##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended July 3, 2009

OR



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

For the transition period from              to

Commission File Number: 0-25395





VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

(Exact name of Registrant as
Specified in its Charter)







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



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

(978) 282-2000

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  | x |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

Shares of common stock outstanding at July 31, 2009: 73,322,823.









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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

TABLE OF CONTENTS



|            |  |                                                                                                                           |  |           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----------
|Item Number |  |                                                                                                                           |  | PageNumber
|PART I.     |  | FINANCIAL INFORMATION                                                                                                     |  |           
|            |  |                                                                                                                          
|Item 1.     |  | Consolidated Financial Statements                                                                                         |  |           
|            |  |                                                                                                                          
|            |  | Unaudited Consolidated Balance Sheets at July 3, 2009 and October 3, 2008                                                 |  | 1         
|            |  | Unaudited Consolidated Statements of Operations for the three and nine month periods endedJuly 3, 2009 and June 27,
 2008 |  | 2         
|            |  | Unaudited Consolidated Statements of Cash Flows for the nine month periods endedJuly 3, 2009 and June 27, 2008            |  | 3         
|            |  | Notes to the Unaudited Consolidated Financial Statements                                                                  |  | 4         
|            |  |                                                                                                                          
|Item 2.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 19        
|            |  |                                                                                                                          
|Item 3.     |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 27        
|            |  |                                                                                                                          
|Item 4.     |  | Controls and Procedures                                                                                                   |  | 28        
|            |  |                                                                                                                          
|PART II.    |  | OTHER INFORMATION                                                                                                         |  |           
|            |  |                                                                                                                          
|Item 1.     |  | Legal Proceedings                                                                                                         |  | 29        
|            |  |                                                                                                                          
|Item 1A.    |  | Risk Factors                                                                                                              |  | 29        
|            |  |                                                                                                                          
|Item 2.     |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  | 35        
|            |  |                                                                                                                          
|Item 3.     |  | Defaults Upon Senior Securities                                                                                           |  | 35        
|            |  |                                                                                                                          
|Item 4.     |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 35        
|            |  |                                                                                                                          
|Item 5.     |  | Other Information                                                                                                         |  | 35        
|            |  |                                                                                                                          
|Item 6.     |  | Exhibits                                                                                                                  |  | 36        
|            |  |                                                                                                                          
|            |  | Signature                                                                                                                 |  | 37        



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##### Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | -------------- | - | -------- | -
|                                                                                                                                                                                                                        |  | July 3,2009                              |          |   | October 3,2008 |  
|                                                                                                                                                                                                                        |  | (Amounts in thousands, exceptshare data) |         
|ASSETS                                                                                                                                                                                                                  |  |                                          |          |   |                |   |          |  
|Current assets                                                                                                                                                                                                          |  |                                          |          |   |                |   |          |  
|Cash and cash equivalents                                                                                                                                                                                               |  | $                                        | 177,641  |   |                | $ | 139,679  |  
|Short-term investments                                                                                                                                                                                                  |  |                                          | 53,791   |   |                |   | 68,996   |  
|Accounts receivable, net                                                                                                                                                                                                |  |                                          | 99,401   |   |                |   | 128,904  |  
|Inventories                                                                                                                                                                                                             |  |                                          | 102,521  |   |                |   | 165,201  |  
|Deferred income taxes                                                                                                                                                                                                   |  |                                          | 25,754   |   |                |   | 21,902   |  
|Other current assets                                                                                                                                                                                                    |  |                                          | 22,692   |   |                |   | 24,447   |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total current assets                                                                                                                                                                                                    |  |                                          | 481,800  |   |                |   | 549,129  |  
|                                                                                                                                                                                                                        |  |                                         
|Long-term investments                                                                                                                                                                                                   |  |                                          | 62,798   |   |                |   | 69,491   |  
|Property, plant and equipment, net                                                                                                                                                                                      |  |                                          | 67,486   |   |                |   | 66,636   |  
|Goodwill                                                                                                                                                                                                                |  |                                          | 12,280   |   |                |   | 12,280   |  
|Other assets                                                                                                                                                                                                            |  |                                          | 2,511    |   |                |   | 2,609    |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total assets                                                                                                                                                                                                            |  | $                                        | 626,875  |   |                | $ | 700,145  |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|                                                                                                                                                                                                                        |  |                                         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                    |  |                                          |          |   |                |   |          |  
|Current liabilities                                                                                                                                                                                                     |  |                                          |          |   |                |   |          |  
|Current portion of long-term debt                                                                                                                                                                                       |  | $                                        | 597      |   |                | $ | 558      |  
|Accounts payable                                                                                                                                                                                                        |  |                                          | 12,883   |   |                |   | 29,072   |  
|Accrued expenses                                                                                                                                                                                                        |  |                                          | 22,764   |   |                |   | 41,745   |  
|Income taxes payable                                                                                                                                                                                                    |  |                                          | 2,897    |   |                |   | 3,740    |  
|Product warranty                                                                                                                                                                                                        |  |                                          | 3,923    |   |                |   | 7,661    |  
|Deferred revenue                                                                                                                                                                                                        |  |                                          | 19,617   |   |                |   | 32,285   |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total current liabilities                                                                                                                                                                                               |  |                                          | 62,681   |   |                |   | 115,061  |  
|                                                                                                                                                                                                                        |  |                                         
|Long-term accrued expenses and other liabilities                                                                                                                                                                        |  |                                          | 64,716   |   |                |   | 63,627   |  
|Deferred income taxes                                                                                                                                                                                                   |  |                                          | 5,883    |   |                |   | 3,951    |  
|Long-term debt                                                                                                                                                                                                          |  |                                          | 1,750    |   |                |   | 2,203    |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total liabilities                                                                                                                                                                                                       |  |                                          | 135,030  |   |                |   | 184,842  |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|                                                                                                                                                                                                                        |  |                                         
|Commitments, contingencies and guarantees (Note 14)                                                                                                                                                                     |  |                                          |          |   |                |   |          |  
|                                                                                                                                                                                                                        |  |                                         
|Stockholders equity                                                                                                                                                                                                    |  |                                          |          |   |                |   |          |  
|Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                                                               |  |                                          |         |   |                |   |         |  
|Common stock, $0.01 par value; 150,000,000 shares authorized; 94,251,505 shares issued and 72,535,675 shares outstanding at July 3, 2009;
93,535,106 shares issued and 71,819,276 shares outstanding at October 3, 2008 |  |                                          | 943      |   |                |   | 935      |  
|Capital in excess of par value                                                                                                                                                                                          |  |                                          | 603,513  |   |                |   | 581,492  |  
|Less: Cost of 21,715,830 shares of common stock held in treasury at July 3, 2009 and October 3, 2008                                                                                                                    |  |                                          | (714,877 | ) |                |   | (714,877 | )
|Retained earnings                                                                                                                                                                                                       |  |                                          | 602,491  |   |                |   | 649,930  |  
|Accumulated other comprehensive loss                                                                                                                                                                                    |  |                                          | (225     | ) |                |   | (2,177   | )
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total stockholders equity                                                                                                                                                                                              |  |                                          | 491,845  |   |                |   | 515,303  |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                              |  | $                                        | 626,875  |   |                | $ | 700,145  |  
|                                                                                                                                                                                                                        |  |                                          |          |   |                |   |          |  

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



1



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|--------------------------------------------- |  | --------------------------------------------- | ------- | - | ------------------------ | - | ------- | ----------- |  | - | ------------ | - |  | - | ------- | -
|                                              |  | Fiscal Three Months Ended                     |         |   | Fiscal Nine Months Ended |  
|                                              |  | July 3,2009                                   |         |   | June 27,2008             |   |         | July 3,2009 |  |   | June 27,2008 |  
|                                              |  | (Amounts in thousands, except per share data) |        
|Revenue                                       |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Product                                       |  | $                                             | 62,695  |   |                          | $ | 159,283 |             |  | $ | 203,681      |   |  | $ | 629,755 |  
|Service                                       |  |                                               | 10,663  |   |                          |   | 23,307  |             |  |   | 40,813       |   |  |   | 62,183  |  
|Royalty and license                           |  |                                               | 20      |   |                          |   | 13      |             |  |   | 79           |   |  |   | 59      |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Total revenue                                 |  |                                               | 73,378  |   |                          |   | 182,603 |             |  |   | 244,573      |   |  |   | 691,997 |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|                                              |  |                                               |         |  
|Cost of revenue                               |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Product                                       |  |                                               | 37,798  |   |                          |   | 80,694  |             |  |   | 129,242      |   |  |   | 321,740 |  
|Service                                       |  |                                               | 7,419   |   |                          |   | 13,972  |             |  |   | 26,006       |   |  |   | 38,871  |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Total cost of revenue                         |  |                                               | 45,217  |   |                          |   | 94,666  |             |  |   | 155,248      |   |  |   | 360,611 |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Gross profit                                  |  |                                               | 28,161  |   |                          |   | 87,937  |             |  |   | 89,325       |   |  |   | 331,386 |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|                                              |  |                                               |         |  
|Operating expenses                            |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Research and development                      |  |                                               | 19,104  |   |                          |   | 27,187  |             |  |   | 60,174       |   |  |   | 84,469  |  
|Marketing, general and administrative         |  |                                               | 22,150  |   |                          |   | 32,116  |             |  |   | 73,000       |   |  |   | 97,517  |  
|Restructuring                                 |  |                                               | 672     |   |                          |   | 646     |             |  |   | 8,972        |   |  |   | 646     |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Total operating expenses                      |  |                                               | 41,926  |   |                          |   | 59,949  |             |  |   | 142,146      |   |  |   | 182,632 |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Operating (loss) income                       |  |                                               | (13,765 | ) |                          |   | 27,988  |             |  |   | (52,821      | ) |  |   | 148,754 |  
|Interest income                               |  |                                               | 1,135   |   |                          |   | 2,056   |             |  |   | 4,375        |   |  |   | 7,596   |  
|Interest expense                              |  |                                               | (92     | ) |                          |   | (283    | )           |  |   | (863         | ) |  |   | (960    | )
|Other (expense) income, net                   |  |                                               | (217    | ) |                          |   | 179     |             |  |   | (744         | ) |  |   | 272     |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|(Loss) income before income taxes             |  |                                               | (12,939 | ) |                          |   | 29,940  |             |  |   | (50,053      | ) |  |   | 155,662 |  
|Provision for (benefit from) income taxes     |  |                                               | 1,318   |   |                          |   | 11,616  |             |  |   | (2,614       | ) |  |   | 59,617  |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|Net (loss) income                             |  | $                                             | (14,257 | ) |                          | $ | 18,324  |             |  | $ | (47,439      | ) |  | $ | 96,045  |  
|                                              |  |                                               |         |   |                          |   |         |             |  |   |              |   |  |   |         |  
|                                              |  |                                               |         |  
|Weighted average shares outstanding - basic   |  |                                               | 72,460  |   |                          |   | 72,606  |             |  |   | 72,200       |   |  |   | 73,881  |  
|Weighted average shares outstanding - diluted |  |                                               | 72,460  |   |                          |   | 73,879  |             |  |   | 72,200       |   |  |   | 75,339  |  
|Net (loss) income per share - basic           |  | $                                             | (0.20   | ) |                          | $ | 0.25    |             |  | $ | (0.66        | ) |  | $ | 1.30    |  
|Net (loss) income per share - diluted         |  | $                                             | (0.20   | ) |                          | $ | 0.25    |             |  | $ | (0.66        | ) |  | $ | 1.27    |  

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



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                 |  |                          |         |   |              |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ------------ | - | -------- | -
|                                                                                                                                 |  | Fiscal Nine Months Ended |        
|                                                                                                                                 |  | July 3,2009              |         |   | June 27,2008 |  
|                                                                                                                                 |  | (Amounts in thousands)   |        
|Cash flows from operating activities:                                                                                            |  |                          |         |   |              |   |          |  
|Net (loss) income                                                                                                                |  | $                        | (47,439 | ) |              | $ | 96,045   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities:                                         |  |                          |         |   |              |   |          |  
|Depreciation and amortization                                                                                                    |  |                          | 11,802  |   |              |   | 12,605   |  
|Amortization of investment premium                                                                                               |  |                          | 450     |   |              |   | 267      |  
|Deferred income taxes                                                                                                            |  |                          | (1,920  | ) |              |   | (7,654   | )
|Stock-based compensation                                                                                                         |  |                          | 17,177  |   |              |   | 16,147   |  
|Tax (charge) benefit from stock-based compensation                                                                               |  |                          | (125    | ) |              |   | 2,458    |  
|Excess tax benefits from stock-based compensation                                                                                |  |                          | (449    | ) |              |   | (2,293   | )
|Changes in assets and liabilities:                                                                                               |  |                          |         |   |              |   |          |  
|Accounts receivable                                                                                                              |  |                          | 30,919  |   |              |   | 39,248   |  
|Inventories                                                                                                                      |  |                          | 54,836  |   |              |   | 4,175    |  
|Other current assets                                                                                                             |  |                          | 1,755   |   |              |   | 7,822    |  
|Accounts payable                                                                                                                 |  |                          | (16,173 | ) |              |   | (19,063  | )
|Accrued expenses                                                                                                                 |  |                          | (16,307 | ) |              |   | 13,478   |  
|Product warranty                                                                                                                 |  |                          | (4,227  | ) |              |   | (2,699   | )
|Deferred revenue                                                                                                                 |  |                          | (15,736 | ) |              |   | (19,463  | )
|Other                                                                                                                            |  |                          | 1,804   |   |              |   | (735     | )
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|Net cash provided by operating activities                                                                                        |  |                          | 16,367  |   |              |   | 140,338  |  
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|                                                                                                                                 |  |                         
|Cash flows from investing activities:                                                                                            |  |                          |         |   |              |   |          |  
|Purchase of property, plant and equipment                                                                                        |  |                          | (6,116  | ) |              |   | (7,591   | )
|Proceeds from sales of investments                                                                                               |  |                          | 5,870   |   |              |   | 7,578    |  
|Proceeds from the maturities of investments                                                                                      |  |                          | 52,824  |   |              |   | 115,542  |  
|Purchase of investments                                                                                                          |  |                          | (34,577 | ) |              |   | (70,596  | )
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|Net cash provided by investing activities                                                                                        |  |                          | 18,001  |   |              |   | 44,933   |  
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|                                                                                                                                 |  |                         
|Cash flows from financing activities:                                                                                            |  |                          |         |   |              |   |          |  
|Proceeds from the issuance of common stock upon exercise of options and issuance of stock under the employee stock purchase
plan |  |                          | 4,977   |   |              |   | 5,154    |  
|Excess tax benefits from stock-based compensation                                                                                |  |                          | 449     |   |              |   | 2,293    |  
|Repurchase of common stock                                                                                                       |  |                          |        |   |              |   | (179,454 | )
|Repayment of long-term debt                                                                                                      |  |                          | (414    | ) |              |   | (316     | )
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|Net cash provided by (used in) financing activities                                                                              |  |                          | 5,012   |   |              |   | (172,323 | )
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|                                                                                                                                 |  |                         
|Effects of exchange rates on cash                                                                                                |  |                          | (1,418  | ) |              |   | (1,331   | )
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|Net increase in cash and cash equivalents                                                                                        |  |                          | 37,962  |   |              |   | 11,617   |  
|Cash and cash equivalents at beginning of period                                                                                 |  |                          | 139,679 |   |              |   | 109,514  |  
|                                                                                                                                 |  |                          |         |   |              |   |          |  
|Cash and cash equivalents at end of period                                                                                       |  | $                        | 177,641 |   |              | $ | 121,131  |  
|                                                                                                                                 |  |                          |         |   |              |   |          |  

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



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Basis of Presentation

Varian Semiconductor Equipment Associates, Inc. (Varian
Semiconductor, the Company, we, our, or us) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits to customers located both
in the United States (U.S.) and in international markets.

