Quarter Ended |      |   | Six Months Ended |  
|                                                                 |  | April 1,2005         |      |   | April 2,2004     |   |      | April 1,2005 |  |   | April 2,2004 |  
|(in thousands)                                                   |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |        |  
|Service cost                                                     |  | $                    | 289  |   |                  | $ | 725  |              |  | $ | 578          |   |  | $ | 1,449  |  
|Interest cost                                                    |  |                      | 810  |   |                  |   | 749  |              |  |   | 1,620        |   |  |   | 1,499  |  
|Expected return on plan assets                                   |  |                      | (806 | ) |                  |   | (711 | )            |  |   | (1,612       | ) |  |   | (1,423 | )
|Amortization of prior service cost and actuarial gainsand losses |  |                      | 50   |   |                  |   | 156  |              |  |   | 100          |   |  |   | 313    |  
|Settlement loss                                                  |  |                      |     |   |                  |   |     |              |  |   | 1,477        |   |  |   |       |  
|                                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |        |  
|Net periodic pension cost                                        |  | $                    | 343  |   |                  | $ | 919  |              |  | $ | 2,163        |   |  | $ | 1,838  |  
|                                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |        |  



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



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Employer Contributions. During the six months ended April 1, 2005, the Company made
contributions totaling $0.4 million to its defined benefit pension plans. The Company currently anticipates contributing an additional $0.5 million to these plans in fiscal year 2005.



Note 15.    Industry Segments



The Companys operations are grouped into two business segments: Scientific Instruments and Vacuum Technologies. The
Scientific Instruments segment designs, develops, manufactures, sells, and services equipment and consumable laboratory supplies for a broad range of life science and chemical analysis applications requiring identification, quantification, and
analysis of the composition or structure of liquids, solids, or gases. The Vacuum Technologies segment designs, develops, manufactures, sells, and services high-vacuum pumps, leak detection equipment, and related products and services used to
create, contain, control, measure, and test vacuum environments in a broad range of life science, industrial, and scientific applications requiring ultra-clean or high-vacuum environments.



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



|                       |  |                      |       |                  |   |              |  |               |       |  |   |      
|---------------------- |  | -------------------- | ----- | ---------------- | - | ------------ |  | ------------- | ----- |  | - | -----
|                       |  | Sales                |       | Sales           
|                       |  | Fiscal Quarter Ended |       | Six Months Ended
|                       |  | April 1,2005         |       | April 2, 2004    |   | April 1,2005 |  | April 2, 2004
|(in millions)          |  |                      |       |                  |   |              |  |               |       |  |   |      
|Scientific Instruments |  | $                    | 161.2 |                  | $ | 149.9        |  | $             | 317.2 |  | $ | 284.0
|Vacuum Technologies    |  |                      | 35.8  |                  |   | 38.5         |  |               | 70.8  |  |   | 69.8 
|                       |  |                      |       |                  |   |              |  |               |       |  |   |      
|Total segment sales    |  | $                    | 197.0 |                  | $ | 188.4        |  | $             | 388.0 |  | $ | 353.8
|                       |  |                      |       |                  |   |              |  |               |       |  |   |      



|                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |      |  
|------------------------------------------------ |  | -------------------- | ---- | - | ---------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                                 |  | Pretax Earnings      |      |   | Pretax Earnings  |  
|                                                 |  | Fiscal Quarter Ended |      |   | Six Months Ended |  
|                                                 |  | April 1,2005         |      |   | April 2,2004     |   |      | April 1,2005 |  |   | April 2,2004 |  
|(in millions)                                    |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |      |  
|Scientific Instruments                           |  | $                    | 12.6 |   |                  | $ | 14.2 |              |  | $ | 23.8         |   |  | $ | 26.9 |  
|Vacuum Technologies                              |  |                      | 6.0  |   |                  |   | 6.8  |              |  |   | 12.2         |   |  |   | 11.6 |  
|                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |      |  
|Total industry segments                          |  |                      | 18.6 |   |                  |   | 21.0 |              |  |   | 36.0         |   |  |   | 38.5 |  
|General corporate                                |  |                      | (4.5 | ) |                  |   | (3.4 | )            |  |   | (8.6         | ) |  |   | (5.7 | )
|Interest income                                  |  |                      | 1.3  |   |                  |   | 0.8  |              |  |   | 2.2          |   |  |   | 1.3  |  
|Interest expense                                 |  |                      | (0.5 | ) |                  |   | (0.6 | )            |  |   | (1.1         | ) |  |   | (1.1 | )
|                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |      |  
|Total pretax earnings from continuing operations |  | $                    | 14.9 |   |                  | $ | 17.8 |              |  | $ | 28.5         |   |  | $ | 33.0 |  
|                                                 |  |                      |      |   |                  |   |      |              |  |   |              |   |  |   |      |  



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 16.    Acquisitions



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



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



|                                              |  |                 |       |  
|--------------------------------------------- |  | --------------- | ----- | -
|                                              |  | AmountAllocated |      
|(in millions)                                 |  |                 |       |  
|Accounts receivable, net                      |  | $               | 1.7   |  
|Inventories                                   |  |                 | 23.5  |  
|Other current assets                          |  |                 | 1.7   |  
|Property, plant, and equipment                |  |                 | 3.1   |  
|Goodwill                                      |  |                 | 16.0  |  
|Identified intangible assets                  |  |                 | 12.6  |  
|                                              |  |                 |       |  
|Total assets acquired                         |  |                 | 58.6  |  
|Liabilities assumed                           |  |                 | (27.0 | )
|                                              |  |                 |       |  
|Net assets acquired                           |  |                 | 31.6  |  
|Purchased in-process research and development |  |                 | 0.7   |  
|                                              |  |                 |       |  
|Total consideration                           |  | $               | 32.3  |  
|                                              |  |                 |       |  



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



The Magnex acquisition was accounted for using the purchase method of accounting. Accordingly, the unaudited condensed consolidated statement of earnings
for the fiscal quarter ended April 1, 2005 includes the results of operations of Magnex since the effective date of its purchase. Significant purchase accounting adjustments were made to conform Magnexs revenue recognition policy with the
Companys policy under U.S. GAAP (these adjustments are reflected in the purchase price allocation set forth above). Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effect
of this acquisition was not material. During the second quarter of fiscal year 2005, a retained amount of $1.0 million relating to the Magnex closing balance sheet was paid by the Company.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



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



|                                              |  |                 |      |  
|--------------------------------------------- |  | --------------- | ---- | -
|                                              |  | AmountAllocated |     
|(in millions)                                 |  |                 |      |  
|Accounts receivable, net                      |  | $               | 4.2  |  
|Inventories                                   |  |                 | 2.0  |  
|Other current assets                          |  |                 | 0.1  |  
|Property, plant, and equipment                |  |                 | 0.1  |  
|Goodwill                                      |  |                 | 4.3  |  
|Identified intangible assets                  |  |                 | 6.3  |  
|                                              |  |                 |      |  
|Total assets acquired                         |  |                 | 17.0 |  
|Liabilities assumed                           |  |                 | (3.1 | )
|                                              |  |                 |      |  
|Net assets acquired                           |  |                 | 13.9 |  
|Purchased in-process research and development |  |                 | 0.1  |  
|                                              |  |                 |      |  
|Total consideration                           |  | $               | 14.0 |  
|                                              |  |                 |      |  



In connection with the
Magnex and Digilab Business acquisitions, the Company has accrued but not yet paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheets and/or to secure the sellers
indemnification obligations. As of April 1, 2005, retained amounts for the Magnex acquisition included $6.0 million relating to the sellers indemnification obligations, which is due to be paid (or received in the form of notes payable by the
Company at the payees election) in two equal installments (net of any indemnification claims) on the first and second anniversaries of the closing of that acquisition. The retained amount for the Digilab Business acquisition, which is due to
be paid during the fourth quarter of fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at April 1, 2005. In addition to these retained payments, the Company is, from time to time, obligated to pay additional
cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of April 1, 2005, up to a maximum of approximately $25.5 million could be payable through fiscal year 2007 under these
contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2005,
and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. The balance of approximately $9.5 million relates to the
acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as additional goodwill at the
time they are earned.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 17.    Income Taxes



