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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)



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



For the quarterly period ended July 2, 2004



OR



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



For the transition period from
 to



Commission File Number 000-25393



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VARIAN, INC.

(Exact Name of Registrant as Specified in its Charter)



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



(650)
213-8000

(Telephone Number)



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



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



The number of shares of the registrants common stock outstanding as of
August 6, 2004 was 34,703,652.



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##### Table of Contents

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JULY 2, 2004



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|PART I  |  | Financial Information                                                                 |  |     
|        |  |                                                                                      
|Item 1. |  | Financial Statements:                                                                 |  |     
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Earnings                                |  | 3   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Balance Sheet                                        |  | 4   
|        |  |                                                                                      
|        |  | Unaudited Condensed Consolidated Statement of Cash Flows                              |  | 5   
|        |  |                                                                                      
|        |  | Notes to the Unaudited Condensed Consolidated Financial Statements                    |  | 6   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 35  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 37  
|        |  |                                                                                      
|PART II |  | Other Information                                                                     |  |     
|        |  |                                                                                      
|Item 2. |  | Changes in Securities, Use of Proceeds, and Issuer Purchase of Equity Securities      |  | 38  
|        |  |                                                                                      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 38  



2



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##### Table of Contents

PART I

FINANCIAL INFORMATION



Item
1.    Financial Statements



VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|-------------------------------------- |  | -------------------- | ------- | - | ----------------- | - | ------- | ----------- |  | - | ------------ | - |  | - | ------- | -
|                                       |  | Fiscal Quarter Ended |         |   | Nine Months Ended |  
|                                       |  | July 2,2004          |         |   | June 27,2003      |   |         | July 2,2004 |  |   | June 27,2003 |  
|Sales                                  |  | $                    | 236,680 |   |                   | $ | 208,734 |             |  | $ | 681,918      |   |  | $ | 609,091 |  
|Cost of sales                          |  |                      | 147,381 |   |                   |   | 130,773 |             |  |   | 424,406      |   |  |   | 376,456 |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Gross profit                           |  |                      | 89,299  |   |                   |   | 77,961  |             |  |   | 257,512      |   |  |   | 232,635 |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Operating expenses                     |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Sales and marketing                    |  |                      | 39,591  |   |                   |   | 36,153  |             |  |   | 117,393      |   |  |   | 104,328 |  
|Research and development               |  |                      | 12,522  |   |                   |   | 12,066  |             |  |   | 36,326       |   |  |   | 34,028  |  
|General and administrative             |  |                      | 13,692  |   |                   |   | 13,037  |             |  |   | 36,939       |   |  |   | 36,051  |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Total operating expenses               |  |                      | 65,805  |   |                   |   | 61,256  |             |  |   | 190,658      |   |  |   | 174,407 |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|                                       |  |                      |         |  
|Operating earnings                     |  |                      | 23,494  |   |                   |   | 16,705  |             |  |   | 66,854       |   |  |   | 58,228  |  
|                                       |  |                      |         |  
|Interest income (expense)              |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Interest income                        |  |                      | 747     |   |                   |   | 413     |             |  |   | 2,115        |   |  |   | 1,057   |  
|Interest expense                       |  |                      | (601    | ) |                   |   | (624    | )           |  |   | (1,817       | ) |  |   | (1,888  | )
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Total interest income (expense), net   |  |                      | 146     |   |                   |   | (211    | )           |  |   | 298          |   |  |   | (831    | )
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Earnings before income taxes           |  |                      | 23,640  |   |                   |   | 16,494  |             |  |   | 67,152       |   |  |   | 57,397  |  
|Income tax expense                     |  |                      | 8,274   |   |                   |   | 5,773   |             |  |   | 23,503       |   |  |   | 20,089  |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Net earnings                           |  | $                    | 15,366  |   |                   | $ | 10,721  |             |  | $ | 43,649       |   |  | $ | 37,308  |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Net earnings per share:                |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Basic                                  |  | $                    | 0.44    |   |                   | $ | 0.32    |             |  | $ | 1.26         |   |  | $ | 1.10    |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Diluted                                |  | $                    | 0.43    |   |                   | $ | 0.31    |             |  | $ | 1.22         |   |  | $ | 1.07    |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Shares used in per share calculations: |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Basic                                  |  |                      | 34,675  |   |                   |   | 33,886  |             |  |   | 34,587       |   |  |   | 33,876  |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  
|Diluted                                |  |                      | 35,794  |   |                   |   | 35,048  |             |  |   | 35,798       |   |  |   | 35,000  |  
|                                       |  |                      |         |   |                   |   |         |             |  |   |              |   |  |   |         |  



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                                  |  |             |         |                |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | -------------- | - | -------
|                                                                                                                                                  |  | July 2,2004 |         | October 3,2003
|ASSETS                                                                                                                                            |  |             |         |                |   |        
|                                                                                                                                                  |  |            
|Current assets                                                                                                                                    |  |             |         |                |   |        
|Cash and cash equivalents                                                                                                                         |  | $           | 175,895 |                | $ | 135,791
|Accounts receivable, net                                                                                                                          |  |             | 171,381 |                |   | 165,049
|Inventories                                                                                                                                       |  |             | 142,976 |                |   | 125,649
|Deferred taxes                                                                                                                                    |  |             | 28,565  |                |   | 26,464 
|Other current assets                                                                                                                              |  |             | 21,352  |                |   | 17,788 
|                                                                                                                                                  |  |             |         |                |   |        
|Total current assets                                                                                                                              |  |             | 540,169 |                |   | 470,741
|Property, plant, and equipment, net                                                                                                               |  |             | 120,840 |                |   | 120,088
|Goodwill                                                                                                                                          |  |             | 127,487 |                |   | 126,411
|Intangible assets, net                                                                                                                            |  |             | 15,043  |                |   | 16,762 
|Other assets                                                                                                                                      |  |             | 4,020   |                |   | 3,050  
|                                                                                                                                                  |  |             |         |                |   |        
|Total assets                                                                                                                                      |  | $           | 807,559 |                | $ | 737,052
|                                                                                                                                                  |  |             |         |                |   |        
|                                                                                                                                                  |  |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |             |         |                |   |        
|                                                                                                                                                  |  |            
|Current liabilities                                                                                                                               |  |             |         |                |   |        
|Notes payable                                                                                                                                     |  | $           | 1,823   |                | $ |       
|Current portion of long-term debt                                                                                                                 |  |             | 6,553   |                |   | 2,811  
|Accounts payable                                                                                                                                  |  |             | 72,728  |                |   | 61,209 
|Deferred profit                                                                                                                                   |  |             | 10,750  |                |   | 14,385 
|Accrued liabilities                                                                                                                               |  |             | 155,094 |                |   | 141,938
|                                                                                                                                                  |  |             |         |                |   |        
|Total current liabilities                                                                                                                         |  |             | 246,948 |                |   | 220,343
|Long-term debt                                                                                                                                    |  |             | 30,000  |                |   | 36,273 
|Deferred taxes                                                                                                                                    |  |             | 13,355  |                |   | 12,454 
|Other liabilities                                                                                                                                 |  |             | 10,444  |                |   | 10,413 
|                                                                                                                                                  |  |             |         |                |   |        
|Total liabilities                                                                                                                                 |  |             | 300,747 |                |   | 279,483
|                                                                                                                                                  |  |             |         |                |   |        
|                                                                                                                                                  |  |            
|Commitments and contingencies (Notes 9, 10, and 12)                                                                                               |  |             |         |                |   |        
|                                                                                                                                                  |  |            
|Stockholders equity                                                                                                                              |  |             |         |                |   |        
|Preferred stockpar value $0.01, authorized1,000 shares; issuednone                                                                             |  |             |        |                |   |       
|Common stockpar value $0.01, authorized99,000 shares; issued and outstanding34,846 shares at July 2, 2004 and 34,181 shares
at October 3, 2003 |  |             | 252,572 |                |   | 252,630
|Retained earnings                                                                                                                                 |  |             | 237,215 |                |   | 193,566
|Accumulated other comprehensive income                                                                                                            |  |             | 17,025  |                |   | 11,373 
|                                                                                                                                                  |  |             |         |                |   |        
|Total stockholders equity                                                                                                                        |  |             | 506,812 |                |   | 457,569
|                                                                                                                                                  |  |             |         |                |   |        
|Total liabilities and stockholders equity                                                                                                        |  | $           | 807,559 |                | $ | 737,052
|                                                                                                                                                  |  |             |         |                |   |        



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                    |  |                   |         |   |               |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                    |  | Nine Months Ended |        
|                                                                                    |  | July 2, 2004      |         |   | June 27, 2003 |  
|Cash flows from operating activities                                                |  |                   |         |   |               |   |         |  
|Net earnings                                                                        |  | $                 | 43,649  |   |               | $ | 37,308  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                   |         |   |               |   |         |  
|Depreciation and amortization                                                       |  |                   | 18,945  |   |               |   | 17,432  |  
|Loss (gain) on disposition of property, plant, and equipment                        |  |                   | 22      |   |               |   | (124    | )
|Tax benefit from stock option exercises                                             |  |                   | 3,716   |   |               |   | 1,352   |  
|Deferred taxes                                                                      |  |                   | (1,152  | ) |               |   | 2,865   |  
|Changes in assets and liabilities, excluding effects of acquisitions:               |  |                   |         |   |               |   |         |  
|Accounts receivable, net                                                            |  |                   | (3,107  | ) |               |   | 14,086  |  
|Inventories                                                                         |  |                   | (16,301 | ) |               |   | (7,855  | )
|Other current assets                                                                |  |                   | (2,703  | ) |               |   | 2,585   |  
|Other assets                                                                        |  |                   | (40     | ) |               |   | 254     |  
|Accounts payable                                                                    |  |                   | 11,230  |   |               |   | 5,318   |  
|Deferred profit                                                                     |  |                   | (3,637  | ) |               |   | (4,413  | )
|Accrued liabilities                                                                 |  |                   | 12,393  |   |               |   | 14,827  |  
|Other liabilities                                                                   |  |                   | (493    | ) |               |   | 576     |  
|                                                                                    |  |                   |         |   |               |   |         |  
|Net cash provided by operating activities                                           |  |                   | 62,522  |   |               |   | 84,211  |  
|                                                                                    |  |                   |         |   |               |   |         |  
|                                                                                    |  |                  
|Cash flows from investing activities                                                |  |                   |         |   |               |   |         |  
|Proceeds from sale of property, plant, and equipment                                |  |                   | 1,219   |   |               |   | 473     |  
|Purchase of property, plant, and equipment                                          |  |                   | (17,306 | ) |               |   | (15,561 | )
|Purchase of businesses, net of cash acquired                                        |  |                   | (1,070  | ) |               |   | (23,586 | )
|Private company equity investments                                                  |  |                   | (1,318  | ) |               |   |        |  
|                                                                                    |  |                   |         |   |               |   |         |  
|Net cash used in investing activities                                               |  |                   | (18,475 | ) |               |   | (38,674 | )
|                                                                                    |  |                   |         |   |               |   |         |  
|                                                                                    |  |                  
|Cash flows from financing activities                                                |  |                   |         |   |               |   |         |  
|Repayment of debt                                                                   |  |                   | (2,815  | ) |               |   | (3,082  | )
|Issuance of debt                                                                    |  |                   | 2,037   |   |               |   | 3,198   |  
|Repurchase of common stock                                                          |  |                   | (23,895 | ) |               |   | (10,368 | )
|Issuance of common stock                                                            |  |                   | 20,121  |   |               |   | 5,600   |  
|Transfers to Varian Medical Systems, Inc.                                           |  |                   | (894    | ) |               |   | (739    | )
|                                                                                    |  |                   |         |   |               |   |         |  
|Net cash used in financing activities                                               |  |                   | (5,446  | ) |               |   | (5,391  | )
|                                                                                    |  |                   |         |   |               |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                       |  |                   | 1,503   |   |               |   | 5,847   |  
|                                                                                    |  |                   |         |   |               |   |         |  
|Net increase in cash and cash equivalents                                           |  |                   | 40,104  |   |               |   | 45,993  |  
|Cash and cash equivalents at beginning of period                                    |  |                   | 135,791 |   |               |   | 65,145  |  
|                                                                                    |  |                   |         |   |               |   |         |  
|Cash and cash equivalents at end of period                                          |  | $                 | 175,895 |   |               | $ | 111,138 |  
|                                                                                    |  |                   |         |   |               |   |         |  
|                                                                                    |  |                  
|Supplemental cash flow information                                                  |  |                   |         |   |               |   |         |  
|Income taxes paid, net of refunds received                                          |  | $                 | 10,679  |   |               | $ | 7,336   |  
|                                                                                    |  |                   |         |   |               |   |         |  
|Interest paid                                                                       |  | $                 | 1,768   |   |               | $ | 1,892   |  
|                                                                                    |  |                   |         |   |               |   |         |  



See accompanying Notes
to the Unaudited Condensed Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1.    Unaudited Interim Condensed Consolidated Financial Statements



These unaudited interim condensed consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the Company)
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The October 3, 2003 balance sheet data was derived from audited financial statements, but does not include
all disclosures required in audited financial statements by GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended October 3, 2003 filed with the SEC. In the opinion of the Companys management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter and nine months ended July 2, 2004 are not necessarily indicative of the results to be expected for a full year or for any
other periods.