The accompanying unaudited interim consolidated financial statements have been
prepared by us in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and pursuant to the instruction to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim
consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Annual Report on Form 10-K filed by us with the SEC on November 25, 2008 for the fiscal year ended
October 3, 2008. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the information required to be set
forth therein. The results of operations for the three and nine months ended July 3, 2009 are not necessarily indicative of the results to be expected for a full year or for any other period.

In connection with preparation of the condensed consolidated financial statements and in accordance with the recently issued Statement of Financial Accounting Standards
(SFAS) No. 165, Subsequent Events, we evaluated subsequent events up to and including August 11, 2009, the date these financial statements were issued.

Note 2. Fair Value

Effective October 4, 2008, we adopted SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurement. SFAS No. 157 framework requires fair value to be determined
based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP No. 157-4 provides additional guidance for estimating fair value under SFAS
No. 157 when there is an inactive market or the market is not orderly. FSP No. 157-4 is effective for interim and annual periods ending after June 15, 2009. Upon adoption, there was no impact on our financial position, results of
operations, and cash flows.

Fair Value Hierarchy

SFAS
No. 157 specifies a hierarchy for disclosure of fair value measurement. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or
unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels are defined as follows:



| |  |  | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities for the instrument or security to be valued.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with
observable market data for substantially the full term of the asset or liability.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable and are significant to
the fair value of the assets or liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This hierarchy requires the use of observable market data when available. We maintain
policies and procedures to value instruments using the best and most relevant data available. Further, we used internal sources and considered external sources to assist us in valuing certain instruments.



4



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##### Table of Contents

Determination of Fair Value

Per SFAS No. 157, we measure fair value utilizing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The following is a description of valuation methodologies we used to measure assets and liabilities at fair value, including an indication of the level in the fair value
hierarchy.

Cash equivalents

We consider demand deposits and
all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents and are classified as Level 1 in the valuation hierarchy. The carrying amounts of cash equivalents approximate estimated
fair value due to the short-term maturities of those financial assets.

Securities available-for-sale

Securities are classified as Level 1 in the valuation hierarchy, where quoted prices are available in an active market. We may utilize an alternative pricing method
(example, matrix pricing) and quotations from bond dealers to assist in determining fair value for each security traded over-the-counter rather than on a securities exchange. Matrix pricing is a mathematical technique which considers information
with respect to comparable bond and note transactions or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, to determine fair value. Securities priced using such
methods are generally classified as Level 2 and typically include U.S. Treasury and agency securities, corporate bonds and municipal bonds.

Deferred
compensation

The deferred compensation liability represents our obligation to pay benefits under our non-qualified deferred compensation plan. The related
investments, held in a Rabbi Trust, consist of equity securities, primarily mutual funds, and are classified as Level 1 in the valuation hierarchy. Adjustments to fair value of both the equity securities and the related deferred compensation
liabilities are recorded in marketing, general and administrative expense.

Derivatives

In general, and where applicable, we use quoted prices in an active market for derivative assets and liabilities, which are traded on exchanges. These derivative assets and liabilities are classified as Level 1.

Assets and Liabilities Measured at Fair Value on a Recurring Basis



|                                     |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  
|------------------------------------ |  | ---------------------- | ------- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------- |  | - | -
|                                     |  | As of July 3,2009      |         | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservableInputs (Level 3)
|                                     |  | (Amounts in thousands)
|Cash equivalents                     |  | $                      | 145,239 |                                                             | $ | 145,239                                     |  |                                         |        |  |   | 
|Short-term and long-term investments |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  
|U.S. Treasury and agency securities  |  |                        | 19,697  |                                                             |   |                                            |  | $                                       | 19,697  |  |   | 
|Corporate bonds                      |  |                        | 75,171  |                                                             |   |                                            |  |                                         | 75,171  |  |   | 
|Municipal bonds                      |  |                        | 15,629  |                                                             |   |                                            |  |                                         | 15,629  |  |   | 
|Equity securities                    |  |                        | 4,993   |                                                             |   | 4,993                                       |  |                                         |        |  |   | 
|Derivative assets                    |  |                        | 429     |                                                             |   | 429                                         |  |                                         |        |  |   | 
|                                     |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  
|Total assets at fair value           |  | $                      | 261,158 |                                                             | $ | 150,661                                     |  | $                                       | 110,497 |  | $ | 
|                                     |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  
|                                     |  |                        |         |                                                            
|Deferred compensation                |  | $                      | 4,993   |                                                             | $ | 4,993                                       |  |                                         |        |  |   | 
|                                     |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  
|Total liabilities at fair value      |  | $                      | 4,993   |                                                             | $ | 4,993                                       |  | $                                       |        |  | $ | 
|                                     |  |                        |         |                                                             |   |                                             |  |                                         |         |  |   |  



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##### Table of Contents

Non-Marketable Equity Investments

The portfolio of financial assets excludes a $1.1 million minority equity investment in two private companies which is accounted for under the cost method and is outside the scope of SFAS No. 157. This equity
investment is included in long-term investments on the consolidated balance sheet.

Note 3. Stock-Based Compensation

We apply the provisions of SFAS No. 123(R), Share Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for
employee and director services. Stock-based compensation cost is measured at grant date and is based on the fair value of the award. The straight-line method is applied to all grants with service conditions, while the graded vesting method is
applied to all grants with both service and performance conditions.

The effect of recording stock-based compensation for the three and nine months ended
July 3, 2009 and June 27, 2008 was as follows:



|                                                           |  |                           |       |              |                          |        |             |  |              |        |  |   |        |  
|---------------------------------------------------------- |  | ------------------------- | ----- | ------------ | ------------------------ | ------ | ----------- |  | ------------ | ------ |  | - | ------ | -
|                                                           |  | Fiscal Three Months Ended |       |              | Fiscal Nine Months Ended |       
|                                                           |  | July 3,2009               |       | June 27,2008 |                          |        | July 3,2009 |  | June 27,2008 |       
|                                                           |  | (Amounts in thousands)    |       |              | (Amounts in thousands)   |       
|Effect of stock-based compensation on income by line item: |  |                           |       |              |                          |        |             |  |              |        |  |   |        |  
|Cost of product revenue                                    |  | $                         | 199   |              | $                        | 264    |             |  | $            | 760    |  | $ | 746    |  
|Cost of service revenue                                    |  |                           | 176   |              |                          | 255    |             |  |              | 629    |  |   | 763    |  
|Research and development expense                           |  |                           | 1,125 |              |                          | 1,151  |             |  |              | 3,595  |  |   | 3,351  |  
|Marketing, general and administrative expense              |  |                           | 3,744 |              |                          | 3,663  |             |  |              | 12,193 |  |   | 11,287 |  
|(Provision) for income taxes                               |  |                           |      |              |                          | (2,234 | )           |  |              |       |  |   | (6,468 | )
|                                                           |  |                           |       |              |                          |        |             |  |              |        |  |   |        |  
|Total cost related to stock-based compensation             |  | $                         | 5,244 |              | $                        | 3,099  |             |  | $            | 17,177 |  | $ | 9,679  |  
|                                                           |  |                           |       |              |                          |        |             |  |              |        |  |   |        |  

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to
estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the options expected term, the expected annual dividend yield and the expected stock price volatility.
Our expected term is calculated using historical data and assumes that all outstanding options will be exercised at the midpoint of the vest date and the full contractual term and is further adjusted for demographic data. We interpolate the
risk-free interest rate from the U.S. Treasury zero-coupon bond that coincides with the expected term. We do not have a history of paying dividends, nor do we expect to in the future. Beginning in fiscal year 2009, we determined that a blended
volatility, using exclusively our historical and implied volatility measures, best reflects expected volatility over the expected term of the option. Prior to fiscal year 2009, we relied on a blended volatility, using our historical and implied
volatility measures, and a peer group implied volatility. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:



|                                       |  |                          |      |   |              |   |       |  
|-------------------------------------- |  | ------------------------ | ---- | - | ------------ | - | ----- | -
|                                       |  | Fiscal Nine Months Ended |     
|                                       |  | July 3,2009              |      |   | June 27,2008 |  
|Expected life (in years)               |  |                          | 3.7  |   |              |   | 3.6   |  
|Expected volatility                    |  |                          | 50.6 | % |              |   | 45.8  | %
|Risk-free interest rate                |  |                          | 1.8  | % |              |   | 3.1   | %
|Expected dividend yield                |  |                          | 0.0  | % |              |   | 0.0   | %
|Weighted-average grant date fair value |  | $                        | 6.84 |   |              | $ | 13.63 |  



6



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##### Table of Contents

The following table summarizes stock option and restricted stock activity as of and for the nine months ended
July 3, 2009:



|                                                    |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |          |                                     |  |   |      
|--------------------------------------------------- |  | --------------------- | - | --------------------------------- | ----------------------------- | ----- | ---------------------------------------- | --- | ----------------------- | - | ------ |  | -------- | ----------------------------------- |  | - | -----
|                                                    |  | Stock Option Activity |   | Unvested RestrictedStock Activity
|                                                    |  | Shares                |   |                                   | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue |   | Shares |  |          | Weighted-AverageGrantDate FairValue
|                                                    |  |                       |   |                                   |                               |       | (In years)                               |     | (In thousands)          |   |        |  |          |                                    
|Outstanding at October 3, 2008                      |  | 5,156,786             |   |                                   | $                             | 23.76 |                                          |     |                         |   |        |  | 785,663  |                                     |  | $ | 28.36
|Granted                                             |  | 1,242,070             |   |                                   |                               | 17.71 |                                          |     |                         |   |        |  | 283,688  |                                     |  |   | 18.55
|Exercised                                           |  | (270,800              | ) |                                   |                               | 12.36 |                                          |     |                         |   |        |  |         |                                     |  |   |     
|Vesting of restricted stock                         |  |                      |   |                                   |                               |      |                                          |     |                         |   |        |  | (328,451 | )                                   |  |   | 26.53
|Forfeited/expired/cancelled                         |  | (48,654               | ) |                                   |                               | 27.93 |                                          |     |                         |   |        |  | (24,190  | )                                   |  |   | 27.26
|                                                    |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |          |                                     |  |   |      
|Outstanding at July 3, 2009                         |  | 6,079,402             |   |                                   | $                             | 23.00 |                                          | 4.3 |                         | $ | 32,100 |  | 716,710  |                                     |  | $ | 25.34
|                                                    |  |                       |   |                                   |                               |       |                                          |     |                         |   |        |  |          |                                     |  |   |      
|                                                    |  |                       |   |                                   |                               |      
|Options vested and expected to vest at July 3, 2009 |  | 5,966,134             |   |                                   | $                             | 23.00 |                                          | 4.2 |                         | $ | 31,688 |  |          |                                     |  |   |      
|Options exercisable at July 3, 2009                 |  | 3,532,375             |   |                                   | $                             | 20.53 |                                          | 3.1 |                         | $ | 23,085 |  |          |                                     |  |   |      

As of July 3, 2009, there were a total of 6,030,870 shares reserved for issuance under the 2006 Stock
Incentive Plan. The aggregate intrinsic value is based on our closing stock price of $24.79 on July 3, 2009 and represents the amounts that would have been received by the option holders had all option holders exercised their options as of that
date. Intrinsic value is defined as the difference between the market price on the date of exercise and the grant date price.

We did not award any
restricted stock units during the three months ended July 3, 2009. There were 55,064 restricted stock units outstanding as of July 3, 2009.

As
of July 3, 2009, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $20.7 million and $16.3 million, respectively. These amounts will be recognized over an estimated
weighted average amortization period of 2.7 years and 2.3 years, respectively.

The total intrinsic value of options exercised during the three and nine
month periods ended July 3, 2009 was $0.4 million and $2.3 million, respectively. The total intrinsic value of options exercised during the three and nine month periods ended June 27, 2008 was $1.4 million and $4.4 million, respectively.

The total fair value of restricted stock grants that vested during the three and nine month periods ended July 3, 2009 was $2.5 million and $6.6
million, respectively. The total fair value of restricted stock grants that vested during the three and nine month periods ended June 27, 2008 was $3.5 million and $13.7 million, respectively.

Employee Stock Purchase Plan

Our employees, who elect to participate
in the Employee Stock Purchase Plan (ESPP), are able to purchase common stock at the lower of 85% of the fair market value of our common stock on the first or last day of the applicable offering period. Typically, each offering period
lasts six months. On November 24, 2008, we decided to suspend enrollment and participation in the ESPP as of January 1, 2009. We expect to lift the suspension once the industry recovers. As of July 3, 2009, there were a total of
828,266 shares of common stock reserved for issuance under the ESPP. The fair value of shares issued under the ESPP was estimated on the commencement date of each offering period using the Black-Scholes option-pricing model with the following
assumptions:



|                                       |  |                          |       |   |              |   |       |  
|-------------------------------------- |  | ------------------------ | ----- | - | ------------ | - | ----- | -
|                                       |  | Fiscal Nine Months Ended |      
|                                       |  | July 3,2009              |       |   | June 27,2008 |  
|Expected life (in years)               |  |                          | 0.5   |   |              |   | 0.5   |  
|Expected volatility                    |  |                          | 49.0  | % |              |   | 57.3  | %
|Risk-free interest rate                |  |                          | 2.1   | % |              |   | 3.3   | %
|Expected dividend yield                |  |                          | 0.0   | % |              |   | 0.0   | %
|Weighted-average grant date fair value |  | $                        | 10.44 |   |              | $ | 11.22 |  

There was no new activity for the three months ended July 3, 2009 due to the suspension of the ESPP in
January 2009.



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##### Table of Contents

Note 4. Cash, Cash Equivalents and Investments

We consider currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash and cash equivalents. The carrying amounts of cash
and cash equivalents approximate estimated fair value because of the short-term maturities of those financial instruments. Cash equivalents at July 3, 2009 and October 3, 2008 were $150.9 million and $110.2 million, respectively.

Investments consist primarily of U.S. Treasury and government agency securities and corporate bonds with ratings AA or better. All investments have been
classified as available-for-sale and are carried at fair value. Investments with contractual maturities greater than one year from the date of acquisition have been classified as long-term.

