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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 March 28, 2003



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 ofIncorporation or Organization) |  | (IRS EmployerIdentification 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 ̈



The number of shares of the registrants common stock outstanding as of April 25, 2003 was 33,879,007.



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##### Table of Contents



VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2003



TABLE OF CONTENTS



|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  |  | Financial Information                                                                 |  |     
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  | Unaudited Consolidated Condensed Statement of Earnings                                |  | 3   
|        |  | Unaudited Consolidated Condensed Balance Sheet                                        |  | 4   
|        |  | Unaudited Consolidated Condensed Statement of Cash Flows                              |  | 5   
|        |  | Notes to the Unaudited Consolidated Condensed Financial Statements                    |  | 6   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 28  
|Item 4. |  | Controls and Procedures                                                               |  | 29  
|       
|PART II |  | Other Information                                                                     |  |     
|Item 5. |  | Submission of Matters to a Vote of Security Holders                                   |  | 30  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 30  







2



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1.    Financial Statements



VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                              |  | Fiscal Quarter Ended |         | Six Months Ended
|--------------------------------------------- |  | -------------------- | ------- | ----------------
|                                              |  | Mar. 28, 2003        |         | Mar. 29, 2002   
|Sales                                         |  | $                    | 204,614 |                 
|Cost of sales                                 |  |                      | 126,330 |                 
|                                              |  |                      |         |                 
|Gross profit                                  |  |                      | 78,284  |                 
|                                              |  |                      |         |                 
|Operating expenses                            |  |                      |         |                 
|Sales and marketing                           |  |                      | 34,489  |                 
|Research and development                      |  |                      | 11,088  |                 
|General and administrative                    |  |                      | 11,434  |                 
|Purchased in-process research and development |  |                      |        |                 
|                                              |  |                      |         |                 
|Total operating expenses                      |  |                      | 57,011  |                 
|                                              |  |                      |         |                 
|Operating earnings                            |  |                      | 21,273  |                 
|Interest expense, net                         |  |                      | 193     |                 
|                                              |  |                      |         |                 
|Earnings before income taxes                  |  |                      | 21,080  |                 
|Income tax expense                            |  |                      | 7,180   |                 
|                                              |  |                      |         |                 
|Net earnings                                  |  | $                    | 13,900  |                 
|                                              |  |                      |         |                 
|Net earnings per share:                       |  |                      |         |                 
|Basic                                         |  | $                    | 0.41    |                 
|                                              |  |                      |         |                 
|Diluted                                       |  | $                    | 0.40    |                 
|                                              |  |                      |         |                 
|Shares used in per share calculations:        |  |                      |         |                 
|Basic                                         |  |                      | 33,805  |                 
|                                              |  |                      |         |                 
|Diluted                                       |  |                      | 34,888  |                 
|                                              |  |                      |         |                 



See
accompanying Notes to the Unaudited Consolidated Condensed Financial statements.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                                  |  | Mar. 28, 2003 |         |   | Sept. 27, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | -
|ASSETS                                                                                                                                            |  |               |         |   |                |  
|                                                                                                                                                 
|Current assets                                                                                                                                    |  |               |         |   |                |  
|Cash and cash equivalents                                                                                                                         |  | $             | 92,270  |   |                | $
|Accounts receivable, net                                                                                                                          |  |               | 172,352 |   |                |  
|Inventories                                                                                                                                       |  |               | 126,890 |   |                |  
|Deferred taxes                                                                                                                                    |  |               | 30,814  |   |                |  
|Other current assets                                                                                                                              |  |               | 16,663  |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total current assets                                                                                                                              |  |               | 438,989 |   |                |  
|Property, plant, and equipment, net                                                                                                               |  |               | 110,562 |   |                |  
|Goodwill                                                                                                                                          |  |               | 125,459 |   |                |  
|Intangible assets, net                                                                                                                            |  |               | 18,228  |   |                |  
|Other assets                                                                                                                                      |  |               | 3,482   |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total assets                                                                                                                                      |  | $             | 696,720 |   |                | $
|                                                                                                                                                  |  |               |         |   |                |  
|                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |               |         |   |                |  
|                                                                                                                                                 
|Current liabilities                                                                                                                               |  |               |         |   |                |  
|Notes payable                                                                                                                                     |  | $             | 2,494   |   |                | $
|Current portion of long-term debt                                                                                                                 |  |               | 3,057   |   |                |  
|Accounts payable                                                                                                                                  |  |               | 58,918  |   |                |  
|Deferred profit                                                                                                                                   |  |               | 21,955  |   |                |  
|Accrued liabilities                                                                                                                               |  |               | 141,932 |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total current liabilities                                                                                                                         |  |               | 228,356 |   |                |  
|Long-term debt                                                                                                                                    |  |               | 36,698  |   |                |  
|Deferred taxes                                                                                                                                    |  |               | 8,243   |   |                |  
|Other liabilities                                                                                                                                 |  |               | 10,326  |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total liabilities                                                                                                                                 |  |               | 283,623 |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|                                                                                                                                                 
|Contingencies (Note 13)                                                                                                                           |  |               |         |   |                |  
|                                                                                                                                                 
|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33,834 shares at Mar. 28, 2003 and 33,951 shares at Sept. 27, 2002 |  |               | 247,316 |   |                |  
|Retained earnings                                                                                                                                 |  |               | 171,006 |   |                |  
|Accumulated other comprehensive loss                                                                                                              |  |               | (5,225  | ) |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total stockholders equity                                                                                                                        |  |               | 413,097 |   |                |  
|                                                                                                                                                  |  |               |         |   |                |  
|Total liabilities and stockholders equity                                                                                                        |  | $             | 696,720 |   |                | $
|                                                                                                                                                  |  |               |         |   |                |  



See
accompanying Notes to the Unaudited Consolidated Condensed Financial statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                    |  | Six Months Ended |        
|----------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                    |  | Mar. 28, 2003    |        
|Cash flows from operating activities                                                |  |                  |        
|Net earnings                                                                        |  | $                | 26,587 
|Adjustments to reconcile net earnings to net cash provided by operating
activities: |  |                  |        
|Depreciation and amortization                                                       |  |                  | 11,330 
|(Gain) loss on disposition of property, plant, and equipment                        |  |                  | (16    
|Purchased in-process research and development                                       |  |                  |       
|Tax benefit from stock option exercises                                             |  |                  | 515    
|Changes in assets and liabilities, excluding effects of acquisitions:               |  |                  |        
|Accounts receivable, net                                                            |  |                  | 2,629  
|Inventories                                                                         |  |                  | (4,442 
|Other current assets                                                                |  |                  | 2,001  
|Other assets                                                                        |  |                  | 113    
|Accounts payable                                                                    |  |                  | 5,510  
|Deferred profit                                                                     |  |                  | 906    
|Accrued liabilities                                                                 |  |                  | 16,772 
|Other liabilities                                                                   |  |                  | 443    
|                                                                                    |  |                  |        
|Net cash provided by operating activities                                           |  |                  | 62,348 
|                                                                                    |  |                  |        
|Cash flows from investing activities                                                |  |                  |        
|Proceeds from sale of property, plant, and equipment                                |  |                  | 324    
|Purchase of property, plant, and equipment                                          |  |                  | (9,985 
|Purchase of businesses, net of cash acquired                                        |  |                  | (22,728
|                                                                                    |  |                  |        
|Net cash used in investing activities                                               |  |                  | (32,389
|                                                                                    |  |                  |        
|Cash flows from financing activities                                                |  |                  |        
|Net issuance (repayment) of debt                                                    |  |                  | 981    
|Repurchase of common stock                                                          |  |                  | (8,074 
|Issuance of common stock                                                            |  |                  | 2,971  
|Net transfers to Varian Medical Systems, Inc.                                       |  |                  | (466   
|                                                                                    |  |                  |        
|Net cash used in financing activities                                               |  |                  | (4,588 
|                                                                                    |  |                  |        
|Effects of exchange rate changes on cash and cash equivalents                       |  |                  | 1,754  
|                                                                                    |  |                  |        
|Net increase (decrease) in cash and cash equivalents                                |  |                  | 27,125 
|Cash and cash equivalents at beginning of period                                    |  |                  | 65,145 
|                                                                                    |  |                  |        
|Cash and cash equivalents at end of period                                          |  | $                | 92,270 
|                                                                                    |  |                  |        
|Supplemental cash flow information                                                  |  |                  |        
|Income taxes paid                                                                   |  | $                | 2,335  
|                                                                                    |  |                  |        
|Interest paid                                                                       |  | $                | 1,266  
|                                                                                    |  |                  |        