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



Note 2.    Description of Business and Basis of Presentation



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



Note
3.    Summary of Significant Accounting Policies



Fiscal Periods. The Companys fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2004 will comprise the 52-week period ending October 1, 2004, and
fiscal year 2003 was comprised of the 53-week period ended October 3, 2003. The fiscal quarters and nine-month periods ended July 2, 2004 and June 27, 2003 each comprised 13 weeks and 39 weeks, respectively.



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



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ----------------- | - | ------ | ------------ |  | - | ------------- | - |  | - | ------ | -
|                                                                                                                                            |  | Fiscal Quarter Ended |        |   | Nine Months Ended |  
|                                                                                                                                            |  | July 2, 2004         |        |   | June 27, 2003     |   |        | July 2, 2004 |  |   | June 27, 2003 |  
|(in thousands, except per share amounts)                                                                                                    |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Net earnings:                                                                                                                               |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|As reported                                                                                                                                 |  | $                    | 15,366 |   |                   | $ | 10,721 |              |  | $ | 43,649        |   |  | $ | 37,308 |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                      | (1,493 | ) |                   |   | (1,915 | )            |  |   | (4,566        | ) |  |   | (5,820 | )
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Pro forma                                                                                                                                   |  | $                    | 13,873 |   |                   | $ | 8,806  |              |  | $ | 39,083        |   |  | $ | 31,488 |  
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Net earnings per share:                                                                                                                     |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Basic  as reported                                                                                                                         |  | $                    | 0.44   |   |                   | $ | 0.32   |              |  | $ | 1.26          |   |  | $ | 1.10   |  
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Basic  pro forma                                                                                                                           |  | $                    | 0.40   |   |                   | $ | 0.26   |              |  | $ | 1.13          |   |  | $ | 0.93   |  
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Diluted  as reported                                                                                                                       |  | $                    | 0.43   |   |                   | $ | 0.31   |              |  | $ | 1.22          |   |  | $ | 1.07   |  
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  
|Diluted  pro forma                                                                                                                         |  | $                    | 0.39   |   |                   | $ | 0.25   |              |  | $ | 1.09          |   |  | $ | 0.90   |  
|                                                                                                                                            |  |                      |        |   |                   |   |        |              |  |   |               |   |  |   |        |  



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



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



|                                       |  |                      |        |                   |              |   |             |  |               |        |  |   |       
|-------------------------------------- |  | -------------------- | ------ | ----------------- | ------------ | - | ----------- |  | ------------- | ------ |  | - | ------
|                                       |  | Fiscal Quarter Ended |        | Nine Months Ended
|                                       |  | July 2,2004          |        |                   | June 27,2003 |   | July 2,2004 |  | June 27, 2003
|(in thousands)                         |  |                      |        |                   |              |   |             |  |               |        |  |   |       
|Net earnings                           |  | $                    | 15,366 |                   |              | $ | 10,721      |  | $             | 43,649 |  | $ | 37,308
|Other comprehensive income:            |  |                      |        |                   |              |   |             |  |               |        |  |   |       
|Currency translation adjustment        |  |                      | (7,500 | )                 |              |   | 15,031      |  |               | 5,652  |  |   | 26,311
|Cash flow hedge fair value adjustments |  |                      |       |                   |              |   | 134         |  |               |       |  |   | 231   
|                                       |  |                      |        |                   |              |   |             |  |               |        |  |   |       
|Total other comprehensive income       |  |                      | (7,500 | )                 |              |   | 15,165      |  |               | 5,652  |  |   | 26,542
|                                       |  |                      |        |                   |              |   |             |  |               |        |  |   |       
|Total comprehensive income             |  | $                    | 7,866  |                   |              | $ | 25,886      |  | $             | 49,301 |  | $ | 63,850
|                                       |  |                      |        |                   |              |   |             |  |               |        |  |   |       



Note
4.    Balance Sheet Detail



|                        |  |              |         |                 |   |        
|----------------------- |  | ------------ | ------- | --------------- | - | -------
|                        |  | July 2, 2004 |         | October 3, 2003
|(In thousands)          |  |              |         |                 |   |        
|Inventories             |  |              |         |                 |   |        
|Raw materials and parts |  | $            | 74,815  |                 | $ | 62,809 
|Work in process         |  |              | 14,800  |                 |   | 12,539 
|Finished goods          |  |              | 53,361  |                 |   | 50,301 
|                        |  |              |         |                 |   |        
|                        |  | $            | 142,976 |                 | $ | 125,649
|                        |  |              |         |                 |   |        



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 5.    Forward Exchange Contracts



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



From time to time, the Company also enters into
foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under SFAS 133. At July 2, 2004, there were no outstanding foreign exchange
forward contracts designated as cash flow hedges of forecasted transactions. During the nine months ended July 2, 2004, no foreign exchange gains or losses from hedge ineffectiveness were recognized.



The Companys foreign exchange forward contracts generally range from
one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of July 2, 2004 follows:



|                  |  |                    |        |                         |   |       
|----------------- |  | ------------------ | ------ | ----------------------- | - | ------
|                  |  | Notional ValueSold |        | NotionalValue Purchased
|(in thousands)    |  |                    |        |                         |   |       
|Euro              |  | $                  |       |                         | $ | 46,034
|Australian dollar |  |                    |       |                         |   | 14,370
|Japanese yen      |  |                    | 8,686  |                         |   |      
|British pound     |  |                    |       |                         |   | 4,878 
|Canadian dollar   |  |                    | 4,087  |                         |   |      
|Swedish krona     |  |                    | 1,124  |                         |   |      
|                  |  |                    |        |                         |   |       
|                  |  | $                  | 13,897 |                         | $ | 65,282
|                  |  |                    |        |                         |   |       



Note
6.    Goodwill and Other Intangible Assets



Changes in the carrying amount of goodwill for each of the Companys reporting segments in the first nine months of fiscal year 2004 were as follows:



|                                                 |  |                       |         |                    |   |                          |  |              |       |  |   |        
|------------------------------------------------ |  | --------------------- | ------- | ------------------ | - | ------------------------ |  | ------------ | ----- |  | - | -------
|                                                 |  | ScientificInstruments |         | VacuumTechnologies |   | ElectronicsManufacturing |  | TotalCompany
|(in thousands)                                   |  |                       |         |                    |   |                          |  |              |       |  |   |        
|Balance as of October 3, 2003                    |  | $                     | 123,343 |                    | $ | 966                      |  | $            | 2,102 |  | $ | 126,411
|Contingent payments on prior years acquisitions |  |                       | 1,064   |                    |   |                         |  |              |      |  |   | 1,064  
|Other adjustments                                |  |                       | 12      |                    |   |                         |  |              |      |  |   | 12     
|                                                 |  |                       |         |                    |   |                          |  |              |       |  |   |        
|Balance as of July 2, 2004                       |  | $                     | 124,419 |                    | $ | 966                      |  | $            | 2,102 |  | $ | 127,487
|                                                 |  |                       |         |                    |   |                          |  |              |       |  |   |        



As required by SFAS
142, Goodwill and Other Intangible Assets, the Company performs an annual goodwill impairment assessment during the second quarter of each fiscal year. In the fiscal quarters ended April 2, 2004 and March 28, 2003, the Company completed its
annual impairment tests and determined that there was no impairment of goodwill.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                            |  |                 |        |                         |   |        |     |  |   |       
|--------------------------- |  | --------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                            |  | July 2, 2004   
|                            |  | Gross           |        | AccumulatedAmortization |   |        | Net
|(in thousands)              |  |                 |        |                         |   |        |     |  |   |       
|Intangible assets           |  |                 |        |                         |   |        |     |  |   |       
|Existing technology         |  | $               | 6,972  |                         | $ | (2,744 | )   |  | $ | 4,228 
|Patents and core technology |  |                 | 4,572  |                         |   | (947   | )   |  |   | 3,625 
|Trade names and trademarks  |  |                 | 2,176  |                         |   | (588   | )   |  |   | 1,588 
|Customer lists              |  |                 | 5,905  |                         |   | (1,541 | )   |  |   | 4,364 
|Other                       |  |                 | 2,434  |                         |   | (1,196 | )   |  |   | 1,238 
|                            |  |                 |        |                         |   |        |     |  |   |       
|                            |  | $               | 22,059 |                         | $ | (7,016 | )   |  | $ | 15,043
|                            |  |                 |        |                         |   |        |     |  |   |       
|                            | 
|                            |  | October 3, 2003
|                            |  | Gross           |        | AccumulatedAmortization |   |        | Net
|(in thousands)              |  |                 |        |                         |   |        |     |  |   |       
|Intangible assets           |  |                 |        |                         |   |        |     |  |   |       
|Existing technology         |  | $               | 6,972  |                         | $ | (2,075 | )   |  | $ | 4,897 
|Patents and core technology |  |                 | 4,572  |                         |   | (632   | )   |  |   | 3,940 
|Trade names and trademarks  |  |                 | 2,176  |                         |   | (389   | )   |  |   | 1,787 
|Customer lists              |  |                 | 5,905  |                         |   | (861   | )   |  |   | 5,044 
|Other                       |  |                 | 2,023  |                         |   | (929   | )   |  |   | 1,094 
|                            |  |                 |        |                         |   |        |     |  |   |       
|                            |  | $               | 21,648 |                         | $ | (4,886 | )   |  | $ | 16,762
|                            |  |                 |        |                         |   |        |     |  |   |       



Amortization expense
relating to intangible assets was $0.7 million and $0.8 million during the fiscal quarters ended July 2, 2004 and June 27, 2003, respectively, and $2.1 million and $1.8 million during the nine months ended July 2, 2004 and June 27, 2003,
respectively. At July 2, 2004, estimated amortization expense for the remainder of fiscal 2004 and for each of the five succeeding fiscal years is as follows:



|                                    |  |                                |      
|----------------------------------- |  | ------------------------------ | -----
|                                    |  | Estimated Amortization Expense
|(in thousands)                      |  |                                |      
|Three months ending October 1, 2004 |  | $                              | 696  
|Fiscal year 2005                    |  | $                              | 2,791
|Fiscal year 2006                    |  | $                              | 2,444
|Fiscal year 2007                    |  | $                              | 2,361
|Fiscal year 2008                    |  | $                              | 2,357
|Fiscal year 2009                    |  | $                              | 1,567



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 7.    Restructuring Activities



During fiscal year 2003, the Company undertook certain restructuring actions
to improve efficiency and more closely align employee skill sets and other resources with the Companys evolving product mix as a result of the Companys continued emphasis on information rich detection. In addition, actions were
undertaken to create a more efficient consumable products operation. These actions primarily impact the Scientific Instruments segment and involve the termination of approximately 160 employees principally in the Companys sales and marketing,
administration, service, and manufacturing functions, the closure of three sales offices, and the consolidation of three consumable products factories into one in Southern California. Substantially all of these activities were completed during
fiscal year 2003 except for the termination of approximately 20 employees, which took place in the second and third quarters of fiscal year 2004, and the Southern California facility consolidation, which was initiated in the third quarter of fiscal
year 2003 and is currently expected to be completed in the fourth quarter of fiscal year 2004. Costs relating to restructuring activities recorded through the third quarter of fiscal year 2004 were included in general and administrative expenses.