As of July 3, 2009, a net unrealized loss on investments of $0.6 million was recorded as accumulated other comprehensive loss. As of October 3, 2008, a net
unrealized loss on investments of $3.7 million was recorded as accumulated other comprehensive loss.

We determined that the unrealized losses at
July 3, 2009, as aggregated by security type in the table below, are temporary. This assessment is based upon the nature of the investments and the causes of the unrealized losses. The investments are in corporate bonds and U.S. Treasury and
agency securities, as stated in the investment policy. The unrealized losses relate to the decline in fair value due to differences between the securities interest rates at acquisition and current interest rates and the decline in credit
worthiness of certain debtors.

In the third quarter of fiscal year 2009, we adopted FSP No. 115-2 and 124-2, Recognition and Presentation of
Other-Than-Temporary Impairment (FSP No. 115-2). FSP No. 115-2 provides additional guidance designed to create greater clarity and consistency in accounting and presenting impairment losses on securities. FSP No. 115-2 is intended to bring
greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive
income remains fair value. FSP No. 115-2 also requires increased and more timely disclosure regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Upon adoption there was no impact on our consolidated
financial position, results of operations and cash flows.

Net realized loss for the nine months ended July 3, 2009 was approximately $0.6 million.



|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |        |                       |  |   |        |  |   |        |  
|----------------------------------- |  | --------------------------------------- | ------ | --------------------- | ------------------------------------- | --- | ------------------- | ----- | --------------------- | ------ |  | ------------------- | ------ | --------------------- |  | - | ------ |  | - | ------ | -
|                                    |  | In Loss Position forLess than 12
Months |        |                       | In Loss Position for 12Months or More |     |                     | Total |                      
|                                    |  | EstimatedFair Value                     |        | GrossUnrealizedLosses |                                       |     | EstimatedFair Value |       | GrossUnrealizedLosses |        |  | EstimatedFair Value |        | GrossUnrealizedLosses | 
|                                    |  | (Amounts in thousands)                  |       
|U.S. Treasury and agency securities |  | $                                       | 5,320  |                       | $                                     | (28 | )                   |       |                       |       |  |                     |       |                       |  | $ | 5,320  |  | $ | (28    | )
|Corporate Bonds                     |  |                                         | 16,845 |                       |                                       | (42 | )                   |       | $                     | 20,186 |  | $                   | (842   | )                     |  |   | 37,031 |  |   | (884   | )
|Other                               |  |                                         |       |                       |                                       |    |                     |       |                       | 4,993  |  |                     | (508   | )                     |  |   | 4,993  |  |   | (508   | )
|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |        |                       |  |   |        |  |   |        |  
|Total                               |  | $                                       | 22,165 |                       | $                                     | (70 | )                   |       | $                     | 25,179 |  | $                   | (1,350 | )                     |  | $ | 47,344 |  | $ | (1,420 | )
|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |        |                       |  |   |        |  |   |        |  

Investments by security type at July 3, 2009 were as follows:



|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|----------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                    |  | Cost                   |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                    |  | (Amounts in thousands)
|U.S. Treasury and agency securities |  | $                      | 19,533  |                      | $ | 192                   |  | $ | (28                 | ) |  | $ | 19,697 
|Corporate Bonds                     |  |                        | 75,433  |                      |   | 622                   |  |   | (884                | ) |  |   | 75,171 
|Municipal Bonds                     |  |                        | 15,585  |                      |   | 44                    |  |   |                    |   |  |   | 15,629 
|Other                               |  |                        | 6,601   |                      |   |                      |  |   | (508                | ) |  |   | 6,093  
|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                               |  | $                      | 117,152 |                      | $ | 858                   |  | $ | (1,420              | ) |  | $ | 116,590
|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        



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##### Table of Contents

Investments by security type at October 3, 2008 were as follows:



|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|----------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                    |  | Cost                   |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                    |  | (Amounts in thousands)
|U.S. Treasury and agency securities |  | $                      | 5,539   |                      | $ | 46                    |  |   |                    |   |  | $ | 5,585  
|Corporate bonds                     |  |                        | 106,059 |                      |   | 119                   |  | $ | (3,088              | ) |  |   | 103,090
|Municipal bonds                     |  |                        | 24,819  |                      |   | 49                    |  |   | (51                 | ) |  |   | 24,817 
|Other                               |  |                        | 5,780   |                      |   |                      |  |   | (785                | ) |  |   | 4,995  
|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                               |  | $                      | 142,197 |                      | $ | 214                   |  | $ | (3,924              | ) |  | $ | 138,487
|                                    |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        

The investment maturities are as follows:



|                                    |  |                        |         |                |   |        
|----------------------------------- |  | ---------------------- | ------- | -------------- | - | -------
|                                    |  | Estimated Fair Value  
|                                    |  | July 3,2009            |         | October 3,2008
|                                    |  | (Amounts in thousands)
|Maturing within 1 year              |  | $                      | 53,792  |                | $ | 68,996 
|Maturing between 1 year and 5 years |  |                        | 62,798  |                |   | 69,491 
|                                    |  |                        |         |                |   |        
|Total                               |  | $                      | 116,590 |                | $ | 138,487
|                                    |  |                        |         |                |   |        

Note 5. Computation of Net (Loss) Income Per Share

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

The calculation of assumed proceeds, used to determine diluted weighted average shares outstanding under the treasury stock method since the adoption of SFAS
No. 123(R), is adjusted by tax windfalls and shortfalls associated with outstanding stock awards. Windfalls and shortfalls are computed by comparing the tax deductible amount of outstanding stock awards to their grant date fair values and
multiplying the result by the applicable statutory tax rate. A positive result creates a windfall, which increases the assumed proceeds, and a negative result creates a shortfall, which reduces the assumed proceeds.

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



|                                                    |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|--------------------------------------------------- |  | --------------------------------------------- | ------- | ------------------------ | ------------ | - | ----------- |  | - | ------------ | - |  | - | ------
|                                                    |  | Fiscal Three Months Ended                     |         | Fiscal Nine Months Ended
|                                                    |  | July 3,2009                                   |         |                          | June 27,2008 |   | July 3,2009 |  |   | June 27,2008
|                                                    |  | (Amounts in thousands, except per share data)
|Numerator:                                          |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|Net (loss) income                                   |  | $                                             | (14,257 | )                        |              | $ | 18,324      |  | $ | (47,439      | ) |  | $ | 96,045
|                                                    |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|                                                    |  |                                               |         |                         
|Denominator:                                        |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|Denominator for basic net (loss) income per share:  |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|Weighted average shares outstanding                 |  |                                               | 72,460  |                          |              |   | 72,606      |  |   | 72,200       |   |  |   | 73,881
|Effect of dilutive securities:                      |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|Stock options and restricted stock                  |  |                                               |        |                          |              |   | 1,273       |  |   |             |   |  |   | 1,458 
|                                                    |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|Denominator for diluted net (loss) income per share |  |                                               | 72,460  |                          |              |   | 73,879      |  |   | 72,200       |   |  |   | 75,339
|                                                    |  |                                               |         |                          |              |   |             |  |   |              |   |  |   |       
|                                                    |  |                                               |         |                         
|Net (loss) income per share - basic                 |  | $                                             | (0.20   | )                        |              | $ | 0.25        |  | $ | (0.66        | ) |  | $ | 1.30  
|Net (loss) income per share - diluted               |  | $                                             | (0.20   | )                        |              | $ | 0.25        |  | $ | (0.66        | ) |  | $ | 1.27  



9



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##### Table of Contents

For the three and nine month periods ended July 3, 2009, 3.2 million and 3.9 million potentially dilutive
shares, respectively, were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive. For the three and nine month periods ended June 27, 2008, 1.2 million and 0.9 million potentially dilutive
shares, respectively, were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive.

Note 6. Accounts
Receivable

Accounts receivable consist of the following:



|                                |  |                        |         |   |                |   |         |  
|------------------------------- |  | ---------------------- | ------- | - | -------------- | - | ------- | -
|                                |  | July 3,2009            |         |   | October 3,2008 |  
|                                |  | (Amounts in thousands) |        
|Billed receivables              |  | $                      | 101,266 |   |                | $ | 130,184 |  
|Allowance for doubtful accounts |  |                        | (1,865  | ) |                |   | (1,280  | )
|                                |  |                        |         |   |                |   |         |  
|Accounts receivable, net        |  | $                      | 99,401  |   |                | $ | 128,904 |  
|                                |  |                        |         |   |                |   |         |  

Note 7. Inventories

The components of inventories are as follows:



|                        |  |                        |         |                |   |        
|----------------------- |  | ---------------------- | ------- | -------------- | - | -------
|                        |  | July 3,2009            |         | October 3,2008
|                        |  | (Amounts in thousands)
|Raw materials and parts |  | $                      | 68,334  |                | $ | 82,343 
|Work in process         |  |                        | 9,006   |                |   | 16,509 
|Finished goods          |  |                        | 25,181  |                |   | 66,349 
|                        |  |                        |         |                |   |        
|Total inventories       |  | $                      | 102,521 |                | $ | 165,201
|                        |  |                        |         |                |   |        

Note 8. Accrued Expenses

The components of accrued expenses are as follows:



|                            |  |                        |        |                |   |       
|--------------------------- |  | ---------------------- | ------ | -------------- | - | ------
|                            |  | July 3,2009            |        | October 3,2008
|                            |  | (Amounts in thousands)
|Accrued incentives          |  | $                      | 3,680  |                | $ | 14,921
|Accrued employee benefits   |  |                        | 5,957  |                |   | 9,756 
|Accrued payroll             |  |                        | 2,858  |                |   | 7,367 
|Accrued retirement benefits |  |                        | 580    |                |   | 2,593 
|Accrued restructuring costs |  |                        | 894    |                |   | 583   
|Other                       |  |                        | 8,795  |                |   | 6,525 
|                            |  |                        |        |                |   |       
|Total accrued expenses      |  | $                      | 22,764 |                | $ | 41,745
|                            |  |                        |        |                |   |       

Note 9. Long-Term Accrued Expenses and Other Long-Term Liabilities

There were $64.7 million and $63.6 million in long-term accrued expenses and other long-term liabilities at July 3, 2009 and October 3, 2008, respectively.
Included in these amounts were $46.2 million and $42.3 million for long-term tax liabilities. In addition, post-employment liabilities, environmental and other costs not expected to be expended within the next year are included in long-term accrued
expenses and other long-term liabilities. The current portion is recorded within accrued expenses.

Note 10. Product Warranties

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



10



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Product warranty activity for the three and nine months ended July 3, 2009 and June 27, 2008 was as follows:



|                                                 |  |                           |        |   |                          |   |        |             |  |   |              |   |  |   |         |  
|------------------------------------------------ |  | ------------------------- | ------ | - | ------------------------ | - | ------ | ----------- |  | - | ------------ | - |  | - | ------- | -
|                                                 |  | Fiscal Three Months Ended |        |   | Fiscal Nine Months Ended |  
|                                                 |  | July 3,2009               |        |   | June 27,2008             |   |        | July 3,2009 |  |   | June 27,2008 |  
|                                                 |  | (Amounts in thousands)    |        |   | (Amounts in thousands)   |  
|Beginning product warranty balance               |  | $                         | 4,931  |   |                          | $ | 12,199 |             |  | $ | 8,339        |   |  | $ | 12,979  |  
|Accruals for warranties issued during the period |  |                           | 1,195  |   |                          |   | 2,635  |             |  |   | 3,709        |   |  |   | 9,419   |  
|Adjustments to pre-existing warranties           |  |                           | (16    | ) |                          |   | (752   | )           |  |   | (936         | ) |  |   | (563    | )
|Fulfillments during the period                   |  |                           | (1,929 | ) |                          |   | (3,643 | )           |  |   | (6,931       | ) |  |   | (11,396 | )
|                                                 |  |                           |        |   |                          |   |        |             |  |   |              |   |  |   |         |  
|Ending product warranty balance                  |  | $                         | 4,181  |   |                          | $ | 10,439 |             |  | $ | 4,181        |   |  | $ | 10,439  |  
|                                                 |  |                           |        |   |                          |   |        |             |  |   |              |   |  |   |         |  
|                                                 |  |                           |        |  
|Current portion of product warranty              |  | $                         | 3,923  |   |                          | $ | 9,711  |             |  |   |              |   |  |   |         |  
|Long-term portion of product warranty            |  |                           | 258    |   |                          |   | 728    |             |  |   |              |   |  |   |         |  
|                                                 |  |                           |        |   |                          |   |        |             |  |   |              |   |  |   |         |  
|Total product warranty liability                 |  | $                         | 4,181  |   |                          | $ | 10,439 |             |  |   |              |   |  |   |         |  
|                                                 |  |                           |        |   |                          |   |        |             |  |   |              |   |  |   |         |  

Note 11. Deferred Revenue

The components of deferred revenue are as follows:



|                                                            |  |                        |        |                |   |       
|----------------------------------------------------------- |  | ---------------------- | ------ | -------------- | - | ------
|                                                            |  | July 3,2009            |        | October 3,2008
|                                                            |  | (Amounts in thousands)
|Fully deferred systems, installation and acceptance revenue |  | $                      | 7,829  |                | $ | 16,794
|Extended warranties                                         |  |                        | 9,929  |                |   | 15,670
|Maintenance and service contracts                           |  |                        | 4,838  |                |   | 5,704 
|Other deferred revenue                                      |  |                        | 532    |                |   | 778   
|                                                            |  |                        |        |                |   |       
|Total deferred revenue                                      |  | $                      | 23,128 |                | $ | 38,946
|                                                            |  |                        |        |                |   |       
|                                                            |  |                       
|Current portion of deferred revenue                         |  | $                      | 19,617 |                | $ | 32,285
|Long-term portion of deferred revenue                       |  |                        | 3,511  |                |   | 6,661 
|                                                            |  |                        |        |                |   |       
|Total deferred revenue                                      |  | $                      | 23,128 |                | $ | 38,946
|                                                            |  |                        |        |                |   |       

Note 12. Restructuring

Our business is cyclical and depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has historically experienced periodic downturns and in response, we have historically recorded restructuring charges in connection with cost reduction initiatives implemented in response to the industry downturns.
Restructuring charges typically consist of severance, benefits and outplacement services offered to terminated employees and sometimes include charges for remaining lease payments on facilities that are closed. Prior to any restructuring
announcements, the restructuring is approved by the appropriate level of management necessary to commit to the specific actions of the reduction in force.

In the third quarter of fiscal year 2009, we incurred a restructuring charge of $0.7 million in connection with the continuation of cost reduction initiatives in response to the continued weakness in the semiconductor capital equipment
market. The expense is related to a reduction of headcount of approximately 30 people, mainly within manufacturing and engineering.

We began relocating
the European operations in Houten, the Netherlands to Schaffhausen, Switzerland, in the fiscal fourth quarter of 2008. The restructuring charge is comprised primarily of one-time termination benefits, and contract termination expense related to a
facility lease.