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



Note 18.    Recent Accounting Pronouncements



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



In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment, an amendment of FASB Statements Nos. 123
and 95(SFAS 123(R)), which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the
fair value of that companys equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates the companies ability to account for share-based compensation transactions using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the
Consolidated Statement of Earnings. Under SFAS 123(R), the Company is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be
used at date of adoption. The Company currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use
of the Black-Scholes option-pricing model. In addition, the adoption of SFAS 123(R) will require additional accounting related to the tax benefit on employee stock options and for stock issued under the Companys employee stock purchase plan.
In March 2005, the SEC released Staff Accounting Bulletin No. (SAB) 107, Share-Based Payment, which provides interpretive guidance relating to the application of SFAS 123(R). The guidance contained in SAB 107 is intended to assist
issuers in the initial implementation of SFAS 123(R) and to enhance the information received by investors and other users of financial statements. SAB 107 allows a flexible approach to the implementation of SFAS 123(R) and provides issuers with
latitude in measuring the value of employee stock options under the new standard. As amended by the SEC in April 2005, SFAS 123(R) is now effective for the first quarter of the Companys fiscal year 2006. The Company is currently evaluating the
requirements of SFAS 123(R) and SAB 107 and expects that they are likely to have a material impact on the Companys results of operations, although the Company is not currently able to estimate that impact.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



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



Note 19.    Subsequent Event



During the third quarter of fiscal year 2005, the Company committed to a
plan to reorganize, consolidate and eliminate certain activities. This plan was undertaken in light of the divestiture of the Companys Electronics Manufacturing business, the result of which is that the Company has lower revenues and reduced
infrastructure requirements. Management determined that this required the Company to adjust its organization and reduce its cost structure.



Under part of this plan, certain administrative functions within the Companys Corporate organization and Scientific Instruments segment are being
reorganized and consolidated. This involves changes in reporting structures, consolidation of certain activities and the elimination of employee positions. The other part of this plan involves the elimination of employee positions in certain other
operations to reduce the Companys cost structure. Management expects these activities to be completed by the end of the first quarter of its fiscal year 2006.



The measures described above are expected to result in the elimination of a total of approximately 70 positions, of which
approximately 45 are in North America and approximately 20 are in Europe. The costs associated with this plan will consist of one-time termination benefits and other related costs for employees in the Corporate organization and the Scientific
Instruments segment whose positions are being eliminated.



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##### Table of Contents

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



Caution Regarding Forward-Looking Statements



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



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



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



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##### Table of Contents

Results of Operations



Sale of Electronics Manufacturing Business and Discontinued Operations. During the second quarter of fiscal year 2005, we sold the business
formerly operated as our Electronics Manufacturing segment to Jabil Circuit, Inc. In connection with the sale, we determined that this business should be accounted for as discontinued operations in accordance with accounting principles generally
accepted in the United States. Consequently, the results of operations of the Electronics Manufacturing business have been excluded from our results from continuing operations for all periods presented and have instead been presented on a
discontinued operations basis. Earnings from discontinued operations for the second quarter and first six months of fiscal year 2005 are discussed separately below.



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



Segment Results



Our continuing operations are grouped into two reportable business segments:
Scientific Instruments and Vacuum Technologies. The following table presents comparisons of our sales and operating earnings for each of those segments and in total for the second quarters of fiscal years 2005 and 2004:



|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|------------------------------ |  | -------------------- | ----- | - | ------------------ | ---- | - | - | - | ----- | --------- |  | ---- | - |  | - | ---- | - |  | ----- | --
|                               |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |     
|                               |  | April 1, 2005        |       |   | April 2, 2004      |      |  
|                               |  | $                    |       |   | % ofSales          |      |   | $ |   |       | % ofSales |  |      | $ |  |   | %    |  
|(dollars in millions)          |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Sales by Segment:              |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                    | 161.2 |   |                    |      |   |   | $ | 149.9 |           |  |      |   |  | $ | 11.3 |   |  | 7.5   | % 
|Vacuum Technologies            |  |                      | 35.8  |   |                    |      |   |   |   | 38.5  |           |  |      |   |  |   | (2.7 | ) |  | (7.0  | ) 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                    | 197.0 |   |                    |      |   |   | $ | 188.4 |           |  |      |   |  | $ | 8.6  |   |  | 4.6   | % 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Operating Earnings by Segment: |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                    | 12.6  |   |                    | 7.8  | % |   | $ | 14.2  |           |  | 9.5  | % |  | $ | (1.6 | ) |  | (11.1 | )%
|Vacuum Technologies            |  |                      | 6.0   |   |                    | 16.7 |   |   |   | 6.8   |           |  | 17.6 |   |  |   | (0.8 | ) |  | (11.5 | ) 
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total segments                 |  |                      | 18.6  |   |                    | 9.4  |   |   |   | 21.0  |           |  | 11.1 |   |  |   | (2.4 | ) |  | (11.2 | ) 
|General corporate              |  |                      | (4.5  | ) |                    | (2.3 | ) |   |   | (3.4  | )         |  | (1.8 | ) |  |   | 1.1  |   |  | 32.4  |   
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                    | 14.1  |   |                    | 7.2  | % |   | $ | 17.6  |           |  | 9.3  | % |  | $ | (3.5 | ) |  | (19.6 | )%
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   



Scientific
Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe and North America. Increased customer demand for our information rich detection products, including those obtained
through the acquisitions of Magnex Scientific Limited (Magnex) in November 2004 and of product lines from Digilab LLC (the Digilab Business) in September 2004. Strong sales volume into life science applications was partially
offset by continued weakness in demand for industrial applications.



Scientific Instruments operating earnings for the second quarters of fiscal years 2005 and 2004 include pretax restructuring and other related costs of $1.7 million and $0.4 million, respectively (see Restructuring Activities below),
and acquisition-related intangible amortization of $1.7 million and $0.7 million, respectively. In addition, operating earnings for the second quarter of fiscal year 2005 includes amortization of $1.6 million related to inventory written up in
connection with the acquisition of Magnex. Excluding the impact of these items, the increase in operating earnings as a percentage of sales resulted primarily from sales volume leverage and efficiency improvements.



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##### Table of Contents

Vacuum Technologies. Vacuum Technologies sales for the second quarter of fiscal year 2005
decreased from a particularly strong second quarter in fiscal year 2004, but increased 2.3% sequentially from the first quarter of fiscal year 2005. The decrease from the second quarter of fiscal year 2004 was primarily due to unusually high demand
from certain OEMs in that quarter.



The decrease in Vacuum
Technologies operating earnings as a percentage of sales was primarily attributable to lower sales volume leverage and higher spending on new product development.