The following tables set forth changes in the Companys
liability relating to the foregoing restructuring activities during the first, second and third quarters of fiscal years 2003 and 2004:



|                                               |  |                  |       |   |                    |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | ----- | - | ------------------ | - | ---- | ----- |  | - | ----- | -
|                                               |  | Fiscal Year 2003 |      
|                                               |  | Employee-Related |       |   | Facilities-Related |   |      | Total | 
|(in thousands)                                 |  |                  |       |   |                    |   |      |       |  |   |       |  
|Balance at September 27, 2002                  |  | $                |      |   |                    | $ | 392  |       |  | $ | 392   |  
|Charges to expense                             |  |                  | 1,482 |   |                    |   | 550  |       |  |   | 2,032 |  
|Cash payments                                  |  |                  | (772  | ) |                    |   | (27  | )     |  |   | (799  | )
|Foreign currency impacts and other adjustments |  |                  | (8    | ) |                    |   | (20  | )     |  |   | (28   | )
|                                               |  |                  |       |   |                    |   |      |       |  |   |       |  
|Balance at December 27, 2002                   |  |                  | 702   |   |                    |   | 895  |       |  |   | 1,597 |  
|Charges to expense                             |  |                  |      |   |                    |   |     |       |  |   |      |  
|Cash payments                                  |  |                  | (688  | ) |                    |   |     |       |  |   | (688  | )
|Foreign currency impacts and other adjustments |  |                  | 80    |   |                    |   | 15   |       |  |   | 95    |  
|                                               |  |                  |       |   |                    |   |      |       |  |   |       |  
|Balance at March 28, 2003                      |  |                  | 94    |   |                    |   | 910  |       |  |   | 1,004 |  
|Charges to expense                             |  |                  | 1,002 |   |                    |   | 101  |       |  |   | 1,103 |  
|Cash payments                                  |  |                  | (584  | ) |                    |   | (139 | )     |  |   | (723  | )
|Foreign currency impacts and other adjustments |  |                  | (16   | ) |                    |   | (96  | )     |  |   | (112  | )
|                                               |  |                  |       |   |                    |   |      |       |  |   |       |  
|Balance at June 27, 2003                       |  | $                | 496   |   |                    | $ | 776  |       |  | $ | 1,272 |  
|                                               |  |                  |       |   |                    |   |      |       |  |   |       |  



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



|                                               |  |                  |       |   |                    |   |       |       |  |   |       |  
|---------------------------------------------- |  | ---------------- | ----- | - | ------------------ | - | ----- | ----- |  | - | ----- | -
|                                               |  | Fiscal Year 2004 |      
|                                               |  | Employee-Related |       |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                  |       |   |                    |   |       |       |  |   |       |  
|Balance at October 3, 2003                     |  | $                | 1,172 |   |                    | $ | 1,197 |       |  | $ | 2,369 |  
|Charges to expense                             |  |                  | 83    |   |                    |   | 78    |       |  |   | 161   |  
|Cash payments                                  |  |                  | (805  | ) |                    |   | (127  | )     |  |   | (932  | )
|Foreign currency impacts and other adjustments |  |                  | 152   |   |                    |   | 34    |       |  |   | 186   |  
|                                               |  |                  |       |   |                    |   |       |       |  |   |       |  
|Balance at January 2, 2004                     |  |                  | 602   |   |                    |   | 1,182 |       |  |   | 1,784 |  
|Charges to expense                             |  |                  | 281   |   |                    |   | 116   |       |  |   | 397   |  
|Cash payments                                  |  |                  | (337  | ) |                    |   | (123  | )     |  |   | (460  | )
|Foreign currency impacts and other adjustments |  |                  | 4     |   |                    |   | 26    |       |  |   | 30    |  
|                                               |  |                  |       |   |                    |   |       |       |  |   |       |  
|Balance at April 2, 2004                       |  |                  | 550   |   |                    |   | 1,201 |       |  |   | 1,751 |  
|Charges to expense                             |  |                  | 163   |   |                    |   |      |       |  |   | 163   |  
|Cash payments                                  |  |                  | (327  | ) |                    |   | (82   | )     |  |   | (409  | )
|Foreign currency impacts and other adjustments |  |                  | (6    | ) |                    |   |      |       |  |   | (6    | )
|                                               |  |                  |       |   |                    |   |       |       |  |   |       |  
|Balance at July 2, 2004                        |  | $                | 380   |   |                    | $ | 1,119 |       |  | $ | 1,499 |  
|                                               |  |                  |       |   |                    |   |       |       |  |   |       |  



The Company expects to
settle substantially all employee-related balances by the end of fiscal year 2004. Facilities-related payments are expected to run through fiscal year 2010. The non-cash portion of restructuring costs recorded by the Company in connection with these
restructuring actions was not significant, either in the aggregate or for any single period.



In addition to the foregoing restructuring costs, the Company incurred approximately $1.5 million in other costs relating directly to the Southern California facility consolidation during the third quarter of fiscal
year 2004. These costs included approximately $1.0 million of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities, approximately $0.2 million in facility relocation costs, and approximately $0.3
million in employee retention and relocation costs.



The
Company currently anticipates that general and administrative expenses for the fourth quarter of fiscal year 2004 will include approximately $0.5 million in pretax restructuring costs and approximately $1.4 million in other related costs in
connection with the Southern California facility consolidation. Of the $1.4 million in other related costs, approximately $1.0 million represents anticipated non-cash charges for accelerated depreciation of assets to be disposed.



Note 8.    Net Earnings Per Share



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



For the fiscal quarters ended
July 2, 2004 and June 27, 2003, options to purchase approximately 43,000 and 701,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive. For the nine months ended July 2, 2004 and
June 27, 2003, options to purchase approximately 56,000 and 1,111,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



|                                            |  |                      |  |                   |  |               |  |               
|------------------------------------------- |  | -------------------- |  | ----------------- |  | ------------- |  | --------------
|                                            |  | Fiscal Quarter Ended |  | Nine Months Ended
|                                            |  | July 2,  2004        |  | June 27,  2003    |  | July 2,  2004 |  | June 27,  2003
|(in thousands)                              |  |                      |  |                   |  |               |  |               
|Weighted-average basic shares outstanding   |  | 34,675               |  | 33,886            |  | 34,587        |  | 33,876        
|Net effect of dilutive stock options        |  | 1,119                |  | 1,162             |  | 1,211         |  | 1,124         
|                                            |  |                      |  |                   |  |               |  |               
|Weighted-average diluted shares outstanding |  | 35,794               |  | 35,048            |  | 35,798        |  | 35,000        
|                                            |  |                      |  |                   |  |               |  |               



Note 9.    Debt
and Credit Facilities



Credit Facilities. During
fiscal year 2002, the Company established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of July 2, 2004. Borrowings under
this credit facility bear interest at rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings and require
the Company to maintain certain levels of financial performance. The Company was in compliance with all such covenants and requirements at July 2, 2004. During the second quarter of fiscal 2004, the Company determined that its current liquidity
position and the short remaining term of the credit facility no longer justified the cost of maintaining the facility. As a result, the facility was terminated in January 2004. Costs incurred in connection with the termination of this facility were
not significant and were expensed during the second quarter of fiscal year 2004.



During fiscal year 2003, the Company established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.7 million at July 2, 2004). The credit facility is available to the
Companys wholly owned Japanese subsidiary for working capital purposes. As of July 2, 2004, an aggregate of 200 million yen (approximately $1.8 million) was outstanding under this credit facility at an annual interest rate of 0.8%, and 100
million yen (approximately $0.9 million) was available for future borrowing. All borrowings outstanding under this credit facility are included in notes payable. This credit facility contains certain covenants that limit future borrowings from this
facility, with which the Company was in compliance at July 2, 2004.



In addition to these bank credit facilities, as of July 2, 2004, the Company and its subsidiaries had a total of $74.6 million in other uncommitted and unsecured credit facilities for working capital purposes with interest rates to be
established at the time of borrowing. No borrowings were outstanding under these credit facilities as of July 2, 2004. All of these credit facilities contain certain customary conditions and events of default, with which the Company was in
compliance at July 2, 2004. Of the $74.6 million in uncommitted and unsecured credit facilities, a total of $40.2 million was limited for use by, or in favor of, certain subsidiaries at July 2, 2004, and a total of $17.5 million of this $40.2
million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to the Companys subsidiaries by customers for
which separate liabilities were recorded in the unaudited condensed consolidated financial statements at July 2, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Long-term Debt. As of July 2, 2004, the Company had $32.5 million in term loans outstanding
compared to $35.0 million at October 3, 2003. As of both July 2, 2004 and October 3, 2003, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both July 2, 2004 and
October 3, 2003. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in compliance with all
restrictive covenants of the term loan agreements at July 2, 2004. The Company also had other long-term notes payable of $4.1 million as of July 2, 2004 with a weighted-average interest rate of 0.0% and $4.1 million as of October 3, 2003 with a
weighted-average interest rate of 0.1%.



The following table
summarizes future principal payments on borrowings under long-term debt outstanding as of July 2, 2004:



|                                           |  |                              |      |              |      |       |      |   |       |  |      |       |            |   |       |  |   |   |  |   |        |  |   |       
|------------------------------------------ |  | ---------------------------- | ---- | ------------ | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | - |  | - | ------ |  | - | ------
|                                           |  | ThreeMonthsEndingOct. 1,2004 |      | Fiscal Years |      | Total
|                                           |  |                              | 2005 |              | 2006 |       | 2007 |   | 2008  |  | 2009 |       | Thereafter |  
|(in thousands)                             |  |                              |      |              |      |       |      |   |       |  |      |       |            |   |       |  |   |   |  |   |        |  |   |       
|Long-term debt (including current portion) |  | $                            |     |              | $    | 6,553 |      | $ | 2,500 |  | $    | 2,500 |            | $ | 6,250 |  | $ |  |  | $ | 18,750 |  | $ | 36,553
|                                           |  |                              |      |              |      |       |      |   |       |  |      |       |            |   |       |  |   |   |  |   |        |  |   |       



Note
10.    Warranty and Indemnification Obligations



Product Warranties. The Companys products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time
the related sale is recognized. The amount of liability to be recorded is based on managements best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. Changes in the
Companys estimated liability for product warranty during the nine months ended July 2, 2004 and June 27, 2003 follow:



|                              |  |                   |        |   |               |   |        |  
|----------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                              |  | Nine Months Ended |       
|                              |  | July 2, 2004      |        |   | June 27, 2003 |  
|(in thousands)                |  |                   |        |   |               |   |        |  
|Beginning balance             |  | $                 | 10,261 |   |               | $ | 9,029  |  
|Charges to costs and expenses |  |                   | 5,649  |   |               |   | 4,283  |  
|Warranty expenditures         |  |                   | (5,312 | ) |               |   | (3,938 | )
|                              |  |                   |        |   |               |   |        |  
|Ending balance                |  | $                 | 10,598 |   |               | $ | 9,374  |  
|                              |  |                   |        |   |               |   |        |  



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



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



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



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



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



Note 11.    Stock Repurchase
Program



During fiscal year 2002, the Companys Board
of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until October 1, 2004. There were no shares repurchased under this authorization during the fiscal quarter ended July 2, 2004. During the nine months ended
July 2, 2004, the Company repurchased and retired 588,952 shares under this authorization at an aggregate cost of $23.9 million. As of July 2, 2004, the Company had remaining authorization for future repurchases of 7,897 shares.