We estimate that the European restructuring activity, inclusive of activity through the first nine months of fiscal year 2009 ($1.8
million), will cost $2.5 million. The estimate also includes future, one-time termination benefits of $0.3 million.

The following table summarizes the
restructuring activity for the first nine months of fiscal year 2009.



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##### Table of Contents

|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ----- | ------------------------ |  | - | -------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                   |  | OngoingBenefitArrangements |        |   | One-timeTerminationBenefits |   |       | ContractTerminationCosts |  |   | OtherAssociatedCosts |   |  | Total |     
|                                   |  | (Amounts in thousands)     |       
|Accrued charges at October 3, 2008 |  | $                          | 184    |   |                             | $ | 324   |                          |  |   |                     |   |  | $     | 75   |   |  | $ | 583    |  
|Costs incurred                     |  |                            | 4,393  |   |                             |   | 1,053 |                          |  | $ | 438                  |   |  |       | 365  |   |  |   | 6,249  |  
|Costs paid                         |  |                            | (3,829 | ) |                             |   | (663  | )                        |  |   |                     |   |  |       | (178 | ) |  |   | (4,670 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       | (68  | ) |  |   | (68    | )
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at January 2, 2009 |  | $                          | 748    |   |                             | $ | 714   |                          |  | $ | 438                  |   |  | $     | 194  |   |  | $ | 2,094  |  
|Costs incurred                     |  |                            | 1,377  |   |                             |   | 238   |                          |  |   |                     |   |  |       | 249  |   |  |   | 1,864  |  
|Adjustments                        |  |                            | 243    |   |                             |   |      |                          |  |   |                     |   |  |       | (56  | ) |  |   | 187    |  
|Costs paid                         |  |                            | (2,114 | ) |                             |   | (363  | )                        |  |   | (33                  | ) |  |       | (169 | ) |  |   | (2,679 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       | (124 | ) |  |   | (124   | )
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at April 3, 2009   |  | $                          | 254    |   |                             | $ | 589   |                          |  | $ | 405                  |   |  | $     | 94   |   |  | $ | 1,342  |  
|Costs incurred                     |  |                            | 678    |   |                             |   | 108   |                          |  |   |                     |   |  |       | 60   |   |  |   | 846    |  
|Adjustments                        |  |                            |       |   |                             |   | (92   | )                        |  |   | (81                  | ) |  |       | (2   | ) |  |   | (175   | )
|Costs paid                         |  |                            | (764   | ) |                             |   | (221  | )                        |  |   | (28                  | ) |  |       | (106 | ) |  |   | (1,119 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       |     |   |  |   |       |  
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at July 3, 2009    |  | $                          | 168    |   |                             | $ | 384   |                          |  | $ | 296                  |   |  | $     | 46   |   |  | $ | 894    |  
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  

Cash outlays related to one-time termination benefits and contract termination costs to exit the Houten facility
will continue through fiscal years 2010 and 2014, respectively.

Note 13. Notes Payable

On May 23, 2008, we entered into a credit agreement with a financial institution providing for borrowings of a maximum principal amount of up to $100.0 million under
an unsecured revolving credit facility. Amounts could be borrowed, repaid and reborrowed from time to time during the five-year commitment period ending May 23, 2013. Borrowings would bear interest at a rate per annum equal to either:
(1) the greater of (a) the prime rate and (b) the federal funds rate plus 0.50%; or (2) the sum of (a) LIBOR, with certain adjustments and (b) an applicable rate, defined in the credit agreement as a
percentage spread based on our leverage ratio.

We terminated this credit agreement effective March 27, 2009, pursuant to the terms of the agreement.
As of March 27, 2009, there were no outstanding borrowings under this credit agreement and we did not incur any early termination penalties in connection with the credit agreement termination.

In February 2003, we purchased our previously leased facility located in Newburyport, Massachusetts. The purchase price consisted of cash payments totaling $3.4 million,
the assumption of the sellers outstanding loan of $5.1 million and the transfer of other prepaid assets of $0.8 million. The loan has a fixed interest rate of 9.05% with monthly payments of principal and interest until the loan matures in
January 2013. The loan may be prepaid in full, but not in part, at any time after November 5, 2006. Prepayment would require us to pay a prepayment penalty equal to the greater of two percent of the outstanding principal balance or the excess
of the present value of all future loan payments over the outstanding principal balance of the loan. As of July 3, 2009, we also had a standby letter of credit outstanding for $0.9 million as a guarantee for the debt on this facility. The $2.3
million and $2.8 million carrying amounts of the loan had estimated fair values of $2.5 million and $2.9 million at July 3, 2009 and October 3, 2008, respectively. The fair values of the loan were estimated using a discounted cash flow analysis. The
interest rates were estimated based on current market conditions and our financial condition at July 3, 2009 and October 3, 2008.

Note 14. Commitments,
Contingencies and Guarantees

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving in such capacity at our request. The term of the indemnification period is upon the later of (i) ten years after the person has ceased being an officer or director, or (ii) the
termination of all pending or threatened actions, suits, proceedings or investigations. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and
officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.
Accordingly, we have not recorded any liabilities for these agreements as of July 3, 2009.



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We enter into indemnification agreements in the normal course of business. Pursuant to these agreements, we indemnify,
hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any patent, or any copyright or other intellectual property infringement claim by any
third party with respect to our products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments we could be required to make under these
indemnification agreements may be unlimited. We believe the estimated fair value of these agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of July 3, 2009.

We also indemnify certain customers with respect to damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage,
product liability, and environmental claims related to the use of our products and services or resulting from the acts or omissions of us, our employees, officers, authorized agents or subcontractors. We have general and umbrella insurance policies
that limit our exposure under these indemnification obligations and guarantees. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any
liabilities for these agreements as of July 3, 2009.

Prior to the spinoff of Varian Semiconductor from Varian Associates, Inc.
(VAI), Varian Semiconductors business was operated as the Semiconductor Equipment Business (SEB) of VAI. On April 2, 1999, VAI contributed its SEB to Varian Semiconductor, its Instruments Business to Varian, Inc.
(VI), and changed its name to Varian Medical Systems, Inc. (VMS). In connection with the spin-off from VAI, Varian Semiconductor, VMS and VI entered into certain agreements which include a Distribution Agreement, an Employee
Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a Transition Services Agreement (collectively, the Distribution Related Agreements) whereby Varian Semiconductor agreed to indemnify VMS and
VI for any costs, liabilities or expenses relating to Varian Semiconductors legal proceedings. Under the Distribution Related Agreements, Varian Semiconductor has agreed to reimburse VMS for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VMS, with respect to certain legal proceedings relating to discontinued operations of VMS. We believe the estimated fair value of the indemnification agreements is minimal, except as
already recorded on the financial statements.

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

We also enter into purchase order commitments in the normal course of business. As of July 3, 2009, we had approximately $35.3 million of purchase
order commitments with various suppliers.

Environmental Remediation

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

For certain of these sites and facilities, various uncertainties
make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. We have accrued $1.1 million in estimated environmental investigation and
remediation costs for these sites and facilities as of July 3, 2009. As to other sites and facilities, sufficient knowledge has been gained to be able to reasonably estimate the scope and costs of future environmental activities. As such, we
have accrued $4.0 million as of July 3, 2009, which represents future costs discounted at 7%, net of inflation, to cover our portion of these costs.

As of July 3, 2009, our environmental liability, based upon future environmental-related costs estimated by VMS as of that date and included in current and long-term accrued expenses, totaled $5.1 million, of which $0.7 million is
classified as current.



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

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

We evaluate our
liability for environmental-related investigation and remediation in light of the liability and financial strength of potentially responsible parties and insurance companies where we believe that we have rights to contribution, indemnity and/or
reimbursement. Claims for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. VMS receives certain cash
payments in the form of settlements and judgments from defendants, its insurers and other third parties from time to time. VMS has also reached an agreement with an insurance company under which the insurance company agreed to pay a portion of our
past and future environmental-related expenditures. Accordingly, we have recorded a receivable for approximately $1.0 million at each of July 3, 2009 and October 3, 2008 which was included in Other assets in the Consolidated
Balance Sheets. We believe that this receivable is recoverable because it is based on a binding, written settlement agreement with a solvent and financially viable insurance company and the insurance company has, in the past, paid the claims that
VMS has made.

Legal Proceedings

Varian Semiconductor
is currently a party to legal disputes. While we believe we have meritorious claims and/or defenses with respect to each dispute, we cannot predict the outcome of each such dispute. Management believes that the ultimate outcome of these disputes,
individually and in the aggregate, will not have a material adverse effect on our financial condition or results of our operations.

Note 15. Derivative
Financial Instruments

Effective January 3, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities and requires entities to provide enhanced disclosure about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys financial position, financial performance, and cash flows.

Although the majority of our
transactions are in U.S. dollars, some transactions are based in various foreign currencies. We use derivatives to hedge the foreign currency exposure that is associated with certain of our revenues, assets and liabilities denominated in various
non-U.S. dollar currencies.

We hedge our exposure in foreign currency denominated assets and liabilities with foreign currency forward contracts. Since
these derivatives hedge existing exposures that are denominated in non-U.S. dollar currencies, these contracts do not qualify for hedge accounting.

We
also use foreign currency forward contracts to hedge our exposure on non-U.S. dollar forecasted revenue transactions. These derivatives are designated as cash flow hedges. We do not engage in currency speculation. For purposes of presentation within
the consolidated statements of cash flows, derivative gains and losses are presented within net cash provided by operating activities.

Cash flow hedges

A designated hedge of the exposure to variability in the future cash flows of an asset or liability, or of a forecasted transaction, is referred to as
a cash flow hedge. We use currency forward contracts to hedge exposures on forecasted non-U.S dollar denominated sales transactions. These instruments generally mature within 12 months. These derivative instruments are recognized on the balance
sheet at fair value and changes in the fair value are reported as a component of accumulated other comprehensive loss in stockholders equity. Once the underlying forecasted transaction is realized, the gain or loss from the derivative is
reclassified from



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other comprehensive income to the consolidated statements of operations, in the related revenue caption, as appropriate. Gains and losses on the derivative
instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized immediately in other (expense) income, net, in the consolidated statements of operations.

As of July 3, 2009, we had no currency forward contracts that were entered into to hedge a forecasted transaction.

Non-designated hedges

Forward exchange contracts are generally used
to hedge certain non-U.S. dollar denominated assets or liabilities. These derivatives are not designated for hedge accounting treatment. Accordingly, these outstanding non-designated derivatives are recognized on the balance sheet at fair value and
changes in the fair value of these hedges are recorded in other (expense) income, net, in the consolidated statements of operations.

The following table
provides the types of derivative instruments outstanding as of July 3, 2009 (amounts in thousands):



|                                                   |  |                               |  |                                   |     |                       |                   |            |   |  
|-------------------------------------------------- |  | ----------------------------- |  | --------------------------------- | --- | --------------------- | ----------------- | ---------- | - | -
|                                                   |  | Asset DerivativesJuly 3, 2009 |  | Liability DerivativesJuly 3, 2009
|                                                   |  | Balance SheetLocation         |  | Fair Value                        |     | Balance SheetLocation |                   | Fair Value
|Derivatives designated as hedging instruments:     |  |                               |  |                                   |     |                       |                   |            |   |  
|Foreign exchange contracts                         |  | Other assets                  |  | $                                 |    |                       | Other liabilities |            | $ | 
|                                                   |  |                               |  |                                  
|Derivatives not designated as hedging instruments: |  |                               |  |                                   |     |                       |                   |            |   |  
|Foreign exchange contracts                         |  | Other assets                  |  | $                                 | 104 |                       | Other liabilities |            | $ | 

The following table provides the effect derivative instruments had on accumulated other comprehensive loss and
consolidated statements of operations for the three month period ended July 3, 2009:



|                                                            |  |                                                                           |      |   |                                                                                 |                 |                                                                                                                     |   |                                                   |  |                             |  |   |      |  
|----------------------------------------------------------- |  | ------------------------------------------------------------------------- | ---- | - | ------------------------------------------------------------------------------- | --------------- | ------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------- |  | --------------------------- |  | - | ---- | -
|Derivatives in Statement 133 Cash Flow
HedgingRelationships |  | Amount of Gain or(Loss) recognized inOCI on Derivative(Effective Portion) |      |   | Gain or (Loss) Reclassified fromAccumulated OCI into Income (Effective Portion) |                 | Gain or (Loss) Recognized inIncome on Derivative (IneffectivePortion and Amount Excludedfrom Effectiveness Testing) |  
|(Amounts in thousands)                                      |  | Amount                                                                    |      |   | Location                                                                        |                 | Amount                                                                                                              |   | Location                                          |  | Amount                      | 
|Foreign exchange contracts                                  |  | $                                                                         | (213 | ) |                                                                                 | Product revenue |                                                                                                                     | $ | 328                                               |  | Other (expense) income, net |  | $ | (13  | )
|                                                            |  |                                                                           |      |  
|Derivatives Not Designated as Hedging Instruments           |  |                                                                           |      |   |                                                                                 |                 |                                                                                                                     |   | Gain or (Loss) Recognized in Income on Derivative | 
|(Amounts in thousands)                                      |  |                                                                           |      |   |                                                                                 |                 |                                                                                                                     |   | Location                                          |  | Amount                      | 
|Foreign exchange contracts                                  |  |                                                                           |      |   |                                                                                 |                 |                                                                                                                     |   |                                                   |  | Other (expense) income, net |  | $ | (829 | )

The following table provides the effect derivative instruments had on accumulated other comprehensive loss and
consolidated statements of operations for the nine month period ended July 3, 2009:



|                                                            |  |                                                                           |        |   |                                                                                 |                 |        |                                                                                                                     |        |                                                   |  |                             |  |   |        |  
|----------------------------------------------------------- |  | ------------------------------------------------------------------------- | ------ | - | ------------------------------------------------------------------------------- | --------------- | ------ | ------------------------------------------------------------------------------------------------------------------- | ------ | ------------------------------------------------- |  | --------------------------- |  | - | ------ | -
|Derivatives in Statement 133 Cash Flow
HedgingRelationships |  | Amount of Gain or(Loss) recognized inOCI on Derivative(Effective Portion) |        |   | Gain or (Loss) Reclassified fromAccumulated OCI into Income (Effective Portion) |                 |        | Gain or (Loss) Recognized inIncome on Derivative (IneffectivePortion and Amount Excludedfrom Effectiveness Testing) |       
|(Amounts in thousands)                                      |  | Amount                                                                    |        |   | Location                                                                        |                 | Amount |                                                                                                                     |        | Location                                          |  | Amount                      | 
|Foreign exchange contracts                                  |  | $                                                                         | (1,810 | ) |                                                                                 | Product revenue |        | $                                                                                                                   | (1,719 | )                                                 |  | Other (expense) income, net |  | $ | 113    |  
|                                                            |  |                                                                           |        |  
|Derivatives Not Designated as Hedging Instruments           |  |                                                                           |        |   |                                                                                 |                 |        |                                                                                                                     |        | Gain or (Loss) Recognized in Income on Derivative | 
|(Amounts in thousands)                                      |  |                                                                           |        |   |                                                                                 |                 |        |                                                                                                                     |        | Location                                          |  | Amount                      | 
|Foreign exchange contracts                                  |  |                                                                           |        |   |                                                                                 |                 |        |                                                                                                                     |        |                                                   |  | Other (expense) income, net |  | $ | (2,115 | )