Consolidated Results



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



|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|--------------------------------------------------------- |  | -------------------- | ----- | - | ------------------ | ----- | - | - | - | ----- | --------- |  | ----- | - |  | - | ----- | - |  | ----- | --
|                                                          |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |      
|                                                          |  | April 1, 2005        |       |   | April 2, 2004      |       |  
|                                                          |  | $                    |       |   | % ofSales          |       |   | $ |   |       | % ofSales |  |       | $ |  |   | %     |  
|(dollars in millions, except per share data)              |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Sales                                                     |  | $                    | 197.0 |   |                    | 100.0 | % |   | $ | 188.4 |           |  | 100.0 | % |  | $ | 8.6   |   |  | 4.6   | % 
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Gross profit                                              |  |                      | 84.9  |   |                    | 43.1  |   |   |   | 83.0  |           |  | 44.0  |   |  |   | 1.9   |   |  | 2.4   |   
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Operating expenses:                                       |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Sales and marketing                                       |  |                      | 41.9  |   |                    | 21.2  |   |   |   | 40.5  |           |  | 21.5  |   |  |   | 1.4   |   |  | 3.4   |   
|Research and development                                  |  |                      | 14.2  |   |                    | 7.2   |   |   |   | 12.6  |           |  | 6.7   |   |  |   | 1.6   |   |  | 12.5  |   
|General and administrative                                |  |                      | 14.7  |   |                    | 7.5   |   |   |   | 12.3  |           |  | 6.5   |   |  |   | 2.4   |   |  | 19.8  |   
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Total operating expenses                                  |  |                      | 70.8  |   |                    | 36.0  |   |   |   | 65.4  |           |  | 34.7  |   |  |   | 5.4   |   |  | 8.3   |   
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Operating earnings                                        |  |                      | 14.1  |   |                    | 7.2   |   |   |   | 17.6  |           |  | 9.3   |   |  |   | (3.5  | ) |  | (19.6 | ) 
|Interest income                                           |  |                      | 1.3   |   |                    | 0.7   |   |   |   | 0.8   |           |  | 0.4   |   |  |   | 0.5   |   |  | 66.0  |   
|Interest expense                                          |  |                      | (0.5  | ) |                    | (0.3  | ) |   |   | (0.6  | )         |  | (0.3  | ) |  |   | (0.1  | ) |  | (6.7  | ) 
|Income tax expense                                        |  |                      | (5.1  | ) |                    | (2.6  | ) |   |   | (6.0  | )         |  | (3.2  | ) |  |   | (0.9  | ) |  | (15.4 | ) 
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Earnings from continuing operations                       |  | $                    | 9.8   |   |                    | 5.0   | % |   | $ | 11.8  |           |  | 6.3   | % |  | $ | (2.0  | ) |  | (16.6 | )%
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Net earnings per diluted share from continuing operations |  | $                    | 0.28  |   |                    |       |   |   | $ | 0.33  |           |  |       |   |  | $ | (0.05 | ) |  |       |   
|                                                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   



Sales. As
discussed under the heading Segment Results above, sales by the Scientific Instruments and Vacuum Technologies segments in the second quarter of fiscal year 2005 increased (decreased) by 7.5% and (7.0%), respectively, compared to the
prior-year quarter. The overall improvement in sales was primarily attributable to demand for our newer products for life science applications, including those obtained through the Magnex and Digilab Business acquisitions.



Geographically, sales in North America of $81.0 million, Europe of $76.3
million, and the rest of the world of $39.7 million in the second quarter of fiscal year 2005 represented increases of 4.9%, 6.0%, and 1.3%, respectively, compared to the second quarter of fiscal year 2004. Increases in Scientific Instruments sales
into North America and Europe, which were partially due to higher NMR and MR imaging system sales, more than offset lower Vacuum Technologies sales into those regions. With regard to the rest of the world, sales into Latin America increased as a
result of higher Scientific Instruments sales in the region. Sales into the Pacific Rim decreased as a result of lower Scientific Instruments sales into the region, due primarily to lower sales of NMR systems, which more than offset higher Vacuum
Technologies sales in the region.



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##### Table of Contents

Gross Profit. Gross profit for the second quarter of fiscal year 2005 reflects the impact of $1.6
million in amortization expense related to inventory written up in connection with the Magnex acquisition (this amount was included in cost of sales). Excluding the impact of this amortization, the gross profit percentage was flat compared to the
prior-year quarter, as higher sales volume leverage in the Scientific Instruments segment and the positive impact of operating efficiencies in the Vacuum Technologies segment were offset by the adverse impact of higher sales of lower margin
high-field NMR systems and certain superconducting magnets (due in part to the Magnex acquisition) in the Scientific Instruments segment and lower sales volume leverage in the Vacuum Technologies segment.



Sales and Marketing. The decrease in sales and marketing expenses as a
percentage of sales resulted primarily from higher sales volume leverage and the positive effects of efficiency improvements in the second quarter of fiscal year 2005. In absolute dollars, the increase in sales and marketing expenses was primarily
attributable to the acquisitions of Magnex and the Digilab Business during the second half of calendar year 2004.



Research and Development. The increase in research and development expenses as a percentage of sales in the second quarter of fiscal year 2005 was
primarily due to our continued focus within the Scientific Instruments and Vacuum Technologies segments on new product development, with an emphasis on life science applications, and the timing of new product release activity. In absolute dollars,
the increase was also attributable to the acquisitions of Magnex and the Digilab Business.



General and Administrative. General and administrative expenses for the second quarter of fiscal year 2005 included approximately $1.7 million in pretax restructuring and other related costs and approximately
$1.6 million in amortization expense relating to acquisition-related intangible assets. In comparison, general and administrative expenses for the second quarter of fiscal year 2004 included approximately $0.4 million in pretax restructuring costs
and approximately $0.7 million in acquisition-related intangible amortization. Excluding the impact of these items, general and administrative expenses were relatively flat as a percentage of sales but increased slightly in absolute dollars. This
increase, which was primarily due to higher Sarbanes-Oxley implementation costs and the acquisitions of Magnex and the Digilab Business, was partially offset by the positive impact of efficiency improvements.



We currently anticipate that general and administrative expenses will
continue to be adversely impacted for the remainder of fiscal year 2005 and during the first quarter of fiscal year 2006 by high costs relating to the initial implementation of the requirements of Section 404 of the Sarbanes-Oxley Act.



Restructuring Activities.



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



28



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##### Table of Contents

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



|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at December 31, 2004                   |  | $                | 270  |   |                    | $ |      |       |  | $ | 270   |  
|Charges to expense, net                        |  |                  |     |   |                    |   | 1,527 |       |  |   | 1,527 |  
|Cash payments                                  |  |                  | (131 | ) |                    |   | (3    | )     |  |   | (134  | )
|Foreign currency impacts and other adjustments |  |                  | (15  | ) |                    |   | (11   | )     |  |   | (26   | )
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at April 1, 2005                       |  | $                | 124  |   |                    | $ | 1,513 |       |  | $ | 1,637 |  
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  



In addition to the
foregoing restructuring costs, we incurred approximately $0.2 million in other costs relating directly to the consolidation of certain field support administrative functions from the Walton location to Magnexs Oxford location during the second
quarter of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs, which will be settled in cash. Since the
inception of this plan, we have recorded approximately $1.8 million in restructuring charges and approximately $0.3 million of other related costs.



We currently anticipate that general and administrative expenses for the third and fourth quarters of fiscal year 2005 will include approximately $0.2
million and $0.1 million in other restructuring-related costs, respectively, comprised of facility and employee relocation and employee training costs, in connection with the Walton facility closure and consolidation in Oxford. Substantially all
actions under the plan are expected to be completed by the end of the first quarter of fiscal year 2006.



Fiscal Year 2004 Plans. During fiscal year 2004, we undertook certain restructuring actions to reorganize the management
structure in our Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of these factories and involved the termination of three employees. These actions were
initiated in the fourth quarter of fiscal year 2004 and were completed in the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in general and
administrative expenses in the fourth quarter of fiscal year 2004; an adjustment to these amounts was subsequently recorded in the first quarter of fiscal year 2005. This restructuring plan did not involve any non-cash components. Since the
inception of this plan, we have recorded restructuring charges of approximately $1.4 million.



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



|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- |  | - | ---- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at December 31, 2004                   |  | $                | 998  |   |                    | $ |      |  | $ | 998  |  
|Cash payments                                  |  |                  | (981 | ) |                    |   |      |  |   | (981 | )
|Foreign currency impacts and other adjustments |  |                  | (17  | ) |                    |   |      |  |   | (17  | )
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                |     |   |                    | $ |      |  | $ |     |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  



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Also during fiscal year 2004, we committed to a separate plan to reorganize our Scientific Instruments
and corporate marketing organizations and to consolidate certain Scientific Instruments administrative functions in North America. This plan, which involved the termination of approximately 20 employees, was undertaken to more closely align the
strategic and operational focus of these organizations across different product lines and to improve efficiency and reduce operating costs. These actions were initiated in the fourth quarter of fiscal year 2004 and were completed by the end of the
second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in general and administrative expenses in the fourth quarter of fiscal year 2004. This
restructuring plan did not involve any non-cash components. Since the inception of this plan, we have recorded restructuring charges of approximately $0.9 million.