On May 11, 2004, the Companys Board of Directors authorized the Company
to repurchase up to an additional 1,000,000 shares of its common stock until September 30, 2007. As of July 2, 2004, no shares had been repurchased under this authorization.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 12.    Contingencies



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



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



For certain of these sites and facilities, various
uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of July 2, 2004, it was nonetheless estimated that the Companys
share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.4 million to $2.3 million (without discounting to present value). The time frame over which these costs are expected to be
incurred varies with each site and facility, ranging up to approximately 30 years as of July 2, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range,
and the Company therefore had an accrual of $1.4 million as of July 2, 2004.



As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of July 2, 2004, it was estimated that
the Companys share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $5.7 million to $12.1 million (without discounting to present value). The time frame over which these
costs are expected to be incurred varies with each site and facility, ranging up to approximately 27 years as of July 2, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated
costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled
$7.2 million at July 2, 2004. The Company therefore had an accrual of $4.8 million as of July 2, 2004, which represents the best estimate of its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in
addition to the $1.4 million described in the preceding paragraph.



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



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



An insurance company has agreed to pay a portion of certain of VAIs (now VMS) future
environmental-related costs for which the Company has an indemnification obligation, and the Company therefore has a $1.1 million receivable in other assets as of July 2, 2004 for the Companys share of such recovery. The Company has not
reduced any environmental-related liability in anticipation of recoveries from third parties.



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



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



Note
13.    Defined Benefit Retirement Plans



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



|                                                                  |  |                      |        |   |                   |   |      |               |  |   |                |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------- | ------ | - | ----------------- | - | ---- | ------------- |  | - | -------------- | - |  | - | ------ | -
|                                                                  |  | Fiscal Quarter Ended |        |   | Nine Months Ended |  
|                                                                  |  | July 2,  2004        |        |   | June 27,  2003    |   |      | July 2,  2004 |  |   | June 27,  2003 |  
|(in thousands)                                                    |  |                      |        |   |                   |   |      |               |  |   |                |   |  |   |        |  
|Service cost                                                      |  | $                    | 725    |   |                   | $ | 536  |               |  | $ | 2,174          |   |  | $ | 1,609  |  
|Interest cost                                                     |  |                      | 749    |   |                   |   | 642  |               |  |   | 2,248          |   |  |   | 1,927  |  
|Expected return on plan assets                                    |  |                      | (711   | ) |                   |   | (694 | )             |  |   | (2,134         | ) |  |   | (2,081 | )
|Amortization of prior service cost and actuarial gains and losses |  |                      | 157    |   |                   |   | 91   |               |  |   | 470            |   |  |   | 274    |  
|Curtailment gain                                                  |  |                      | (1,284 | ) |                   |   |     |               |  |   | (1,284         | ) |  |   |       |  
|                                                                  |  |                      |        |   |                   |   |      |               |  |   |                |   |  |   |        |  
|Net periodic pension (income) cost                                |  | $                    | (364   | ) |                   | $ | 575  |               |  | $ | 1,474          |   |  | $ | 1,729  |  
|                                                                  |  |                      |        |   |                   |   |      |               |  |   |                |   |  |   |        |  



During the third
quarter of fiscal year 2004, the Company ceased making contributions to its existing defined benefit retirement plan in Australia and commenced contributions to a new defined contribution plan for the benefit of its participants. In connection with
this action, the Company recorded a curtailment gain of approximately $1.3 million in the fiscal quarter ended July 2, 2004. The Company currently anticipates that the Australian defined benefit retirement plan will be wound up in the fourth quarter
of fiscal year 2004, resulting in a corresponding settlement loss of between $0 and $2.0 million.



Employer Contributions. During the nine months ended July 2, 2004, the Company made contributions totaling $1.5 million to its defined benefit
retirement plans. The Company currently anticipates contributing an additional $0.5 million to these plans in the fourth quarter of fiscal year 2004.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 14.    Industry Segments



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



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



|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|------------------------- |  | -------------------- | ----- | -------------------- | - | ----------- |  | - | ------------ | - |  | - | ---- | -
|                          |  | Sales                |       | Pretax Earnings      |  
|                          |  | Fiscal Quarter Ended |       | Fiscal Quarter Ended |  
|                          |  | July 2,2004          |       | June 27,2003         |   | July 2,2004 |  |   | June 27,2003 |  
|(in millions)             |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Scientific Instruments    |  | $                    | 149.2 |                      | $ | 135.3       |  | $ | 13.4         |   |  | $ | 11.5 |  
|Vacuum Technologies       |  |                      | 34.8  |                      |   | 28.5        |  |   | 5.3          |   |  |   | 2.8  |  
|Electronics Manufacturing |  |                      | 52.7  |                      |   | 44.9        |  |   | 6.4          |   |  |   | 5.5  |  
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Total industry segments   |  |                      | 236.7 |                      |   | 208.7       |  |   | 25.1         |   |  |   | 19.8 |  
|General corporate         |  |                      |      |                      |   |            |  |   | (1.6         | ) |  |   | (3.1 | )
|Interest income           |  |                      |      |                      |   |            |  |   | 0.7          |   |  |   | 0.4  |  
|Interest expense          |  |                      |      |                      |   |            |  |   | (0.6         | ) |  |   | (0.6 | )
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Total                     |  | $                    | 236.7 |                      | $ | 208.7       |  | $ | 23.6         |   |  | $ | 16.5 |  
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|                          |  |                     
|                          |  | Sales                |       | Pretax Earnings      |  
|                          |  | Nine Months Ended    |       | Nine Months Ended    |  
|                          |  | July 2,2004          |       | June 27,2003         |   | July 2,2004 |  |   | June 27,2003 |  
|(in millions)             |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Scientific Instruments    |  | $                    | 433.3 |                      | $ | 395.2       |  | $ | 40.3         |   |  | $ | 39.1 |  
|Vacuum Technologies       |  |                      | 104.5 |                      |   | 86.1        |  |   | 16.9         |   |  |   | 10.6 |  
|Electronics Manufacturing |  |                      | 144.1 |                      |   | 127.8       |  |   | 15.8         |   |  |   | 15.2 |  
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Total industry segments   |  |                      | 681.9 |                      |   | 609.1       |  |   | 73.0         |   |  |   | 64.9 |  
|General corporate         |  |                      |      |                      |   |            |  |   | (6.1         | ) |  |   | (6.7 | )
|Interest income           |  |                      |      |                      |   |            |  |   | 2.1          |   |  |   | 1.1  |  
|Interest expense          |  |                      |      |                      |   |            |  |   | (1.8         | ) |  |   | (1.9 | )
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  
|Total                     |  | $                    | 681.9 |                      | $ | 609.1       |  | $ | 67.2         |   |  | $ | 57.4 |  
|                          |  |                      |       |                      |   |             |  |   |              |   |  |   |      |  



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



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



Note 15.    Recent Accounting Pronouncements



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



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



In May 2004, the FASB issued FASB Staff Position No. (FSP) 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003(the Act). The Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit
plans that provide a benefit that is at least actuarially equivalent to the Medicare Part D benefit. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004 and supersedes FSP 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was issued in January 2004. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy provided for under the Act
and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. The Company is currently
evaluating the impact, if any, of the adoption of FSP 106-2 on its financial condition or results of operations and expects to complete this evaluation during the fourth quarter of fiscal year 2004. Therefore, the accompanying unaudited condensed
consolidated financial statements do not reflect any possible effects of the adoption of FSP 106-2.



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##### Table of Contents

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



Caution Regarding Forward-Looking Statements



Throughout this Report, and particularly in this Item 2Managements Discussion and Analysis of Financial Condition and Results of
Operations, there are forward-looking statements that are based upon our current expectations, estimates, and projections, and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some
cases, you can identify these statements by words such as may, might, will, should, expects, plans, anticipates, believes, estimates,
predicts, potential, or continue, and other similar terms.



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



Other risks and uncertainties include, but are not limited to, the following:
whether we will succeed in new product development, commercialization, performance, and acceptance, particularly in life science applications; whether we can achieve continued growth in sales in life science applications; risks arising from the
timing of shipments, installations, and the recognition of revenues on leading-edge nuclear magnetic resonance (NMR) systems; whether we can increase profit margins on newer leading-edge NMR products; the impact of shifting product mix
on margins in the Scientific Instruments segment; whether we will see continued demand for vacuum products and for electronics manufacturing services; competitive products and pricing; economic conditions in our product and geographic markets;
whether we will see continued and timely delivery of key raw materials and components by suppliers, including magnets for our NMR systems; foreign currency fluctuations that could adversely impact revenue growth and earnings; whether we will see
sustained market investment in capital equipment; whether we will see reduced demand from customers that operate in cyclical industries; the impact of delays in government funding for research; the actual cost of anticipated restructuring activities
and their impact on future costs; and other risks detailed from time to time in our filings with the Securities and Exchange Commission (the SEC). You should carefully consider those risks, in addition to the other information in this
Report and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new
information, future events, or otherwise.



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##### Table of Contents

Results of Operations



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



Segment Results



Our operations are grouped into three reportable business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The
following table presents comparisons of our sales and operating earnings for each of our segments and in total for the third quarters of fiscal years 2004 and 2003:



|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|------------------------------ |  | -------------------- | ----- | - | ------------------ | ---- | - | - | - | ----- | --------- |  | ---- | - |  | - | ---- |  | ----- | -
|                               |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |     
|                               |  | July 2, 2004         |       |   | June 27, 2003      |      |  
|                               |  | $                    |       |   | % ofSales          |      |   | $ |   |       | % ofSales |  |      | $ |  | % |     
|(dollars in millions)          |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Sales by Segment:              |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Scientific Instruments         |  | $                    | 149.2 |   |                    |      |   |   | $ | 135.3 |           |  |      |   |  | $ | 13.9 |  | 10.3  | %
|Vacuum Technologies            |  |                      | 34.8  |   |                    |      |   |   |   | 28.5  |           |  |      |   |  |   | 6.3  |  | 21.7  |  
|Electronics Manufacturing      |  |                      | 52.7  |   |                    |      |   |   |   | 44.9  |           |  |      |   |  |   | 7.8  |  | 17.5  |  
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Total company                  |  | $                    | 236.7 |   |                    |      |   |   | $ | 208.7 |           |  |      |   |  | $ | 28.0 |  | 13.4  | %
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Operating Earnings by Segment: |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Scientific Instruments         |  | $                    | 13.4  |   |                    | 8.9  | % |   | $ | 11.5  |           |  | 8.5  | % |  | $ | 1.8  |  | 16.0  | %
|Vacuum Technologies            |  |                      | 5.3   |   |                    | 15.3 |   |   |   | 2.8   |           |  | 9.8  |   |  |   | 2.5  |  | 90.0  |  
|Electronics Manufacturing      |  |                      | 6.4   |   |                    | 12.2 |   |   |   | 5.5   |           |  | 12.1 |   |  |   | 1.0  |  | 18.2  |  
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Total segments                 |  |                      | 25.1  |   |                    | 10.6 |   |   |   | 19.8  |           |  | 9.5  |   |  |   | 5.3  |  | 21.3  |  
|General corporate              |  |                      | (1.6  | ) |                    | (0.7 | ) |   |   | (3.1  | )         |  | (1.5 | ) |  |   | 1.5  |  | (47.7 | )
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  
|Total company                  |  | $                    | 23.5  |   |                    | 9.9  | % |   | $ | 16.7  |           |  | 8.0  | % |  | $ | 6.8  |  | 40.7  | %
|                               |  |                      |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |       |  



Scientific
Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe. Increased customer demand for our information rich detection products, such as mass spectrometers, drove higher sales
volume in both life science and industrial applications.