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Note 16. Comprehensive (Loss) Income

The following table reconciles net (loss) income to comprehensive (loss) income, net of tax effect, for the third quarter and first nine months of fiscal years 2009 and 2008:



|                                                                                                                    |  |                           |         |   |                          |   |        |             |  |   |              |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------------------ | - | ------ | ----------- |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                    |  | Fiscal Three Months Ended |         |   | Fiscal Nine Months Ended |  
|                                                                                                                    |  | July 3,2009               |         |   | June 27,2008             |   |        | July 3,2009 |  |   | June 27,2008 |  
|                                                                                                                    |  | (Amounts in thousands)    |         |   | (Amounts in thousands)   |  
|Net (loss) income                                                                                                   |  | $                         | (14,257 | ) |                          | $ | 18,324 |             |  | $ | (47,439      | ) |  | $ | 96,045 |  
|Other comprehensive (loss) income:                                                                                  |  |                           |         |   |                          |   |        |             |  |   |              |   |  |   |        |  
|Unrealized (loss) gain on cash flow hedging instruments                                                             |  |                           | (208    | ) |                          |   | 312    |             |  |   | (1,395       | ) |  |   | 512    |  
|Reclassification adjustment for realized (gain) loss on cash flow hedging instruments included in net (loss) income |  |                           | (312    | ) |                          |   | 65     |             |  |   | 1,225        |   |  |   | (316   | )
|Unrealized gain (loss) on investments                                                                               |  |                           | 1,903   |   |                          |   | (298   | )           |  |   | 1,588        |   |  |   | (97    | )
|Reclassification adjustment for realized loss (gain) on investments included in net (loss) income                   |  |                           | 12      |   |                          |   | (16    | )           |  |   | 534          |   |  |   | (115   | )
|                                                                                                                    |  |                           |         |   |                          |   |        |             |  |   |              |   |  |   |        |  
|Comprehensive (loss) income                                                                                         |  | $                         | (12,862 | ) |                          | $ | 18,387 |             |  | $ | (45,487      | ) |  | $ | 96,029 |  
|                                                                                                                    |  |                           |         |   |                          |   |        |             |  |   |              |   |  |   |        |  

Note 17. Operating Segments and Geographic Information

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

We expect that sales of our products to relatively few customers will continue to account for a high percentage of our revenue in the foreseeable future. In the third
quarter of fiscal year 2009, revenue from two customers accounted for 24% and 13%, respectively, of our total revenue. In the third quarter of fiscal year 2008, revenue from two customers each accounted for 18%, of our total revenue. During the
first nine months of fiscal year 2009, revenue from two customers accounted for 25% and 10%, respectively, of our total revenue. During the first nine months of fiscal year 2008, revenue from three customers accounted for 18%, 11% and 11%,
respectively, of our total revenue.

As of July 3, 2009, three customers represented 22%, 14% and 11%, respectively, of the total accounts receivable
balance. As of October 3, 2008, four customers accounted for 16%, 12%, 11% and 10%, respectively, of the total accounts receivable balance.

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



|                              |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |        |  |   |        
|----------------------------- |  | ---------------------- | ------- | ------ | - | ------ |  | ------ | ------ | ----- | - | ------- |  | ------------ | ------- |  | - | ------ |  | - | -------
|                              |  | NorthAmerica           |         | Europe |   | Japan  |  | Taiwan |        | Korea |   | Other   |  | Consolidated
|                              |  | (Amounts in thousands)
|Revenue  Three months ended: |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |        |  |   |        
|July 3, 2009                  |  | $                      | 15,588  |        | $ | 5,874  |  | $      | 7,366  |       | $ | 29,973  |  | $            | 3,740   |  | $ | 10,837 |  | $ | 73,378 
|June 27, 2008                 |  | $                      | 37,672  |        | $ | 21,822 |  | $      | 12,798 |       | $ | 34,789  |  | $            | 41,847  |  | $ | 33,675 |  | $ | 182,603
|                              |  |                        |         |        |   |        | 
|Revenue  Nine months ended:  |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |        |  |   |        
|July 3, 2009                  |  | $                      | 80,439  |        | $ | 26,691 |  | $      | 44,824 |       | $ | 50,710  |  | $            | 20,332  |  | $ | 21,577 |  | $ | 244,573
|June 27, 2008                 |  | $                      | 151,600 |        | $ | 43,510 |  | $      | 44,604 |       | $ | 237,465 |  | $            | 128,439 |  | $ | 86,379 |  | $ | 691,997
|                              |  |                        |         |        |   |        | 
|Long-lived assets:            |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |        |  |   |        
|July 3, 2009                  |  | $                      | 63,084  |        | $ | 1,087  |  | $      | 176    |       | $ | 461     |  | $            | 4,956   |  | $ | 233    |  | $ | 69,997 
|October 3, 2008               |  | $                      | 60,617  |        | $ | 379    |  | $      | 296    |       | $ | 553     |  | $            | 7,055   |  | $ | 345    |  | $ | 69,245 

Note 18. Income Taxes

Our effective tax rate is based on our expectation of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

We
recorded an income tax benefit of $2.6 million for the nine months ended July 3, 2009. Exclusive of discrete items, the projected effective tax benefit for the year is approximately 12%, comprised of an expected tax benefit at the U.S.
statutory rate of 35%, offset by the lower benefit of losses incurred in low tax jurisdictions and other items aggregating approximately 23%. The benefit in the nine months of fiscal year 2009 was also offset in the period by discrete charges of
$3.3 million primarily relating to tax return adjustments and secondarily to interest accrued on uncertain tax positions. Our effective income tax rate was a 5% benefit for the first nine months of fiscal year 2009. The discrete income tax expense
charged in the first nine months of fiscal year 2009 reduced the effective tax rate benefit by approximately 7 percentage points. For the nine month period ended June 27, 2008, our income tax



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expense of $59.6 million included a discrete net benefit of $2.1 million related to a Swiss net operating loss and tax return adjustments, offset by FIN 48
interest accrual, various charges related to the legal realignment, and other discrete items. Our effective income tax rate was 38% for the first nine months of fiscal year 2008. The discrete income tax benefit received in the first nine months of
fiscal year 2008 reduced the effective tax rate by approximately 1 percentage point.

We adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109, or FIN 48, on September 29, 2007. The net increase in the reserve for unrecognized tax benefits during the first nine months of fiscal year 2009 was $3.0
million for positions taken in the current year. Of this amount, approximately $0.9 million represents the increase for the third quarter of fiscal year 2009. As of July 3, 2009, the total amount of unrecognized tax benefits was $55.4 million,
of which $52.0 million would impact the effective tax rate, if recognized. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax
assets of which $1.9 million relate to state tax credits which are fully offset by a valuation allowance. As of July 3, 2009, the total amount of accrued interest and penalties related to uncertain tax positions was $4.1 million. We will
reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period. We include interest and penalties related to unrecognized tax benefits within our provision for income
taxes.

Except for the matters currently in the Appeals Office of the Internal Revenue Service, or IRS, as discussed below, we do not anticipate that the
total unrecognized tax benefits will significantly change due to settlements of audits, the expiration of statute of limitations, or other resolutions of uncertain tax positions in the next twelve months.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the IRS. We are
subject to audit by the IRS and various state and foreign authorities for the fiscal years 2003 through 2007. The IRS recently concluded an examination of certain refund claims, primarily related to the extraterritorial income exclusion, filed by us
for the fiscal years 2000 through 2004. The IRS issued a notice of disallowance relating to a portion of these claims and we filed a formal protest with the Appeals Office of the IRS. An Appeals hearing date has not been set. It is unknown whether
agreement on these claims will be reached within the next twelve months. The favorable resolution of these claims could result in a benefit to the tax provision of up to $5.8 million. The IRS is currently conducting an examination of fiscal year
2007. Audit field work began in late January 2009 and is ongoing.

In fiscal year 2007, we implemented a plan to realign the legal entities within our
worldwide affiliated group to make our legal structure more consistent with the geographic mix of our customers and suppliers. The realignment of our entities has caused the tax rate to become more sensitive to the geographic distribution of
profits.

Note 19. Recent Accounting Pronouncements

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141. SFAS No. 141(R) requires a number of changes in accounting for business combinations, including the recognition of
contingent consideration and certain contingent assets and liabilities at fair value, capitalization of acquired in-process research and development, expensing of acquisition related transaction costs and restructuring costs, and the recognition of
changes in the acquirers income tax valuation allowance. This statement will be effective for our fiscal year 2010, with early adoption prohibited. The adoption of SFAS No. 141(R) will change our accounting treatment for business
combinations on a prospective basis.

In February 2008, the FASB issued FASB Staff Position, or FSP No. 157- 2, Effective Date of FASB Statement
No. 157, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial statements when it is applied to non-financial assets and non-financial
liabilities that are not measured at fair value on a recurring basis, beginning in the first quarter of fiscal year 2010.

In June 2008, the FASB issued
FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, Earnings per Share. This
FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including
interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP, with early application not permitted. We are currently evaluating the effect, if any, that the adoption of FSP No. EITF
03-6-1 will have on our financial position, results of operations and cash flows.



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In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Standards Accounting Codification, or Codification, as the source of authoritative U.S. GAAP recognized by the FASB
to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date
and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS No. 168 also replaces FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles given that once in effect, the Codification will carry the same level of authority. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We
are currently evaluating the effect if any that the adoption of SFAS No. 168 will have on our financial position, results of operations and cash flows.



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

This Form 10-Q contains certain forward-looking statements. For purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, any statements using the terms believes,
anticipates, expects, plans or similar expressions are forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those
projected. There are a number of important factors that could cause Varian Semiconductor Equipment Associates, Inc.s (Varian Semiconductor, the Company, we, our, or us) actual results
to differ materially from those indicated by forward-looking statements made in this report and presented by management from time to time. Some of the important risks and uncertainties that may cause Varian Semiconductors financial results to
differ are described under the heading Risk Factors in this report, which include any material changes to and restate and supersede the risk factors previously disclosed in Part I, Item 1A. Risk Factors of our Annual
Report on Form 10-K for the year ended October 3, 2008, filed with the SEC on November 25, 2008.

The following information should be read in
conjunction with the unaudited interim consolidated financial statements and notes thereto included in Item 1. Consolidated Financial Statements of this quarterly report and the audited consolidated financial statements and notes thereto
and the section titled Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 3, 2008, filed with the SEC on
November 25, 2008.

Overview

We are the leading
supplier of ion implantation equipment used in the fabrication of semiconductor chips. We design, manufacture, market and service semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. The VIISta
ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. We have shipped more than 4,000 systems worldwide.

We provide support, training, and after-market products and services that help our customers obtain high utilization and productivity, reduce operating costs and extend
capital productivity of investments through multiple product generations. In fiscal year 2009, we were ranked number one in customer satisfaction in VLSI Research Inc.s customer survey for all large suppliers of wafer processing equipment, an
honor received in twelve of the past thirteen years.

Our industry is cyclical. The business depends upon semiconductor manufacturers expectations
and resulting capacity investments for future integrated circuit demand. Historically, our business has experienced significant volatility and we believe the semiconductor capital equipment business will continue to be volatile, largely due to
fluctuations in the level of investment by foundry and memory manufacturers. During fiscal year 2009, we experienced a significant drop in business compared to fiscal year 2008. This decline is in addition to a decline of approximately 21% in
revenue from fiscal year 2007 to fiscal year 2008. We believe that overcapacity in the memory market was the primary driver for the decline in business from fiscal year 2007 to fiscal year 2008. We also believe that continued overcapacity in the
memory markets, along with the global credit crisis and the decline in end-user demand for semiconductors, has resulted in the rapid decline in revenue during the first nine months of fiscal year 2009. These factors are expected to continue to
negatively impact our business through at least the remainder of fiscal year 2009. Our revenue has historically been derived from a limited number of customers, some of which require financing to continue upgrade and/or expansion plans that require
the purchase of our tools. Our after-market business has also been adversely affected as fabs are running at lower utilization levels, thus requiring fewer parts, upgrades and services.

We believe that our management team has the industry experience to quickly and effectively react to sizing adjustments required by the volatility in the market. As such, we began resizing our business in fiscal year
2008 and continued through the first nine months of fiscal year 2009. We expect to continue to closely monitor the industry.

We believe that we have the
financial strength and liquidity to continue investing in product development such that we can continue to maintain our leading industry position. As of July 3, 2009, we had $293.1 million in cash and investments and approximately $2.3 million
in debt. Furthermore, despite the year to date loss, we generated approximately $16.4 million in cash from operations during the first nine months of fiscal year 2009.

Our business is tied closely to our market share and the total available market for ion implanters. Calendar year 2008 semiconductor capital expenditure reports show that the total available market for ion implanters
decreased by approximately 40% versus calendar year 2007. In addition, based mainly on references to leading industry analyst reports and current customer buying patterns, we believe that semiconductor capital equipment spending will significantly
decline in 2009 from 2008.



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Wafer size and market.Most advanced devices below 90nm are produced on 300mm wafers. Memory manufacturers
typically produce integrated circuits used for flash and dynamic random access memory, or DRAM, which store and retrieve information, while logic manufacturers typically produce integrated circuits used to process data. Foundry manufacturers have
the capability to produce both memory and logic wafers.

Market Share and Total Available Market. The table below shows our calendar year 2008 and
2007 market share, as reported by Gartner Dataquest in April 2009 and April 2008, respectively. Market share estimates are calculated on a subset of revenue, and information reported by Gartner Dataquest may not be consistent on a company by company
basis. The table below also shows the total available market for ion implanter sales in calendar years 2008 and 2007, also reported by Gartner Dataquest in April 2009 and April 2008, respectively. The total available market represents estimated
worldwide total revenue for ion implanters sold during each of the calendar years.



|                |  |                                 |   |  |                                           |   |  |                       |     |                  |   |      
|--------------- |  | ------------------------------- | - |  | ----------------------------------------- | - |  | --------------------- | --- | ---------------- | - | -----
|                |  | Market ShareCalendar Year Ended |   |  | Total Available MarketCalendar Year Ended
|                |  | December 31,2008                |   |  | December 31,2007                          |   |  | December 31,2008      |     | December 31,2007
|                |  |                                 |   |  |                                           |   |  | (Amounts in millions)
|By market       |  |                                 |   |  |                                           |   |  |                       |     |                  |   |      
|Medium current  |  | 41.5                            | % |  | 56.6                                      | % |  | $                     | 281 |                  | $ | 454  
|High current    |  | 78.1                            | % |  | 77.8                                      | % |  |                       | 371 |                  |   | 672  
|High energy     |  | 22.8                            | % |  | 12.8                                      | % |  |                       | 79  |                  |   | 147  
|Ultra high dose |  | 100.0                           | % |  | 100.0                                     | % |  |                       | 67  |                  |   | 64   
|                |  |                                 |   |  |                                           |   |  |                       |     |                  |   |      
|Overall         |  | 61.5                            | % |  | 64.5                                      | % |  | $                     | 798 |                  | $ | 1,337
|                |  |                                 |   |  |                                           |   |  |                       |     |                  |   |      

Market share and total available market research data is also published by VLSI Research Inc. In May 2009, VLSI
Research Inc. reported that our overall market share was 65% and that the total available market was $757.8 million for calendar year 2008.