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



|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- |  | - | ---- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at December 31, 2004                   |  | $                | 624  |   |                    | $ |      |  | $ | 624  |  
|Cash payments                                  |  |                  | (371 | ) |                    |   |      |  |   | (371 | )
|Foreign currency impacts and other adjustments |  |                  | 5    |   |                    |   |      |  |   | 5    |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                | 258  |   |                    | $ |      |  | $ | 258  |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  



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



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



|                                               |  |                  |    |   |                    |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | -- | - | ------------------ | - | ---- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |    |   | Facilities-Related |   |      | Total | 
|(in thousands)                                 |  |                  |    |   |                    |   |      |       |  |   |       |  
|Balance at December 31, 2004                   |  | $                | 87 |   |                    | $ | 952  |       |  | $ | 1,039 |  
|Cash payments                                  |  |                  |   |   |                    |   | (217 | )     |  |   | (217  | )
|Foreign currency impacts and other adjustments |  |                  | (3 | ) |                    |   | (6   | )     |  |   | (9    | )
|                                               |  |                  |    |   |                    |   |      |       |  |   |       |  
|Balance at April 1, 2005                       |  | $                | 84 |   |                    | $ | 729  |       |  | $ | 813   |  
|                                               |  |                  |    |   |                    |   |      |       |  |   |       |  



The non-cash portion
of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period. Since the inception of this plan, we have recorded approximately $7.9 million in
restructuring charges and approximately $2.3 million of other related costs.



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##### Table of Contents

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



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



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



Income Tax
Expense.The effective income tax rate was 34.0% for the second quarter of fiscal year 2005, compared to 33.7% for the second quarter of fiscal year 2004.



Earnings from Continuing Operations. Earnings from continuing operations for the second quarter of fiscal year 2005 reflect the impact of
approximately $1.7 million in pretax restructuring and other related costs, approximately $1.6 million in pretax acquisition-related intangible amortization, and approximately $1.6 million in pretax amortization related to inventory written up in
connection with the Magnex acquisition. Net earnings for the second quarter of fiscal year 2004 reflect the impact of approximately $0.4 million in pretax restructuring and other related costs and approximately $0.7 million in pretax
acquisition-related intangible amortization. Excluding the impact of these items, the increase in earnings from continuing operations resulted primarily from higher sales and operating profit margins in our Scientific Instruments segment, partially
offset by lower sales and operating profit margins in our Vacuum Technologies segment.



Earnings from Discontinued Operations. Earnings from discontinued operations include earnings from the operations of the disposed Electronics Manufacturing business as well as the one-time book gain on the sale
transaction. During the second quarter of fiscal year 2005, we recorded approximately $2.0 million in earnings generated by the operations of the disposed business (net of tax) and approximately $70.1 million (net of tax) relating to the one-time
gain on the sale transaction. Earnings generated by the operations of the disposed business were approximately $2.9 million (net of tax) in the second quarter of fiscal year 2004. Excluding the one-time gain on the sale transaction, the decrease in
earnings from discontinued operations is primarily due to the inclusion of the results of only ten weeks of operations in the second quarter of fiscal year 2005 (as a result of the sale taking place during the quarter) compared to a full thirteen
weeks of operations in the second quarter of the prior year.



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##### Table of Contents

First Six Months of Fiscal Year 2005 Compared to First Six Months of Fiscal Year 2004



Segment Results



The following table presents comparisons of our sales and operating earnings
for each of our segments and in total for the first six months of fiscal years 2005 and 2004:



|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|------------------------------ |  | ---------------- | ----- | - | ------------------ | ---- | - | - | - | ----- | --------- |  | ---- | - |  | - | ---- | - |  | ----- | --
|                               |  | Six Months Ended |       |   | Increase(Decrease) |     
|                               |  | April 1, 2005    |       |   | April 2, 2004      |      |  
|                               |  | $                |       |   | % ofSales          |      |   | $ |   |       | % ofSales |  |      | $ |  |   | %    |  
|(dollars in millions)          |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Sales by Segment:              |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                | 317.2 |   |                    |      |   |   | $ | 284.0 |           |  |      |   |  | $ | 33.2 |   |  | 11.7  | % 
|Vacuum Technologies            |  |                  | 70.8  |   |                    |      |   |   |   | 69.8  |           |  |      |   |  |   | 1.0  |   |  | 1.5   |   
|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                | 388.0 |   |                    |      |   |   | $ | 353.8 |           |  |      |   |  | $ | 34.2 |   |  | 9.7   | % 
|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Operating Earnings by Segment: |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                | 23.8  |   |                    | 7.5  | % |   | $ | 26.9  |           |  | 9.5  | % |  | $ | (3.1 | ) |  | (11.5 | )%
|Vacuum Technologies            |  |                  | 12.1  |   |                    | 17.2 |   |   |   | 11.6  |           |  | 16.6 |   |  |   | 0.5  |   |  | 4.7   |   
|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total segments                 |  |                  | 35.9  |   |                    | 9.3  |   |   |   | 38.5  |           |  | 10.9 |   |  |   | (2.6 | ) |  | (6.6  | ) 
|General corporate              |  |                  | (8.6  | ) |                    | (2.2 | ) |   |   | (5.7  | )         |  | (1.6 | ) |  |   | 2.9  |   |  | 52.5  |   
|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                | 27.3  |   |                    | 7.0  | % |   | $ | 32.8  |           |  | 9.3  | % |  | $ | (5.5 | ) |  | (16.8 | )%
|                               |  |                  |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |   |  |       |   



Scientific
Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe and North America. Increased customer demand for our information rich detection products, including those obtained
through the acquisitions of Magnex and the Digilab Business, drove higher sales volume in both life science and industrial applications.



Scientific Instruments operating earnings for the first six months of fiscal years 2005 and 2004 include pretax restructuring and other related costs of
$2.9 million and $0.6 million, respectively (see Restructuring Activities below), and acquisition-related intangible amortization of $3.1 million and $1.4 million, respectively. In addition, operating earnings for the first six months of
fiscal year 2005 include the impact of an in-process research and development charge of $0.7 million and amortization of $3.2 million related to inventory written up in connection with the acquisitions of Magnex and the Digilab Business. Excluding
the impact of these items, the increase in operating earnings as a percentage of sales resulted primarily from sales volume leverage and efficiency improvements. The increase from these positive factors was partially offset by the adverse impact of
higher sales of lower margin high-field NMR systems and certain superconducting magnets (due in part to the Magnex acquisition) and transition costs relating to the Magnex and Digilab Business acquisitions.



Vacuum Technologies. The increase in Vacuum Technologies sales
resulted primarily from higher demand for products serving life science applications.



The increase in Vacuum Technologies operating earnings as a percentage of sales was primarily attributable to the positive impact of cost reduction initiatives on manufacturing costs.



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Consolidated Results



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



|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|--------------------------------------------------------- |  | ---------------- | ----- | - | ------------------ | ----- | - | - | - | ----- | --------- |  | ----- | - |  | - | ----- | - |  | ----- | --
|                                                          |  | Six Months Ended |       |   | Increase(Decrease) |      
|                                                          |  | April 1, 2005    |       |   | April 2, 2004      |       |  
|                                                          |  | $                |       |   | % ofSales          |       |   | $ |   |       | % ofSales |  |       | $ |  |   | %     |  
|(dollars in millions, except per share data)              |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Sales                                                     |  | $                | 388.0 |   |                    | 100.0 | % |   | $ | 353.8 |           |  | 100.0 | % |  | $ | 34.2  |   |  | 9.7   | % 
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Gross profit                                              |  |                  | 166.5 |   |                    | 42.9  |   |   |   | 156.2 |           |  | 44.2  |   |  |   | 10.3  |   |  | 6.5   |   
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Operating expenses:                                       |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Sales and marketing                                       |  |                  | 81.6  |   |                    | 21.0  |   |   |   | 77.5  |           |  | 21.9  |   |  |   | 4.1   |   |  | 5.3   |   
|Research and development                                  |  |                  | 27.1  |   |                    | 7.0   |   |   |   | 23.8  |           |  | 6.7   |   |  |   | 3.3   |   |  | 13.7  |   
|General and administrative                                |  |                  | 29.8  |   |                    | 7.7   |   |   |   | 22.1  |           |  | 6.2   |   |  |   | 7.7   |   |  | 34.7  |   
|Purchased in-process researchand development              |  |                  | 0.7   |   |                    | 0.2   |   |   |   |      |           |  |      |   |  |   | 0.7   |   |  | 100.0 |   
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Total operating expenses                                  |  |                  | 139.2 |   |                    | 35.9  |   |   |   | 123.4 |           |  | 34.9  |   |  |   | 15.8  |   |  | 12.8  |   
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Operating earnings                                        |  |                  | 27.3  |   |                    | 7.0   |   |   |   | 32.8  |           |  | 9.3   |   |  |   | (5.5  | ) |  | (16.8 | ) 
|Interest income                                           |  |                  | 2.3   |   |                    | 0.6   |   |   |   | 1.4   |           |  | 0.4   |   |  |   | 0.9   |   |  | 67.5  |   
|Interest expense                                          |  |                  | (1.1  | ) |                    | (0.3  | ) |   |   | (1.2  | )         |  | (0.3  | ) |  |   | (0.1  | ) |  | (7.2  | ) 
|Income tax expense                                        |  |                  | (6.9  | ) |                    | (1.8  | ) |   |   | (11.1 | )         |  | (3.1  | ) |  |   | (4.2  | ) |  | (37.6 | ) 
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Earnings from continuing operations                       |  | $                | 21.6  |   |                    | 5.6   | % |   | $ | 21.9  |           |  | 6.2   | % |  | $ | (0.3  | ) |  | (1.4  | )%
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   
|Net earnings per diluted share from continuing operations |  | $                | 0.60  |   |                    |       |   |   | $ | 0.61  |           |  |       |   |  | $ | (0.01 | ) |  |       |   
|                                                          |  |                  |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |       |   |  |       |   