Scientific Instruments operating earnings for the third quarters of fiscal years 2004 and 2003 reflect pretax restructuring and other related costs of $1.6 million and $0.6 million, respectively (see Restructuring Activities below).
Excluding the impact of these restructuring and other related costs, the increase in operating earnings as a percentage of sales resulted primarily from higher gross profit margins, which were positively affected by a mix shift toward higher margin
mass spectrometry products and lower costs associated with newer leading-edge products which had an adverse impact in the third quarter of fiscal year 2003. Despite the increase in the third quarter of fiscal year 2004 due to the foregoing factors,
Scientific Instruments gross profit margins continued to be adversely effected by a mix shift toward lower margin high-field NMR systems and, to a lesser extent, leading-edge cold probes for NMR, and away from higher margin low-field NMR systems.



Vacuum Technologies. The increase in Vacuum
Technologies sales resulted primarily from an increase in the volume of products sold into both life science and industrial uses. Sales were particularly strong into a broad range of industrial applications. In life science applications, sales
growth was driven by increased demand for turbomolecular pumps for use in OEM mass spectrometers. The increase in Vacuum Technologies operating earnings as a percentage of sales was primarily attributable to higher gross profit margins due to sales
volume leverage and approximately $0.5 million of pretax restructuring costs that were incurred in the third quarter of fiscal year 2003.



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##### Table of Contents

Electronics Manufacturing. The increase in Electronics Manufacturing sales was primarily due to
higher volume from medical equipment and industrial customers. The increase in Electronics Manufacturing operating earnings as a percentage of sales was primarily due to approximately $0.5 million in pretax transition costs incurred in the third
quarter of fiscal year 2003 in connection with an acquisition completed in that period. Excluding the impact of these acquisition transition costs, the decrease in operating earnings as a percentage of sales was attributable to higher start-up costs
relating to new business from existing customers in the third quarter of fiscal year 2004.



Consolidated Results



The following table presents comparisons of our sales and other selected consolidated financial results for the third quarters of fiscal years 2004 and 2003:



|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|-------------------------------------------- |  | -------------------- | ----- | - | ------------------ | ----- | - | - | - | ----- | --------- |  | ----- | - |  | - | ---- | - |  | ---- | -
|                                             |  | Fiscal Quarter Ended |       |   | Increase(Decrease) |      
|                                             |  | July 2, 2004         |       |   | June 27, 2003      |       |  
|                                             |  | $                    |       |   | % ofSales          |       |   | $ |   |       | % ofSales |  |       | $ |  |   | %    |  
|(dollars in millions, except per share data) |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Sales                                        |  | $                    | 236.7 |   |                    | 100.0 | % |   | $ | 208.7 |           |  | 100.0 | % |  | $ | 27.9 |   |  | 13.3 | %
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Gross profit                                 |  | $                    | 89.3  |   |                    | 37.7  |   |   | $ | 78.0  |           |  | 37.3  |   |  | $ | 11.3 |   |  | 14.5 |  
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Operating expenses:                          |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Sales and marketing                          |  |                      | 39.6  |   |                    | 16.7  |   |   |   | 36.2  |           |  | 17.3  |   |  |   | 3.4  |   |  | 9.5  |  
|Research and development                     |  |                      | 12.5  |   |                    | 5.3   |   |   |   | 12.1  |           |  | 5.8   |   |  |   | 0.4  |   |  | 3.8  |  
|General and administrative                   |  |                      | 13.7  |   |                    | 5.8   |   |   |   | 13.0  |           |  | 6.2   |   |  |   | 0.7  |   |  | 5.0  |  
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Total operating expenses                     |  |                      | 65.8  |   |                    | 27.8  |   |   |   | 61.3  |           |  | 29.3  |   |  |   | 4.5  |   |  | 7.4  |  
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Operating earnings                           |  |                      | 23.5  |   |                    | 9.9   |   |   |   | 16.7  |           |  | 8.0   |   |  |   | 6.8  |   |  | 40.6 |  
|Interest income                              |  |                      | 0.8   |   |                    | 0.3   |   |   |   | 0.4   |           |  | 0.2   |   |  |   | 0.3  |   |  | 80.9 |  
|Interest expense                             |  |                      | (0.6  | ) |                    | (0.2  | ) |   |   | (0.6  | )         |  | (0.3  | ) |  |   |     |   |  | (3.7 | )
|Income tax expense                           |  |                      | (8.3  | ) |                    | (3.5  | ) |   |   | (5.8  | )         |  | (2.8  | ) |  |   | (2.5 | ) |  | 43.3 |  
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|Net earnings                                 |  | $                    | 15.4  |   |                    | 6.5   | % |   | $ | 10.7  |           |  | 5.1   | % |  | $ | 4.6  |   |  | 43.3 | %
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  
|                                             |  |                      |       |   |                    |      
|Net earnings per diluted share               |  | $                    | 0.43  |   |                    |       |   |   | $ | 0.31  |           |  |       |   |  | $ | 0.12 |   |  |      |  
|                                             |  |                      |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |      |  



Sales. As shown
above, sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 10.3%, 21.7%, and 17.5%, respectively, compared to the prior-year quarter. The improvement in sales was primarily attributable to
general economic improvement and continued acceptance of our newer products.



Geographically, sales in North America of $131.9 million, Europe of $72.2 million, and the rest of the world of $32.6 million in the third quarter of fiscal year 2004 represented increases (decreases) of 11.0%, 27.1%,
and (1.7%), respectively, compared to the third quarter of fiscal year 2003. All three segments experienced an increase in sales across all major geographic regions that they served except for Scientific Instruments sales into the Pacific Rim, which
decreased. The decrease in sales in the Pacific Rim in the third quarter of fiscal year 2004 was primarily due to lower sales of high-field NMR systems into that region as compared to the third quarter of fiscal year 2003. This decrease was
partially offset by continued growth in sales of other Scientific Instruments and Vacuum Technologies products into the Pacific Rim and higher Scientific Instruments sales into Latin America. The increase in North America sales was due to higher
demand in all three of our segments. The increase in Europe was driven by improved Scientific Instruments and Vacuum Technologies sales volume; in part, this reflects the currency effect of the stronger Euro in the third quarter of fiscal year 2004.



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Gross Profit. The increase in gross profit percentage resulted from a mix shift toward higher
margin mass spectrometry products and application-based consumable products and lower costs associated with newer leading-edge products, which negatively impacted gross profit margins in the third quarter of fiscal year 2003. Higher sales volume
leverage in the Vacuum Technologies segment also contributed to the increase. Together, these factors increased the gross profit percentage by between one-half and one percent. The increase due to these factors was partially offset by lower gross
profit margins in the Electronics Manufacturing segment due primarily to higher start-up costs relating to new business from existing customers in the third quarter of fiscal year 2004.



Sales and Marketing. The decrease in sales and marketing expenses as a percentage of sales resulted primarily from
higher sales volume leverage in the third quarter of fiscal year 2004. The increase in sales and marketing expenses in absolute dollars was due to higher order-based commissions and the weaker U.S. dollar, which increased costs for most of our
non-U.S. operations.



Research and Development. Research
and development expenses were 5.3% and 5.8% of sales in the third quarters of fiscal years 2004 and 2003, respectively. As a percentage of sales, the higher research and development spending in the third quarter of fiscal year 2003 was due primarily
to the timing of new product introductions.



General and
Administrative. General and administrative expenses for the third quarter of fiscal year 2004 included approximately $1.6 million in pretax restructuring and other related costs and a pretax gain of approximately $1.3 million relating to the
curtailment of a defined benefit pension plan in Australia. In comparison, general and administrative expenses for the third quarter of fiscal year 2003 included approximately $1.1 million in pretax restructuring costs. Excluding the impact of these
items, general and administrative expenses were relatively flat as a percentage of sales in the third quarters of fiscal years 2004 and 2003.



Restructuring Activities. During fiscal year 2003, we undertook certain restructuring actions to improve efficiency and more closely align employee
skill sets and other resources with our evolving product mix as a result of our continued emphasis on information rich detection. In addition, actions were undertaken to create a more efficient consumable products operation. These actions primarily
impacted the Scientific Instruments segment and involved the termination of approximately 160 employees principally in our sales and marketing, administration, service, and manufacturing functions, the closure of three sales offices, and initial
steps to consolidate three consumable products factories into one in Southern California. Substantially all of these activities were completed during fiscal year 2003 except for the termination of approximately 20 employees, which took place in the
second and third quarters of fiscal year 2004, and the Southern California facility consolidation, which was initiated in the third quarter of fiscal year 2003 and is currently expected to be completed in the fourth quarter of fiscal year 2004.
Costs relating to restructuring activities recorded through the third quarter of fiscal year 2004 were included in general and administrative expenses.



The following tables set forth changes in the Companys liability relating to the foregoing restructuring activities during the third quarters of
fiscal years 2003 and 2004:



|                                               |  |                                    |       |   |                     |   |      |       |  |   |       |  
|---------------------------------------------- |  | ---------------------------------- | ----- | - | ------------------- | - | ---- | ----- |  | - | ----- | -
|                                               |  | Fiscal Quarter Ended June 27, 2003 |      
|                                               |  | Employee-Related                   |       |   | Facilities- Related |   |      | Total | 
|(in thousands)                                 |  |                                    |       |   |                     |   |      |       |  |   |       |  
|Balance at March 28, 2003                      |  | $                                  | 94    |   |                     | $ | 910  |       |  | $ | 1,004 |  
|Charges to expense                             |  |                                    | 1,002 |   |                     |   | 101  |       |  |   | 1,103 |  
|Cash payments                                  |  |                                    | (584  | ) |                     |   | (139 | )     |  |   | (723  | )
|Foreign currency impacts and other adjustments |  |                                    | (16   | ) |                     |   | (96  | )     |  |   | (112  | )
|                                               |  |                                    |       |   |                     |   |      |       |  |   |       |  
|Balance at June 27, 2003                       |  | $                                  | 496   |   |                     | $ | 776  |       |  | $ | 1,272 |  
|                                               |  |                                    |       |   |                     |   |      |       |  |   |       |  



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|                                               |  |                                   |      |   |                     |   |       |       |  |   |       |  
|---------------------------------------------- |  | --------------------------------- | ---- | - | ------------------- | - | ----- | ----- |  | - | ----- | -
|                                               |  | Fiscal Quarter Ended July 2, 2004 |     
|                                               |  | Employee-Related                  |      |   | Facilities- Related |   |       | Total | 
|(in thousands)                                 |  |                                   |      |   |                     |   |       |       |  |   |       |  
|Balance at April 2, 2004                       |  | $                                 | 550  |   |                     | $ | 1,201 |       |  | $ | 1,751 |  
|Charges to expense                             |  |                                   | 163  |   |                     |   |      |       |  |   | 163   |  
|Cash payments                                  |  |                                   | (327 | ) |                     |   | (82   | )     |  |   | (409  | )
|Foreign currency impacts and other adjustments |  |                                   | (6   | ) |                     |   |      |       |  |   | (6    | )
|                                               |  |                                   |      |   |                     |   |       |       |  |   |       |  
|Balance at July 2, 2004                        |  | $                                 | 380  |   |                     | $ | 1,119 |       |  | $ | 1,499 |  
|                                               |  |                                   |      |   |                     |   |       |       |  |   |       |  



We expect to settle
substantially all employee-related balances by the end of fiscal year 2004. Facilities-related payments are expected to run through fiscal year 2010. The non-cash portion of restructuring costs recorded in the third quarters of fiscal years 2003 and
2004 was not significant, either in the aggregate or for any single period presented.