See
accompanying Notes to the Unaudited Consolidated Condensed Financial statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



Note 1.    Unaudited Interim Consolidated Condensed Financial Statements



These unaudited interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the
Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The September 27, 2002 balance sheet data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended September 27, 2002 filed with the SEC. In the opinion of the Companys management, the interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information
required to be set forth therein. The results of operations for the fiscal quarter and six months ended March 28, 2003 are not necessarily indicative of the results to be expected for a full year or for any other periods.



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



Note 2.    Description of Business and Basis of Presentation



The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum products
and services, and electronics manufacturing services. These businesses primarily serve life science, industrial, academic, and research customers. Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian
Associates, Inc. (VAI). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company for each share of VAI (the Distribution).



The Companys fiscal years reported are the 52- or
53-week periods ending on the Friday nearest September 30. Fiscal year 2003 will comprise the 53-week period ending October 3, 2003, and fiscal year 2002 was comprised of the 52-week period ended September 27, 2002. The fiscal quarters and six-month
periods ended March 28, 2003 and March 29, 2002 each comprised 13 weeks and 26 weeks, respectively.



Note 3.    Balance Sheet Detail



|                        |  | Mar. 28, 2003 |         | Sept. 27, 2002
|----------------------- |  | ------------- | ------- | --------------
|(In thousands)          |  |               |         |               
|Inventories             |  |               |         |               
|Raw materials and parts |  | $             | 68,976  |               
|Work in process         |  |               | 10,872  |               
|Finished goods          |  |               | 47,042  |               
|                        |  |               |         |               
|                        |  | $             | 126,890 |               
|                        |  |               |         |               



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





Note
4.    Forward Exchange Contracts



The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the local functional currencies. These
contracts are accounted for under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. (FAS) 133, Accounting for Derivative Instruments and Hedging Activities. The Company records
these contracts at fair value with the related gains and losses recorded in general and administrative expenses. The gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balance being hedged.



The Company also enters into foreign exchange
forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under FAS 133. At March 28, 2003, there were no outstanding forward contracts designated as cash
flow hedges of forecasted sale transactions. A loss of $0.1 million (net of tax) on closed forward contracts has been included in accumulated other comprehensive loss in stockholders equity and will be recognized as a reduction in sales when
the related sale transaction is recorded. During the six months ended March 28, 2003, a loss of $0.1 million from hedge ineffectiveness was recognized and included in general and administrative expenses.



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 March 28, 2003 follows:



|                  |  | Notional Value Sold |        | Notional Value Purchased
|----------------- |  | ------------------- | ------ | ------------------------
|(in thousands)    |  |                     |        |                         
|Euro              |  | $                   |       |                         
|Australian dollar |  |                     |       |                         
|Japanese yen      |  |                     | 20,305 |                         
|Canadian dollar   |  |                     | 6,278  |                         
|British pound     |  |                     | 4,549  |                         
|Swedish krona     |  |                     |       |                         
|                  |  |                     |        |                         
|                  |  | $                   | 31,132 |                         
|                  |  |                     |        |                         



Note
5.    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 2003 were as follows:



|                                 |  | Scientific Instruments |         | Vacuum Technologies |   | Electronics Manufacturing |  | Total Company
|-------------------------------- |  | ---------------------- | ------- | ------------------- | - | ------------------------- |  | -------------
|(in thousands)                   |  |                        |         |                     |   |                           |  |              
|Balance as of September 27, 2002 |  | $                      | 112,854 |                     | $ | 966                       |  | $            
|Fiscal year 2003 acquisitions    |  |                        | 9,531   |                     |   |                          |  |              
|Other adjustments                |  |                        | 6       |                     |   |                          |  |              
|                                 |  |                        |         |                     |   |                           |  |              
|Balance as of March 28, 2003     |  | $                      | 122,391 |                     | $ | 966                       |  | $            
|                                 |  |                        |         |                     |   |                           |  |              



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





As
required by FAS 142, Goodwill and Other Intangible Assets, the Company completed its annual goodwill impairment assessment during the second quarter of fiscal year 2003 and determined that there was no impairment.



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



|                                             |  | Mar. 28, 2003 |        |   | Sept. 27, 2002 |  
|-------------------------------------------- |  | ------------- | ------ | - | -------------- | -
|(in thousands)                               |  |               |        |   |                |  
|Intangible assets                            |  |               |        |   |                |  
|Customer contracts and related relationships |  | $             | 5,905  |   |                | $
|Existing technology                          |  |               | 6,972  |   |                |  
|Patents and core technology                  |  |               | 4,572  |   |                |  
|Trade names and trademarks                   |  |               | 2,176  |   |                |  
|Other                                        |  |               | 1,974  |   |                |  
|                                             |  |               |        |   |                |  
|                                             |  |               | 21,599 |   |                |  
|Accumulated amortization                     |  |               | (3,371 | ) |                |  
|                                             |  |               |        |   |                |  
|                                             |  | $             | 18,228 |   |                | $
|                                             |  |               |        |   |                |  



Amortization expense relating to intangible assets was $0.6 million and $0.5 million during the fiscal quarters ended March 28, 2003 and March 29, 2002, respectively, and $1.1 million and $0.6 million during the six months ended
March 28, 2003 and March 29, 2002, respectively.



Note
6.    Acquisition of Roche DAT Business



In January 2003, the Company acquired the non-clinical, drugs of abuse testing business (the DAT Business) of Roche Diagnostics Corporation (Roche) for approximately $22.2 million in cash. The DAT Business
develops, markets, and sells consumable products for detecting drugs of abuse, including several products manufactured by the Company for Roche prior to the acquisition. As a result of this acquisition, the Company added the DAT Business sales
and distribution capabilities to the Companys existing consumables business, which is part of the Scientific Instruments segment.



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



|                               |  | Amount Allocated |     
|------------------------------ |  | ---------------- | ----
|(in millions)                  |  |                  |     
|Inventories                    |  | $                | 3.2 
|Property, plant, and equipment |  |                  | 2.4 
|Goodwill                       |  |                  | 9.5 
|Identified intangible assets   |  |                  | 7.2 
|                               |  |                  |     
|Total assets acquired          |  |                  | 22.3
|Liabilities assumed            |  |                  | (0.1
|                               |  |                  |     
|Net assets acquired            |  | $                | 22.2
|                               |  |                  |     



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





The
amounts allocated to identified intangible assets have a weighted-average useful life of approximately 6.7 years. These intangible assets are being amortized using the straight-line method over their respective estimated useful lives. An external
appraisal was performed which used the income approach, the royalty savings approach, and the cost approach to determine the fair value of the DAT Business significant identifiable intangible assets. A risk-adjusted discount rate of 12% was
applied to cash flow projections to determine the present value of the different intangible assets.