Sales. As
discussed under the heading Segment Results above, sales by the Scientific Instruments and Vacuum Technologies segments in the first six months of fiscal year 2005 increased by 11.7% and 1.5%, respectively, compared to the first six months of
fiscal year 2004. The overall improvement in sales was primarily attributable to demand for our newer products for both life science and industrial applications, including those obtained through the Magnex and Digilab Business acquisitions.



Geographically, sales in North America of $157.8 million,
Europe of $153.6 million, and the rest of the world of $76.6 million in the first six months of fiscal year 2005 represented increases of 5.0%, 16.5%, and 6.8%, respectively, compared to the first six months of fiscal year 2004. Sales by the
Scientific Instruments segment increased across all major geographic regions, as did Vacuum Technologies segment sales into Europe and the Pacific Rim. However, Vacuum Technologies sales into North America decreased in the first six months of fiscal
year 2005, primarily as a result of unusually high demand from certain OEMs in that region during the first six months of fiscal year 2004.



Gross Profit. Gross profit for the first six months of fiscal year 2005 reflects the impact of $3.2 million in amortization expense related to
inventory written up in connection with the Magnex and the Digilab Business acquisitions (this amount was included in cost of sales). Excluding the impact of this amortization, the decrease in gross profit percentage resulted from higher sales of
lower-margin high field NMR systems and from certain superconducting magnets (due in part to the Magnex acquisition) within the Scientific Instruments. This decrease was partially offset by the positive impact of sales volume leverage in the
Scientific Instruments segment and operating efficiencies in the Vacuum Technologies segment.



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##### Table of Contents

Sales and Marketing. The decrease in sales and marketing expenses as a percentage of sales
resulted primarily from higher sales volume leverage and the positive effects of efficiency improvements in the Scientific Instruments segment in the first six months of fiscal year 2005. In absolute dollars, the increase in sales and marketing
expenses primarily related to the acquisitions of Magnex and the Digilab Business.



Research and Development. The increase in research and development as a percentage of sales was due primarily to our continued focus within both segments on new product development with an emphasis on life
science applications and the timing of new product release activity. In absolute dollars, the increase was also attributable to the acquisitions of Magnex and the Digilab Business.



General and Administrative. General and administrative expenses for the first six months of fiscal year 2005 included
approximately $2.9 million in pretax restructuring and other related costs, approximately $3.1 million in amortization expense relating to acquisition-related intangible assets, and a pretax loss of approximately $1.5 million relating to the
settlement of a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in the second half of fiscal year 2004). In comparison, general and
administrative expenses for the first six months of fiscal year 2004 included approximately $0.6 million in pretax restructuring costs and approximately $1.4 million in acquisition-related intangible amortization. Excluding the impact of these
items, general and administrative expenses were flat as a percentage of sales but increased in absolute dollars. The increase in absolute dollars was primarily due to higher Sarbanes-Oxley Section 404 implementation costs and general and
administrative costs from the acquisitions of Magnex and the Digilab Business. This increase was partially offset by the positive impact of operating efficiencies.



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



Restructuring
Activities.



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



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



|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- | ----- |  | - | ----- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at October 1, 2004                     |  | $                |     |   |                    | $ |      |       |  | $ |      |  
|Charges to expense, net                        |  |                  | 270  |   |                    |   | 1,527 |       |  |   | 1,797 |  
|Cash payments                                  |  |                  | (131 | ) |                    |   | (3    | )     |  |   | (134  | )
|Foreign currency impacts and other adjustments |  |                  | (15  | ) |                    |   | (11   | )     |  |   | (26   | )
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  
|Balance at April 1, 2005                       |  | $                | 124  |   |                    | $ | 1,513 |       |  | $ | 1,637 |  
|                                               |  |                  |      |   |                    |   |       |       |  |   |       |  



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In addition to the foregoing restructuring costs, we incurred approximately $0.3 million in other costs
relating directly to the consolidation of certain field support administrative functions from the Walton location to Magnexs Oxford location during the first six months of fiscal year 2005. This amount was comprised of non-cash charges for
accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs, which will be settled in cash.



Fiscal Year 2004 Plans. During fiscal year 2004, we undertook certain restructuring actions to reorganize the management
structure in our Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of these factories and involved the termination of three employees. These actions were
initiated in the fourth quarter of fiscal year 2004 and were completed in the second quarter of fiscal year 2005. All severance and other employee-related costs relating to this restructuring plan were initially recorded and included in general and
administrative expenses in the fourth quarter of fiscal year 2004; an adjustment to these amounts was recorded during the first six months of fiscal year 2005. This restructuring plan did not involve any non-cash components.



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



|                                               |  |                  |        |   |                    |   |       |  |   |        |  
|---------------------------------------------- |  | ---------------- | ------ | - | ------------------ | - | ----- |  | - | ------ | -
|                                               |  | Employee-Related |        |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |        |   |                    |   |       |  |   |        |  
|Balance at October 1, 2004                     |  | $                | 665    |   |                    | $ |      |  | $ | 665    |  
|Charges to expense                             |  |                  | 335    |   |                    |   |      |  |   | 335    |  
|Cash payments                                  |  |                  | (1,004 | ) |                    |   |      |  |   | (1,004 | )
|Foreign currency impacts and other adjustments |  |                  | 4      |   |                    |   |      |  |   | 4      |  
|                                               |  |                  |        |   |                    |   |       |  |   |        |  
|Balance at April 1, 2005                       |  | $                |       |   |                    | $ |      |  | $ |       |  
|                                               |  |                  |        |   |                    |   |       |  |   |        |  



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



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



|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | ---- | - | ------------------ | - | ----- |  | - | ---- | -
|                                               |  | Employee-Related |      |   | Facilities-Related |   | Total | 
|(in thousands)                                 |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at October 1, 2004                     |  | $                | 859  |   |                    | $ |      |  | $ | 859  |  
|Reversals of expense, net                      |  |                  | (11  | ) |                    |   |      |  |   | (11  | )
|Cash payments                                  |  |                  | (595 | ) |                    |   |      |  |   | (595 | )
|Foreign currency impacts and other adjustments |  |                  | 5    |   |                    |   |      |  |   | 5    |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                | 258  |   |                    | $ |      |  | $ | 258  |  
|                                               |  |                  |      |   |                    |   |       |  |   |      |  