In addition to the foregoing restructuring costs, we incurred approximately $1.5 million in other costs relating directly to the Southern California facility consolidation during the third quarter of fiscal year 2004.
These costs included approximately $1.0 million of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities, approximately $0.2 million in facility relocation costs, and approximately $0.3 million in
employee retention and relocation costs.



We currently
anticipate that general and administrative expenses for the fourth quarter of fiscal year 2004 will include approximately $0.5 million in pretax restructuring costs and approximately $1.4 million in other related costs in connection with the
Southern California facility consolidation. Of the $1.4 million in other related costs, approximately $1.0 million represents anticipated non-cash charges for accelerated depreciation of assets to be disposed.



When they were initiated during fiscal 2003, we estimated that the foregoing
restructuring activities would eventually result in a reduction in annual operating expenses of approximately $9 million-$11 million, primarily in selling, general, and administrative expenses and, to a lesser extent, in cost of sales. Some of
these cost savings have been and will continue to be reinvested into other parts of our business, for example, as part of our continued emphasis on information rich detection. In addition, unrelated cost increases in other areas of our operations
such as corporate compliance costs could offset some of these cost savings. Although it is difficult to quantify with any precision our actual cost savings to date from these still-ongoing activities, we currently believe that the ultimate savings
realized will not differ materially from our initial estimate.



Net Earnings. Net earnings for the third quarter of fiscal year 2004 reflect the impact of approximately $1.6 million in pretax restructuring and other related costs and a pretax gain of approximately $1.3 million relating to the
curtailment of a defined benefit pension plan in Australia. Net earnings for the third quarter of fiscal year 2003 included approximately $1.1 million in pretax restructuring costs. Excluding the impact of these costs, the increase in net earnings
resulted primarily from increased sales in all three of our segments as well as higher gross profit margins.



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##### Table of Contents

With respect to consolidated results for fiscal year 2004, we expect GAAP operating margins to be between
9.3% and 9.7% and GAAP net earnings per diluted share to be between $1.55 and $1.64. These projected GAAP operating margins and GAAP net earnings per diluted share include approximately $3.8 million in anticipated pretax restructuring and other
related costs relating to the consolidation of three consumable products factories into one in Southern California, of which approximately $1.9 million was incurred in the first nine months of fiscal year 2004. Of the approximately $1.9 million
expected to be incurred in the fourth quarter of fiscal year 2004, approximately $1.0 million relates to anticipated non-cash charges for accelerated depreciation of assets to be disposed. The projected GAAP operating margins and GAAP net earnings
per diluted share also include approximately $2.8 million in anticipated pretax intangible asset amortization and the net impact of the curtailment and subsequent settlement of a defined benefit pension plan in Australia. The curtailment of this
plan resulted in a pretax gain of approximately $1.3 million in the third quarter of fiscal year 2004, and the settlement of the plan is expected to result in a pretax charge of between $0 and $2.0 million in the fourth quarter of fiscal year 2004.



First Nine Months of Fiscal Year 2004 Compared to First
Nine Months of Fiscal Year 2003



Segment Results



The following table presents comparisons of our sales and
operating earnings for each of our segments and in total for the first nine months of fiscal years 2004 and 2003:



|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|------------------------------ |  | ----------------- | ----- | - | ------------------ | ---- | - | - | - | ----- | --------- |  | ---- | - |  | - | ---- |  | ---- | -
|                               |  | Nine Months Ended |       |   | Increase(Decrease) |     
|                               |  | July 2, 2004      |       |   | June 27, 2003      |      |  
|                               |  | $                 |       |   | % ofSales          |      |   | $ |   |       | % ofSales |  |      | $ |  | % |     
|(dollars in millions)          |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Sales by Segment:              |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Scientific Instruments         |  | $                 | 433.3 |   |                    |      |   |   | $ | 395.2 |           |  |      |   |  | $ | 38.1 |  | 9.6  | %
|Vacuum Technologies            |  |                   | 104.5 |   |                    |      |   |   |   | 86.1  |           |  |      |   |  |   | 18.4 |  | 21.4 |  
|Electronics Manufacturing      |  |                   | 144.1 |   |                    |      |   |   |   | 127.8 |           |  |      |   |  |   | 16.3 |  | 12.8 |  
|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Total company                  |  | $                 | 681.9 |   |                    |      |   |   | $ | 609.1 |           |  |      |   |  | $ | 72.8 |  | 12.0 | %
|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Operating Earnings by Segment: |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Scientific Instruments         |  | $                 | 40.3  |   |                    | 9.3  | % |   | $ | 39.1  |           |  | 9.9  | % |  | $ | 1.2  |  | 3.1  | %
|Vacuum Technologies            |  |                   | 16.9  |   |                    | 16.2 |   |   |   | 10.6  |           |  | 12.3 |   |  |   | 6.3  |  | 59.2 |  
|Electronics Manufacturing      |  |                   | 15.8  |   |                    | 11.0 |   |   |   | 15.2  |           |  | 11.9 |   |  |   | 0.6  |  | 4.2  |  
|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Total segments                 |  |                   | 73.0  |   |                    | 10.7 |   |   |   | 64.9  |           |  | 10.6 |   |  |   | 8.1  |  | 12.5 |  
|General corporate              |  |                   | (6.1  | ) |                    | (0.9 | ) |   |   | (6.7  | )         |  | (1.1 | ) |  |   | 0.5  |  | (7.7 | )
|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  
|Total company                  |  | $                 | 66.9  |   |                    | 9.8  | % |   | $ | 58.2  |           |  | 9.6  | % |  | $ | 8.6  |  | 14.8 | %
|                               |  |                   |       |   |                    |      |   |   |   |       |           |  |      |   |  |   |      |  |      |  



Scientific
Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe and North America. To a lesser extent, the weaker U.S dollar also contributed to the increase in sales, principally in
Europe. General economic improvement and increased customer demand for our newer products drove increased sales in both life science and industrial applications.



Scientific Instruments operating earnings reflect pretax restructuring and other related costs of $2.2 million and $2.2
million in the first nine months of fiscal years 2004 and 2003, respectively (see Restructuring Activities below). Excluding the impact of these restructuring and other related costs, the decrease in operating earnings as a percentage of
sales resulted primarily from lower gross profit margins, which were adversely affected by a mix shift toward lower margin high-field NMR systems and leading-edge cold probes for NMR and away from higher margin low-field NMR systems, and by higher
sales and marketing costs. Sales and marketing costs were higher as a percentage of sales due to higher order-based commissions and the weaker U.S. dollar, which increased costs for most non-U.S. operations. The decrease in operating earnings as a
percentage of sales from these factors was partially offset by stronger sales of higher margin mass spectrometry products.



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##### Table of Contents

Vacuum Technologies. The sales increase in Vacuum Technologies resulted primarily from an increase
in the volume of products sold into both life science and industrial applications. In life science applications, sales growth was driven by increased demand for turbomolecular pumps for use in OEM mass spectrometers. Industrial sales growth came
from higher demand for pumps for broad industrial uses including semiconductor applications. To a lesser extent, the weaker U.S. dollar also contributed to the increase in sales, particularly in Europe. The increase in Vacuum Technologies operating
earnings as a percentage of sales was primarily attributable to higher gross profit margins due to sales volume leverage and approximately $0.5 million of pretax restructuring costs that were incurred in the first nine months of fiscal year 2003,
partially offset by higher operating costs outside of the United States due in part to the impact of the weaker U.S. dollar.



Electronics Manufacturing. The increase in Electronics Manufacturing sales was primarily due to higher volume from industrial customers as well as
approximately $7.0 million in incremental revenues from new customers obtained through an acquisition completed during the third quarter of fiscal year 2003. The decrease in Electronics Manufacturing operating earnings as a percentage of sales was
primarily due to lower gross margins in the first nine months of fiscal year 2004. These lower gross margins were attributable to higher start-up costs relating to new business from existing customers and a mix shift toward some lower margin
industrial equipment products in the first nine months of fiscal year 2004, partially offset by the impact of approximately $0.5 million in pretax transition costs associated with the acquisition completed in the first nine months of fiscal year
2003.



Consolidated Results



The following table presents comparisons of our sales and other selected
consolidated financial results for the first nine months of fiscal years 2004 and 2003:



|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|-------------------------------------------- |  | ----------------- | ----- | - | ------------------ | ----- | - | - | - | ----- | --------- |  | ----- | - |  | - | ---- | - |  | ----- | -
|                                             |  | Nine Months Ended |       |   | Increase(Decrease) |      
|                                             |  | July 2, 2004      |       |   | June 27, 2003      |       |  
|                                             |  | $                 |       |   | % ofSales          |       |   | $ |   |       | % ofSales |  |       | $ |  |   | %    |  
|(dollars in millions, except per share data) |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Sales                                        |  | $                 | 681.9 |   |                    | 100.0 | % |   | $ | 609.1 |           |  | 100.0 | % |  | $ | 72.8 |   |  | 12.0  | %
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Gross profit                                 |  | $                 | 257.5 |   |                    | 37.8  |   |   | $ | 232.6 |           |  | 38.2  |   |  |   | 24.9 |   |  | 10.7  |  
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating expenses:                          |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Sales and marketing                          |  |                   | 117.4 |   |                    | 17.2  |   |   |   | 104.3 |           |  | 17.1  |   |  |   | 13.1 |   |  | 12.5  |  
|Research and development                     |  |                   | 36.3  |   |                    | 5.4   |   |   |   | 34.0  |           |  | 5.6   |   |  |   | 2.3  |   |  | 6.8   |  
|General and administrative                   |  |                   | 36.9  |   |                    | 5.4   |   |   |   | 36.1  |           |  | 5.9   |   |  |   | 0.8  |   |  | 2.5   |  
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Total operating expenses                     |  |                   | 190.6 |   |                    | 28.0  |   |   |   | 174.4 |           |  | 28.6  |   |  |   | 16.2 |   |  | 9.3   |  
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating earnings                           |  |                   | 66.9  |   |                    | 9.8   |   |   |   | 58.2  |           |  | 9.6   |   |  |   | 8.7  |   |  | 14.8  |  
|Interest income                              |  |                   | 2.1   |   |                    | 0.3   |   |   |   | 1.1   |           |  | 0.1   |   |  |   | 1.0  |   |  | 100.1 |  
|Interest expense                             |  |                   | (1.8  | ) |                    | (0.2  | ) |   |   | (1.9  | )         |  | (0.3  | ) |  |   | 0.1  |   |  | (3.8  | )
|Income tax expense                           |  |                   | (23.5 | ) |                    | (3.5  | ) |   |   | (20.1 | )         |  | (3.3  | ) |  |   | (3.4 | ) |  | 17.0  |  
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|Net earnings                                 |  | $                 | 43.7  |   |                    | 6.4   | % |   | $ | 37.3  |           |  | 6.1   | % |  | $ | 6.4  |   |  | 17.0  | %
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  
|                                             |  |                   |       |   |                    |      
|Net earnings per diluted share               |  | $                 | 1.22  |   |                    |       |   |   | $ | 1.07  |           |  |       |   |  | $ | 0.15 |   |  |       |  
|                                             |  |                   |       |   |                    |       |   |   |   |       |           |  |       |   |  |   |      |   |  |       |  



Sales. As shown
above, sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 9.6%, 21.4%, and 12.8%, respectively, compared to the prior-year period. The improvement in sales was primarily attributable to
general economic improvement and continued acceptance of our newer products.