Note 7.    Net Earnings Per Share



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



For the fiscal quarters ended March 28, 2003 and March 29,
2002, options to purchase 1,179,208 and 636,942 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. For the six months ended March 28, 2003 and March 29, 2002, options to
purchase 1,080,718 and 659,529 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.



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



|                                            |  | Fiscal Quarter Ended |  | Six Months Ended
|------------------------------------------- |  | -------------------- |  | ----------------
|                                            |  | Mar. 28, 2003        |  | Mar. 29, 2002   
|(in thousands)                              |  |                      |  |                 
|Weighted-average basic shares outstanding   |  | 33,805               |  | 33,452          
|Net effect of dilutive stock options        |  | 1,083                |  | 1,470           
|                                            |  |                      |  |                 
|Weighted-average diluted shares outstanding |  | 34,888               |  | 34,922          
|                                            |  |                      |  |                 



Note
8.    Comprehensive Income (Loss)



The Companys comprehensive income is comprised of net earnings, foreign currency translation adjustments, and changes in the fair value of highly effective cash flow hedge transactions. Comprehensive income was $20.0 million
and $11.6 million for the fiscal quarters ended March 28, 2003 and March 29, 2002, respectively, and $38.0 million and $21.6 million for the six months ended March 28, 2003 and March 29, 2002, respectively. Accumulated other comprehensive loss is
included as a component of stockholders equity.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





Note
9.    Debt, Credit Facilities, and Guarantees



As of March 28, 2003, the Company and its subsidiaries had $55.7 million in uncommitted, 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 March 28, 2003. All of these credit facilities contain certain conditions and events of default customary for such facilities, with which the Company was in compliance. Of the $55.7 million in
uncommitted, unsecured credit facilities, a total of $34.8 million was limited for use by, or in favor of, certain subsidiaries. As of March 28, 2003, a total of $21.6 million of the $34.8 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 the Companys subsidiaries by customers for which separate liabilities were recorded in the Unaudited
Consolidated Condensed Financial Statements at March 28, 2003. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



In February 2003, the Company established a short-term bank
credit facility in Japan in the amount of 300 million yen (approximately $2.5 million). The credit facility is available to the Companys wholly owned Japanese subsidiary for working capital purposes. As of March 28, 2003, an aggregate of $2.5
million was outstanding under this credit facility at an annual interest rate of 0.8%. This credit facility contains certain covenants that limit future borrowings of the Company from this facility, with which the Company was in compliance.



Note 10.    Warranty Liability



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 March 28, 2003 were
as follows:



|(in thousands)                   |  |   |        |  
|-------------------------------- |  | - | ------ | -
|Balance as of September 27, 2002 |  | $ | 9,029  |  
|Charges to costs and expenses    |  |   | 2,534  |  
|Warranty expenditures            |  |   | (2,424 | )
|                                 |  |   |        |  
|Balance as of March 28, 2003     |  | $ | 9,139  |  
|                                 |  |   |        |  



Note
11.    Stock Repurchase Program



During fiscal year 2002, the Companys Board of Directors provided an authorization for the Company to repurchase up to 1,000,000 shares of its common stock until October 1, 2004. During the fiscal quarter ended December 27,
2002, the Company repurchased and retired 274,000 shares under this authorization at an aggregate cost of $8.1 million. As of March 28, 2003, the Company had remaining authorization for future repurchases of 676,000 shares.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





Note
12.    Accounting for Stock-based Compensation



At March 28, 2003, the Company had two stock-based employee compensation plans, the Varian, Inc. Omnibus Stock Plan (the Plan) and the Varian, Inc. Employee Stock Purchase Plan (the ESPP). The Company
has adopted the pro forma disclosure provisions of FAS 123, Accounting for Stock-Based Compensation. 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 the options granted under the
Plan and shares issued under the ESPP as prescribed by FAS 123, net earnings and net earnings per share would have been reduced to the pro forma amounts shown below:



|                                                                                                                                            |  | Fiscal Quarter Ended |        |   | Six Months Ended |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ---------------- | -
|                                                                                                                                            |  | Mar. 28, 2003        |        |   | Mar. 29, 2002    |  
|(in thousands, except per share amounts)                                                                                                    |  |                      |        |   |                  |  
|Net earnings:                                                                                                                               |  |                      |        |   |                  |  
|As reported                                                                                                                                 |  | $                    | 13,900 |   |                  | $
|Deduct: Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax effects |  |                      | (1,921 | ) |                  |  
|                                                                                                                                            |  |                      |        |   |                  |  
|Pro forma net earnings                                                                                                                      |  | $                    | 11,979 |   |                  | $
|                                                                                                                                            |  |                      |        |   |                  |  
|Net earnings per share:                                                                                                                     |  |                      |        |   |                  |  
|Basicas reported                                                                                                                           |  | $                    | 0.41   |   |                  | $
|                                                                                                                                            |  |                      |        |   |                  |  
|Basicpro forma                                                                                                                             |  | $                    | 0.35   |   |                  | $
|                                                                                                                                            |  |                      |        |   |                  |  
|                                                                                                                                           
|Dilutedas reported                                                                                                                         |  | $                    | 0.40   |   |                  | $
|                                                                                                                                            |  |                      |        |   |                  |  
|Dilutedpro forma                                                                                                                           |  | $                    | 0.34   |   |                  | $
|                                                                                                                                            |  |                      |        |   |                  |  



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.



Under the terms of the Distribution, the Company and Varian Semiconductor Equipment Associates, Inc. (VSEA) each agreed to indemnify Varian Medical Systems, Inc. (VMS) for
one-third of certain environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





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. Under the terms of the Distribution, 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 tax benefits recognized or realized by VMS for such costs).



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 March 28, 2003, 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 $1.8 million to $4.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately
30 years as of March 28, 2003. 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 $1.8 million as of March 28,
2003.



As to other sites and facilities,
sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental-related activities. As of March 28, 2003, it was estimated that the Companys share of the future exposure for environmental-related
costs for these sites and facilities ranged in the aggregate from $6.1 million to $13.5 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 March 28, 2003. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental-related cost than any other
amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.4 million at March 28, 2003. The Company therefore had an accrual of $4.9 million as of March 28, 2003,
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 $1.8 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 agreed to pay a portion of certain of VAIs (now VMS) future environmental-related costs for which the
Company has an indemnity obligation, and the Company therefore has a $1.3 million receivable in other assets as of March 28, 2003 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.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





Legal
proceedings.    The Company is currently the defendant in a patent infringement lawsuit brought by Unaxis Balzers Aktiengesellschaft Liechtenstein, which is seeking infringement damages (royalties and/or lost profits) for the
period beginning when the Companys alleged infringing product (a Vacuum Technologies leak detection system) was introduced in 1997 until the patent expired in 2001. During that period, the Companys revenues on that product were $17.6
million. The Company believes that it has strong defenses and intends to vigorously defend against this lawsuit.



In addition to this matter, the Company is also involved in other 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.    Industry Segments



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



These segments were determined based on how management views and evaluates the Companys operations.