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



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



|                                               |  |                  |     |   |                    |   |      |       |  |   |      |  
|---------------------------------------------- |  | ---------------- | --- | - | ------------------ | - | ---- | ----- |  | - | ---- | -
|                                               |  | Employee-Related |     |   | Facilities-Related |   |      | Total | 
|(in thousands)                                 |  |                  |     |   |                    |   |      |       |  |   |      |  
|Balance at October 1, 2004                     |  | $                | 149 |   |                    | $ | 830  |       |  | $ | 979  |  
|Charges to expense, net                        |  |                  |    |   |                    |   | 402  |       |  |   | 402  |  
|Cash payments                                  |  |                  | (63 | ) |                    |   | (513 | )     |  |   | (576 | )
|Foreign currency impacts and other adjustments |  |                  | (2  | ) |                    |   | 10   |       |  |   | 8    |  
|                                               |  |                  |     |   |                    |   |      |       |  |   |      |  
|Balance at April 1, 2005                       |  | $                | 84  |   |                    | $ | 729  |       |  | $ | 813  |  
|                                               |  |                  |     |   |                    |   |      |       |  |   |      |  



In addition to the
foregoing restructuring costs, we incurred approximately $0.1 million in other related costs relating directly to the Southern California facility consolidation during the first six months of fiscal year 2005. These costs primarily related to
non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the facility. Since the inception of this plan, we have recorded approximately $7.9 million in restructuring charges and approximately $2.3 million in
other related costs. The non-cash portion of restructuring costs recorded by us in connection with these restructuring actions was not significant, either in the aggregate or for any single period.



Income Tax Expense.The effective income tax rate was 24.3% for the
first six months of fiscal year 2005, compared to 33.7% for the first six months of fiscal year 2004. The lower rate in the first six months of fiscal year 2005 was primarily due to a discrete, one-time reduction in income tax expense of $3.0
million recorded as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the period. This reduction was partially offset as a result of the purchased in-process research and development charge also recorded
during the first six months, which increased the effective income tax rate slightly because it was not tax deductible. Excluding the impact of these two discrete items, the effective income tax rate of 34.0% for the first six months of fiscal year
2005 was slightly higher than the effective tax rate of 33.7% for the first six months of fiscal year 2004.



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Earnings from Continuing Operations. Earnings from continuing operations for the first six months
of fiscal year 2005 reflect the impact of approximately $2.9 million in pretax restructuring and other related costs, approximately $3.1 million in pretax acquisition-related intangible amortization, approximately $3.2 million in pretax amortization
related to inventory written up in connection with acquisitions, an in-process research and development charge of approximately $0.7 million related to the Magnex acquisition, a pretax loss of approximately $1.5 million relating to the settlement of
a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in fiscal year 2004), and a discrete, one-time reduction in income tax expense of $3.0
million recorded during the period as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the period. Earnings from continuing operations for the first six months of fiscal year 2004 reflect the impact of
approximately $0.6 million in pretax restructuring and other related costs and approximately $1.4 million in pretax acquisition-related intangible amortization. Excluding the impact of these items, the increase in earnings from continuing operations
resulted primarily from higher sales and operating profit margins in both our Scientific Instruments and Vacuum Technologies segments in the first six months of fiscal year 2005.



Earnings from Discontinued Operations. Earnings from discontinued operations include earnings from the operations of
the disposed Electronics Manufacturing business as well as the one-time book gain on the sale transaction. During the first six months of fiscal year 2005, we recorded approximately $5.2 million in earnings generated by the operations of the
disposed business (net of tax) and approximately $70.1 million (net of tax) relating to the one-time gain on the sale transaction. Earnings generated by the operations of the disposed business were approximately $6.4 million (net of tax) in the
first six months of fiscal year 2004. Excluding the one-time gain on the sale transaction, the decrease in earnings from discontinued operations is primarily due to the inclusion of the results of only 23 weeks of operations in the first six months
of fiscal year 2005 (as a result of the sale taking place during that period) compared to a full 26 weeks of operations in the first six months of the prior year.



Liquidity and Capital Resources



We generated $30.0 million of cash from operating activities in the first six months of fiscal year 2005, which compares to $44.1 million generated in the
first six months of fiscal year 2004. The decrease in cash from operating activities resulted primarily from cash outflows resulting from decreases in accrued liabilities ($26.4 million) and accounts payable ($14.9 million) compared to cash inflows
from changes in these same balances in the first six months of fiscal year 2004. The relative decrease in cash flows from accrued liabilities was driven by the higher income tax payments and the conversion of several significant customer advances in
connection with sales recorded during the first six months of fiscal year 2005. The relative decrease in cash flow from accounts payable was primarily the result of the timing of payments to vendors. The impact of the foregoing factors on operating
cash flow was partially offset by a higher cash inflows resulting from decreases in accounts receivable ($15.6 million) and lower cash outflows from increases in inventories ($12.0 million). These changes were primarily attributable to the timing of
customer shipments, invoicing, and cash collections and the timing of magnet purchases and deliveries for NMR systems.



We generated $176.5 million of cash from investing activities in the first six months of fiscal year 2005, which compares to $12.1 million used for
investing activities in the first six months of fiscal year 2004. The increase in cash generated from investing activities (compared to cash used in the prior-year period) was primarily due to the pretax proceeds from the sale of the Electronics
Manufacturing business in the second quarter of fiscal year 2005, partially offset by payments made for the acquisition of Magnex in the first quarter of fiscal year 2005. No significant acquisition-related cash payments were made in the first six
months of fiscal year 2004. In addition, we generated $35.0 million from the sale of short-term investments, offset by purchases of $10.0 million, during the first six months of fiscal year 2005. There were no purchases or sales of short-term
investments during the first six months of fiscal year 2004. During the second half of fiscal year 2005, we expect cash flows from investing activities to include income tax payments totaling approximately $43.0 million relating to the taxable gain
on the sale of the Electronics Manufacturing business.



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We used $29.8 million of cash for financing activities in the first six months of fiscal year 2005, which
compares to $9.4 million used for financing activities in the first six months of fiscal year 2004. The increase in cash used for financing activities was principally due to higher cash expenditures to repurchase common stock (which was then
retired), lower proceeds from the issuance of common stock, and higher debt repayments. The increased level of stock repurchases in the first half of fiscal year 2005 was the result of an increased effort to utilize excess cash, particularly the
estimated net proceeds from the anticipated sale of the Electronics Manufacturing business, to reduce the number of outstanding common shares. The decrease in proceeds from the issuance of common stock was due to lower stock option exercise volume.
The increase in debt repayments was primarily due to the repayment of a long-term note payable during the first half of fiscal year 2005.



As of April 1, 2005, we had a total of $83.3 million in 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 April 1, 2005. All of these credit facilities contain certain customary conditions and events of default, with which we were in compliance at
April 1, 2005. Of the $83.3 million in uncommitted and unsecured credit facilities, a total of $50.8 million was limited for use by, or in favor of, certain subsidiaries at April 1, 2005, and a total of $11.8 million of this $50.8 million was being
utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to our subsidiaries by customers for which separate liabilities were
recorded in the unaudited interim condensed consolidated financial statements at April 1, 2005. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



As of April 1, 2005, we had $31.3 million in term loans outstanding compared
to $32.5 million at October 1, 2004. As of both April 1, 2005 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2% and the weighted-average interest rate was 6.8%. 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 April 1, 2005. At October
1, 2004, we had other long-term notes payable of $4.2 million with a weighted-average interest rate of 0.0%. During the second quarter of fiscal year 2005, we paid the outstanding balance on this long-term note in advance of a significant increase
in the applicable interest rate.



In connection with the Magnex
and Digilab Business acquisitions, we have accrued but not yet paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheets and/or to secure the sellers indemnification
obligations. As of April 1, 2005, retained amounts for the Magnex acquisition included $6.0 million relating to the sellers indemnification obligations, which is due to be paid (or received in the form of notes payable by us at the
payees election) in two equal installments (net of any indemnification claims) on the first and second anniversaries of the closing of that acquisition, which occurred in November 2004. The retained amount for the Digilab Business acquisition,
which is due to be paid during the fourth quarter of fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at April 1, 2005. In addition to these retained payments, we are, from time to time, obligated to pay
additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of April 1, 2005, up to a maximum of approximately $25.5 million could be payable through fiscal year 2007
under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial performance targets through fiscal
year 2005, and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. The balance of approximately $9.5 million relates to
the acquisition of Bear Instruments, Inc. (Bear) in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as
additional goodwill at the time they are earned. During the second half of fiscal year 2005, we expect to make payments of approximately $0.7 million to the former Bear shareholders under their contingent consideration arrangement, and approximately
$1.4 million to Digilab in settlement of a net asset adjustment based on the final closing balance sheet of the Digilab Business. Both of these payments will result in additional goodwill relating to the respective acquisitions when paid.