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##### Table of Contents

Geographically, sales in North America of $373.6 million, Europe of $204.0 million, and the rest of the
world of $104.3 million in the first nine months of fiscal year 2004 represented increases of 12.0%, 17.7%, and 2.1%, respectively, compared to the first nine months of fiscal year 2003. All three segments experienced an increase in sales across all
major geographic regions that they served except for Scientific Instruments sales into the Pacific Rim, which decreased. The decrease in sales in the Pacific Rim in the first nine months of fiscal year 2004 was primarily due to lower sales of
high-field NMR systems into that region as compared to the first nine months of fiscal year 2003. This decrease was partially offset by continued growth in sales of other Scientific Instruments and Vacuum Technologies products into the Pacific Rim
and higher Scientific Instruments sales into Latin America. The increase in North America sales was due to higher demand for products from all three segments. The increase in Europe was driven by improved Scientific Instruments and Vacuum
Technologies sales; in part, this reflects the currency effect of the stronger Euro in the first nine months of fiscal year 2004.



Gross Profit. The decrease in gross profit percentage resulted primarily from higher start-up costs relating to new business from existing
customers and a mix shift toward some lower margin industrial equipment products in the Electronics Manufacturing segment. These factors reduced the gross profit percentage by almost one-half of one percent. To a lesser extent, stronger sales of
Vacuum Technologies products as well as of higher margin mass spectrometry products and application-based consumable products in the Scientific Instruments segment positively impacted the gross profit percentage. However, the positive impact of
these factors was offset by the adverse impact of a mix shift toward lower margin high-field NMR systems and NMR cold probes and away from higher margin low-field NMR systems in the first nine months of fiscal year 2004.



Sales and Marketing. Sales and marketing expenses were 17.2% and 17.1%
of sales in the first nine months of fiscal years 2004 and 2003, respectively. The increase in sales and marketing expenses in absolute dollars was due primarily to higher sales commissions.



Research and Development. Research and development expenses were 5.4%
and 5.6% of sales in the first nine months of fiscal years 2004 and 2003, respectively. As a percentage of sales, the higher research and development spending in the first nine months of fiscal year 2003 was due primarily to the timing of new
product introductions.



General and Administrative.
General and administrative expenses for the first nine months of fiscal year 2004 included approximately $2.2 million in pretax restructuring and other related costs as well as a pretax gain of approximately $1.3 million relating to the curtailment
of a defined benefit pension plan in Australia. In comparison, general and administrative expenses for the first nine months included approximately $3.2 million in pretax restructuring costs. Excluding the impact of these items, general and
administrative expenses were relatively flat as a percentage of sales in the first nine months of fiscal years 2004 and 2003.



Restructuring Activities. During fiscal year 2003, we undertook certain restructuring actions to improve efficiency and more closely align employee
skill sets and other resources with our evolving product mix as a result of our continued emphasis on information rich detection. In addition, actions were undertaken to create a more efficient consumable products operation. These actions primarily
impacted the Scientific Instruments segment and involved the termination of approximately 160 employees principally in our sales and marketing, administration, service, and manufacturing functions, the closure of three sales offices and the
consolidation of three consumable products factories into one in Southern California. Substantially all of these activities were completed during fiscal year 2003 except for the termination of approximately 20 employees, which took place in the
second and third quarters of fiscal year 2004, and the Southern California facility consolidation, which was initiated in the third quarter of fiscal year 2003 and is currently expected to be completed in the fourth quarter of fiscal year 2004.
Costs relating to restructuring activities recorded through the second quarter of fiscal year 2004 were included in general and administrative expenses.



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The following tables set forth changes in the Companys liability relating to the foregoing
restructuring activities during the first nine months of fiscal years 2003 and 2004:



|                                               |  |                                 |        |   |                     |   |       |       |  |   |        |  
|---------------------------------------------- |  | ------------------------------- | ------ | - | ------------------- | - | ----- | ----- |  | - | ------ | -
|                                               |  | Nine Months Ended June 27, 2003 |       
|                                               |  | Employee-Related                |        |   | Facilities-Related  |   |       | Total | 
|(in thousands)                                 |  |                                 |        |   |                     |   |       |       |  |   |        |  
|Balance at September 27, 2002                  |  | $                               |       |   |                     | $ | 392   |       |  | $ | 392    |  
|Charges to expense                             |  |                                 | 2,484  |   |                     |   | 651   |       |  |   | 3,135  |  
|Cash payments                                  |  |                                 | (2,044 | ) |                     |   | (166  | )     |  |   | (2,210 | )
|Foreign currency impacts and other adjustments |  |                                 | 56     |   |                     |   | (101  | )     |  |   | (45    | )
|                                               |  |                                 |        |   |                     |   |       |       |  |   |        |  
|Balance at June 27, 2003                       |  | $                               | 496    |   |                     | $ | 776   |       |  | $ | 1,272  |  
|                                               |  |                                 |        |   |                     |   |       |       |  |   |        |  
|                                               | 
|                                               |  | Nine Months Ended July 2, 2004  |       
|                                               |  | Employee-Related                |        |   | Facilities- Related |   |       | Total | 
|(in thousands)                                 |  |                                 |        |   |                     |   |       |       |  |   |        |  
|Balance at October 3, 2003                     |  | $                               | 1,172  |   |                     | $ | 1,197 |       |  | $ | 2,369  |  
|Charges to expense                             |  |                                 | 527    |   |                     |   | 194   |       |  |   | 721    |  
|Cash payments                                  |  |                                 | (1,469 | ) |                     |   | (332  | )     |  |   | (1,801 | )
|Foreign currency impacts and other adjustments |  |                                 | 150    |   |                     |   | 60    |       |  |   | 210    |  
|                                               |  |                                 |        |   |                     |   |       |       |  |   |        |  
|Balance at July 2, 2004                        |  | $                               | 380    |   |                     | $ | 1,119 |       |  | $ | 1,499  |  
|                                               |  |                                 |        |   |                     |   |       |       |  |   |        |  



The non-cash portion
of restructuring costs recorded in the first nine months of fiscal years 2003 and 2004 was not significant, either in the aggregate or for any single period presented.



During the first nine months of fiscal year 2004, we incurred approximately $1.9 million in other costs relating directly to
the Southern California facility consolidation. These costs included approximately $1.0 million of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities and are in addition to the restructuring
costs described above.



Net Earnings. Net earnings for
the first nine months of fiscal year 2004 reflect the impact of approximately $2.2 million in pretax restructuring and other related costs and a pretax gain of approximately $1.3 million relating to the curtailment of a defined benefit pension plan
in Australia. Net earnings for the first nine months of fiscal year 2003 included approximately $3.2 million in pretax restructuring costs. Excluding the impact of these items, the increase in net earnings resulted primarily from increased sales in
all three of our segments.



Liquidity and Capital Resources



We generated $62.5 million of cash from operating activities in the first
nine months of fiscal year 2004, which compares to $84.2 million generated in the first nine months of fiscal year 2003. The decrease in cash from operating activities resulted primarily from the relative changes in accounts receivable
($17.2 million) and inventories ($8.4 million), partially offset by the relative change in accounts payable ($5.9 million). Cash usage relating to accounts receivable in the first nine months of fiscal year 2004 of $3.1 million was primarily
attributable to higher sales volume. Cash generated from accounts receivable in the first nine months of fiscal year 2003 of $14.1 million was primarily due to a significant improvement in the average number of days accounts receivable were
outstanding during the period. The relative increase in inventory during the first nine months of fiscal year 2004 was the result of our need to support higher sales and order volume for our products, which led us to maintain more inventory, and the
timing of magnet purchases and deliveries for NMR systems. Inventory turnover for the two periods was relatively constant. The decrease in cash from operating activities relating to accounts receivable and inventories was partially offset by a
larger increase in accounts payable in the first nine months of fiscal year 2004 resulting from higher inventory purchases to meet our higher order and sales volume.



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We used $18.5 million of cash for investing activities in the first nine months of fiscal year 2004,
which compares to $38.7 million used in the first nine months of fiscal year 2003. The decrease in cash used for investing activities was primarily due to the acquisition of the non-clinical, drugs of abuse testing business of Roche Diagnostics
Corporation in the first nine months of fiscal year 2003. No significant acquisition-related cash payments were made in the first nine months of fiscal year 2004.



We used $5.4 million of cash for financing activities in the first nine months of fiscal year 2004, which compares to $5.4
million used in the first nine months of fiscal year 2003. Cash used for financing activities in the first nine months of fiscal years 2004 and 2003 was primarily due to cash expenditures to repurchase common stock (which was then retired). These
stock repurchases were the result of an effort to utilize excess cash to offset increases in our outstanding common shares due to stock option exercise volume. The impact of these stock repurchases on our cash balance was partially offset by
proceeds from the issuance of common stock pursuant to stock option exercises.



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



During fiscal year 2003, we established a short-term bank credit facility in Japan in the amount of 300 million yen
(approximately $2.7 million at July 2, 2004). The credit facility is available to our wholly owned Japanese subsidiary for working capital purposes. As of July 2, 2004, an aggregate of 200 million yen (approximately $1.8 million) was outstanding
under this credit facility at an annual interest rate of 0.8%, and 100 million yen (approximately $0.9 million) was available for future borrowing. This credit facility contains certain covenants that limit future borrowings under this facility,
with which we were in compliance at July 2, 2004.



In addition
to these bank credit facilities, as of July 2, 2004, we had a total of $74.6 million in other uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were
outstanding under these credit facilities as of July 2, 2004. All of these credit facilities contain certain customary conditions and events of default, with which we were in compliance at July 2, 2004. Of the $74.6 million in uncommitted and
unsecured credit facilities, a total of $40.2 million was limited for use by, or in favor of, certain subsidiaries at July 2, 2004, and a total of $17.5 million of this $40.2 million was being utilized in the form of bank guarantees or short-term
standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to our subsidiaries by customers for which separate liabilities were recorded in the unaudited condensed consolidated financial
statements at July 2, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



As of July 2, 2004, we had $32.5 million in term loans outstanding compared to $35.0 million at October 3, 2003. As of both July 2, 2004 and October 3,
2003, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both July 2, 2004 and October 3, 2003. The term loans contain certain covenants that limit future borrowings and
the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. We were in compliance with all restrictive covenants of the term loan agreements at July 2, 2004. We also had other long-term notes
payable of $4.1 million as of July 2, 2004 with a weighted-average interest rate of 0.0% and $4.1 million as of October 3, 2003 with a weighted-average interest rate of 0.1%.



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From time to time, we are obligated to pay additional cash purchase price amounts in the event that
contingent financial or operational milestones are met by acquired businesses. As of July 2, 2004, up to a maximum of $9.5 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Any contingent payments
made will be recorded as additional goodwill at the time they are earned.