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



|                          |  | Fiscal Quarter Ended |       | Fiscal Quarter Ended |  
|------------------------- |  | -------------------- | ----- | -------------------- | -
|                          |  | Mar. 28, 2003        |       | Mar. 29, 2002        |  
|                          |  | Sales                |       | Sales                |  
|(in millions)             |  |                      |       |                      |  
|Scientific Instruments    |  | $                    | 135.6 |                      | $
|Vacuum Technologies       |  |                      | 28.2  |                      |  
|Electronics Manufacturing |  |                      | 40.9  |                      |  
|                          |  |                      |       |                      |  
|Total industry segments   |  |                      | 204.7 |                      |  
|General corporate         |  |                      |      |                      |  
|Interest expense, net     |  |                      |      |                      |  
|                          |  |                      |       |                      |  
|Total                     |  | $                    | 204.7 |                      | $
|                          |  |                      |       |                      |  



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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





|                          |  | Six Months Ended |       | Six Months Ended |  
|------------------------- |  | ---------------- | ----- | ---------------- | -
|                          |  | Mar. 28, 2003    |       | Mar. 29, 2002    |  
|                          |  | Sales            |       | Sales            |  
|(in millions)             |  |                  |       |                  |  
|Scientific Instruments    |  | $                | 259.9 |                  | $
|Vacuum Technologies       |  |                  | 57.6  |                  |  
|Electronics Manufacturing |  |                  | 82.9  |                  |  
|                          |  |                  |       |                  |  
|Total industry segments   |  |                  | 400.4 |                  |  
|General corporate         |  |                  |      |                  |  
|Interest expense, net     |  |                  |      |                  |  
|                          |  |                  |       |                  |  
|Total                     |  | $                | 400.4 |                  | $
|                          |  |                  |       |                  |  



Note
15.    Recent Accounting Pronouncements



In August 2001, the FASB issued FAS 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did not have a significant impact on the Companys financial condition or results of operations.



In October 2001, the FASB issued FAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting Principles Board Opinion No.
(APB) 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. While FAS 144 carries forward many of
the provisions of FAS 121 and APB 30, some of the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and amortized over their remaining service period, and the
standard broadens the presentation of discontinued operations. The adoption of FAS 144 in the first quarter of fiscal year 2003 did not have a significant impact on the Companys financial condition or results of operations.



In July 2002, the FASB issued FAS 146, Accounting for Exit
or Disposal Activities. FAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth
in Emerging Issues Task Force Issue No. (EITF) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of FAS 146
includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. FAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 in the second quarter of fiscal year 2003 did not have a significant impact on the Companys financial condition or results of operations.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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





In
November 2002, the FASB issued Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, standby letters of credit, and warranty obligations. It also clarifies that at the
time a company issues a guarantee, a company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions
of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and measurement provisions in the second quarter of
fiscal year 2003 did not have a significant impact on the Companys financial condition or results of operations. The disclosure requirements of FIN 45, which were effective for both interim and annual periods, were adopted by the Company in
the first quarter of fiscal year 2003.



In
November 2002, the FASBs Emerging Issues Task Force finalized EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than
one unit of accounting. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. However, it does not address when the criteria for revenue recognition are met
or provide guidance on the appropriate revenue recognition convention for a given unit of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is
permitted. Upon adoption, entities may elect to either apply EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its
financial condition or results of operations.



In
December 2002, the FASB issued FAS 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FAS 123. FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt
the accounting provisions of FAS 123, Accounting for Stock-Based Compensation. Since the Company has decided to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of FAS 148 in the fiscal
quarter ended March 28, 2003 did not have an effect on its financial condition or results of operations. However, the Company has begun making the additional disclosures required by FAS 148.



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



Until April 2, 1999, the business of Varian, Inc. (the Company) was operated as the Instruments business (IB) of
Varian Associates, Inc. (VAI). IB included the business units that designed, developed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing
services. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2,
1999 (the Distribution). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. (VSEA) and distributed to the holders of record of VAI common stock on March
24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (VMS) effective as of April 3,
1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the Distribution Agreement). For purposes of providing an
orderly transition and to define certain ongoing relationships between and among the Company, VMS, and VSEA after the Distribution, the Company, VMS, and VSEA also entered into certain other agreements which include an Employee Benefits Allocation
Agreement, an Intellectual Property Agreement, and a Tax Sharing Agreement.



The Companys fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2003 will comprise the 53-week period ending October 3, 2003, and fiscal
year 2002 was comprised of the 52-week period ended September 27, 2002. The fiscal quarters and six-month periods ended March 28, 2003 and March 29, 2002 each comprised 13 weeks and 26 weeks, respectively.



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 managements current expectations, estimates, and projections, and that reflect
managements beliefs and assumptions based upon information available to management at the date of this Report. In some cases, you can identify these statements by words such as may, might, will,
should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue, and other similar terms.



We caution investors that forward-looking statements are only
predictions, based upon our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual
results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed below under the heading Risk
Factors. We encourage you to read that section carefully. Other risks and uncertainties include, but are not limited to, the following: whether we will succeed in new product development, commercialization, performance, and acceptance,
particularly in life science applications; whether we can achieve continued growth in sales in life science applications; risks arising from the timing of shipments, installations, and the recognition of revenues on leading-edge nuclear magnetic
resonance (NMR) systems; whether we will see renewed demand for vacuum products and contract electronics manufacturing; competitive products and pricing; economic conditions in the Companys product and geographic markets; whether
we will see continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; whether we will see sustained or improved market investment in capital
equipment; whether we will be able to successfully integrate acquired businesses; whether we will see reduced demand from customers that operate in cyclical industries; whether government funding for research might decline; and other risks detailed
from time to time in the Companys filings with the Securities and Exchange Commission (the SEC). You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC,
before deciding to invest in our stock or to maintain or change your investment. We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise.



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##### Table of Contents



Results of Operations



Second Quarter of Fiscal Year 2003
Compared to Second Quarter of Fiscal Year 2002



Sales.    Sales were $204.7 million in the second quarter of fiscal year 2003, an increase of 7.5% from sales of $190.4 million in the second quarter of fiscal year 2002. Sales by the Scientific
Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 13.7%, 3.3%, and (6.8%), respectively, compared to the year-ago period.



Geographically, sales in North America of $104.7 million, Europe of $59.4 million, and the rest of the world
of $40.6 million in the second quarter of fiscal year 2003 represented (decreases) increases of (11.0%), 27.4%, and 54.9%, respectively, as compared to the second quarter of fiscal year 2002. The decrease in North America was primarily the result of
a shift in the NMR systems sales from North America to the Pacific Rim and lower sales by the Electronics Manufacturing segment. The increase in Europe was driven by stronger sales of Scientific Instruments due in part to the stronger Euro in the
second quarter of fiscal year 2003. The increase in the rest of the world was primarily driven by growth in Scientific Instruments sales (particularly sales of NMR systems) into the Pacific Rim.



Gross Profit.    Gross profit was
$78.3 million (representing 38.3% of sales) in the second quarter of fiscal year 2003, compared to $70.2 million (representing 36.9% of sales) in the second quarter of fiscal year 2002. The increase in gross profit percentage was driven primarily by
higher Electronics Manufacturing gross profit margins as a result of improved operational efficiencies in the second quarter of fiscal year 2003.