We estimate
our market share on a regular basis. We do so based on extensive information, including our own revenues, competitor orders and other key information such as tool move-ins at the fabs. Our market share estimates are usually closely aligned with
those of Gartner Dataquest. Revenue recognition disparities do not normally cause significant swings in calculations of market share. However, we believe the significant decline in semiconductor capital equipment business in 2008 caused revenue
recognition delays from 2007 shipments to distort 2008 market share metrics. Our information indicates that based on a competitors delayed revenue recognition, a significant portion of their medium current tool shipments in 2007 was not
recognized as revenue until 2008. As such, we believe our 2008 medium current market share, if normalized for these shipments, would be approximately flat from 2007 and our overall 2008 market share would be several percentage points higher than our
overall 2007 market share. Since 2007 we have not lost a medium current customer. Our high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes (65nm and below). We began developing single
wafer high current tools in 1994 and are currently the industry leader. The increase in high energy market share is primarily related to customer mix in the total available market for high energy tools. Our position in the ultra high-dose market has
resulted from the success of our new plasma doping tool, known as the VIISta PLAD, which is currently used by memory manufacturers.

Critical Accounting
Policies and Significant Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, we evaluate our estimates, including those related to revenues, inventories, accounts
receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies. We continue to have the same critical accounting policies and estimates as
are described in Item 7 in the Annual Report on Form 10-K for the fiscal year ended October 3, 2008, filed with the SEC on November 25, 2008. We operate in a highly cyclical and competitive industry that is influenced by a variety of
diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and geographic and macroeconomic trends. Estimating product demand beyond a relatively short forecasting horizon is
difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. We base



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our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors
discussed in the section titled Risk Factors in Part II, Item 1A.

Results of Operations

Revenue

The following table sets forth revenue by category for the
three and nine month periods ended July 3, 2009 and June 27, 2008:



|                      |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|--------------------- |  | ------------------------- | ------ | ------------ | ------------------------ | ------- |  | - | ------------- | - |  | ----------- | - | ------------ | - | ------- |  | - | ------------- |  | - | -------- | - |  | ----- | -
|                      |  | Fiscal Three Months Ended |        |              | Fiscal Nine Months Ended |        
|                      |  | July 3,2009               |        | June 27,2008 |                          | Change  |  |   | PercentChange |   |  | July 3,2009 |   | June 27,2008 |   | Change  |  |   | PercentChange | 
|                      |  | (Amounts in thousands)    |        |              | (Amounts in thousands)   |        
|Revenue               |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|Product               |  | $                         | 62,695 |              | $                        | 159,283 |  | $ | (96,588       | ) |  | -60.6       | % |              | $ | 203,681 |  | $ | 629,755       |  | $ | (426,074 | ) |  | -67.7 | %
|Service               |  |                           | 10,663 |              |                          | 23,307  |  |   | (12,644       | ) |  | -54.2       | % |              |   | 40,813  |  |   | 62,183        |  |   | (21,370  | ) |  | -34.4 | %
|Royalty and license   |  |                           | 20     |              |                          | 13      |  |   | 7             |   |  | 53.8        | % |              |   | 79      |  |   | 59            |  |   | 20       |   |  | 33.9  | %
|                      |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|Revenue               |  | $                         | 73,378 |              | $                        | 182,603 |  | $ | (109,225      | ) |  | -59.8       | % |              | $ | 244,573 |  | $ | 691,997       |  | $ | (447,424 | ) |  | -64.7 | %
|                      |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|                      |  |                           |        |              |                          |         |  |  
|Revenue by territory: |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|Asia Pacific          |  | $                         | 51,916 |              | $                        | 123,109 |  | $ | (71,193       | ) |  | -57.8       | % |              | $ | 137,443 |  | $ | 496,887       |  | $ | (359,444 | ) |  | -72.3 | %
|North America         |  |                           | 15,588 |              |                          | 37,672  |  |   | (22,084       | ) |  | -58.6       | % |              |   | 80,439  |  |   | 151,600       |  |   | (71,161  | ) |  | -46.9 | %
|Europe                |  |                           | 5,874  |              |                          | 21,822  |  |   | (15,948       | ) |  | -73.1       | % |              |   | 26,691  |  |   | 43,510        |  |   | (16,819  | ) |  | -38.7 | %
|                      |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  
|Revenue               |  | $                         | 73,378 |              | $                        | 182,603 |  | $ | (109,225      | ) |  | -59.8       | % |              | $ | 244,573 |  | $ | 691,997       |  | $ | (447,424 | ) |  | -64.7 | %
|                      |  |                           |        |              |                          |         |  |   |               |   |  |             |   |              |   |         |  |   |               |  |   |          |   |  |       |  

Product

During the third quarter and the first nine months of fiscal year 2009, product revenue was $62.7 million and $203.7 million, respectively, compared to $159.3 million and $629.8 million, respectively, for the same periods a year ago.
Overcapacity in the memory market, along with the global credit crisis and the decline in end-user demand for semiconductors, has caused our customers to significantly decrease their spending for our products. On a unit basis, the number of tools
recorded in revenue declined 73% for the first nine months of fiscal year 2009, compared to the first nine months of fiscal year 2008. In addition, revenue from parts and upgrades sales during the first nine months of fiscal year 2009 decreased 51%
compared to the same fiscal period a year ago, due to lower utilization levels at most customers.

Service

Service revenue during the third quarter and first nine months of fiscal year 2009 was $10.7 million and $40.8 million, respectively, compared to $23.3 million and $62.2
million, respectively, for the same periods a year ago. This decrease in the third quarter and first nine months of fiscal year 2009 as compared to the same periods in fiscal year 2008 is primarily related to a decrease in installation revenue due
to fewer tool shipments and a decrease in service contract revenue as a result of customer fab closures and reduced utilization levels.

Revenue by
Territory

The Asia Pacific region has historically accounted for a significant percentage of our revenues. The decrease in revenue from this region for
the third quarter and first nine months of fiscal year 2009 as compared to the same periods in fiscal year 2008 is due to the worldwide decrease in semiconductor manufacturing, particularly among memory customers in the Asia Pacific region. The most
significant driver of change across all regions is the substantial drop in memory business.

Royalty and License

Royalty revenue during the third quarter and first nine months of fiscal years 2009 and 2008 was less than $0.1 million, as all agreements have now expired.

Customers

In the third quarter of fiscal year 2009, revenue from
two customers accounted for 24% and 13%, respectively, of our total revenue. In the third quarter of fiscal year 2008, revenue from two customers each accounted for 18% of our total revenue. During the first nine months of fiscal year 2009, revenue
from two customers accounted for 25% and 10%, respectively, of our total revenue. During the first nine months of fiscal year 2008, revenue from three customers accounted for 18%, 11% and 11%, respectively, of our total revenue.

Fluctuations in the timing and mix of product shipments, customer requirements for systems, and the completion of the installation of the product will continue to have a
significant impact on the timing and amount of revenue in any given reporting period (see also Item 1A. Risk Factors).



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Shipment Mix

Our
tools are used primarily in 300mm wafer-size fabs. Our tools are used by logic, memory and foundry manufacturers for integrated circuit production. Logic manufacturers make chips that process information and are owned by the companies that design
the chips. Memory manufacturers make chips that store information and they, too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over
the last several years the demand for memory chips has outstripped the demand for logic chips. However, overcapacity in the memory market has caused a significant decline in demand from memory customers. Virtually all of our tool shipments are 300mm
tools, which began to replace 200mm tools at the end of the 1990s. The following table sets forth tool shipments by market, as a percent of total tool shipments, for the third quarter and first nine months, respectively, of fiscal years 2009 and
2008. Percentages are based on the number of tools shipped during the respective period.



|          |  |                           |   |  |                          |   |  |             |   |  |              |  
|--------- |  | ------------------------- | - |  | ------------------------ | - |  | ----------- | - |  | ------------ | -
|          |  | Fiscal Three Months Ended |   |  | Fiscal Nine Months Ended |  
|          |  | July 3,2009               |   |  | June 27,2008             |   |  | July 3,2009 |   |  | June 27,2008 |  
|By market |  |                           |   |  |                          |   |  |             |   |  |              |  
|Memory    |  | 33                        | % |  | 48                       | % |  | 29          | % |  | 64           | %
|Logic     |  | 9                         | % |  | 26                       | % |  | 42          | % |  | 16           | %
|Foundry   |  | 58                        | % |  | 26                       | % |  | 29          | % |  | 20           | %
|          |  |                           |   |  |                          |   |  |             |   |  |              |  
|Shipments |  | 100                       | % |  | 100                      | % |  | 100         | % |  | 100          | %
|          |  |                           |   |  |                          |   |  |             |   |  |              |  

Cost of Product Revenue

Cost of product revenue was $37.8 million and gross margin was 40% for the third quarter of fiscal year 2009, compared to cost of product revenue of $80.7 million and gross margin of 49% for the third quarter of
fiscal year 2008. For the first nine months of fiscal year 2009, cost of product revenue was $129.2 million and gross margin was 37%, compared to cost of product revenue of $321.7 million and gross margin of 49% for the first nine months of fiscal
year 2008. The primary reason for the decrease in gross margin for the third quarter and first nine months of fiscal year 2009 versus the same periods a year ago is under utilization of the factory due to significantly lower volume. We have decided
to maintain a minimum number of employees in the factory despite the lower volume to ensure our ability to quickly add capacity when the industry begins to recover. Costs have been managed through multiple efforts, including a reduced workforce and
mandatory shutdowns. The under utilized factory impacted gross profit by $1.6 million, or 3%, in gross margin and $11.6 million, or 6%, in gross margin in the third quarter and first nine months of fiscal year 2009, respectively. In addition,
charges related to product transitions and reductions in the demand for legacy parts and upgrades resulted in an approximate 2% and 3% reduction in gross margin during the third quarter and first nine months of fiscal year 2009, respectively, versus
an approximate reduction in gross margin of less than 2% and 1% for the same periods a year ago. A lower sales mix of tools versus upgrades and parts partially offset the negative impact from the factory for both the third quarter and first nine
months of fiscal year 2009 versus the same periods a year ago. Tools typically are sold at lower margins than upgrades and parts.

Cost of Service
Revenue

Cost of service revenue was $7.4 million and gross margin was 30% for the third quarter of fiscal year 2009, compared to cost of service
revenue of $14.0 million and gross margin of 40% for the third quarter of fiscal year 2008. Cost of service revenue was $26.0 million and gross margin was 36% for the first nine months of fiscal year 2009, compared to cost of service revenue of
$38.9 million and gross margin of 37% for the first nine months of fiscal year 2008. Cost of service revenue primarily consists of the costs to install the tool at the customers fab. Thus, fluctuations in service margins are mainly attributed
to the change in installation margins, which are influenced by product and regional mix. The fair value of installations is assessed periodically and is largely based upon the historical experience of the effort and cost to complete installations.

Research and Development

Research and development
expense for the third quarter and first nine months of fiscal year 2009 was $19.1 million and $60.2 million, respectively, compared to $27.2 million and $84.5 million, respectively, for the same periods in fiscal year 2008. Although we have
implemented cost reduction efforts, such as lower levels of headcount and mandatory shutdowns, we continue to maintain our investments in new product development and growth initiatives.

Marketing, General and Administrative

Marketing, general, and administrative expense for the third quarter and first
nine months of fiscal year 2009 was $22.2 million and $73.0 million, respectively, compared to $32.1 million and $97.5 million, respectively, for the same periods in fiscal year 2008. The decrease in the third quarter and first nine months of fiscal
year 2009 was primarily due to cost reduction efforts implemented during



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the industry downturn. Compensation plans have been significantly reduced and/or suspended and cost reduction efforts have resulted in lower levels of
headcount and associated costs, such as travel. In addition, we have had mandated shutdowns for several weeks each quarter during fiscal year 2009.

Restructuring Costs

Our business is cyclical and depends upon the capital expenditures of semiconductor manufacturers, which in turn depend
on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. The semiconductor industry has historically experienced periodic downturns and in response, we have historically recorded restructuring
charges in connection with cost reduction initiatives implemented in response to the industry downturns. Restructuring charges typically consist of severance, benefits and outplacement services offered to terminated employees and sometimes include
charges for remaining lease payments on facilities that are closed. Prior to any restructuring announcements, the restructuring is approved by the appropriate level of management necessary to commit to the specific actions of the reduction in force.

In the third quarter of fiscal year 2009, we incurred a restructuring charge of $0.7 million in connection with the continuation of cost reduction
initiatives in response to the continued weakness in the semiconductor capital equipment market. The expense is related to a reduction of headcount of approximately 30 people, mainly within manufacturing and engineering.

We began relocating the European operations in Houten, the Netherlands to Schaffhausen, Switzerland, in the fiscal fourth quarter of 2008. The restructuring charge is
comprised primarily of one-time termination benefits, and contract termination expense related to a facility lease.

We estimate that the European
restructuring activity, inclusive of activity through the first nine months of fiscal year 2009 ($1.8 million), will cost $2.5 million. The estimate also includes future, one-time termination benefits of $0.3 million.