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



As of July 2, 2004, we had cancelable commitments to a contractor for capital
expenditures totaling approximately $3.5 million relating to the ongoing consolidation of three consumable products factories into one in Southern California. In the event that these commitments are canceled for reasons other than the
contractors default, we may be responsible for reimbursement of actual costs incurred by the contractor. We had no material non-cancelable commitments for capital expenditures as of July 2, 2004. In the aggregate, we currently anticipate that
our capital expenditures will be between $6 million and $10 million during the fourth quarter of fiscal year 2004.



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



Contractual Obligations and Other Commercial Commitments



The following table summarizes future principal payments on outstanding debt and minimum rentals due for certain facilities and other leased assets under
long-term, non-cancelable operating leases as of July 2, 2004:



|                                           |  |                               |       |              |      |        |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|------------------------------------------ |  | ----------------------------- | ----- | ------------ | ---- | ------ | ---- | - | ----- |  | ---- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------ |  | - | ------
|                                           |  | Three MonthsEndingOct. 1,2004 |       | Fiscal Years |      |       
|                                           |  |                               | 2005  |              | 2006 |        | 2007 |   | 2008  |  | 2009 |       | Thereafter |   | Total
|(in thousands)                             |  |                               |       |              |      |        |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Operating leases                           |  | $                             | 2,613 |              | $    | 6,733  |      | $ | 3,995 |  | $    | 2,728 |            | $ | 2,129 |  | $ | 1,907 |  | $ | 25,710 |  | $ | 45,815
|Notes payable                              |  |                               | 1,823 |              |      |       |      |   |      |  |      |      |            |   |      |  |   |      |  |   |       |  |   | 1,823 
|Long-term debt (including current portion) |  |                               |      |              |      | 6,553  |      |   | 2,500 |  |      | 2,500 |            |   | 6,250 |  |   |      |  |   | 18,750 |  |   | 36,553
|                                           |  |                               |       |              |      |        |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       
|Total contractual cash obligations         |  | $                             | 4,436 |              | $    | 13,286 |      | $ | 6,495 |  | $    | 5,228 |            | $ | 8,379 |  | $ | 1,907 |  | $ | 44,460 |  | $ | 84,191
|                                           |  |                               |       |              |      |        |      |   |       |  |      |       |            |   |       |  |   |       |  |   |        |  |   |       



In addition to the
non-cancelable contractual obligations included in the above table and the cancelable commitments for capital expenditures of approximately $3.5 million described under Liquidity and Capital Resources above, we had cancelable commitments to
purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $26.5 million, net of deposits paid, as of July 2, 2004. In the event that these commitments are canceled for reasons other than the
suppliers default, we may be responsible for reimbursement of actual costs incurred by the supplier.



As of July 2, 2004, we did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of
some contingent event, except for contingent payments of up to a maximum of $9.5 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific timing and amounts of which are not currently
determinable.



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Recent Accounting Pronouncements



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



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



In May 2004, the
FASB issued FASB Staff Position No. (FSP) 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003(the Act). The Act introduced a prescription
drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare Part D benefit. FSP 106-2 is effective
for the first interim or annual period beginning after June 15, 2004 and supersedes FSP 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was issued in
January 2004. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy provided under the Act and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine
whether benefits provided under its plan are actuarially equivalent to Medicare Part D. We are currently evaluating the impact, if any, of the adoption of FSP 106-2 on our financial condition or results of operations and expect to complete this
evaluation during the fourth quarter of fiscal year 2004. Therefore, the accompanying unaudited condensed consolidated financial statements do not reflect any possible effects of the adoption of FSP 106-2.



Risk Factors



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



For certain of these sites and
facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of July 2, 2004, it was nonetheless estimated
that our share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.4 million to $2.3 million (without discounting to present value). The time frame over which these costs are expected
to be incurred varies with each site and facility, ranging up to approximately 30 years as of July 2, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such
range, and we therefore had an accrual of $1.4 million as of July 2, 2004.



As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of July 2, 2004, it was estimated that
our share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $5.7 million to $12.1 million (without discounting to present value). The time frame over which these costs are
expected to be incurred varies with each site and facility, ranging up to approximately 27 years as of July 2, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was
a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $7.2
million at July 2, 2004. We therefore had an accrual of $4.8 million as of July 2, 2004, which represents the best estimate of our share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to
the $1.4 million described in the preceding paragraph.



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



An insurance company has agreed to pay a portion of certain of VAIs
(now VMS) future environmental-related costs for which we have an indemnification obligation, and we therefore have a $1.1 million receivable in other assets as of July 2, 2004 for our share of such recovery. We have not reduced any
environmental-related liability in anticipation of recoveries from third parties.



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



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



Item 3.    Quantitative and Qualitative Disclosures About Market Risk



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



At July 2, 2004, there were no outstanding forward contracts designated as
cash flow hedges of forecasted transactions. During the nine months ended July 2, 2004, no foreign exchange gains or losses from cash flow hedge ineffectiveness were recognized.



Our foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign
exchange forward contracts that were outstanding as of July 2, 2004 follows:



|                  |  |                    |        |                         |   |       
|----------------- |  | ------------------ | ------ | ----------------------- | - | ------
|                  |  | Notional ValueSold |        | NotionalValue Purchased
|(in thousands)    |  |                    |        |                         |   |       
|Euro              |  | $                  |       |                         | $ | 46,034
|Australian dollar |  |                    |       |                         |   | 14,370
|Japanese yen      |  |                    | 8,686  |                         |   |      
|British pound     |  |                    |       |                         |   | 4,878 
|Canadian dollar   |  |                    | 4,087  |                         |   |      
|Swedish krona     |  |                    | 1,124  |                         |   |      
|                  |  |                    |        |                         |   |       
|                  |  | $                  | 13,897 |                         | $ | 65,282
|                  |  |                    |        |                         |   |       



Interest Rate
Risk. We have no material exposure to market risk for changes in interest rates. We invest any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to our
financial condition or results of operations. We enter into debt obligations principally to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At July 2, 2004, our debt obligations had
fixed interest rates.



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



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



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##### Table of Contents

Debt Obligations.



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



|                                           |  |                              |       |   |              |      |       |   |      |   |       |      |  |   |       |   |  |            |       |   |       |   |   |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ---------------------------- | ----- | - | ------------ | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---------- | ----- | - | ----- | - | - | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | ThreeMonthsEndingOct. 1,2004 |       |   | Fiscal Years |      |       |   |     
|                                           |  |                              | 2005  |   |              | 2006 |       |   | 2007 |   |       | 2008 |  |   | 2009  |   |  | Thereafter |       |   | Total |  
|(dollars in thousands)                     |  |                              |       |   |              |      |       |   |      |   |       |      |  |   |       |   |  |            |       |   |       |   |   |   |  |   |        |   |  |   |        |  
|Notes payable                              |  | $                            | 1,823 |   |              | $    |      |   |      | $ |      |      |  | $ |      |   |  | $          |      |   |       | $ |  |   |  | $ |       |   |  | $ | 1,823  |  
|Average interest rate                      |  |                              | 0.8   | % |              |      |      | % |      |   |      | %    |  |   |      | % |  |            |      | % |       |   |  | % |  |   |       | % |  |   | 0.8    | %
|                                           |  |                              |       |   |              |      |       |  
|Long-term debt (including current portion) |  | $                            |      |   |              | $    | 6,533 |   |      | $ | 2,500 |      |  | $ | 2,500 |   |  | $          | 6,250 |   |       | $ |  |   |  | $ | 18,750 |   |  | $ | 36,553 |  
|Average interest rate                      |  |                              |      | % |              |      | 2.7   | % |      |   | 7.2   | %    |  |   | 7.2   | % |  |            | 6.7   | % |       |   |  | % |  |   | 6.7    | % |  |   | 6.1    | %





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



For our defined benefit retirement plans, we make
assumptions regarding several variables including the expected long-term rate of return on plan assets and the discount rate in order to determine defined benefit retirement plan expense for the year. This expense is referred to as net
periodic pension cost. We assess the expected long-term rate of return on plan assets and discount rate assumption for each defined benefit plan based on relevant market conditions as prescribed by SFAS 87 and make adjustments to the
assumptions as appropriate. On an annual basis, we analyze the rates of return on plan assets and discount rates used and determine that these rates are reasonable. For rates of return, this analysis is based on a review of the nature of the
underlying assets, the allocation of those assets and their historical performance relative to the overall markets in the countries where the related plans are effective. Historically, our assumed asset allocations have not varied significantly from
the actual allocations. Discount rates are based on the prevailing market long-term interest rates in the countries where the related plans are effective. As of October 3, 2003, the estimated long-term rate of return on our defined benefit pension
plan assets ranged from 0.5% to 7.0% (weighted-average of 6.4%), and the assumed discount rate for our defined benefit pension plan obligations ranged from 1.5% to 5.5% (weighted-average of 5.3%).



If any of these assumptions were to change, our net periodic pension cost
would also change. We incurred net periodic pension cost relating to our defined benefit retirement plans of $2.3 million in fiscal year 2003, $1.7 million in fiscal year 2002, and $0.9 million in fiscal year 2001, and expect our net periodic
pension cost (excluding any settlement or curtailment gains or losses) to be approximately $2.7 million in fiscal year 2004. A one percent decrease in the weighted-average estimated return on plan assets or assumed discount rate would increase our
net periodic pension cost for fiscal year 2004 by $0.4 million and $1.4 million, respectively. As of October 3, 2003, our projected benefit obligation relating to defined benefit retirement plans was $57.4 million. A one percent decrease in the
weighted-average estimated discount rate would increase this obligation by $11.6 million.



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##### Table of Contents

Item 4.    Controls and Procedures



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



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



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##### Table of Contents

PART II

OTHER INFORMATION



Item 2.    Changes in Securities, Use of Proceeds, and Issuer Purchase of Equity Securities



|(e) |  | During fiscal year 2002, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until October 1, 2004. No shares were
repurchased under this authorization during the fiscal quarter ended July 2, 2004. During the nine months ended July 2, 2004, the Company repurchased and retired 588,952 shares under this authorization at an aggregate cost of $23.9 million. As of
July 2, 2004, the Company had remaining authorization for future repurchases of 7,897 shares.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 11, 2004, the Companys Board of Directors authorized the Company to repurchase up to an additional 1,000,000 shares of its common stock until
September 30, 2007. As of July 2, 2004, no shares had been repurchased under this authorization.



Item 6.    Exhibits and Reports on Form 8-K



(a)    Exhibits.



|           |  |                                                                                                     |  |                           |  |      |  |               |  |              
|---------- |  | --------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- |  | ------------- |  | -------------
|           |  |                                                                                                     |  | Incorporated by Reference |  |     
|ExhibitNo. |  | Exhibit Description                                                                                 |  | Form                      |  | Date |  | ExhibitNumber |  | FiledHerewith
|10.20      |  | Change in Control Agreement, dated as of July 1, 2004, between Varian, Inc. and Sean M. Wirtjes.    |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  | X            
|           |  |                                                                                                     |  |                           | 
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  |              
|           |  |                                                                                                     |  |                           | 
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                           |  |      |  |               |  |              



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



The Company furnished a Current Report on Form 8-K on April 28, 2004 for its press release reporting its results for the second quarter ended April 2,
2004.



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SIGNATURES



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



|                      |  |                           |  |                                                                                                                                          
|--------------------- |  | ------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                      |  | VARIAN, INC. (Registrant)
|                      |  |                          
|Date: August 16, 2004 |  | By:                       |  | /s/ G. EDWARD MCCLAMMY                                                                                                                   
|                      |  |                           |  | G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)



39