Sales and Marketing.    Sales and marketing expenses were $34.5 million (representing 16.9% of sales) in the
second quarter of fiscal year 2003, compared to $32.0 million (representing 16.8% of sales) in the second quarter of fiscal year 2002. The $2.5 million increase in sales and marketing expenses resulted primarily from the acquisition of ANSYS
Technologies, Inc. (ANSYS) in February 2002 and the non-clinical, drugs of abuse testing business (the DAT Business) of Roche Diagnostics Corporation in January 2003 as well as costs associated with higher revenues.



Research and
Development.    Research and development expenses were $11.1 million (representing 5.4% of sales) in the second quarter of fiscal year 2003, compared to $9.6 million (representing 5.0% of sales) in the second quarter of
fiscal year 2002. Research and development expenses increased primarily because the Company continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life
science applications. The Company expects that, as a percentage of sales, research and development expenses will continue at this higher level for fiscal year 2003.



General and Administrative.    General and administrative expenses were $11.4
million (representing 5.6% of sales) in the second quarter of fiscal year 2003, compared to $8.7 million (representing 4.6% of sales) in the second quarter of fiscal year 2002. The increase in general and administrative expenses resulted primarily
from higher expenses related to acquired businesses (including intangible asset amortization), higher insurance costs, higher than normal legal expenses for Vacuum Technologies, and workforce reduction costs. The Company expects that, as a
percentage of sales, general and administrative expenses will continue at this higher level for fiscal year 2003.



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Purchased
In-Process Research and Development.    In connection with the acquisition of ANSYS in February 2002, the Company recorded a one-time charge of $0.9 million for purchased in-process research and development in the second
fiscal quarter ended March 29, 2002 relating to several ANSYS products that were in process at the time of the acquisition. No such charges were recorded in the second quarter of fiscal year 2003.



Net Interest Expense.    Net
interest expense was $0.2 million (representing 0.1% of sales) in the second quarter of fiscal year 2003, compared to $0.5 million (representing 0.2% of sales) in the second quarter of fiscal year 2002.



Taxes on Earnings.    The effective
income tax rate was 34.1% for the second quarter of fiscal year 2003 compared to 37.7% (of which 1.7% relates to the purchased in-process research and development charge) for the second quarter of fiscal year 2002. During the second quarter of
fiscal year 2003, the Company lowered its estimated effective tax rate for the full fiscal year 2003 from 36% to 35%, primarily due to a reduction in tax rates and higher than expected tax credits in certain foreign jurisdictions.



Net Earnings.    Net earnings for
the second quarter of fiscal year 2003 were $13.9 million ($0.40 net earnings per diluted share), compared to $11.6 million ($0.33 net earnings per diluted share) in the second quarter of fiscal year 2002. The net earnings for the second quarter of
fiscal year 2002 include the impact of a charge of $0.9 million for purchased in-process research and development relating to the ANSYS acquisition. Excluding the impact of this charge, the increase in net earnings is primarily attributable to
increased profitability in the Scientific Instruments and Electronics Manufacturing segments, partially offset by decreased Vacuum Technologies profitability.



Segments.    Scientific Instruments sales of $135.6 million in the second quarter of fiscal year 2003 increased
13.7% over the second quarter of fiscal year 2002 sales of $119.1 million. The growth in sales was primarily driven by increased sales of certain products selling into life science applications and the impact of the stronger Euro. Earnings from
operations in the second quarter of fiscal year 2003 of $14.5 million (10.7% of sales) increased from $12.2 million (10.2% of sales) in the second quarter of fiscal year 2002. The operating earnings for the second quarter of fiscal year 2002 include
the impact of a $0.9 million in-process research and development charge relating to the ANSYS acquisition. Excluding the impact of this charge, the decrease in operating earnings as a percentage of sales resulted primarily from earnings dilution
related to the acquisition of the DAT Business in January 2003 and higher general and administrative costs. For fiscal year 2003, high single-digit growth is expected for Scientific Instruments sales, with good growth in sales for life science
applications and modest, if any, growth in sales for chemical analysis applications. Operating profit margins are expected to move toward 12% as fiscal year 2003 progresses.



Vacuum Technologies sales of $28.2 million in the second quarter of fiscal year 2003 increased 3.3% from
$27.3 million in the second quarter of fiscal year 2002. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the second quarter of fiscal year 2003 of $3.3 million (11.9% of
sales) were down from $4.2 million (15.3% of sales) in the second quarter of fiscal year 2002. The lower operating earnings, as a percentage of sales, were primarily attributable to higher operating expenses, partially offset by higher gross profit
margins. The higher operating expenses included investments made in the marketing and research and development areas, higher insurance, legal, and workforce reduction costs as well as the impact of the stronger Euro. Mid-single digit growth in
Vacuum Technologies sales is expected for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be in the mid-teens.



Electronics Manufacturing sales in the second quarter of fiscal year 2003 of $40.9 million decreased 6.8% from $44.0 million in the second
quarter of fiscal year 2002. The decrease in sales was primarily due to several customers slowing their order rates during the second quarter of fiscal year 2003, seemingly in response to the uncertain impact of world events. Earnings from
operations in the second quarter of fiscal year 2003 of $5.0 million (12.2% of sales) increased from $4.0 million (8.9% of sales) in the second quarter of fiscal year 2002, primarily as a result of operational efficiencies. Modest, if any, growth in
Electronics Manufacturing sales is expected for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be near 10%.



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With respect
to consolidated results for fiscal year 2003, we expect mid- to high-single digit sales growth, with an operating profit percentage similar to fiscal year 2002. Our current expectations for fiscal year 2003 assume that there is no deterioration in
economic conditions in the markets in which the Company operates.



First Six Months of Fiscal Year 2003 Compared to First Six Months of Fiscal Year 2002



Sales.    Sales were $400.4 million in the first six months of fiscal year 2003, an increase of 6.9% from sales
of $374.6 million in the first six months of fiscal year 2002. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 10.1%, 7.2%, and (2.3%), respectively.



Geographically, sales in North America of $214.7 million,
Europe of $116.7 million, and the rest of the world of $69.0 million in the first six months of fiscal year 2003 represented (decreases) increases of (3.2%), 15.9%, and 32.4%, respectively, as compared to the first six months of fiscal year 2002.
The decrease in North America primarily resulted from a shift in the NMR systems sales mix from North America to the Pacific Rim. This decrease was partially offset by higher sales into North America by the rest of the Scientific Instruments segment
including ANSYS, which was acquired in February 2002. The increase in Europe was due to stronger sales of Scientific Instruments. The increase in the rest of the world was primarily driven by growth in Scientific Instruments sales (particularly
sales of NMR systems) into the Pacific Rim, partially offset by lower sales into Latin America.



Gross Profit.    Gross profit was $154.7 million (representing 38.6% of sales) in the first six months of fiscal year 2003, compared to $139.9 million (representing 37.3% of
sales) in the first six months of fiscal year 2002. The increase in gross profit percentage was driven primarily by higher Electronics Manufacturing gross profit margins as a result of improved operational efficiencies and lower new customer
start-up costs in the first six months of fiscal year 2003, as well as lower Vacuum Technologies gross profit margins in the first six months of the prior fiscal year due to the negative impact of decreased demand on cost of sales.



Sales and Marketing.    Sales and
marketing expenses were $68.2 million (representing 17.0% of sales) in the first six months of fiscal year 2003, compared to $62.9 million (representing 16.8% of sales) in the first six months of fiscal year 2002. The higher sales and marketing
expenses resulted primarily from the acquisition of ANSYS in February 2002 and the DAT Business in January 2003 as well as costs associated with higher revenues.