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



As of April 1, 2005, we had cancelable commitments to a contractor for capital expenditures totaling approximately $0.8 million relating to the ongoing consolidation of three consumable products factories into one in
Southern California. In the event that these commitments are canceled for reasons other than the contractors default, we may be responsible for reimbursement of actual costs incurred by the contractor. We had no material non-cancelable
commitments for capital expenditures as of April 1, 2005. In the aggregate, we currently anticipate that our capital expenditures will be between $10.0 million and $15.0 million during the remaining six months of fiscal year 2005.



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



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 April 1, 2005:



|                                           |  |                               |       |              |      |        |      |   |       |  |      |        |            |   |       |  |   |       |  |   |        |  |   |       
|------------------------------------------ |  | ----------------------------- | ----- | ------------ | ---- | ------ | ---- | - | ----- |  | ---- | ------ | ---------- | - | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                           |  | Six MonthsEndingSept. 30,2005 |       | Fiscal Years |      | Total 
|                                           |  |                               | 2006  |              | 2007 |        | 2008 |   | 2009  |  | 2010 |        | Thereafter |  
|(in thousands)                             |  |                               |       |              |      |        |      |   |       |  |      |        |            |   |       |  |   |       |  |   |        |  |   |       
|Operating leases                           |  | $                             | 6,214 |              | $    | 8,226  |      | $ | 5,452 |  | $    | 3,837  |            | $ | 3,480 |  | $ | 3,022 |  | $ | 30,815 |  | $ | 61,046
|Long-term debt (including current portion) |  |                               | 1,250 |              |      | 2,500  |      |   | 2,500 |  |      | 6,250  |            |   |      |  |   | 6,250 |  |   | 12,500 |  |   | 31,250
|                                           |  |                               |       |              |      |        |      |   |       |  |      |        |            |   |       |  |   |       |  |   |        |  |   |       
|Total contractual cash obligations         |  | $                             | 7,464 |              | $    | 10,726 |      | $ | 7,952 |  | $    | 10,087 |            | $ | 3,480 |  | $ | 9,272 |  | $ | 43,315 |  | $ | 92,296
|                                           |  |                               |       |              |      |        |      |   |       |  |      |        |            |   |       |  |   |       |  |   |        |  |   |       



In addition to the
non-cancelable contractual obligations included in the above table and the cancelable commitments for capital expenditures of approximately $0.8 million described under Liquidity and Capital Resources above, we had cancelable commitments to
purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $13.4 million, net of deposits paid, as of April 1, 2005. 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 April 1, 2005, we did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of
some contingent event, except for contingent payments of up to a maximum of $25.5 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific timing and amounts of which are not currently
determinable.



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Recent Accounting Pronouncements



In December 2003, the Financial Accounting Standards Board (FASB) issued a proposed amendment to Statement of
Financial Accounting Standards No. (SFAS) 128, Earnings per Share, to make it consistent with International Accounting Standard 33, Earningsper Share, so as to make earnings per share computations comparable on a
global basis. As currently drafted, the amendment would require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts
such as options or warrants. The current method of calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The
proposed amendment would also change other aspects of SFAS 128 that would not impact our earnings per share calculations. The amended standard is currently expected to be issued in the fourth quarter of our fiscal year 2005 and, once effective, will
require retrospective application for all prior periods presented. If the proposed statement is finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on our financial condition
or results of operations.



In December 2004, the FASB issued
SFAS 123 (revised 2004), Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (SFAS 123(R)), which addresses the accounting for share-based payment transactions in which a company receives employee services in
exchange for either equity instruments of that company or liabilities that are based on the fair value of that companys equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates
companies ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such
transactions be accounted for using a fair value-based method and recognized as expense in our Consolidated Statement of Earnings. Under SFAS 123(R), we are required to determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We currently use the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a
different model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. In addition, the adoption of SFAS 123(R) will require additional accounting related to the tax benefit on employee stock
options and for stock issued under our employee stock purchase plan. In March 2005, the SEC released Staff Accounting Bulletin No. (SAB) 107, Share-Based Payment, which provides interpretive guidance relating to the application of
SFAS 123(R). The guidance contained in SAB 107 is intended to assist issuers in the initial implementation of SFAS 123(R) and to enhance the information received by investors and other users of financial statements. SAB 107 allows a flexible
approach to the implementation of SFAS 123(R) and provides issuers with latitude in measuring the value of employee stock options under the standard. As amended by the SEC in April 2005, SFAS 123(R) is now effective for the first quarter of our
fiscal year 2006. We are currently evaluating the requirements of SFAS 123(R) and SAB 107 and expect that they are likely to have a material impact on our results of operations, although we are not currently able to estimate that impact.



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



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



Risk Factors



Customer Demand. Demand for our products depends upon, among other factors, the level of capital expenditures by current and prospective customers,
the rate of economic growth in the markets in which we compete, the level of government funding for research, 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.



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.



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



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



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



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Changes to financial accounting standards can also create variability in our operating results. There has
been an ongoing public debate as to whether the fair value of employee stock option and employee stock purchase plan shares should be treated as a compensation expense and, if so, how to appropriately determine the fair value of these instruments.
As discussed under the heading Recent Accounting Pronouncements above, the FASB has published SFAS 123(R), which amends existing financial accounting standards to require that awards made under equity compensation plans be recorded as
compensation expense using the fair value method. SFAS 123(R) will be effective for the first quarter of our fiscal year 2006. We are currently evaluating the requirements of SFAS 123(R).



Competition. The industries in which we operate are highly competitive. 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.



For 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 and wire used in
superconducting magnets, are purchased from limited or single sources of supply. The loss of a key supplier or the inability to obtain certain key raw materials or components could cause delays or reductions in shipments of our products or increase
our costs, which could have an adverse effect on our financial condition or results of operations.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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For certain of these sites and facilities, various uncertainties make it difficult to assess the
likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of April 1, 2005, it was nonetheless estimated that our share of the future exposure for environmental-related
costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up
to approximately 13 years as of April 1, 2005. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and we therefore had an accrual of $1.3 million as of
April 1, 2005.



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 April 1, 2005, it was estimated that our share of the future exposure for these environmental-related costs for
these sites and facilities ranged in the aggregate from $4.6 million to $15.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to
approximately 30 years as of April 1, 2005. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any
other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at April 1, 2005. We therefore had an accrual of $4.5 million as
of April 1, 2005, which represents the best estimate of our share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.



The foregoing amounts are only estimates of anticipated future
environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation,
monitoring, and remediation activities and the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.



An insurance company has agreed to pay a portion of certain of VAIs (now VMS) future environmental-related costs for which we have an
indemnification obligation, and we therefore have a short-term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of inflation) in other assets as of April 1, 2005 for our share of such recovery.
We have not reduced any environmental-related liability in anticipation of recoveries from third parties.



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



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



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As mandated by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public
companies to include in their annual reports on Form 10-K a report issued by management containing their assessment of the effectiveness of the companys internal control over financial reporting. In addition, the registered public accounting
firm auditing the companys financial statements must attest to and report on managements assessment of the effectiveness of the companys internal control over financial reporting. These new requirements are effective for our
current fiscal year ending September 30, 2005. The requirements of Section 404 and their application to our operations are complex; as a result, it is difficult to estimate what the actual cost of our initial Section 404 implementation will be, but
the cost is expected to be significant.



Item 3.    Quantitative and Qualitative Disclosures About Market Risk



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



At April 1, 2005, there were no outstanding forward contracts designated as
cash flow hedges of forecasted transactions. During the six months ended April 1, 2005, no foreign exchange gains or losses from cash flow hedge ineffectiveness were recognized.