The following table summarizes the restructuring activity for the first nine months of fiscal year 2009.



|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ----- | ------------------------ |  | - | -------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                   |  | OngoingBenefitArrangements |        |   | One-timeTerminationBenefits |   |       | ContractTerminationCosts |  |   | OtherAssociatedCosts |   |  | Total |     
|                                   |  | (Amounts in thousands)     |       
|                                   |  |                            |        |   |                            
|Accrued charges at October 3, 2008 |  | $                          | 184    |   |                             | $ | 324   |                          |  |   |                     |   |  | $     | 75   |   |  | $ | 583    |  
|Costs incurred                     |  |                            | 4,393  |   |                             |   | 1,053 |                          |  | $ | 438                  |   |  |       | 365  |   |  |   | 6,249  |  
|Costs paid                         |  |                            | (3,829 | ) |                             |   | (663  | )                        |  |   |                     |   |  |       | (178 | ) |  |   | (4,670 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       | (68  | ) |  |   | (68    | )
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at January 2, 2009 |  | $                          | 748    |   |                             | $ | 714   |                          |  | $ | 438                  |   |  | $     | 194  |   |  | $ | 2,094  |  
|Costs incurred                     |  |                            | 1,377  |   |                             |   | 238   |                          |  |   |                     |   |  |       | 249  |   |  |   | 1,864  |  
|Adjustments                        |  |                            | 243    |   |                             |   |      |                          |  |   |                     |   |  |       | (56  | ) |  |   | 187    |  
|Costs paid                         |  |                            | (2,114 | ) |                             |   | (363  | )                        |  |   | (33                  | ) |  |       | (169 | ) |  |   | (2,679 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       | (124 | ) |  |   | (124   | )
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at April 3, 2009   |  | $                          | 254    |   |                             | $ | 589   |                          |  | $ | 405                  |   |  | $     | 94   |   |  | $ | 1,342  |  
|Costs incurred                     |  |                            | 678    |   |                             |   | 108   |                          |  |   |                     |   |  |       | 60   |   |  |   | 846    |  
|Adjustments                        |  |                            |       |   |                             |   | (92   | )                        |  |   | (81                  | ) |  |       | (2   | ) |  |   | (175   | )
|Costs paid                         |  |                            | (764   | ) |                             |   | (221  | )                        |  |   | (28                  | ) |  |       | (106 | ) |  |   | (1,119 | )
|Non-cash settlements               |  |                            |       |   |                             |   |      |                          |  |   |                     |   |  |       |     |   |  |   |       |  
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  
|Accrued charges at July 3, 2009    |  | $                          | 168    |   |                             | $ | 384   |                          |  | $ | 296                  |   |  | $     | 46   |   |  | $ | 894    |  
|                                   |  |                            |        |   |                             |   |       |                          |  |   |                      |   |  |       |      |   |  |   |        |  

Cash outlays related to one-time termination benefits and contract termination costs to exit the Houten facility
will continue through fiscal years 2010 and 2014, respectively.

Interest Income and Interest Expense

During the third quarter and first nine months of fiscal year 2009, we earned $1.0 million and $3.5 million in net interest income, respectively, compared to $1.8 million
and $6.6 million, respectively, for the same periods of fiscal year 2008. The decrease in net interest income for the third quarter and first nine months of fiscal year 2009 was due to a decrease in interest rates as a result of global economic
conditions. In addition, we recorded $0.3 million of interest expense during the second quarter of fiscal year 2009



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related to financing charges associated with the termination of the $100.0 million line of credit. For more information on the termination of this line of
credit, see Note 13, Notes Payable, in the accompanying notes to the unaudited interim consolidated financial statements.

Other (Expense)
Income, Net

Other expense, net was $0.2 million and $0.7 million for the third quarter and first nine months of fiscal year 2009, respectively,
compared to other income, net, of $0.2 million and $0.3 million, respectively, for the same periods of fiscal year 2008. Other (expense) income includes foreign currency exchange gains and losses.

Provision for Income Taxes

Our effective tax rate is based on our
expectation of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

We recorded an income tax benefit of $2.6 million
for the nine months ended July 3, 2009. Exclusive of discrete items, the projected effective tax benefit for the year is approximately 12%, comprised of an expected tax benefit at the U.S. statutory rate of 35%, offset by the lower benefit of
losses incurred in low tax jurisdictions and other items aggregating approximately 23%. The benefit in the nine months was also offset in the period by discrete charges of $3.3 million primarily relating to tax return adjustments and secondarily to
interest accrued on uncertain tax positions. Our effective income tax rate was a 5% benefit for the first nine months of fiscal year 2009. The discrete income tax expense charged in the first nine months of fiscal year 2009 reduced the effective tax
rate benefit by approximately 7 percentage points. For the nine month period ended June 27, 2008, our income tax expense of $59.6 million included a discrete net benefit of $2.1 million related to a Swiss net operating loss and tax return
adjustments, offset by FIN 48 interest accrual, various charges related to the legal realignment, and other discrete items. Our effective income tax rate was 38% for the first nine months of fiscal year 2008. The discrete income tax benefit received
in the first nine months of fiscal year 2008 reduced the effective tax rate by approximately 1 percentage point.

We adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109, or FIN 48, on September 29, 2007. The net increase in the reserve for unrecognized tax benefits during the first nine
months of fiscal year 2009 was $3.0 million for positions taken in the current year. Of this amount, approximately $0.9 million represents the increase for the third quarter of fiscal 2009. As of July 3, 2009, the total amount of unrecognized
tax benefits was $55.4 million, of which $52.0 million would impact the effective tax rate, if recognized. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items
that are offset by deferred tax assets of which $1.9 million relate to state tax credits which are fully offset by a valuation allowance. As of July 3, 2009, the total amount of accrued interest and penalties related to uncertain tax positions
was $4.1 million. We will reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period. We include interest and penalties related to unrecognized tax benefits within
our provision for income taxes.

Except for the matters currently in the Appeals Office of the Internal Revenue Service, or IRS, as discussed below, we do
not anticipate that the total unrecognized tax benefits will significantly change due to settlements of audits, the expiration of statute of limitations, or other resolutions of uncertain tax positions in the next twelve months.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the IRS. We are
subject to audit by the IRS and various state and foreign authorities for the fiscal years 2003 through 2007. The IRS recently concluded an examination of certain refund claims, primarily related to the extraterritorial income exclusion, filed by us
for the fiscal years 2000 through 2004. The IRS issued a notice of disallowance relating to a portion of these claims and we filed a formal protest with the Appeals Office of the IRS. An Appeals hearing date has not been set. It is unknown whether
agreement on these claims will be reached within the next twelve months. The favorable resolution of these claims could result in a benefit to the tax provision of up to $5.8 million. The IRS is currently conducting an examination of fiscal year
2007. Audit field work began in late January 2009 and is ongoing.

In fiscal year 2007, we implemented a plan to realign the legal entities within our
worldwide affiliated group to make our legal structure more consistent with the geographic mix of our customers and suppliers. The realignment of our entities has caused the tax rate to become more sensitive to the geographic distribution of
profits.

Net (Loss) Income

As a result of the
foregoing factors, in the third quarter and first nine months of fiscal year 2009, we recorded net loss of $14.3 million and $47.4 million, respectively, compared to net income of $18.3 million and $96.0 million, respectively, for the same periods
of fiscal year 2008. In the third quarter and first nine months of fiscal year 2009, net loss per diluted share was $0.20 and $0.66, respectively, compared to net income per diluted share of $0.25 and $1.27, respectively, for the same periods of
fiscal year 2008.



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Liquidity and Capital Resources

We generated $16.4 million of cash from operations during the first nine months of fiscal year 2009, compared to $140.3 million of cash generated from operations during the first nine months of fiscal year 2008. Cash
generated by operations in the first nine months of fiscal year 2009, was primarily a result of reductions in inventory of $54.8 million, accounts receivables of $30.9 million and non-cash expenses, such as stock-based compensation of $17.2 million
and depreciation and amortization of $11.8 million; partially offset by a net loss of $47.4 million and decreases of $16.2 million in accounts payable, $16.3 million in accrued expenses, and $15.7 million in deferred revenue. Accrued expenses
decreased mainly due to the payout of incentive compensation following the end of the prior fiscal year. The decrease in inventory was primarily due to lower material receipts for the lower build plan and the decrease in accounts receivable was
related to substantially lower sales volumes. Accounts receivable did not decrease as much as inventory due to extended payment terms granted on prior quarter tool shipments. Cash provided by operations in the first nine months of fiscal year 2008
was primarily a result of net income of $96.0 million, plus non-cash expenses such as stock-based compensation of $16.1 million and depreciation and amortization of $12.6 million. Also, contributing to cash from operations was a decrease in accounts
receivable of $39.2 million on account of lower sales volume. The increase in cash was partially offset by a decrease in accounts payable of $19.1 million, primarily driven by lower material receipts and a decrease of $19.5 million in deferred
revenue. Deferred revenue decreased due to lower sales volume and fully deferred tools at the end of fiscal year 2007 that were recognized as revenue during fiscal year 2008.

We generated $18.0 million from investing activities during the first nine months of fiscal year 2009, compared to $44.9 million in the first nine months of fiscal year 2008. We received proceeds from sales and
maturities of investments of $5.9 million and $52.8 million, respectively, during the period, partially offset by $34.6 million used for the purchase of investments and $6.1 million used for the purchase of property, plant and equipment during the
first nine months of fiscal year 2009. In the first nine months of fiscal year 2008, we received proceeds from sales and maturities of investments of $7.6 million and $115.5 million, respectively, during the period, partially offset by $70.6 million
used for the purchase of investments and $7.6 million used for the purchase of property, plant and equipment during the same period. During the first nine months of fiscal year 2009, maturities from investments decreased due to the timing of
maturities and fewer securities purchased in the later part of fiscal year 2008 due to the market environment.

Our Board of Directors amended the share
repurchase program by increasing the amount of funds that may be expended in repurchasing common stock from $700.0 million to $800.0 million as of April 21, 2008. As of July 3, 2009 there were $85.6 million remaining in the program. The
program does not have a fixed expiration date.

During the first nine months of fiscal year 2009, we generated $5.0 million of cash from financing
activities, primarily from $5.0 million of cash received from the issuance of common stock upon the exercise of stock options. During the first nine months of fiscal year 2008, we used $172.3 million of cash for financing activities, primarily to
repurchase shares of our common stock. This was partially offset by $5.2 million of cash received from the issuance of common stock upon the exercise of stock options. We have not purchased any shares of our common stock during the first nine months
of fiscal year 2009 due to our interest in preserving cash during the current industry downturn.

As previously reported, on May 23, 2008, we entered
into a credit agreement with multiple financial institutions and JPMorgan Chase Bank, N.A. as administrative agent, which was filed as Exhibit 10.1 to Form 8-K filed with the SEC on May 23, 2008. The credit agreement provided for borrowing by
us of a maximum principal amount of up to $100.0 million under an unsecured revolving credit facility during the five-year commitment period ending May 23, 2013, unless earlier terminated pursuant to the terms of the credit agreement. We
terminated this credit agreement effective March 27, 2009, pursuant to the terms of the credit agreement. As of March 27, 2009, there were no outstanding borrowings under this credit agreement and we did not incur any early termination
penalties in connection with the credit agreement termination.

Our liquidity is affected by many factors, some based on the normal operations of the
business and others related to the uncertainties of the industry and global economies. We believe that cash, cash equivalents and investments of $293.1 million at July 3, 2009 will be sufficient to satisfy working capital requirements,
commitments for capital expenditures and other purchase commitments, environmental contingencies and cash requirements through at least the next twelve months.

Off-Balance Sheet Arrangements

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



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Contractual Obligations

We have various contractual obligations impacting our liquidity. The following table summarizes our future payments under contractual obligations as of July 3, 2009:



|                                    |  |                        |         |                 |   |           |  |           |       |                  |   |       |  |   |       |  |   |       
|----------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | ----- |  | - | ------
|                                    |  | Payments Due by Period
|                                    |  | Total                  |         | Less Than 1Year |   | 1-3 Years |  | 3-5 Years |       | More Than 5Years |   | Other
|                                    |  | (Amounts in thousands) |         |                
|Long-term debt and interest expense |  | $                      | 2,747   |                 | $ | 785       |  | $         | 1,570 |                  | $ | 392   |  |   |      |  |   |      
|Operating lease obligations         |  |                        | 4,490   |                 |   | 2,212     |  |           | 1,809 |                  |   | 469   |  |   |      |  |   |      
|Purchase obligations (a)            |  |                        | 35,321  |                 |   | 35,313    |  |           | 8     |                  |   |      |  |   |      |  |   |      
|Non-current income tax payable (b)  |  |                        | 46,221  |                 |   |          |  |           |      |                  |   |      |  |   |      |  | $ | 46,221
|Other long-term liabilities (c)     |  |                        | 24,645  |                 |   | 375       |  |           | 4,669 |                  |   | 641   |  | $ | 2,775 |  |   | 16,185
|                                    |  |                        |         |                 |   |           |  |           |       |                  |   |       |  |   |       |  |   |       
|Total contractual cash obligations  |  | $                      | 113,424 |                 | $ | 38,685    |  | $         | 8,056 |                  | $ | 1,502 |  | $ | 2,775 |  | $ | 62,406
|                                    |  |                        |         |                 |   |           |  |           |       |                  |   |       |  |   |       |  |   |       



|(a) | Purchase obligations represent agreements to purchase materials or other goods and capital expenditures for the construction or purchase of property, plant and equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Represents the non-current tax payable obligation under FIN 48. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to
uncertainties in the timing of tax audit outcomes and therefore included this amount in the Other column.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Included in other long-term liabilities are liabilities for post-employment and post-retirement benefits, deferred compensation, warranty provision, environmental reserve and other
obligations. For certain long-term obligations we are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we include these amounts in the Other column.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Transactions with Affiliates and Related Parties

Operations prior to April 2, 1999 had been part of the former Varian Associates, Inc., or VAI, now known as Varian Medical Systems, Inc., or VMS, (See Note 14. Commitments, Contingencies and Guarantees in the accompanying notes to the
unaudited interim consolidated financial statements). During the first nine month periods of fiscal years 2009 and 2008, we were charged $0.6 million and $0.8 million, respectively, by VMS in settlement of these obligations.

Recent Accounting Pronouncements

In December 2007, the FASB issued
SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141. SFAS No. 141(R) requires a number of changes in accounting for business combinations, including the recognition of contingent consideration and certain
contingent assets and liabilities at fair value, capitalization of acquired in-process research and development, expensing of acquisition related transaction costs and restructuring costs, and the recognition of changes in the acquirers income
tax valuation allowance. This statement will be effective for our fiscal year 2010, with early adoption prohibited. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis.

In February 2008, the FASB issued FASB Staff Position, or FSP No. 157-2, Effective Date of FASB Statement No. 157, which delays the
effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial statements when it is applied to non-financial assets and non-financial liabilities that are not measured
at fair value on a recurring basis, beginning in the first quarter of fiscal year 2010.

In June 2008, the FASB issued FSP No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, Earnings per Share. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP, with early application not permitted. We are currently evaluating the effect, if any, that the adoption of FSP No. EITF 03-6-1 will have on
our financial position, results of operations and cash flows.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Standards Accounting



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Codification, or Codification, as the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities and rules and
interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS No. 168 also replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles given that once in effect,
the Codification will carry the same level of authority. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently evaluating the effect if any that the
adoption of SFAS No. 168 will have on our financial position, results of operations and cash flows.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|------- | ---------------------------------------------------------

Foreign Currency Exchange Risk

As a multinational company, we face exposure to adverse movements in foreign currency exchange rates. This
exposure may change over time as our business practices evolve and could impact our financial results. We use derivative instruments to protect our foreign operations from fluctuations in earnings and cash flows caused by volatility in currency
exchange rates. We hedge our current exposures and a portion of our anticipated foreign currency exposures with foreign currency forward contracts having terms of up to twelve months. However, based on the results of an annual test, a 10% change in
the exchange rate of the U.S. dollar against other major currencies would not have a material effect on our results of operations.

We have established
balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in the exchange rates. These programs reduce, but do not always
entirely eliminate, the impact of currency exchange movements. Historically, our primary exposures have resulted from non-U.S. dollar denominated sales and purchases in Asia Pacific and Europe. We do not use derivative instruments for trading or
speculative purposes. For further discussion of the accounting treatment of our derivative instruments please refer to Note 15, Derivative Financial Instruments, in the accompanying notes to the unaudited interim consolidated financial
statements.