Research and Development.    Research and development expenses were $22.0 million
(representing 5.5% of sales) in the first six months of fiscal year 2003, compared to $18.6 million (representing 5.0% of sales) in the first six months of fiscal year 2002. Research and development expenses increased primarily because the Company
continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications.



General and Administrative.    General and administrative expenses were $23.0
million (representing 5.7% of sales) in the first six months of fiscal year 2003, compared to $18.5 million (representing 4.9% of sales) in the first six months of fiscal year 2002. The increase in general and administrative expenses resulted
primarily from restructuring charges recorded in the first six months of fiscal year 2003. These charges consisted mainly of employee severance-related costs to realign resources in the field offices of the Scientific Instruments segment to better
focus on life science applications, and costs to close a field office in Latin America. Higher expenses related to acquired businesses (including intangible asset amortization), higher insurance costs, and higher than normal legal expenses for
Vacuum Technologies also contributed to the increase in the first six months of fiscal year 2003.



Purchased In-Process Research and Development.    In connection with the acquisition of ANSYS in February 2002,
the Company recorded a one-time charge of $0.9 million for purchased in-process research and development in the first six months of fiscal year 2002 relating to several ANSYS products which were in process at the time of the acquisition. No such
charges were recorded in the first six months of fiscal year 2003.



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Net
Interest Expense.    Net interest expense was $0.6 million (representing 0.2% of sales) in the first six months of fiscal year 2003, compared to $0.8 million (representing 0.2% of sales) in the first six months of fiscal year
2002.



Taxes on
Earnings.    The effective income tax rate was 35.0% for the first six months of fiscal year 2003 compared to 36.8% (of which 0.8% relates to the purchased in-process research and development charge) for the first six months
of fiscal year 2002. During the first six months of fiscal year 2003, the Company lowered its estimated effective tax rate for the full fiscal year 2003 from 36% to 35%, primarily due to a reduction in tax rates and higher than expected tax credits
in certain foreign jurisdictions.



Net
Earnings.    Net earnings for the first six months of fiscal year 2003 were $26.6 million ($0.76 net earnings per diluted share), compared to $24.1 million ($0.69 net earnings per diluted share) in the first six months of
fiscal year 2002. Net earnings for the first six months of fiscal year 2003 reflect the impact of $2.0 million in pretax restructuring charges, while net earnings for the first six months of fiscal year 2002 include the impact of a one-time charge
of $0.9 million for purchased in-process research and development relating to the ANSYS acquisition. Excluding the effect of these charges, the increase in net earnings in the first six months of fiscal year 2003 was primarily the result of
increased profitability in the Electronics Manufacturing segment.



Segments.    Scientific Instruments sales of $259.9 million in the first six months of fiscal year 2003 increased 10.1% over the first six months of fiscal year 2002 sales of $236.0 million. The
growth in sales was primarily driven by increased sales of certain products selling into life science applications and the acquisition of ANSYS in February 2002. Earnings from operations in the first six months of fiscal year 2003 were $27.6 million
(10.6% of sales) compared to $27.1 million (11.5% of sales) in the first six months of fiscal year 2002. These results include $1.6 million in pretax restructuring charges in the first six months of fiscal year 2003 and a one-time charge of $0.9
million for purchased in-process research and development relating to the ANSYS acquisition in the first six months of fiscal year 2002. Excluding the impact of these charges, the decrease in operating earnings as a percentage of sales resulted
primarily from increased research and development and general and administrative expenses in the first six months of fiscal year 2003.



Vacuum Technologies sales of $57.6 million in the first six months of fiscal year 2003 increased 7.2% from the first six months of fiscal
year 2002 sales of $53.7 million. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the first six months of fiscal year 2003 of $7.8 million (13.6% of sales) were down
from $8.0 million (14.9% of sales) in the first six months of fiscal year 2002. The lower operating earnings were primarily attributable to increased spending on research and development and higher than normal legal expenses.



Electronics Manufacturing sales in the first six months of
fiscal year 2003 of $82.9 million decreased (2.3%) from $84.9 million in the first six months of fiscal year 2002. The decrease in sales was primarily due to several customers slowing their order rates, especially during the second quarter of fiscal
year 2003, seemingly in response to the uncertain impact of world events. Earnings from operations in the first six months of fiscal year 2003 of $9.7 million (11.7% of sales) increased from $7.1 million (8.3% of sales) in the first six months of
fiscal year 2002, primarily as a result of operational efficiencies and lower new customer start-up costs.



Liquidity and Capital Resources



The Company generated $62.3 million of cash from operating activities in the first six months of fiscal year 2003, which compares to $29.2 million in the first six months of fiscal year 2002. The
increase in cash from operating activities resulted from higher collections of contract advances and improved working capital utilization.



The Company used $32.4 million of cash for investing activities in the first six months of fiscal year 2003, which compares to $59.0
million in the first six months of fiscal year 2002. The decrease in cash used for investing activities in the first six months of fiscal year 2003 was primarily due to lower cash expenditures for acquisitions.



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The Company
used $4.6 million of cash for financing activities in the first six months of fiscal year 2003, which compares to $0.9 million used for financing activities in the first six months of fiscal year 2002. The increase in cash used for financing
activities in the first six months of fiscal year 2003 was primarily due to the repurchase of common stock and lower proceeds from common stock issuances, partially offset by short-term borrowings under a new bank credit facility in Japan.



During fiscal year 2002, the Company established
a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of March 28, 2003. Borrowings under this credit facility bear interest at
rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings of the Company and require the maintenance by the
Company of certain levels of financial performance. The Company was in compliance with all such covenants and requirements as of March 28, 2003.



As of March 28, 2003, the Company and its subsidiaries had $55.7 million in uncommitted, 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 March 28, 2003. All of these credit facilities contain certain conditions and events of default customary for
such facilities, with which the Company was in compliance. Of the $55.7 million in uncommitted, unsecured credit facilities, a total of $34.8 million was limited for use by, or in favor of, certain subsidiaries. As of March 28, 2003, a total of
$21.6 million of the $34.8 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 the Companys
subsidiaries by customers for which separate liabilities were recorded in the Unaudited Consolidated Condensed Financial Statements at March 28, 2003. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or
letters of credit as of that date.



In February
2003, the Company established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.5 million). The credit facility is available to the Companys wholly owned Japanese subsidiary for working capital
purposes. As of March 28, 2003, an aggregate of $2.5 million was outstanding under this credit facility at an annual interest rate of 0.8%. This credit facility contains certain covenants that limit future borrowings of the Company from this
facility, with which the Company was in compliance.



As of March 28, 2003, the Company had $36.3 million in term loans outstanding compared to $37.5 million at September 27, 2002. As of both March 28, 2003 and September 27, 2002, fixed interest rates on the term loans ranged from 6.7%
to 7.2%. The weighted-average interest rate on the term loans was 6.9% at both March 28, 2003 and September 27, 2002. 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 during the first six months of fiscal year 2003. The Company also had other long-term notes payable
of $3.5 million as of March 28, 2003 with a weighted-average interest rate of 0.2% and $3.5 million as of September 27, 2002 with a weighted-average interest rate of 0.9%.



Future principal payments on long-term debt outstanding on March 28, 2003 were $1.5 million, $2.8 million,
$4.0 million, $4.0 million, $2.5 million, $6.3 million, and $18.7 million during the six months ending October 3, 2003 and fiscal years 2004, 2005, 2006, 2007, 2008, and thereafter, respectively.