Our foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign
exchange forward contracts that were outstanding as of April 1, 2005 follows:



|                  |  |                   |        |                        |   |       
|----------------- |  | ----------------- | ------ | ---------------------- | - | ------
|                  |  | NotionalValueSold |        | NotionalValuePurchased
|(in thousands)    |  |                   |        |                        |   |       
|Euro              |  | $                 |       |                        | $ | 61,253
|Australian dollar |  |                   |       |                        |   | 12,175
|Japanese yen      |  |                   | 3,001  |                        |   |      
|British pound     |  |                   | 15,131 |                        |   |      
|Danish krona      |  |                   | 1,182  |                        |   |      
|Canadian dollar   |  |                   | 8,374  |                        |   |      
|Swiss franc       |  |                   |       |                        |   | 1,423 
|                  |  |                   |        |                        |   |       
|                  |  | $                 | 27,688 |                        | $ | 74,851
|                  |  |                   |        |                        |   |       



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 April 1, 2005, our debt obligations
had fixed interest rates.



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



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



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Debt Obligations.



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



|                                           |  |                              |       |   |              |      |       |       |      |   |       |      |  |   |       |   |  |            |   |   |  |   |       |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ---------------------------- | ----- | - | ------------ | ---- | ----- | ----- | ---- | - | ----- | ---- |  | - | ----- | - |  | ---------- | - | - |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | SixMonthsEndingSept. 30,2005 |       |   | Fiscal Years |      |       | Total |     
|                                           |  |                              | 2006  |   |              | 2007 |       |       | 2008 |   |       | 2009 |  |   | 2010  |   |  | Thereafter |   |  
|(dollars in thousands)                     |  |                              |       |   |              |      |       |       |      |   |       |      |  |   |       |   |  |            |   |   |  |   |       |   |  |   |        |   |  |   |        |  
|Long-term debt (including current portion) |  | $                            | 1,250 |   |              | $    | 2,500 |       |      | $ | 2,500 |      |  | $ | 6,250 |   |  | $          |  |   |  | $ | 6,250 |   |  | $ | 12,500 |   |  | $ | 31,250 |  
|Average interest rate                      |  |                              | 7.2   | % |              |      | 7.2   | %     |      |   | 7.2   | %    |  |   | 6.7   | % |  |            |  | % |  |   | 6.7   | % |  |   | 6.7    | % |  |   | 6.8    | %



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



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



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



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



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Item 4.    Controls and Procedures



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



Changes in internal control over financial reporting. There was no
change in our internal control over financial reporting that occurred during our second 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 2.    Unregistered Sales of Equity Securities and Use of Proceeds



(c)March 2005 Stock Repurchase Program.On February 4, 2005, the Companys Board of Directors approved a new stock repurchase
authorization under which the Company may repurchase up to $145 million of its common stock. This new authorization was conditioned upon the closing of the sale of the Companys Electronics Manufacturing business and, upon becoming effective,
was intended to replace the prior repurchase authorization approved in May 2004. The sale of the Electronics Manufacturing business closed on March 11, 2005, and the new repurchase authorization became effective on that date and will remain
effective through September 30, 2006. No shares were repurchased under this new authorization during the fiscal quarter ended April 1, 2005. As of April 1, 2005, the Company had remaining authorization of $145 million for future repurchases of its
common stock under this program.



May 2004 Stock Repurchase
Program. The following table summarizes information relating to stock repurchases by the Company under the May 2004 stock repurchase program during the fiscal quarter ended April 1, 2005:



|                                     |  |                   |  |                        |       |                                                         |         |                                                                |         |    
|------------------------------------ |  | ----------------- |  | ---------------------- | ----- | ------------------------------------------------------- | ------- | -------------------------------------------------------------- | ------- | ---
|Fiscal Month                         |  | SharesRepurchased |  | Average PricePer Share |       | Shares Repurchasedas Part of PubliclyAnnounced Plan (1) |         | Maximum Number ofShares that May YetBe Purchased Underthe Plan |        
|Balance  December 31, 2004          |  |                   |  |                        |       |                                                         |         |                                                                | 807,897 |    
|January 1, 2005  January 28, 2005   |  |                  |  | $                      |      |                                                         |        |                                                                | 807,897 |    
|January 29, 2005  February 25, 2005 |  | 446,104           |  |                        | 41.39 |                                                         | 446,104 |                                                                | 361,793 |    
|February 26, 2005  March 10, 2005   |  | 355,449           |  |                        | 42.47 |                                                         | 355,449 |                                                                | 6,344   | (1)
|March 11, 2005  April 1, 2005       |  |                  |  |                        |      |                                                         |        |                                                                |        |    
|                                     |  |                   |  |                        |       |                                                         |         |                                                                |         |    
|Total shares repurchased             |  | 801,553           |  | $                      | 41.87 |                                                         | 801,553 |                                                                |         |    
|                                     |  |                   |  |                        |       |                                                         |         |                                                                |         |    

---

|(1) |  | In May 2004, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007. Upon the closing of the
sale of the Electronics Manufacturing business on March 11, 2005, this repurchase authorization was replaced and the remaining 6,344 shares under this authorization were no longer available for repurchase.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



At the Companys Annual Meeting of Stockholders held on February 3, 2005, the Companys stockholders considered and voted on two matters. Those
matters and the voting on those matters were as follows:



Proposal OneElection of three Class III directors for three-year terms:



Nominee Conrad W. Hewitt: 30,501,863 votes for; 2,756,645 votes withheld



Nominee Garry W. Rogerson: 32,835,210 votes for; 423,298 votes withheld



Nominee Elizabeth E. Tallett: 30,833,498 votes for;
2,425,008 votes withheld



Proposal TwoApproval of the
Amended and Restated Varian, Inc. Omnibus Stock Plan:



20,905,841 votes for; 8,428,463 votes against; 260,333 votes abstaining



Pursuant to the rules of The Nasdaq Market, Inc., Proposal One allowed brokers to vote without receipt of instructions from clients, so there were no broker non-votes. There were 3,663,869 broker non-votes on Proposal
Two.



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##### Table of Contents

Item 6.    Exhibits



(a)    Exhibits.



|           |  |                                                                                                                                                                                                                  |  |                           |  |                |  |     |  |  
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------------- |  | --- |  | -
|ExhibitNo. |  | Exhibit Description                                                                                                                                                                                              |  | Incorporated by Reference |  | FiledHerewith 
|           |  | Form                                                                                                                                                                                                             |  | Date                      |  | ExhibitNumber  | 
|10.19*     |  | Description of Certain Compensatory Arrangements between Registrant and Executive Officers                                                                                                                       |  |                           |  |                |  |     |  | X
|           |  |                                                                                                                                                                                                                  |  |                           | 
|10.24      |  | Asset Purchase Agreement by and between Varian, Inc. and Jabil Circuit, Inc. dated as of February 4, 2005                                                                                                        |  | 8-K                       |  | March 17, 2005 |  | 2.1 |  |  
|           |  |                                                                                                                                                                                                                  |  |                           | 
|10.25*     |  | Retention, Incentive and Separation Agreement, dated as of February 4, 2005, between Varian, Inc. and C. Wilson Rudd, and Renewal Agreement, dated as of March 11, 2005, between Varian, Inc.
and C. Wilson Rudd |  |                           |  |                |  |     |  | X
|           |  |                                                                                                                                                                                                                  |  |                           | 
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              |  |                           |  |                |  |     |  | X
|           |  |                                                                                                                                                                                                                  |  |                           | 
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              |  |                           |  |                |  |     |  | X
|           |  |                                                                                                                                                                                                                  |  |                           | 
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                              |  |                           |  |                |  |     |  |  
|           |  |                                                                                                                                                                                                                  |  |                           | 
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                              |  |                           |  |                |  |     |  |  

---

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



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SIGNATURES



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



|                   |  |  |  |     |  |                           |  |                                                                                                                                          
|------------------ |  |  |  | --- |  | ------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                   |  |  |  |     |  | VARIAN, INC. (Registrant)
|                   |  |  | 
|Date: May 11, 2005 |  |  |  | By: |  | /s/ G. EDWARD MCCLAMMY   
|                   |  |  |  |     |  |                           |  | G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)







51