The table below presents the notional amounts (at the contract exchange rates), the weighted-average contractual foreign currency exchange
rates and the estimated fair value of our contracts outstanding as of July 3, 2009 and October 3, 2008.



|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|----------------------------------------- |  | ---------------------- | ------ | ------------ | --------------- | -------------------------------- | - | --- | ------------- |  | ------------ | ------ | -------------------------------- | -------- |  | - | ----- | -
|                                          |  | July 3, 2009           |        |              | October 3, 2008 |                                 
|                                          |  | NotionalValue          |        | ContractRate |                 | EstimatedFair Value -Gain (Loss) |   |     | NotionalValue |  | ContractRate |        | EstimatedFair Value -Gain (Loss) |         
|                                          |  | (Dollars in thousands) |       
|Foreign currency purchase contracts:      |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|Singapore Dollar                          |  | $                      | 391    |              | 1.45            |                                  | $ |    |               |  | $            | 3,573  |                                  | 1.42     |  | $ | (54   | )
|Korean Won                                |  |                        |       |              |                |                                  |   |    |               |  |              | 2,750  |                                  | 1,129.65 |  |   | (215  | )
|Japanese Yen                              |  |                        |       |              |                |                                  |   |    |               |  |              | 2,808  |                                  | 105.44   |  |   | (7    | )
|Euro                                      |  |                        | 2,141  |              | 0.71            |                                  |   | (6  | )             |  |              | 2,342  |                                  | 0.71     |  |   | (31   | )
|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|                                          |  |                        |        |              |                 |                                 
|Total foreign currency purchase contracts |  | $                      | 2,532  |              |                 |                                  | $ | (6  | )             |  | $            | 11,473 |                                  |          |  | $ | (307  | )
|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|Foreign currency sell contracts:          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|Japanese Yen                              |  | $                      | 19,360 |              | 96.43           |                                  | $ | 43  |               |  | $            | 38,477 |                                  | 106.11   |  | $ | (434  | )
|Korean Won                                |  |                        | 7,814  |              | 1,254.50        |                                  |   | 85  |               |  |              | 13,660 |                                  | 1,084.26 |  |   | 1,574 |  
|Israeli Shekel                            |  |                        | 1,243  |              | 3.95            |                                  |   | (20 | )             |  |              | 1,088  |                                  | 3.60     |  |   | (35   | )
|New Taiwan Dollar                         |  |                        | 997    |              | 32.73           |                                  |   | 2   |               |  |              | 1,009  |                                  | 32.02    |  |   | 5     |  
|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|                                          |  |                        |        |              |                 |                                 
|Total foreign currency sell contracts     |  | $                      | 29,414 |              |                 |                                  | $ | 110 |               |  | $            | 54,234 |                                  |          |  | $ | 1,110 |  
|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  
|                                          |  |                        |        |              |                 |                                 
|Total contracts                           |  | $                      | 31,946 |              |                 |                                  | $ | 104 |               |  | $            | 65,707 |                                  |          |  | $ | 803   |  
|                                          |  |                        |        |              |                 |                                  |   |     |               |  |              |        |                                  |          |  |   |       |  

Interest Rate Risk

Although payments under certain of our overseas borrowing facilities are tied to market indices, we are not exposed to material interest rate risk from these borrowing facilities. We have no material cash flow exposure due to rate changes
for cash equivalents and short-term investments. We maintain investments primarily in U.S. Treasury, government agency and investment-grade corporate and municipal securities, as well as short-term time deposits and money market funds with
investment grade financial institutions. Cash equivalents at July 3, 2009 and October 3, 2008 were $150.9 million and $110.2 million, respectively. At July 3, 2009 and October 3, 2008, our short-term investments were $53.8
million and $69.0 million, respectively, and consisted primarily of corporate bonds, certificates of deposit and government agency and U.S. Treasury securities with ratings of AA or better. At July 3, 2009 and October 3, 2008, our
long-term investments were $61.7 million and $68.5 million, respectively, and consisted primarily of U.S. Treasury, government agency, and corporate bonds with ratings of AA or better.



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Commodity Price Risk

We are not exposed to material commodity price risk.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The management of Varian Semiconductor, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the disclosure controls and procedures of Varian Semiconductor as of July 3, 2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of Varian Semiconductors disclosure controls and procedures as of July 3, 2009, the Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, Varian Semiconductors disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No change in Varian Semiconductors internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 3, 2009 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Information required by this Item is provided in
Note 14. Commitments, Contingencies and Guarantees to the unaudited interim consolidated financial statements under Part I, Item 1 and is incorporated herein by reference.



|ITEM 1A. | Risk Factors
|-------- | ------------

You should carefully consider the following risk
factors, in addition to other information included in this quarterly report on Form 10-Q and in other documents we file with the SEC, in evaluating Varian Semiconductor and our business. If any of the following risks occur, our business, financial
condition and operating results could be materially adversely affected. The following risk factors include any material changes to and restate and supersede the risk factors previously disclosed in Part I, Item 1A. Risk Factors of
our Annual Report on Form 10-K for the year ended October 3, 2008.

Recent deterioration in the global economy and credit markets may continue to
adversely affect our future results of operations.

Our operations may continue to be adversely affected by the recent deterioration in the global
economy causing our customers to delay or cease spending on our products. The recent tightening of the credit markets may continue to negatively impact our operations by affecting the solvency of our customers and key suppliers and the ability of
our customers to obtain credit to finance purchases of our products. If the instability in the global economy and credit markets continues, our financial condition and results of operations could continue to be adversely impacted.

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

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

We face intense competition in the semiconductor equipment industry.

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

We derive a substantial portion of our revenues from a small number of customers, and our business may be harmed by the loss of any one significant customer.

From time to time within the same accounting period, we have sold significant percentages of our systems to our major customers, some of which include Chartered, Elpida,
Hynix, Hynix-Numonyx, IBM, Inotera, Intel, Micron, Qimonda, Rexchip, Samsung, Tech Semi, TSMC, UMC and Winbond. During some quarters, some of these customers have individually accounted for more than 10% of our total revenue. We expect that sales of
our products to relatively few customers will continue to account for a high percentage of our revenue in the foreseeable future. Furthermore, we may have difficulty attracting additional large customers because our sales depend, in large part, upon
the decision of a prospective customer to increase manufacturing capacity in an existing fabrication facility or to transfer a manufacturing process to a new fabrication facility, both of which typically involve a significant capital commitment.
Once a semiconductor manufacturer has selected a particular suppliers capital equipment, the manufacturer generally relies upon that equipment for the specific production line application. Consequently, we may experience difficulty in selling
to a prospective customer if that customer initially selects a competitors capital equipment.



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Our quarterly results of operations are likely to fluctuate, and as a result, we may fail to meet the expectations of
our investors and securities analysts, which may cause the price of our common stock to decline.

We have experienced and expect to continue to
experience significant fluctuations in our quarterly financial results. From time to time, customers may accelerate, postpone or cancel shipments, or production difficulties may delay shipments. A cancellation, delay in shipment or delay in customer
acceptance of the product upon installation in any quarter may cause revenue in such quarter to fall significantly below expectations, which could cause the market price of our common stock to decline. Our financial results also fluctuate based on
gross profit realized on sales. Gross profit as a percentage of revenue may vary based on a variety of factors, including the mix and average selling prices of products sold, costs to manufacture and customize systems and inventory management. In
addition, a number of other factors may impact our quarterly financial results, including, but not limited to the following:



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



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



| |  |  | the extent that customers use our products and services in their business;
| | - |  | --------------------------------------------------------------------------



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



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



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



| |  |  | a technical change that we are unable to address with our products;
| | - |  | -------------------------------------------------------------------



| |  |  | a failure to achieve continued market acceptance of our key products;
| | - |  | ---------------------------------------------------------------------



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



| |  |  | introduction of new products by our competitors;
| | - |  | ------------------------------------------------



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



| |  |  | legal or technical challenges to our products and technology;
| | - |  | -------------------------------------------------------------



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



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



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

Our
operating expenses also fluctuate on a quarterly basis. A high percentage of our expenses are relatively fixed, thus, even a minimal number of cancelled, postponed or delayed shipments could have a significant adverse impact on financial results. In
addition, we may continue to heavily invest in areas such as research and development, despite lower revenue levels. As such, financial results could be adversely impacted.

It is difficult for us to predict the quarter in which we will be recognizing revenue from large product orders.

We
customarily sell a relatively small number of systems within any period. Consequently, our revenue and financial results could be negatively impacted for a particular quarter if anticipated orders from even a few customers are not received in time
to permit shipment and/or there are delays in customer acceptance of the product upon installation or future obligations included in the contract do not permit revenue to be recognized on current tool sales under generally accepted accounting
principles (GAAP). Generally, we recognize all or a portion of the revenue from a product upon shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists, fees are contractually fixed or
determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance. Please refer to the full revenue recognition policy in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Significant Judgments and Accounting Estimates section of our most recent Annual Report on



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Form 10-K. As a result, it is often difficult to determine the timing of product revenue recognition. In addition, our product order backlog at the beginning
of each quarter may not include all systems needed to achieve expected revenues for that quarter. Because we may build systems according to forecast, the absence of a significant backlog for an extended period of time could adversely affect
financial results.

Our future business depends, in part, on our ability to successfully introduce and manage the transition to new products, and we may
not succeed in accomplishing these goals.

We believe that our future success will depend on our ability to develop, manufacture and successfully
introduce new systems and product lines with improved capabilities and to continue enhancing existing products; in particular, products that respond to the trend toward single wafer processing and 300mm wafer processing at more advanced nodes. We
derive virtually all of our revenue from sales and servicing of systems and related products and services. We must accurately forecast the demand for new products while managing the transition from older products. In addition, we may be unable to
complete the development or meet the technical specifications of new systems or enhancements or to manufacture and ship these systems or enhancements in volume and on time, which may harm our reputation and business. If any of our new products have
reliability or quality problems, we may incur additional warranty and service expenses, experience a decline in product orders or incur higher manufacturing costs to correct such problems, all of which could adversely affect financial results.

We are subject to the risks of operating internationally and we derive a substantial portion of our revenues from outside the U.S.

International revenues account for a substantial portion of our revenue. Because we rely on sales to customers in Asia Pacific for a significant portion of our revenue,
our business is very likely to be adversely impacted by economic downturns and instability in that region. Our business in Asia Pacific is affected by demand in each country. In addition, international sales are subject to risks, including, but not
limited to:



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



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



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



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



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



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



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

If we
are unable to protect our proprietary rights adequately, we may lose our ability to compete effectively in the semiconductor equipment industry.

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



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



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



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



| |  |  | that the rights granted under our patents will provide us with competitive advantages.
| | - |  | --------------------------------------------------------------------------------------

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

In addition, we maintain and enforce our trademarks to increase customer recognition of our products. If our trademarks are used by
unauthorized third parties, our business may be harmed. We also rely on contractual restrictions on disclosure, copying and



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transferring title, including confidentiality agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties to
protect our proprietary rights. If these contractual agreements are breached, we may not have adequate remedies for any such breaches. We also cannot provide assurance that our trade secrets will not otherwise become known to or be independently
developed by others.

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

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

We depend on limited groups of suppliers or single source suppliers, the loss of which could impair our ability to manufacture products and systems.

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

Our outsource providers may fail to perform as we expect.

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

Our indemnification obligations under the Distribution Related Agreements could
be substantial, and we may not be fully indemnified in accordance with the Distribution Related Agreements for the expenses we incur.

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

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

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

VAI has been named by the U.S. Environmental Protection
Agency and third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA), at eight sites where VAI is alleged to have shipped manufacturing
waste for recycling or disposal. VAI is also in various stages of environmental investigation and/or remediation under the direction of, or in consultation with foreign, federal, state and local agencies at certain



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current or former VAI facilities. The Distribution Related Agreements provide that each of VMS, Varian Semiconductor and VI will indemnify the others for
one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon payment of these costs.

For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such
activities if undertaken. We have accrued estimated environmental investigation and remediation costs for these sites and facilities. As to other sites and facilities, sufficient knowledge has been gained to be able to reasonably estimate the scope
and costs of future environmental activities. As such, we have sufficient accruals to cover our portion of these costs.

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

Our ability to manage potential growth or decline, integration of potential acquisitions, and potential disposition of product lines and technologies creates risks.

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

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

We manufacture our products at one primary manufacturing facility and are thus subject to risk of disruption.

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

If we lose key employees or are unable to attract and retain key employees, we may be unable to pursue business opportunities.

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

We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.

Provisions of our certificate of incorporation and by-laws and of Delaware law could delay, defer or prevent an acquisition or change in control of Varian Semiconductor
or otherwise adversely affect the price of our common stock. For example, our Board of Directors is classified into three classes, and stockholders do not have the right to call special meetings of stockholders. Our certificate of incorporation also
permits our Board of Directors to issue shares of preferred stock without stockholder approval. In addition to delaying or preventing an acquisition, the issuance of a substantial number of preferred shares could adversely affect the price of the
common stock.



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We do not anticipate paying dividends on our common stock in the future.

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

Our financial results may be adversely impacted by higher than expected tax rates or exposure to additional income tax liabilities.

As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. We are
subject to income taxes in both the U.S. and various foreign jurisdictions and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate could be adversely affected by changes in the distribution of earnings
between countries with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect profitability. In particular, due to the global business realignment, the distribution of
worldwide earnings has changed and has caused the tax rate to become more sensitive to the geographic distribution of profits. We could face significant challenges regarding the geographic composition of these earnings from one or more jurisdictions
upon audit. Our effective tax rate has benefited from the research and development (R & D) tax credit which will expire on December 31, 2009. If the R & D credit is not extended, our tax liability may increase. The
carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. or carry-back losses to prior profitable periods. Our tax returns are currently under audit by the
Internal Revenue Service (IRS) and could be audited by other tax authorities. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products, services, and the use of
intangible assets. We could face significant future challenges on these transfer pricing issues in one or more jurisdictions. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. Although we believe that our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax
provisions and accruals.

The U.S. Government has recently announced tax proposals which, if enacted, would cause us to re-evaluate the structure of our
international operations. We may incur additional costs to modify our international structure and be required to pay additional taxes if all or any of the proposals become law. Until further details on the proposals are provided in actual
legislation, it is not possible to estimate the potential impact of these proposals on the results of our operations.



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

Not
applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not applicable.



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

Not
applicable.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

Not applicable.



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|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

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

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

Registrant



|                      |  |                                                                
|--------------------- |  | ---------------------------------------------------------------
|By:                   |  | /s/ ROBERT J. HALLIDAY                                         
|                      |  | Robert J. Halliday                                             
|                      |  | Executive Vice President, Chief Financial Officer and Treasurer
|                      |  | (Principal Financial Officer and Duly Authorized Officer)      
|                      | 
|Date: August 11, 2009 |  |                                                                



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