The Distribution Agreement provides that the Company is
responsible for certain litigation to which VAI was a party, and further provides that the Company 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).



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In connection
with certain acquisitions, the Company has accrued but not yet paid certain purchase price amounts which have been held back to secure the sellers indemnification obligations. These holdback amounts, which are due to be
paid at various times through fiscal year 2004 (net of any indemnification claims), totaled approximately $1.0 million at March 28, 2003. In addition to the holdback payments, the Company is also obligated to pay additional cash purchase
price amounts in the event that contingent financial or operational milestones are met by the acquired businesses. As of March 28, 2003, up to a maximum of $15.4 million could be payable through fiscal year 2006 under these contingent consideration
arrangements. Any contingent payments made will be recorded as additional goodwill at the time they are earned.



The Companys liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others
related to the uncertainties of the industry and global economies. Although the Companys cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with
the Companys 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 March 28, 2003:





|                                           |  | Six Months Ending Oct. 3, 2003 |       | Fiscal Years |      |       
|------------------------------------------ |  | ------------------------------ | ----- | ------------ | ---- | ------
|                                           |  |                                | 2004  |              | 2005 |       
|(in thousands)                             |  |                                |       |              |      |       
|Operating leases                           |  | $                              | 5,301 |              | $    | 7,764 
|Notes payable                              |  |                                | 2,494 |              |      |      
|Long-term debt (including current portion) |  |                                | 1,522 |              |      | 2,785 
|                                           |  |                                |       |              |      |       
|Total contractual cash obligations         |  | $                              | 9,317 |              | $    | 10,549
|                                           |  |                                |       |              |      |       



In
addition to the above, the Company had cancelable commitments to purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $35.1 million, net of deposits paid, as of March 28, 2003. In the event
that these commitments are canceled for reasons other than the suppliers default, the Company would be responsible for reimbursement of actual costs incurred by the supplier.



As of March 28, 2003, the Company 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 $15.4 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific
timing and amounts of which are not currently determinable.



Recent Accounting Pronouncements



In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (FAS) 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did
not have a significant impact on the Companys financial condition or results of operations.



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In October
2001, the FASB issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,which supersedes FAS 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,and
portions of Accounting Principles Board Opinion No. (APB) 30,Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. While FAS 144 carries forward many of the provisions of FAS 121 and APB 30, some of the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and
amortized over their remaining service period, and the standard broadens the presentation of discontinued operations. The adoption of FAS 144 in the first quarter of fiscal year 2003 did not have a significant impact on the Companys financial
condition or results of operations.



In July
2002, the FASB issued FAS 146, Accounting for Exit or Disposal Activities. FAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force Issue No. (EITF) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of FAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees
who are involuntarily terminated. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 in the second quarter of fiscal year 2003 did not have a significant impact on the Companys
financial condition or results of operations.



In
November 2002, the FASB issued Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, standby letters of credit, and warranty obligations. It also clarifies that at the
time a company issues a guarantee, a company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions
of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and measurement provisions in the second quarter of
fiscal year 2003 did not have a significant impact on the Companys financial condition or results of operations. The disclosure requirements of FIN 45, which were effective for both interim and annual periods, were adopted by the Company in
the first quarter of fiscal year 2003.



In
November 2002, the FASBs Emerging Issues Task Force finalized EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than
one unit of accounting. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. However, it does not address when the criteria for revenue recognition are met
or provide guidance on the appropriate revenue recognition convention for a given unit of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is
permitted. Upon adoption, entities may elect to either apply the EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its
financial condition or results of operations.



In
December 2002, the FASB issued FAS 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FAS 123. FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt
the accounting provisions of FAS 123, Accounting for Stock-Based Compensation. Since the Company has decided to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of FAS 148 in the fiscal
quarter ended March 28, 2003 did not have an effect on its financial condition or results of operations. However, the Company has begun making the additional disclosures required by FAS 148.



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Risk Factors



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



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



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



Variability of Operating Results.    The Company experiences some cyclical patterns in sales of its products.
Generally, sales and earnings in the first quarter of the Companys fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in our first fiscal quarter (October to December) and
many customers defer December deliveries until the next calendar year, our second fiscal quarter. Our fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the other three quarters, primarily because many
customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced by other factors, including general economic conditions, acquisitions, and new product introductions. Consequently, our results of operations
may fluctuate significantly from quarter to quarter.



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



Certain of our leading-edge NMR systems, probes, and components (together accounting for less than 10% of the Companys revenues and
operating profits) sell for high prices and on long lead-times. These systems and components are complex; require development of new technologies and, therefore, significant research and development resources; are often intended for evolving
leading-edge research applications; often have customer-specific features, custom capabilities, and specific acceptance criteria; and, in the case of NMR systems, require superconducting magnets that can be difficult to manufacture. These
superconducting magnets are not manufactured by us, so our ability to ship, install and obtain customer acceptance of our leading-edge NMR systems is dependent upon the superconducting magnet suppliers timely development, delivery, and
installation of magnets that perform to customer specifications. If we are unable to meet these challenges, it could have an adverse effect on the Companys 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 leading-edge NMR systems and probes, which in turn can make it difficult for us to forecast the timing of revenue recognition and the achieved gross profit margin on
these systems.



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Competition.    The industries in which the Company operatesscientific instruments, vacuum technologies, and electronics manufacturingare highly competitive. In each of these industries, we
compete against many U.S. and non-U.S. companies, most with global operations. Some of our competitors have greater financial resources than we have, which may enable them to respond more quickly to new or emerging technologies, take advantage of
acquisition opportunities, compete on price, or devote greater resources to research and development, engineering, manufacturing, marketing, sales, or managerial activities. Others have greater name recognition and geographic and market presence or
lower cost structures than the Company. In addition, weaker demand and excess capacity in our industries could cause greater price competition as our competitors seek to maintain sales volumes and market share. Additionally, in the case of
electronics manufacturing, current and prospective customers continually evaluate the merits of manufacturing products internally; there is substantial excess manufacturing capacity in the industry; certain competitors manufacture or are seeking to
manufacture outside the U.S. where there can be significant cost advantages, and certain customers may be willing to move to off-shore manufacturing for cost reasons; larger competitors might have greater direct buying power from
suppliers; and electronics manufacturing processes are generally not subject to significant intellectual property protection. For all of the foregoing reasons, competition could result in lower revenues due to lost sales or price reductions, lower
margins, and loss of market share, which could have an adverse effect on the Companys financial condition or results of operations.



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



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



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



Business Interruption.    The Companys 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, such as our production facilities and headquarters in California. Due to the 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, it could disrupt our
operations, delay shipments, and cause us to incur significant repair or replacement costs, which could have an adverse effect on the Companys financial condition or results of operations.



The Companys employees based in certain foreign
countries are subject to collective bargaining agreements. Of these, the Companys employees in Australia are subject to a collective bargaining agreement that is currently being renegotiated. A work stoppage, strike, or other labor action at
this or other facilities of the Company could have an adverse effect on the Companys financial condition or results of operations.



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Intellectual Property.    The Companys success depends on its 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 the Companys financial condition or results of operations.



The Company is currently the defendant in a patent
infringement lawsuit brought by Unaxis Balzers Aktiengesellschaft Liechtenstein, which is seeking infringement damages (royalties and/or lost profits) for the period beginning when the Companys alleged infringing product (a Vacuum Technologies
leak detection system) was introduced in 1997 until the patent expired in 2001. During that period, the Companys revenues on that product were $17.6 million. The Company believes that it has strong defenses and intends to vigorously defend
against this lawsuit.



Other third parties might
claim that the Company infringes 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. Failure to protect against these
risks could have an adverse effect on the Companys financial condition or results of operations.



Acquisitions.    The Company has acquired companies and operations, and intends to acquire companies and
operations in the future, as part of its 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 the Companys financial condition or results of operations.



Foreign Operations and Currency Exchange
Rates.    A significant portion of the Companys sales, manufacturing activities, and employees are outside of the United States. As a result, the Company is 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. Additionally, the U.S. dollar value of the Companys sales varies with currency exchange rate fluctuations, although the
Companys manufacturing operations in other countries often act as a natural hedge against the profitability impact of foreign currency exchange fluctuations relative to the U.S. dollar. These risks could have an adverse effect on the
Companys financial condition or results of operations.



Key Personnel.    The Companys 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 the Companys financial condition or results of operations.



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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.



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. Under the terms of the Distribution, 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 tax benefits recognized or realized by VMS for such costs).



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 March 28, 2003, 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 $1.8 million to $4.8 million (without discounting to present value). The time frame over which these costs are
expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of March 28, 2003. 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 $1.8 million as of March 28, 2003.



As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental-related activities. As of March 28, 2003, it was
estimated that the Companys share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $6.1 million to $13.5 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 March 28, 2003. As to each of these sites and facilities, it was determined that a particular amount within the range of
estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.4 million at
March 28, 2003. The Company therefore had an accrual of $4.9 million as of March 28, 2003, 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 $1.8 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 agreed to pay a portion of certain of
VAIs (now VMS) future environmental-related costs for which the Company has an indemnity obligation, and the Company therefore has a $1.3 million receivable in other assets as of March 28, 2003 for the Companys share of such
recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.



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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.



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



Item 3.    Quantitative and Qualitative Disclosures About Market Risk



Foreign Currency Exchange Risk



The Company typically hedges its foreign currency exposures associated with certain assets and liabilities denominated in non-functional
currencies and with certain forecasted foreign currency cash flows. The success of the Companys hedging activities depends on its ability to forecast transaction activity in various currencies. To the extent that these forecasts are overstated
or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. However, the Company believes that in most cases gains or losses would be substantially offset by losses or gains from the
related foreign exchange forward contracts. As a result, the direct effect of an immediate 10% change in exchange rates would not be material to the Companys financial condition or results of operations. The Companys foreign exchange
forward contracts generally range from one to 12 months in original maturity.



At March 28, 2003, there were no outstanding forward contracts designated as cash flow hedges of forecasted sale transactions. A loss of $0.1 million (net of tax) on closed forward contracts has been
included in accumulated other comprehensive loss in stockholders equity and will be recognized as a reduction in sales when the related sale transaction is recorded. During the six months ended March 28, 2003, a loss of $0.1 million from hedge
ineffectiveness was recognized and included in general and administrative expenses. A summary of all forward exchange contracts that were outstanding as of March 28, 2003 follows:



|                  |  | Notional Value Sold |        | Notional Value Purchased
|----------------- |  | ------------------- | ------ | ------------------------
|(in thousands)    |  |                     |        |                         
|Euro              |  | $                   |       |                         
|Australian dollar |  |                     |       |                         
|Japanese yen      |  |                     | 20,305 |                         
|Canadian dollar   |  |                     | 6,278  |                         
|British pound     |  |                     | 4,549  |                         
|Swedish krona     |  |                     |       |                         
|                  |  |                     |        |                         
|                  |  | $                   | 31,132 |                         
|                  |  |                     |        |                         



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##### Table of Contents



Interest Rate Risk



The Company has no material exposure to
market risk for changes in interest rates. The Company invests 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 the Companys financial condition or
results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At March 28, 2003, the Companys debt obligations
had fixed interest rates.



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



Although payments under certain of the Companys operating leases for its facilities are tied to market
indices, the Company is not exposed to material interest rate risk associated with its operating leases.



Debt Obligations



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





|                                           |  | Six Months Ending Oct. 3, 2003 |       |   | Fiscal Years |      |       |   |     
|------------------------------------------ |  | ------------------------------ | ----- | - | ------------ | ---- | ----- | - | ----
|                                           |  |                                | 2004  |   |              | 2005 |       |   | 2006
|(dollars in thousands)                     |  |                                |       |   |              |      |       |   |     
|Notes payable                              |  | $                              | 2,494 |   |              | $    |      |   |     
|Average interest rate                      |  |                                | 0.8   | % |              |      |      | % |     
|Long-term debt (including current portion) |  | $                              | 1,522 |   |              | $    | 2,785 |   |     
|Average interest rate                      |  |                                | 6.2   | % |              |      | 6.6   | % |     



Item 4.    Controls and Procedures



Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Companys management,
including the Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the
CEO and CFO have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Companys internal controls or in other factors that could significantly affect the disclosure
controls subsequent to the date of that evaluation.



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##### Table of Contents

PART II

OTHER INFORMATION



Item 5.    Submission of Matters to a Vote of Security Holders



At the Companys Annual Meeting of Stockholders held on February 6, 2003, 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 two Class I directors for three-year terms:



Nominee Richard U. De Schutter: 30,772,307 votes for; 214,796 votes withheld



Nominee Allen J. Lauer: 30,738,937 votes for; 248,166 votes withheld



Proposal Two  Approval of the Companys Employee
Stock Purchase Plan:



29,816,347 votes for;
1,111,029 votes against; 59,727 votes abstaining



Pursuant to the rules of The Nasdaq Market, Inc., both of these matters allowed brokers to vote without receipt of instructions from clients, so there were no broker non-votes.



Item 6.    Exhibits and Reports on Form 8-K



(a)  Exhibits:



|Exhibit No. |   |  | Description                                                                                                                                                                                                             
|----------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.11       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Allen J.
Lauer.                                                                                                
|           
|10.12       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, and Amendment to Amended and Restated
Change of Control Agreement, dated as of May 7, 2003, between Varian, Inc. and G. Edward McClammy.
|           
|10.13       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Sergio
Piras.                                                                                                  
|           
|10.14       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and C.
Wilson Rudd.                                                                                                
|           
|10.15       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Arthur
W. Homan.                                                                                               
|           
|10.16       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Garry W.
Rogerson.                                                                                             
|           
|10.19       | * |  | Amended and Restated Change of Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Martin
ODonoghue.                                                                                             
|           
|99.1        |   |  | Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                                        
|           
|99.2        |   |  | Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                                        

| | 
| | 

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



(b)  Reports on Form 8-K filed during the fiscal quarter ended March 28, 2003:



None.



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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)By:

/s/    G. EDWARD
MCCLAMMYG. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)




Date:    May 8, 2003



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##### Table of Contents

CERTIFICATION



I, Allen J. Lauer, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Varian, Inc.;
| | -- |  | -------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:    May 8, 2003





|/s/    ALLEN J.
LAUER                                           
|----------------------------------------------------------------
|Allen J. Lauer Chairman of the Board and Chief Executive
Officer



32



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##### Table of Contents

CERTIFICATION



I, G. Edward McClammy, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Varian, Inc.;
| | -- |  | -------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:    May 8, 2003





|/s/    G. EDWARD
MCCLAMMY                                                      
|-------------------------------------------------------------------------------
|G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer



33